The Smoot-Krugman carbon import tariff

I wrote last Friday about the China/India hole in the American climate strategy:

America appears to lack a high-probability strategy for how to get China, India, and Russia to agree to self-impose a significant positive carbon price.

The Administration and its Congressional allies are trying to impose a significant carbon price in the U.S. through something like the Waxman-Markey bill, while entering an international negotiation process in which as much as 60% of global carbon emissions could face little to no carbon price. The likely outcome would dramatically tilt the global economic playing field, harming U.S. workers and firms relative to their counterparts in China and India.At the same time, it would make little progress toward addressing the risk of severe global climate change, as a large portion of global carbon emissions would remain effectively uncapped.

In that post I identified two questions that American policymakers need to answer to fill that hole. The first of those was:

What tools should we use to try to convince the government of China to impose a positive carbon price as part of a global effort? (choose one or more)

  1. Leadership: U.S. goes first and self-imposes a price. Then we use diplomacy to try to convince the Chinese to do the same.
  2. Carrots: The U.S. pays the Chinese to reduce their emissions.
  3. Sticks: The U.S. imposes import tariffs on Chinese goods as long as the government China does not impose a carbon price.

I now see that I was eight days behind Dr. Paul Krugman in identifying this challenge. On May 14th, he wrote in his New York Times column “Empire of Carbon“:

(T)he people I talk to are increasingly optimistic that Congress will soon establish a cap-and-trade system that limits emissions of greenhouse gases, with the limits growing steadily tighter over time. And once America acts, we can expect much of the world to follow our lead.

… But that still leaves the problem of China, where I have been for most of the last week. … But China cannot continue along its current path because the planet can’t handle the strain. … And the growth of emissions from China … already the world’s largest producer of carbon dioxide … is one main reason for this new pessimism.

I’d like to compare where I think Dr. Krugman stands on various elements of the strategic question I posed, and compare them with my own views. We differ in our concern about the risks and costs of severe climate change, and that difference leads us to radically different policy recommendations.

I should state at the outset my views on the science and risk of climate change. There is a significant amount of evidence that there is a long-term risk of severe climate change. But there is little discussion about the numbers: How big of a risk? How much warmer? How quickly? How certain are we? And the numbers matter a lot. If we knew with certainty that Earth would warm 10 degrees over the next 20-30 years, I would be screaming for an immediate big carbon tax. If instead we think Earth is likely to warm one degree over the next century or two, then climate change is a trivial concern and we needn’t worry about it. The problem is that nobody knows where we are between these two extremes. This uncertainty matters a lot, and it makes the problem hard.

Given this uncertainty, I believe there is a small but non-trivial risk that there will be severe climate change over the next century or two. And so I am willing to consider significant and effective policy actions to slow the growth of greenhouse gas emissions to reduce that risk. I do not, however, believe that risk is so great or so certain that we must immediately commit to drastic changes in our economy, or that we must ignore the costs of those policy actions. I treat this like any other policy question: Given tremendous quantitative uncertainty, what are the marginal costs and benefits of our current emissions path, compared with various recommended policy options? I will quantify my thinking on these questions in a separate post. I am willing to consider policies to set a domestic carbon price, if I can be convinced that they’re worth it and will work. So far I have not seen any carbon pricing proposal that I think (a) would have benefits that exceed the costs, and (b) is feasible in the real world of nation-states with differing national interests. But I’m open to suggestions.

For now, let’s focus on two different answers to the China/India question in the American climate strategy.

