25 Jun 2008

Trade and Emissions

The Economist reports that fears of "offshoring pollution" and industrial shutdown from carbon restrictions are overblown:
Energy makes up less than 1% of the cost of making cars, furniture or computers. Even some energy-intensive industries, such as power generation, should not be much affected. Since they have no foreign competition, they could pass on extra costs to their customers.

Only a few industries—metals, paper, chemicals, cement and the like—are both global and profligate enough to be at risk. These accounted for just over 3% of America's output in 2005 and less than 2% of its jobs.


A study sponsored by Resources for the Future, an American think-tank, has tried to describe how American industry would meet a carbon price, albeit one of just $10 a ton—much less than the European price of over €25 ($39). Based on economic modelling, it concludes that industrial output would fall by less than 1%. The hardest-hit industry would be metals, but even that would shrink by only 1.5%. Better yet, the damage could be offset by granting energy-intensive firms enough free permits to cover just 15% of their emissions.

Another study under way at the Pew Centre on Global Climate Change, another think-tank, sizes up a $15 carbon price using data on the past effects of rising energy prices on industry. It concludes that output would fall by 2% or less in 80% of cases. Paper and glass would face a bigger contraction, of 5%. Still, even the most vulnerable industries would not suffer the Armageddon that lobbying groups are predicting.

That is important, since it suggests that the politicians are over-reacting, and that their remedies may actually make matters worse. A carbon tariff, for example, would be hard to implement. Customs officials would either have to assess the emissions embedded in imports, an impossibly complicated task, or make arbitrary assumptions, a recipe for a trade war. Moreover, it would do nothing to protect exports of energy-intensive goods from cheap competition.
Bottom Line: Domestic permits and tariffs on foreign goods are too complicated, and carbon taxes are not. Carbon taxes should be introduced at a low level and increased gradually to give domestic industry time to adjust, foreign governments time to implement their own taxes, and everyone the opportunity to work towards the "optimal" tax. Taxes require the least control, calibration and intervention -- characteristics that will allow markets to reduce GHG gas emissions at the least cost.

1 comment:

  1. As you know, I am skeptical of any new government initiative--especially one involving hundreds of billions of dollars--but your proposals are much much better than what I think we'll actually get out of DC.


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