I did not expect much progress out of COP26. But I failed to consider the spreading of bad ideas.
Enormously Complex Managed Trade
Please note Tariffs to Tackle Climate Change Gain Momentum.
Policy makers on both sides of the Atlantic are looking at targeting steel, chemicals and cement. The tariffs would give a competitive advantage to manufacturers in countries where emissions are relatively low.
Economists and policy makers have been exploring the idea of carbon tariffs over the past 20 years, to level the playing field for domestic companies and to encourage trading partners to toughen their own emissions rules. When Yale University economist William Nordhaus accepted the Nobel Prize for his work on the economics of climate change in 2018, he proposed a global “climate club” of low-polluting countries that would impose a 3% tariff on imports from higher-polluting non-club members.
The European Union has taken the lead in carbon tariffs, unveiling its proposed plan in July. It currently has a cap-and-trade system in which domestic companies must obtain a permit to emit carbon, capped at a set amount. Permits currently change hands for around 60 euros, or $68, per metric ton of emissions.
Under its proposal, the EU would charge producers outside the area a fee similar to what domestic companies pay, based on the carbon content of their products sold in Europe. The border adjustments would initially apply to four heavily polluting sectors: steel, aluminum, cement and fertilizer. European officials hope to implement the program by 2025 as part of a broader deal to cut continental emissions 55% by 2030.
British, Japanese and Canadian governments have begun exploring similar plans. In the U.S., more than a dozen bills have been introduced in Congress since 2015, by both Democrats and Republicans, that include some kind of carbon tariff, usually linked to a carbon tax on domestic products.
- Carbon tariffs are “a perfect tool in economic theory, but we are not living in an economic theoretical world, unfortunately,” said Markus Zimmer, an environmental economist for Allianz SE in Germany. “Once all the politicians and the lawyers work through the regulations, you can get the opposite of what you intend.”
- Texas Rep. Kevin Brady, the top House Republican for trade policy, criticized the agreement as “enormously complex managed trade.”
- Counting and verifying emissions at individual facilities will be difficult and costly, and could create the potential for manipulation, said Stefan Koester, a senior analyst specializing in climate policy at Information Technology and Innovation Foundation, a nonpartisan Washington think tank.
- In the U.S., carbon pricing—whether a carbon tax or a European-style emissions-trading scheme—remains deeply unpopular. Congressional Democrats are looking at ways to calculate “implicit costs that come from regulation” of U.S. companies and imposing an equivalent cost on foreign competitors, said Mr. Peters, the California congressman. “It’s not a simple thing.”
The above disagreements are well-stated and accurate. They missed several key ones.
- Tariffs are not a tax on foreign nations. Tariffs are a tax on US consumers and businesses guaranteed to drive up prices at a time when concerns over inflation are already soaring.
- Complaints of “dumping” are ridiculous. Dumping implies selling below cost. If that is indeed happening, then it is to the advantage of US consumers and importers and to the detriment of the dumpers.
- The WTO has repeatedly ruled against such measures. Trade fights are bound to escalate.
- Katherine Tai, Biden’s trade rep said “The WTO is considered by many as an institution that not only has no solutions to offer on environmental concerns, but is part of the problem.” Curiously, other than the environmental slant, she sounds like Trump. How can anyone not see the damage Trump did?
Level Playing Fields
The alleged quest for level playing fields is never the true objective. It’s always about protecting manufacturers who cannot compete in the real world.
In this case, politicians and unproductive businesses want to mask protections with unrealistic climate goals.
And they won’t stop with steel, chemicals, or cement.
The damages would be enormous.
No COP26 Deal
There will be no COP26 deal on this. The vast majority of countries will object. But the G7 nations can do this individually.
If they do, in unison, expect a major trade calamity accompanied by stagflation depending on how crazy the politicians act.
On July 6 I noted EU Tries to Convince Trading Partners Its Carbon Tax is Not a Tax.
CBAM, the EU’s carbon border adjustment mechanism looks like a tax, acts likes a tax and is indeed a tax. However, the EU says it is not a tax, but an “adjustment mechanism”.
Will Hypocrisy Rule?
Do we promote solar panels or not? At what price? Do we think long-term or short term?
Biden Has a Solar Panel, Climate Change Dilemma, Will Hypocrisy Rule?
Trump’s Global Trade War Was Over Manufacturing, Biden’s Will Be Over Clean Energy
On August 31, I commented Trump’s Global Trade War Was Over Manufacturing, Biden’s Will Be Over Clean Energy
Unfortunately, that appears increasingly likely to have been an accurate assessment. I would have rather been wrong.