  • Dr. Krugman appears to believe that, if China does not slow its global greenhouse emissions growth, actions by the rest of the world will be insufficient to significantly slow global emissions. Krugman: “In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015.” That’s a decision that, all by itself, will swamp any emissions reductions elsewhere.” I agree with him on this point.
  • I agree with Dr. Krugman’s read of the official Chinese position: “So what is to be done about the China problem? Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels.” This is consistent with what I know about the Chinese position from our Administration negotiators in 2007 and 2008 , and with what the Financial Times reported last Friday: “Beijing reiterated its belief that developing countries, including China, should curb emissions on a voluntary basis, and only if the cuts ‘accord with their national situations and sustainable development strategies.'” Translation: We’re not setting a domestic carbon price. The Chinese are proposing that the U.S. and other rich nations choose answer (B) Carrots from my menu above: rich countries pay China to reduce their emissions.
  • It appears that Dr. Krugman believes Chinese leaders will not be swayed by option (A) Leadership: “And once America acts, we can expect much of the world to follow our lead.” But that still leaves the problem of China – I largely agree with him on this point.
  • Dr. Krugman appears to presume that we must slow the growth of global greenhouse gas emissions starting now. I disagree with Dr. Krugman on this point, and am more persuaded by Dr. Bjorn Lomborg. The state of technology is such that economic costs of near-term emissions reductions are high, and the long-term climate benefits are small. As an example, Dr. Lomborg estimates that $1 expended through the Kyoto agreement would produce the equivalent of about 30 cents of long-term climate benefits. To the extent you believe long-term climate change must be addressed, we are better off devoting resources to technology pushes that try to reduce the cost of carbon-reducing technologies. The less expensive these technologies, the easier it is for everyone to make significant emissions reductions, and the easier it would be to get a global emissions reduction agreement that includes China and India (presuming you think such an agreement is necessary).
  • Since Dr. Krugman believes that we must persuade the Chinese to change their growth path “because the planet can’t handle the strain,” he appears to conclude that we should threaten a carbon import tariff. His phrasing is quite careful, but he is clearly floating the idea:

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

  • Technically, Dr. Krugman does not say (1) the U.S. (2) should propose (3) a carbon import tariff. He instead predicts that “sanctions, probably in the form of taxes on their exports” will be imposed by unnamed countries “sooner than most people think.” By itself, this is only a prediction. But in the following two bolded sentences, he endorses such “sanctions, probably in the form of taxes on [Chinese] exports” by unnamed countries. With this clever phrasing, Dr. Krugman has floated an aggressive but ultimately deniable policy proposal: a carbon import tariff.
  • I believe there are cures that are worse than the disease. An import tariff would be protectionist (Dr. Krugman concedes this point). In the context of a global climate change negotiation in which different countries are establishing different domestic carbon prices, and in which two of the world’s largest economies (China and India) refuse to do the same, it is easy to see how a carbon import tariff by the U.S. could set off a global trade war, with potentially devastating effects on the world economy. It appears that Dr. Krugman is willing to bear the increased risk of a global trade war for the benefit of an increased probability that China (and India?) will slow their greenhouse gas emissions. I am not.

For completeness, my answer to my own strategic question is “(D) None of the above.”

  • Even if the U.S. establishes a domestic carbon price through a cap-and-trade or carbon tax, diplomacy alone will be unable to convince the Chinese and Indian leaders to do the same in their countries. Option (A) Diplomacy won’t work by itself.
  • Without reductions in Chinese and Indian emissions, I expect that the total climate benefits of the likely global reductions in future emissions growth would not be worth the economic costs to the U.S. of a domestic carbon price (in the near term).
  • I oppose the U.S. paying large developing countries like China and India to reduce their emissions. I am confident the U.S. Congress would agree with this view. Option (B) will not happen in the U.S., nor should it.
  • Because I think the risks of significant damage from severe climate change are small, and the costs of near-term emissions reductions using current technology are high, and because I am deeply concerned that a carbon import tariff might provoke a global trade war, I strongly oppose option (C) Sticks, including any form of carbon import tariff. Free trade, including with China, is more important to me than the possibility of creating leverage on Chinese leaders to try to change their energy development path.
  • We are not talking about small numbers here. China thinks developed countries should contribute 1/2 to 1 percent of GDP to help poorer countries cut their emissions, and the economic effects of domestic carbon prices are measured in the same orders of magnitude. When you’re measuring things in percent of GDP, you’re shooting with real bullets. I oppose imposing such a tariff, threatening one, or even floating the idea as Dr. Krugman has done.
  • Therefore, I conclude the best policy is for the U.S. not to impose a domestic carbon price in the near future. To the extent policymakers believe severe climate change is a risk that should be addressed, I instead recommend they focus on pushing carbon-reducing technology R&D, and reducing tariffs and other trade barriers to the exchange of such technologies, as Dan Price has recommended.
  • I would be comfortable with the U.S. contributing taxpayer funds to a joint international R&D effort, if it were an alternative to a domestic carbon price, and as long as U.S. firms maintained their property rights to such research.

