Global Policy Memo
Commentary and Counterpoint on World Affairs
Posted by Jeff on March 23, 2009 at 5:40 pm
filed under International Trade and Protectionism
Last week, Energy Secretary Steven Chu said that the U.S. is open to the idea of imposing carbon tariffs on imports. The idea behind these tariffs is simple: if the U.S. adopts a cap-and-trade scheme, it will increase the price of domestic factors of production (e.g. electricity in Illinois), but it will not increase the price of foreign factors of production (e.g. electricity in China). As a result, a cap-and-trade scheme would have the general effect of increasing the relative price of domestically produced goods (although this is not true uniformly, because many domestically produced goods are largely produced using foreign factors, and vice versa). The carbon tariff would be a rough attempt to correct this imbalance by imposing a tax on carbon-intensive imports. In other words, it would be intended to prevent a cap-and-trade scheme from distorting domestic consumption in favor or foreign carbon-intensive goods.
The newspapers (WSJ and NYT) take it more or less for granted that such a policy would be WTO-inconsistent because it violates the Article I MFN principle. However, I think this is incorrect. In a WTO dispute, the U.S. would probably invoke an Article XX(g) defense, which provides an exception for measures “relating to the conservation of exhaustible natural resources.” The exhaustible natural resource in question is carbon-free atmosphere–this might sound implausible, but the Appellate Body in U.S. - Reformulated Gasoline did actually rule that clean air is an exhaustible natural resource, so it might very well rule that carbon-free atmosphere is as well. The U.S. might also argue that its natural resources might be threatened by the effects of global warming - for example, if its lumber supply would be reduced because its trees cannot survive in a warmer climate - and thus those exhaustible natural resources are also at play. As I suggested before, the “relates to” language (as explained in U.S. - Reformulated Gasoline,) is a fairly low hurdle to clear. The only challenge will be to demonstrate that the measure’s effect on conservation is not “merely incidental.” I would expect the WTO panel to agree that a U.S. carbon tariff is not “merely incidental” to safeguarding a carbon-free atmosphere.
(The U.S. might also invoke Article XX(b) and XX(d) exceptions, but for several legal reasons I would not expect those arguments to persuade a WTO panel.)
If my friends on the U.S. Trade Representative’s legal team agree with this legal analysis, then we might see the U.S. move towards a carbon tariff unilaterally without fear of WTO-sanctioned retaliatory measures.
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Sina
That’s a really interesting post. I’ve read about WTO concerns, and your argument seems convincing to me. I also don’t think it violates the spirit of free trade to be imposing these kinds of tariffs. If anything, hopefully it will prod other nations to set up a coherent, multilateral regime that forces polluters to pay the cost of their externalities.
Jeffrey Kessler
You raise an interesting point about the relationship between carbon tariffs and “the spirit of free trade.” It’s not as obvious to me that they are in harmony. Certain domestic political lobbies would push a carbon tariff because of the effects it has on increasing the home-bias of U.S. consumption patterns. (Of course, there will be many lobbies on the other side of the issue, especially those that represent exporters to countries that do not unilaterally adopt a cap-and-trade scheme.) Thus both in effect and in motive, a carbon tariff could advance a protectionist political agenda.
If you believe in maximizing the size of the world’s pie and you also want to stop global warming, I think the only way to go is a multilateral, Kyoto-style solution. It sounds like you agree that that would be the best scenario.