What Should Cap and Traders Do If China Doesn't Want to Cooperate?
The story so far: In the hours before Waxman-Markey passed the House, a provision was added to the legislation requiring the White House to impose a carbon tariff on the imports of countries that don't have limits on their greenhouse gases by 2020. Controversial!
This is meant to accomplish two things: First, it strengthens the White House's hand in negotiations with other countries. As Brad Plumer writes, "a number of China experts have suggested to me that China's eagerness to talk with the United States about climate change stems, in part, from their fear of a gory trade war. So it's perfectly conceivable that the House may have strengthened the Obama administration's position in its ongoing talks with China. U.S. negotiators can say, 'Look, we don't want a trade war, but we're having a hard time restraining Congress, so it's important that we work these issues out before protectionists in the House and Senate do something really stupid.'"
Second, it prevents what's known as "leakage." Essentially, if carbon-intensive goods produced in America become more expensive because of cap-and-trade, they may simply be replaced by imports. Wal-Mart will stop buying Little Baby Oil Patch from factories in Ohio and begin buying them from factories in Shanghai. Indeed, you could even see cap-and-trade as giving other countries a short-term incentive to ignore their carbon emissions because it will make their goods relatively cheaper.
But it's not all upside. It could start a trade war. It may seem that the United States is bullying other countries. And tariffs are not, in most case, terribly economically efficient. Opinion on this seems a bit split. Paul Krugman thinks the policy makes sense. Tyler Cowen (who used the title I wanted to use for this post: "Cap-and-trade-war") and Matthew Yglesias don't. Barack Obama has clucked his tongue, saying, "I think we have to be very careful about sending any protectionist signals there." And that may be right too. But Josh Bivens, an economist at the Economic Policy Institute, sent me a smart e-mail in favor of the policy. I've copied it below the fold:
First, I may be wrong on this, but given the closeness of the vote, is anybody sure that Waxman-Markey would've passed without the border adjustments? I'm not, and, I'm also pretty sure that nothing passes the Senate without them (maybe not even with them), so this surely deserves much larger weight on the 'pro' side of the ledger than people seem to be granting.
Second, the potential scale of losses from leakage don't sound trivial to me. A report by RFF says that the benefits of unilateral US carbon pricing are reduced by 25% if nothing is done to stop leakage. And, comparing border adjustments to other ways to curb this leakage while we wait on an international agreement make them look pretty good to me.
I am not very sanguine about the politics of losing a quarter of the benefits of an incredibly hard-fought legislative win every year while we wait on an international agreement - how durable do people think the WM win will be if opponents can come back every year with (not totally in-credible) estimates of how many jobs we've lost to trading partners because of it? The border adjustment in WM buys more than a decade to reach an agreement before it kicks in. This seems entirely reasonable to me.
Third, where I think Krugman is most right about this stuff is how bizarre it is that a (literally) textbook economics solution (albeit a second-best one) to this problem (that is probably even allowed under existing international trade law) has inspired such ferocious hand-wringing about protectionism, coercion, and making other countries furious. There is no rational reason at all why a carbon tariff that any country can unilaterally disarm through its own actions should be a serious hold-up to an international agreement.
If we really think that other countries are incapable of recognizing this I don't see how we think reaching a rational international agreement is ever possible in the first place.
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