Saturday, September 12, 2009

Nicholas Sarkozy: tax carbon at the border

FT (via Krugman) reports on a proposal from French President Sarkozy:
“I will not accept a system ... that imports products from countries that don’t respect the rules [on carbon emission reductions],” he said in a speech to factory workers in the eastern Ain region of France.

“We need to impose a carbon tax at [Europe’s] borders. I will lead that battle.”

The French president has in the past sparked accusations of protectionism after calling for European import tariffs on products from countries that do not abide by international targets on carbon emission reductions.

On Thursday economists warned that such an initiative – likely to be supported by some European countries such as Italy – could have catastrophic consequences for the ongoing attempts to strike a global trade deal.

“This would put the developed world on a collision course with China, India and other developing countries. It could do serious damage to the international trade system,” said Simon Tilford, chief economist of the Centre for European reform. “It would be seen as naked protectionism.”

Mr Sarkozy sought to defend his position, which is clearly aimed at making France’s own carbon tax more palatable in the face of strong public opposition.

“A carbon tax at the border is the natural complement to a domestic carbon tax. More importantly, a carbon tax at the borders is vital for our industries and our jobs. This has nothing to do with protectionism,” he said. “This is about fair play.”
In a previous post I said I thought it would be better only to threaten a border carbon tax after the failure of the Copenhagen meeting on  climate change.    My feeling is that it would be much better if you could convince  polluting countries to impose the carbon tax themselves. That way, they could use the money to pay for investment in non-polluting technologies.

Nevertheless, to make a  domestic carbon tax palatable to impatient domestic constituencies, Sarkozy and members of the US Congress are already talking about punishing countries that don't do enough to reduce their own carbon emissions.  The principle of a border tax, as economist Stiglitz -- and now Krugman -- explain, is fair.  To me, it is the timing of the French and American proposals that is questionable. 

But on second thought, might there be an argument to be made that it would actually be preferable for carbon to be taxed mainly at the border?  Perhaps.  

Understandably, the developing world has demanded that the West pay for the cost of going carbon neutral.  I live-blogged Shell chairman Ollila (photo right) telling an audience in Helsinki that on moral grounds, there's no bucking the developing world's insistence on this point:
Developed economies have used up the atmosphere's capacity to absorb CO2; now developing countries are entering a phase where their need for energy is becoming intensive.

In addition to policy angle, there is a geopolitical angle: significant change with regards to emerging markets. Advanced economies must lead by example. This will necessitate resource transfers from developing to emerging markets. But transfers from govt to govt are problematic. Consider the position of a US political leader who proposed such a transfer. He would face political problems.
Cap and trade is a politically feasible way to make the transfers. CDM is a license to do arbitrage -- create opportunities between developed and developing economies.
If there is no straightforward global Cap and Trade deal,  might border-levied carbon taxes achieve something similar?   Supposing rich countries levy taxes on imports from developing countries, theoretically these taxes could be returned to developing countries.*   To the extent there is less corruption in rich countries, at least this way everyone would know that a carbon tax is actually being levied.   Also, this way it may be possible to ensure that more of the tax actually went towards subsidizing alternative energy projects in the developing world.

Nevertheless, in a 2008 paper on "border carbon adjustments" (Pdf), Aaron Cosbey wrote that "there may be an inherent tension between administrative feasibility on the one hand, and effectiveness or WTO legality on the other."   In terms of effectiveness, Cosbey suggests that "a broader scheme will be particularly difficult to manage, but a scheme that is more narrowly cast may have unintended adverse impacts."

Moreover, the bulk of China's future carbon emissions will likely not be produced on account of the goods China manufactures for export, but as a by-product of production for local consumption.

In the long run, I wonder if a border carbon border tax would concern a sufficiently large segment of the global economy to make a difference.  On the other hand, maybe getting global industry** on the right track will require some short-term prodding. 

Is Sarkozy on the right track?  Taking into account factors like national pride (i.e. the cultural sensitivity factor), the imperialistic history of France and, more recently, the arrogance of American leaders, I think it is surely better not to go there yet -- not even talk about going there -- unless we have to.  But if no global deal emerges from Copenhagen, it's good to have this alternative strategy in mind.
Photo of Sarkozy by Jotman was taken at the G20 in London.
*  Returning this money is apparently not envisioned by the bill before the US Congress. According to the CTC, in "Rep. John Larson’s new carbon tax bill . . . U.S. would collect and retain the revenue generated by equalizing carbon taxes on products imported from countries that haven’t enacted their own or whose carbon tax rate is lower than ours."  A paper by Aaron Cosbey shows that there are various ways to implement "border carbon adjustments" (Pdf here, excerpt here).
** Global industry or countries?  Just a thought: Perhaps rather than thinking about border carbon taxes in terms of  "developed countries Vs developing countries" we should think in terms of a global system dominated by a relatively small number of large corporations.   

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