I have tremendous respect for Dr. Krugman’s past work as an international economist. I am surprised that he is willing to risk a global trade war, and that he would apparently fire the first shot when the global economy is so weak.

34 responses

  1. Keith,

    I just want to say, aside from the particulars (i.e., not agreeing or disagreeing with anything in this post of yours or others), that I think your long-form posts, with the premises and logic of arguments laid out and examined in a structured way, is great. Far too much content in the blogosphere consists of sweeping or vague assertions and assorted rhetoric, rather than the intelligent approach you take.

  2. I know I said this in my comment on the other post, but it is amazing that we are able to conduct this conversation without even mentioning nuclear energy.

    Of course, it doesn’t address the China/India problem, but it goes a long way to solving our problem (with other R&D investments as KH proposed). That doesn’t matter, though, because there is nothing we can do about China and probably about India (and Russia). Personally, I’m glad the Chinese are so recalcitrant. It makes it much harder to justify the boondoggles currently being floated. Let’s hope they stay selfish.

    (Even if we did pay them, I doubt they would comply. They’ll just fudge the numbers with no one the wiser. Exactly like the Soviets did. How rich it would be if they took our subsidies and used them to build up their military. Wouldn’t surprise me).

    Incidentally, about two years ago I was randomly watching a committee debate in the Senate, apparently relating to some climate bill. I have no idea what it was, but I distinctly remember about half of the Senators, including Barbara Boxer and Joe Lieberman, absolutely savaging China, and being perfectly frank about their willingness to tax their imports. There is also a strong protectionist wing of the Republican party.

    So, I’m pretty confident that KH is right that the idea, at this time, will be verboten. But if the economy picks up in a year or two, I don’t see much to hold back the eco-nuts and protectionists in Congress from returning to the “punish China” talk.

    And Obama is such a good politician he could sell protectionism as free trade.

    Then again, the taxes would be absolutely impossible to implement. It’s not a “dominant” strategy. China will, first, probably none-too-subtly imply that they’ll nuke us if we go through with it (they’ve done it before, lord knows).

    Second, they’ll counter-sanction and threaten to dump our debt. Since our leaders have no guts (not that I want them to in this case), we’ll cave. And the Chinese know it. Which is why they know we won’t bring it up in the first place if they simply preemptively threaten apocalypse now.

    Still, some of these congress people are crazy. They’re willing to, let’s say, not take a trade war off the table if it means saving their butts in the 2010 election by pandering to unions. They also might believe that Al Gore speaks the gospel truth. (Krugman believes it, which is why HE feels a trade war is acceptable. If a congressperson believes it, why wouldn’t he or she feel the same?).

    Oh, and they might get it into their heads to threaten “import taxes” ostensibly for “slowing carbon emissions” in order to have leverage over China in dealing with North Korea. It’s probably too late for that, though.

    Just thinking.

  3. KBH: I concur with ‘Brooks’ and give you kudo’s for the long form post.

    Assume that Paul Krugman is indeed a brillant individual. I believe this is correct.
    Assume that as an Nobel prize winning economist he is fully aware of the potential economic damage that would arise from a global trade war. I believe this too is correct.
    Assume further that he is quite willing ‘to threaten “import taxes” ostensibly for “slowing carbon emissions”’ (as Chris has noted) and to implement such if possible.

