The Smoot-Krugman carbon import tariff
29 May
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)
- Leadership: U.S. goes first and self-imposes a price. Then we use diplomacy to try to convince the Chinese to do the same.
- Carrots: The U.S. pays the Chinese to reduce their emissions.
- 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-r
educing 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 – 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.
Related Posts
(best matches are listed first)- The wrong way to address climate change
- The G-8 agreement (especially on climate change)
- What did President Bush announce today on climate change?
- What was accomplished at the G-20 Summit?
- President Bush’s trip to Europe
- The China/India hole in the American climate strategy
- Parsing the President: no “climate change”?
- Food prices & food aid
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.
Is the phrase “in comparison to if nothing is done,” (to appear after the first comma)implied?
I instead recommend they focus on pushing carbon-reducing technology R&D
In public policy discussions, R&D spending tends to be treated as a kind of panacea. Invoke the magic letters and all heads nod sagely, “More R&D, yes more R&D. That’s the ticket.” This response does not recognize that (1) you can’t predict what new insights will arise from Research and (2) you can only Develop a new insight if it arises from that research. Net yields from R&D spending, especially in the direction of a particular desired result, are often negative.
So proposals to spend on R&D should be subjected to the same skepicism applied to political proposals. We ask why we believe that the Chinese government will do this or that in response to this tariff or that diplomatic initiative. We should also ask why we expect a significant positive net yield from R&D spending.
Because greenhouse gas suppression is a relatively new field (in contrast to “alternative energy”) R&D spending may indeed be well rewarded. But Nature’s answer to results-oriented research is often that you can’t get there from here. We should be careful to treat favorable R&D outcomes as unexpected exogenous inputs, not as miracles the arrival of which appear in our program schedule – not that KBH did.
I am a mechanical engineer (BSME, MSME) with a background in R&D.
Ken
Apologies if this post comes across as too cyncial, but I basically agree with RedSt8er in post #4.
It all comes down to increasing political power in the hands of the State. Paul Krugman and his ilk would be in favor of almost any program, tax, or whatever that increased their political power over people’s lives.
You all look at the man-made global warming question on its own merits and try and decide on the costs and benefits based on magnitude of temperature changes. People on the Left see the benefits of imposing control over energy not in terms of trying to reduce global temperatures by 2/10 of a degree, but in the benefit of power. No cost is too large for the benefit of control.
Just ask yourself this on any man-made global warming proposal that comes out, does it increase or decrease the citizen’s freedom?
The best way to promote new technology is to place a price on carbon. Ideally, the price should be low initially but be credibly projected to progressively increase over the timescale for technological change.
It is interesting how those who would normally favour market-driven technology development instead favour government sponsorship for low-carbon technology (at least, I think that this is what you are proposing).
That’s why I’m distinctly at unease with Henessey’s position on the issue. It basically amounts to hoping that the White Knight of Technology will save us from any serious costs on the climate issue by throwing some amount of money at the problem, as if technological effectiveness responds in some type of direct linear relationship to the amount of R & D spending.
I mean, take a look at what happened in the US auto sector in terms of oil consumption after the passage of CAFE laws in the 1970s. The overall efficiency of cars rose drastically, yet oil consumption still shot up, simply because people “ate the gains”, so to speak.
In any case, don’t under-estimate even 1-2 degrees of warming in the overall global temperature. For one thing, that can translate into radically different temperature changes on the local level (since the poles are warming faster than most other areas, for example), and we just don’t know enough about the climate and environmental impact that 1-2 degrees will bring (for example, the total difference in mean temperature between London now and London in the last Ice Age, when it was as cold as northern Alaska, amounts to about 5-6 degree Celsius change).
How to deal with a reluctant China, the world’s greatest CO2 producer, is a difficult problem because our focus is on government regulation of CO2 production. That drives the concept of using tariffs to impose economic damage if China itself fails to impose that damage through cap and trade or other carbon reduction programs.
