Copenhagen failed. So should we tax carbon at the border?
8th February, 2010
The lack of agreement at Copenhagen has left some thinking that the only way to protect national economies is to tax imports from nations who don't pay a carbon price...
The letter landed on the desks of US Senate leaders Harry Reid and Mitch McConnell unannounced. Its authors were four of the country's biggest corporate lobbyists; powerful people, not used to being ignored.
'We write to express our deep concerns...' the letter began. Concerns about a proposed government bill, meant to reduce American greenhouse gas emissions and then – as now – being debated by the Senate.
Inside the bill's 1437 pages was a proposal for a 'border adjustment', a vague phrase meaning that, if the Senate did vote to cut US carbon emissions, a new tax could be imposed on imports from any other country that did not stop polluting in turn.
China and India hated the idea, the letter's authors wrote. The situation could turn nasty, as indeed it did at December's climate summit in Copenhagen, where sniping over border taxes threatened to escalate into something worse.
'Climate change is a global problem that calls for international cooperation, not unilateral ultimatums,' the letter said. 'These provisions … could trigger a "green trade war".'
The thinking behind a carbon border tax is this: country A(merica) decides to cut its carbon emissions through a cap-and-trade system like that proposed in the US climate bill, while country C(hina) does not. Cap-and-trade works by making carbon emissions expensive, so businesses in country A will end up footing a bill that those in country C do not. To level things out, country A taxes imports from country C, a tax calculated to be equal to the amount C's businesses would pay if they were operating in A and had to pay for their carbon emissions through cap-and-trade.
Seems complicated, but it boils down to saying, 'if I'm paying this, then I'm sure as hell making you do so too.'
The world's first carbon border tax was announced in December 2009, not between countries but states. Minnesota decided to tax electricity imports from its coal-hungry neighbour, North Dakota. North Dakota responded by threatening to take Minnesota to court. Border taxes, it seems, cause conflict.
In fact, talk to anyone for long enough about carbon border taxes and you summon up the monster of a 'trade war'. EU trade commissioner-designate Karel de Gucht used the phrase when speaking to the European parliament in January this year. The monster also cast a shadow over Copenhagen, where the EU, US and Australia resisted calls from developing nations to rule out such a tax. Jairam Ramesh, the chief negotiator for India, told reporters: 'We are totally against it, totally against it'. Border taxes were neither ruled in, nor out, in the summit's final accord.
Meanwhile, in London, the chairman of Government regulator the Financial Services Authority, Adair Turner, has repeatedly said he is open to the idea of a carbon border tax. Lord Turner also chairs the Government's influential Committee on Climate Change (CCC), whose chief executive, David Kennedy, says such a tax 'is an option that we should keep on the table'.
Indeed, the failure of Copenhagen to agree any viable, international alternative has increased the urgency of those pushing the idea. Its detractors argue that designing international carbon border taxes is difficult, but the question now is less whether such a tax it is introduced, than at what cost.
'The main argument against border tax adjustments is not difficulty,' Kennedy says. 'It is more that some people are worried these could lead to a trade war.'
What is it good for?
Why go to war? Well, one reason is cost; the cost, on the one hand, of not introducing a carbon border tax. Research by the CCC suggests those British industries that will pay the highest cost for reducing our own carbon emissions account for only one per cent of the country's Gross Domestic Product. But that one per cent is about £3.5 billion.
The fear is that these industries may relocate to countries where it is cheaper to pollute. The CCC estimates these businesses provide just 0.5 per cent of British employment. But the again, that is about 144,000 people's jobs. A border tax would aim to prevent these companies moving, or losing out, by making it as expensive for manufacturers to pollute elsewhere and export their goods to Britain as it is for those manufacturers polluting within Britain itself.
On the other hand, the cost of imposing a border tax would hit some very hard indeed. World trade can crudely, but not entirely inaccurately, be summarised by saying that things are made in Asia and sold to the West. A US carbon border tax, says a report by authors from the World Bank and Peterson Institute, would cause China’s manufacturing exports to decline by a whopping 21 per cent and India’s by 16 per cent. From Beijing and New Dehli, the view is that this would be selfish, and unfair.
