Carbon tariff trade war?

Terence Corcoran, Financial Post Published: Tuesday, March 25, 2008

As world financial markets struggle through credit risks, looming currency crisis and talk of recession/depression, along come an assortment of politicians and economists set to pile on another round of global downers: carbon taxes and a possible carbon trade war.

A European Union summit agreement two weeks ago to slash carbon emissions by 2020 ended with a veiled threat. If the rest of the world doesn't match Europe's carbon tax and control regimes, "appropriate measures" can be taken by the EU, the final summit statement said. The phrase "appropriate measures" hasn't been defined yet, but French President Nicolas Sarkozy thinks Europe should impose a carbon tariff on goods imported into Europe. If steel arrives from China or America, countries that have no carbon taxes in place, then Europe should tax the steel.
European governments love a good excuse to build trade barriers. Carl B. Hamilton, a Swedish MP and economics professor, warns in a letter to the Financial Times that EU-initiated carbon trade barriers "could provoke a global trade war between the EU on the one hand and countries such as the United States, China, India and Brazil on the other."

Risks of carbon protectionism are rising elsewhere. Two Canadian economists, Thomas Courchene and John R. Allan of the Institute for Research on Public Policy, write in the latest issue of the institute's magazine, Policy Options, that "carbon tariffs" offer a solution to the inevitable "free rider" problems that will flow from national and local carbon tax regimes.
The free rider problem is twofold. First, if Canada or Europe imposes carbon taxes, companies based in non-carbon-tax countries will have a competitive advantage. Second, Canadian companies hit by Canadian taxes will have an incentive to build new plants in non-tax jurisdictions. The way to fix these two problems, Messrs. Courchene and Allan say, is to impose a carbon tariff on imports. As they put it:

A national carbon tariff or a carbon import tax [would be] levied on the carbon footprint of all imports from all countries (including on the carbon emissions components relating to the logistics compnent, especially shipping, throughout the supply chain). Consistency ... would require that it be applied to all domestically produced and consumed products.

Fitting these tariffs into the world trading system would be a piece of cake. "So long as the national environmental policies do not discriminate arbitrarily between foreign and domestic products, or between products imported from different trading partners, there should be no problem." Well, that was easy to say, but what it means in practice is another matter.
Tracking carbon inputs in any product is an impossible task, a nightmare of measurement and calculation that would require a massive bureaucracy at the World Carbon Trade Measurement Agency and tie up carbon trade negotiators for decades, assuming no trade war intervenes to crash the world trade system. An example is beer: Canadian beer would benefit if European beer faced a carbon tax on transport costs from Europe. But Canadian beer might use hops and other inputs that have to be transported across Canada. What kind of electricity and water sources are used in each location? Would carbon tariffs become a protectionist policy favouring Canadian beer?

In Ottawa, the Liberals appear to be leaning toward a carbon tax plan. As the Liberal economic strategist, M.P. John Mc-Callum would know that Canada is in no position to impose a carbon tax in isolation. It would impose a burden on Canadian industries and hit the country's competitiveness. Even the National Round Table on the Economy and the Environment only endorsed a carbon tax if it were part of an international effort. Canada cannot impose a carbon tax on its own, unless Mr. Mc-Callum intends to follow the advice of Tom Courchene and John Allan. If the Liberals want a carbon tax, they will have to adopt, like the EU, compensating threats of trade action against non-carbon tax nations.

Before we go too far on this, we might want to remember the story of the U.S. Smoot-Hawley Tariff. Back in 1931, at the beginning of the Great Depression, Congress whipped up a tariff bill to protect U.S. industry and farmers. It raised existing tariffs from 40% to more than 50%. The tariff on Canadian wheat jumped 40%. The trade-crippling law hit the world economy and is widely credited with exacerbating the Depression.

Well, you might say, no carbon tariff is going to be that severe. But who can say? To hit carbon emission reductions targets set by governments, carbon taxes are going to have to run to US$200 or US$300 a tonne, equal to more than 75¢ on a litre of gasoloine. That's bad enough, but doubly dangerous if imposed in the context of a global trade war and worldwide financial crises.

Another option, of course, is to have the United Nations impose a global carbon tax that it would collect and redistribute. There's a name for that kind of global measure: the Tobin tax. That's what the carbon tax effort is all about, if anybody wants to look it up.