    Why would this brillant, Nobel prize winning economist suggest such an economically dangerous path?

    It seems to me that Krugman has long been a political person rather than an economic person. As a political person does his political positions not benefit from gains in the political sphere if such economically dangerous events occur? Does domestic government become even more powerful if the world economy is imploding. Does Krugman’s position therein also become more powerful? Would his political policies have a greater likelihood of enactment by an all controlling domestic government when the world’s economy grinds into dust? Does a political person stand to gain if the economic person fails?

    While I find conspiracy theories a huge waste of time what then is to be made of a series of intellectually contradictory facts?

  4. For some reason, as I was reading this, I harkened back to debates in previous administration (Bush/Clinton/Bush or some combination thereof) related to the conferring of Most Favored Nation trade status to China. The debate was over whether this was appropriate given China’s human rights abuses. I could see a similar argument being made, in today’s political climate, that we would not want to confer Most Favored Nation to any nationt that did not apply an appropriate carbon cost on their industry. Although such a policy would not be called a “carbon tax”, the net effect of it would be the same, and it would be likely to be interpretted as such by any country affected by it.

    In the end, I am in agreement with Hennessey. Option (D), none of the above, is the correct option. At this point, the societal costs of reducing carbon emissions outweight the benefits of doing so. This is because of certain value judgements that I have made, that we should attempt to maximize the societal benefits of reducing carbon emissions. The Obama Administration, on the other hand, appears to have decided that it is better to maximize carbon emissions without incurring societal costs (as evidenced by their proposed CAFE standards). Someone else might be willing to incur some societal cost in order to further reduce carbon emissions.

    One of the driving factors in this kind of valuation is fear. I fear the consequences of reducing carbon emissions more than I fear the effects of rising carbon emissions. The Obama Administration fears increasing carbon emissions more than the consequences of reducing them. Interestingly, however, as the Administration does not seem to endorse an increase in nuclear energy, which is carbon free, it can be argued that they fear nuclear energy more than they fear climate change. Of course, it may just be that they fear the political ramifications of supporting increased nuclear energy production more than they fear climate change, which is an even more interesting proposition.

  5. Why do you believe that humans are the primary cause of global warming or climate change? If we are not the primary cause, why should we engage in self-flagellation by enacting carbon controls?

  6. Keith, You haven’t addressed the two party talks between the US and China. The main topic was technology sharing/transfer.

    http://www.guardian.co.uk/environment/2009/may/28/john-kerry-united-states-china-climate-change

    http://www.carnegieendowment.org/events/?fa=eventDetail&id=1281

    Quote from the above Carnegie Endowment article:

    “Mathews opened the discussion by revealing for the first time that Carnegie and GEI together facilitated a year of off-the-record talks between Chinese and American energy experts and political leaders. Bill Chandler, director of Carnegie’s Energy and Climate program, and Jin Jiaman, executive director of GEI China, launched the talks in 2007 with the goal of moving beyond discussing what the two countries could do to address climate change and beginning to discuss how to do it. According to Chandler, helping to facilitate the political agreement to begin the dialogue seemed to be the best service the non-government sector could provide.

    The resulting U.S.-China Climate Track II Dialogue afforded leaders from each country the opportunity to speak frankly and discuss the types of collaboration likely to produce results. Both teams agreed global emissions must be cut by 60 percent by the year 2050, and that both China and the United States must take action.”

    Also, this from the Chinese Minister Xie

    “In the question and answer session, Xie and Cantwell first discussed the prospects of domestic climate legislation in the U.S., with Cantwell expressing her hope that Congress may agree to some form of Obama’s cap-and-trade plan before the end of the year, while acknowledging the hurdles that must be overcome first. Xie explained that his country will be more likely to act aggressively once the U.S. takes this decisive domestic action and agrees to help countries like China finance their transition to a clean energy economy.”