A solution is to shift the focus from regulation of production to regulation of consumption. If each item consumed had a known carbon price that had to be paid to consume that item, then the source of the item (China, USA, etc.) would no longer be important. I recommend that the US do its part in the global effort to save the world by awarding carbon consumption permits to its people. To purchase an item, a person would have to pay (have deducted from his/her carbon allowance) for its carbon contribution. There would be no tariff involved and goods from all sources could be treated equally. Carbon consumption permits could be traded between people.
We would need to change our payment infrastructure to implement my plan. The Japanese use their cell phones as credit cards. Point-of-sale payments are made via the phone, just like we now pay for most items by credit card. A system to debit a person’s carbon consumption permit account concurrent with debiting their bank account is entirely feasible.
While I am not convinced that there is a real man-made global warming crisis, if we are to take steps to limit carbon emissions, they should be sensible steps. Limiting consumption is the most direct approach we can take. And it would have the great advantage of allowing the people to understand the constraints being placed on them by carbon emission limitations.
Global Warming is not a real problem. Environmentalism is best understood as a new religious movement for modern secular rich people. Human beings are inherently superstitious and drawn to apocalyptic belief systems. The “fate of the planet” is not at stake. There is zero risk that global warming will make the planet unlivable.
The Global Warming apocalypse is a fantasy and the left wing equivalent of the Rapture — and just as nonsensical. Sadly, the Left will impoverish the rest of us while they tilt at the climate change windmills. The eco-left tend to be rich, though, so they don’t care if their policies crush the middle class.
I doubt that few among you would make a significant investment based on the weather forecast but here we are seriously discussing making major changes to the US economy based on predictions from computer models that are less proven than those used for weather forecasting. Madness…
Thanks, Brooks. It reflects my experience in the White House. This is what we did every day, although usually in more depth than what you see in these posts.
Great question. I think that agreements on technology transfer, and on international cooperative R&D efforts, are not only possible, but likely. I imagine there will/would be a strong bipartisan consensus for U.S. taxpayers to contribute a few billion dollars to such an effort. This is more likely if it’s multilateral, but bilateral deals are also quite possible.
At the same time, I draw different conclusions than you from the Guardian and Carnegie articles. The text you quoted does not change my view of the Chinese leaders’ position.
I distinguish between on the one hand technology transfer, or a joint or multilateral R&D effort, and on the other hand China or India pricing carbon, in which they raise the cost of producing power domestically. I think he first is quite feasible, the second unlikely, even given these new articles.
So in the text you quote, I pay particular attention to a few key phrases (emphasis in italics is mine):
– “Both teams agreed global emissions [not particular nations' emissions] must be cut by 60 percent by the year 2050, and that both China and the United States must take action.” Chinese leaders (and American leaders, if they so choose) can easily interpret “both … must take action” to mean different kinds and levels of action: a carbon price in the U.S., and more “voluntary” or “co-benefit” efforts in China.
– “Xie explained that his country will be more likely to act aggressively …” in no way represents a commitment for China to price carbon.
– “… once the U.S. … and agrees to help countries like China finance their transition to a clean energy economy.” This can be interpreted as either we subsidize the creation and/or transfer of technology, or we subsidize their carbon price and their retrofitting of their plants, or their adoption of technologies like carbon capture and sequestration on their plants. I find the latter assumption more likely, given previous statements from Chinese leaders that developed countries should contribute 1/2 – 1% of GDP to help finance this transition. That will never happen, and I think Chinese leaders are smart enough to know that. So the if clause will never be met, and therefore there’s little to no risk the Chinese will have to “act aggressively,” which is non-specific, and further all Xie said was that they are “more likely to act aggressively.”
Yes, an agreement with China is possible, especially if it’s about technology R&D or technology transfer. Depending on the details, I might think such an agreement was a good thing. But it’s a long way from there to getting an agreement that China will take the actions needed to dramatically slow their near-term emissions growth.