'All you need to start a trade war,' says Michael Levi, a climate expert at the US Council on Foreign Relations, 'is a perception of unfairness.'
The weapons of a trade war
Trade wars, like war itself, change with the times. The modern weapons of choice are improvised devices: technical standards that keep out imports; government procurement rules such as 'Buy China' and 'Buy America'; bail-outs for domestic companies, and 'countervailing duties' to negate the effect of subsidies abroad. Some call such devices 'protectionism', which makes them sound defensive. In reality, they are offensive, asymmetrical and mean.
For example, in September 2009 the US imposed duties of up to 35 percent on tyre imports from China. China, riled up, threatened to target US chicken exports in return. As in a modern war, collateral damage is wrought among those factory workers forced to go home and tell their husbands, wives and children they have lost their jobs because the company can't make a profit exporting its (suddenly more expensive) chickens and tyres.
There would also, as with the spat between Minnesota and North Dakota, be legal battles to be fought. Such disputes between countries would be likely to drag on for years, and involve lawyers who charge a large daily rate for their service. Either response then – guerilla warfare or 'I'll see you in court' – also carries a cost.
Moral high ground?
Oddly, as one climate negotiator who was at Copenhagen tells me, a border tax can be seen as a (high-handed) way to claim the moral high ground.
'A border adjustment is like saying "We are paying to sort out climate change"', he says, '"and so should you".'
Odder still, according to other government officials, there is one way of thinking that suggests it might be to the mutual advantage of both sides – and to us all – if countries continued headlong down the seemingly selfish path of putting border taxes in place.
One major hurdle to the introduction of such a tax was cleared recently when the World Trade Organistion (WTO) signalled it might allow such a tax under its rules. But, under WTO rules, a country can only impose a border tax on imports only if a) the country itself imposes a domestic cost to its own industry (say a carbon tax or cap-and-trade system) and b) those imports come from countries that have no equivalent system in place.
In the US, the corporate lobbyists' letter has most likely failed to impress, and the new climate change legislation is only expected to pass – if it passes at all – if it includes a carbon border tax. A mutually agreed international programme of emissions cuts, such as that on the table at Copenhagen, was perhaps the last thing that could have stopped this taking place.
The Copenhagen effect
The failure of Copenhagen – and British diplomats now privately describe Copenhagen as 'a qualified failure' – thus presents developing countries with a stark choice: either accept the US border tax or impose national carbon taxes of their own.
By sidestepping the need to pay the US tax, these countries could prevent preventing trade warfare breaking out. There is also another, very good, reason to choose this second option. Last September, the Energy Research Institute (ERI) of the Chinese National Development and Reform Commission produced a report saying:
'If China does not levy a carbon tax, exported Chinese products will probably pay a carbon tax to foreign countries, but if it levies the tax itself, it could avoid the foreign taxes'.
Put simply, if China imposes a carbon tax on Chinese businesses, the tax revenue stays in China. If it does not, and Chinese businesses pay a tax levied on imports to the US, the money goes to Washington instead.
In fact, the ERI proposed a rate of 100 yuan (£9.1) per tonne to be imposed as early as next year, although analysts expect Beijing to levy a more cautious 10 yuan, and not for a few years at least. Whatever the figures, the effect of this would be two-fold: firstly, China would be exempt from any border tax imposed by the US. Secondly, Chinese businesses will want to reduce their carbon emissions to avoid paying the Chinese tax.
In this outcome, neither the US nor China – the two biggest carbon polluters in the world – can really claim the moral high ground. Both are acting in their own selfish interests. But look at it another way and this really doesn't matter. The result of these countries following their own selfish interests would be less carbon produced by both.
After Copenhagen, with the UN already abandoning its first January deadline for countries to publicly state their emissions reductions targets, this act of mutual self-interest may be a genuine reason for hope.
Dan Box is a freelance journalist and a regular columnist for the Ecologist
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