And now a carbon tariff

So far the idea of a carbon tariff has received very little attention in this or many other countries. That may change soon. Joe Biden’s platform includes the following: “As the U. S. takes steps to make domestic polluters bear the full cost of their carbon pollution, the Biden administration will impose carbon adjustment fees or quotas on carbon- intensive goods from countries that are failing to meet their climate and environmental obligations.”

There is a certain logic to this argument. Carbon policies impose higher energy costs on businesses through price hikes, either explicitly via carbon taxes or permit fees or implicitly, as a result of “clean fuel” regulations or other such mandates. This makes domestic businesses uncompetitive in export markets and susceptible to import competition from countries with less stringent carbon policies. It also undermines domestic policies aiming to curb global GHG emissions if production moves to countries with few tough policies.

My favourite example comes from a Quebec solar panel manufacturer. Canadians thump their chests with pride as they install solar panels on their rooftops in order to help reduce GHG emissions but little do they know that the environmental benefit is substantially blunted because the Chinese panels they’ve imported are built using coal- based energy. In July, Korea announced a quota on imported solar panels: only those with less than 670 kg CO2/ kw are now acceptable. Chinese manufacturers, many of whose panels have emission intensity well above that, have objected.

France has also imposed “carbon adjustments” on imported solar panels. And the Trump administration hit Chinese solar panels with tariffs — though as part of its general tariff offensive, not specifically to curb GHG emissions. U.S. tariffs on steel and semi-conductors have also made Chinese-built panels more expensive — so much so that the U. S. solar lobby has complained all these tariffs will destroy thousands of U. S. jobs. Even so, Chinese exports have increased since early 2019 in response to rising U. S. demand. That still begs the question, however, of just how much Chinese panels made with coal-based energy reduce global GHG emissions.

The argument for a carbon tariff is boosted by a recent paper by Joseph Shapiro of the University of California, Berkeley. Examining the differences in tariffs and non- tariff barriers that “clean” and “dirty” goods face at each stage of their production, he estimates that, overall, more carbon- intensive goods face less protection than less carbon- intensive goods. Worldwide, the implicit trade subsidy to more carbon- intensive products is a hefty $ 550 to $ 800 billion per year ( in US$ 2016). Perhaps surprisingly, the countries with the highest implicit subsidies include Norway (over $400 per tonne of CO2) and the United Kingdom, France and Germany ( at roughly $ 200 per tonne each). Canada and the United States are in a more moderate range of $83-$139 per tonne implicit carbon subsidy.

The lower tariffs and nontrade barriers for carbon-intensive products reflect governments’ desire to encourage the export and limit the import of such carbon-intensive manufacturing products as iron, steel, cement and fertilizer, in part by subjecting imported raw materials to less protection. For example, China imports metallurgical coal from Australia and Canada to produce iron and steel, with the primary GHG emissions taking place in China where the coal is burned.

Although there is a theoretical case for carbon adjustments the great practical danger is that they will end up being used in aid of green protectionism that will shrink global trade. Governments could easily turn otherwise well- intentioned carbon tariffs into protection for politically important domestic industries. Such protectionism causes consumer prices to rise — consumers generally being less organized to resist protectionist policies. So although Shapiro’s analysis is quite interesting, economists do not run governments. The politicians who do will grab at any trade barriers that can help them win elections.

Advanced countries have often used trade barriers to block imports from low-wage countries. Market access through the WTO has given developing countries like China the ability to export both their naturally low-cost as well as their subsidized products to the rest of the world. Now, with China dominant in such manufactured products as steel, cement and consumer goods, other countries are responding with tariff wars. Given that China accounts today for 28 per cent of global carbon emissions, expect green protectionism to become a part of these tariff wars.

And we are starting to see some of these protectionist trends in Canada. The new USMCA agreement will cause auto prices to rise with new regulations — 75 rather than 60 per cent North American content and a US$ 16 minimum wage on 40 per cent of labour used — that encourage the use of domestic steel, plastics and aluminum inputs from more highly paid workers. A carbon tariff on the 25 per cent of value-added coming from other countries would push up auto prices further — not to mention force up the price of gasoline and diesel so as to nudge consumers toward more expensive electric vehicles. Automobiles could become out of reach for low- income consumers. Yes, costs could be offset by electric vehicle consumer subsidies or financial support to Canadian EV producers. But who pays for these subsidies? We all do through policies like GST hikes or health spending cutbacks.

So watch out for the carbon tariff. In an apolitical world needing global co-operation to reduce GHG emissions, it may make sense. But in the world we live in, giving vote- hungry governments a new trade weapon is unlikely to end well.

protectionism causes consumer prices to rise.