    It seems we are well on our way to getting some agreement before Copenhagen. From Xie’s last statement it seems the Chinese are open to binding targets through technology transfer even though they are still holding out for financial assistance that would come from all developed nations not just the US.

    Your imaginary debate with Krugman is counterproductive. Obviously Krugman was clueless about these discussions and the functionaries in China he spoke with either decided to humor the great prevericator (see: http://patterico.com/2005/08/26/paul-krugman-just-cant-get-it-right/ ) or were also equally clueless.

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  9. There are two issues here, one of effectiveness and one of fairness.

    i. The first one refers to how to slowdown (stop, or reverse) human-made climate change. I think that, as with other international issues (genocide, human rights, global trade and migration, etc.), we need a world government with sovereignty over the whole world, who would impose a common carbon tax. This would be the solution that any Pigouvian economist would give. Proceeds can be distributed world-wide as lump-sum subsidies.

    ii. The second one refers to present differences in income per capita, as well as past paths of development (and emission). The fact that present differences of income per capita correlate strongly with accumulated past emissions, indicates (to me) that there should be some compensation from developed to underdeveloped countries. This would be similar, in logic, to a government that pays a group of people for a problem for which they are not responsible; say, for example, they pay people in a town with nuclear toxins to move somewhere else. Again, a world organization (a WTO, or a stronger UN) should be the natural place to negotiate these transfers.

  10. One more thing: this should not be discussed in terms of US and China only. There are more than 200 countries in this world. If China keeps growing (an polluting) as it is, soon enough, under second point above, will have to be paying less developed countries (I would guess, mainly Africa and Latin America).

  11. TGiven that we (the US) is financing so much of its current debt w/Chinese investments, it seems to me that were we to adopt option B, we would merely be the middleman in having China pay itself to reduce emissions. were i the Chinese, i’m sure i’d wonder a bit about that.

  12. I agree that better technology would probably be the best option but wouldnt a carbon tax provide extra incentives to companies to improve technology. Even if barriers to trade are removed and new technology is promoted it still wont provide a big enough incentive for companies to develop or adopt them.

  13. Keith has mentioned Greg Mankiw several times in reference to Pigouvian taxes, it might be useful to read Greg’s paper http://www.palgrave-journals.com/eej/journal/v35/n1/pdf/eej200843a.pdf and see where policy runs headlong into economic theory. What might be sound economic policy might not be politically possible. The best way to implement cap and trade is to auction the permits but the coal fired electric utilities wouldn’t come on board until the permits were free (hat tip to Bjorn Lomborg). Because the government doesn’t get revenue from the permits there are deadweight losses to consumers because there are no offsetting cuts in other taxes. There are a lot of nuances to policy possibilities that might arise from the abysmal state of economics education in this country. From immigration to energy policy the public is ill prepared to make sound decisions and the politicians are hamstrung within this state ignorance. Often we go on the internet not to learn but to confirm our own prejudices and we cannot see the other side of the argument clearly see: http://www.nytimes.com/2009/05/28/opinion/28kristof.html?em When you combine that tendency with ignorance you have a democracy that is in peril or you have a flame war.

  14. this analysis in flawed in the following way:

    “Because I think the risks of significant damage from severe climate change are small, and the costs of near-term emissions reductions using current technology are high”

    the risk of significant damage is small. But the expected value of this overall situation is close to infinitely negative. In the event that there is significant damage, you are multiplying a small probability by a whole host of absolutely unpredictable tidal wave ( literally and figuratively ) of a myriad negative consequences, from economic to national security, etc.

  15. The thing is if i make an economic decision I tend to consider probility and impact to derive an appropriate decision. But if it’s about anything probably affecting my or others survival I can become quite risk averse. While the west might suffer the most from projected climate changes, countries like Bangladesh certainly will…

  16. @Steven Hales: Clearly you are orders of magnitude above me intellectually so forgive any ignorance I display. I greatly appreciate the content of your comments.

