Recent studies have highlighted that sizable amounts of carbon emissions are transferred between world regions in the form of traded goods and services. That is, considerably more emissions are generated for the production of imports to e.g. the EU and US than those associated with their exports.
This observation has frequently been regarded as an indication that energy-intensive industries are being relocated from industrialised to developing and newly industrialising countries, especially to China.
It has also been argued that this so-called "off-shoring" of energy-intensive economic activities has allowed Annex-I countries to the Kyoto protocol to meet their reduction commitments without achieving any real reductions in global emissions.
For this reason, there is a widespread fear that efforts to implement climate measures unilaterally – without a global agreement – will simply shift emissions to countries without comparable policies in place, instead of reducing global emissions.
Consequently, it has been proposed to ”level the playing field“ by applying a tariff on imported products in proportion to their carbon content. These so-called "carbon tariffs" or "border tax adjustments“ were first proposed for the EU by the Sarkozy administration and recently revived by Arnaud Montebourg, the French minister for industrial revival. They also played a prominent role in the US Waxman-Markey bill that was eventually voted down in the Senate.
Carbon import taxes won’t decrease emissions
While wide parts of the environment movement deplore the absence of such trade measures to strengthen domestic environmental legislation, it is not entirely clear whether they would actually decrease emissions in countries against which they are applied.
Obviously, the simple logic of putting a price equal to the economic damage associated to one unit of carbon emissions cannot easily be transferred to imported emissions. Restricting the import of a certain good does not automatically mean that the emissions associated with its production are avoided, as it could either be sold onto a third market or consumed domestically instead.
In the most extreme case, such a tariff could even increase emissions of a country against which they are applied. For instance, if it were to induce China to export fewer electronics, toys, and textiles to western markets, it is conceivable that some fraction of China’s capacity might shift to more carbon-intensive products, such as steel or heavy machinery.
Furthermore, it seems questionable whether carbon tariffs would incentivise countries to behave cooperatively in international climate negotiations and take steps to clean up their energy system.
To the contrary, such trade measures could send the wrong signal, thus undermining mutual trust, which could lead to countervailing measures and even a ”trade war“.
Export taxes not carbon tariffs
An attractive alternative to carbon tariffs are export taxes, put into place by the major exporters of carbon-intensive products. Since 2007, the Chinese government has applied such export taxes (as well as quotas) in energy-intensive sectors as part of its low-carbon development strategy. Compared to carbon tariffs, these measures have the advantage of providing a more direct incentive to adopt cleaner production methods.
They also prevent "trade-diversion", in other words re-orientation of exports to third countries without policies to put a price on imported carbon emissions. In addition, exports taxes can be expected to be politically less challenging, as they are agreed by the country in question and hence less prone to manipulation by trade partners’ vested interests that focus on protecting market share rather than improving environmental quality.
Political feasibility is also increased by the fact that the revenues of such a tax would accrue to the exporter instead of the importer. In this context, the voluntary export restrictions agreed by Japanese car manufacturers to limit their exports to the US directly come to mind.
While export taxation would very likely constitute a more promising approach than carbon tariffs to reduce emissions in countries such as China, their primary objective is to protect trade partners’ industries, as for the case of Japanese export restraints mentioned above. Hence, from an environmental point of view, it is not clear why any country should limit emission pricing to its export sector.
Clearly, any desired amount of emission reduction can be achieved the more cost-efficiently the broader the portfolio of available mitigation options. That is, by extending a carbon price to either energy-intensive industries in general, or even to the entire economy, emission reduction can be achieved in a less costly way.
Carbon pricing and a new era of cooperation
Such carbon pricing would probably also decrease political pressure to impose carbon tariffs against China in other countries. In addition, it could also lay the foundations for cooperative behavior, for example by fostering the transfer of existing technologies or engaging in joint research and development.
China has announced the creation of pilot emission trading systems in seven provinces and cities, with trading to begin in 2013. According to the 12th Five-Year Plan, these pilot systems are due to be extended into a nation-wide emission market by 2015.
These first steps clearly constitute a promising approach towards market-based environmental regulation. In the medium term, such a Chinese emission trading system could be integrated with other existing (such as the EU ETS) or newly emerging (such as in Australia, Korea and Mexico) emission-trading systems. With such "linked" systems, certificates corresponding to emission reductions achieved in one region could be used to offset emissions in another region. By equalising the costs of avoiding one unit of emissions across systems, economic efficiency would increase, as emission reductions could be carried out where they can be achieved most cheaply.
More importantly, however, an array of linked regional emission trading systems could constitute an integral building block for a new global climate regime and pave the way towards the level of cooperation that is needed to prevent anthropogenic dangerous climate change but that was absent in recent rounds of international climate negotiations.
Michael Jakob is from the Potsdam Institute for Climate Impact Research