    Q: My understanding is that water vapor is actually the most aggressive greenhouse gas (Wikipedia – greenhouse gases). If so, then why not seek to moderate water vapor? Is it that governments are unable to regulate (e.g., tax) water vapor hence they attack CO2 as a more available, albeit secondary, substitute?

    Q: Prof. Scott Mandi discussed climate change in conjunction with the Vikings in Greenland. (http://www2.sunysuffolk.edu/mandias/lia/index.html)

    “A careful examination of the climate record reveals that Europe experienced a prolonged warm period known as the Medieval Warm Period (hereafter referred to as MWP) between the years 600 and 1150, cooling of the climate between the years 1150 and 1460, a brief warming between the years 1460 and 1560, followed by dramatic cooling known as the Little Ice Age (hereafter referred to as LIA) between the years 1560 and 1850.”

    Clearly this all occurred prior to CO2 emissions being of any major concern. Although the Professor explicity proscribes the use of this report as evidence of a non-human cause of contemporary global climate change I do not understand why this is so. If significant global climate change has just recently (geologically speaking) ocurred in the absence of man made CO2 emissions why then the current hysteria over CO2 emissions?

    Q: As Michael Kogan puts it, while the future risks from global warming have a low probability the presupposed magnitude of negative outcome is huge thus the expected value of the outcome is enormous.
    Could we not logically make exactly the same argument regarding the risk of another (emphasize “another”) asteroid strike? And what, exactly do global warming proponents recommend as protection from that disaster?

    Thanks again for your cogent comments.

  17. Redst8r, you are correct that we can make this argument regarding the risk of an asteroid strike and probably about a lot of other things, too. Isn’t this why astronomers track lots of celestial bodies and understand and model their trajectories, we have various ideas about how exactly we would go about blowing this thing up if we had to, etc. But there is a crucial difference – we have very little say in whether or not an asteroid decides to hit us, or the sun decides to explode and suck us into a black hole, etc. But in the case of global warming, presumably it is of our own making, if not entirely, then to a significant extent and we can potentially stop it – maybe at a high cost, but we still have that choice.

    In the case of global warming, if you creatively think about all the implications of let’s say a moderately bad scenario unfolding, including national security implications, then I think you will come to the conclusion that it is worth expending considerable resources to try and fix this.

    And of course the Chinese will not do anything unless we do something first. They will need political cover and we can provide it through quid pro quo negotiations, threats of tariffs and other methods. But if we don’t do anything, they certainly won’t do anything either.

  18. I like most economists, think Krugman is a great economist, but I think also many economists would agree with me that he is way off base when it comes to politics and international relations of which he has no special knowledge.

    The other concern you didn’t mention was that carbon tariffs would likely be in violation of WTO provisions.

    Perhaps unsurprisingly, I agree with pretty much all of what you said and have been trying to get that message out in the classes I teach and wrote much the same for the NYTimes Freakonomics blog:

    Though I’m also ok with the idea of introducing a small carbon price, if nothing else, to get experience setting up a system in case it needs to be ramped up, and as a potentially efficient way to promote technology. And maybe your option A, leadership, may not be as futile as we fear, so a small carbon price could make progress in that direction.

    Also to echo what you said in the comments, the lesson I learned well from the White House is that even economists are pretty unanimous that a tax is the most efficient policy, how money is redistributed makes a huge difference and can make a good policy bad.

  19. “Xie explained that his country will be more likely to act aggressively once the U.S. … agrees to help countries like China finance their transition to a clean energy economy.””

    The sarcastic voice in my head said that we will go out back and take the money for that from the money tree. We (the US) are broke, even BO agrees. The idea that Congress is going to tax Americans to send money to China is laughable.

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