There is a tremendous amount of wiggle room in those public statements. Both our interpretations are consistent with them. Based on other statements and my prior experience, for now I will stick with my previously posted analysis of the Chinese leaders’ position.
Thanks again for the comment and the links to the articles.
Keith, Thanks for the reply. I am probably being a bit naive about what China will actually do or commit to. I think what they have said is that will decrease carbon intensity per unit of GDP by 20% by 2010 from 2005 levels, this is in their 2005 5 year plan. What I think is new is the results of these talks. What you said about reducing trade barriers to clean tech is obviously what some of the talks had to be about. Free trade is a prerequisite for the free exchange of ideas.
If China and the US do reach an agreement and speak with one voice at Copenhagen I think that could be real and meaningful progress. What is interesting is that China is accelerating its build out of nuclear plants see: http://www.world-nuclear-news.org/EE_Nuclear_dips_in_2008_2905091.html
“Renaissance in earnest from 2013?
No new reactors started operation in 2008, but construction did begin on ten units, indicating that the same number could be completed per year from around 2013 as visible results of the global push for more nuclear power.
Construction starts in 2008 came in China (six units), Russia (two) and South Korea (two). The extensive new build programs in China and Russia are well funded and supported, and China is proposing to accelerate build rates year on year into the middle of the century. Given that India is preparing a major push for new build at the same time as countries such as Italy, the UK and the USA, the 2013-2018 timeframe is expected to see the start of many new construction projects.
Decisions in Argentina, Brazil, Slovakia, Romania and the USA to complete stalled nuclear projects first in line with simple economics will see more reactors enter operation in the nearer term. In addition, of course, will come large reactors in Finland and France, as well as two in Japan, two in India, five in Russia and some 12 in China that are all due for completion around 2013.”
When you put this nuclear build together with China and India’s beginning to phase out oil subsidies they are setting the stage for real changes in their use of energy. The construction of coal fired plants will continue but this NYTimes article shows that China is using advanced tech in many of these new coal plants http://www.nytimes.com/2009/05/11/world/asia/11coal.html
From the article:
“But largely missing in the hand-wringing is this: China has emerged in the past two years as the world’s leading builder of more efficient, less polluting coal power plants, mastering the technology and driving down the cost.”
If China is bending the energy curve then they are putting themselves in a position to make real commitments. If we don’t pay attention to the technical and policy changes taking place within China and India today I don’t think we can make sound judgements on what they are willing to do.
BTW thanks for pushing my thinking on this topic it is appreciated.
These are great comments, Jose. I think you’re succinctly highlighting where I believe the textbook economics model breaks down. When you write that “Proceeds can be distributed world-wide as lump-sum subsidies,” I think that it is extremely unlikely that the leaders of nation states will agree to that if the (re)distributions are large and transparent. Oversimplifying, do you think Americans would agree to redistribute, for instance, 1/2% of GDP to China+Russia+India? I believe that I know they would not. A cynic would argue that part of the reason that advocates want national caps, rather than carbon taxes, is to keep such international transfers opaque.
The fairness point depends on how the initial property rights are assigned. Again, I’m confident that different nations would take different perspectives on what is an appropriate property right, and therefore an appropriate definition of “fairness,” based on their particular national perspective.
I believe the textbook Pigovian tax model breaks down because the redistribution would have to be enormous, and there is no central authority to force that to happen. So whether one thinks a global carbon price is a good thing or a bad thing, I think it’s highly unlikely to come about.
As for US & China only, I agree. I have oversimplified as a pedagogical tool. If you see my post from last week, I believe that oversimplifying “large developing countries” to China+India+Russia, and then one more time to China, creates a simple conceptual model that helps me think about it. In practice, you’d need to apply the same logic to at least India and Russia to encompass a large share of the “developing country” emissions.
Thanks again for your thoughtful comments.
Michael, I would agree with you on the far future risks. The worst effects are from 2100 onward. See: http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/30_10_06_exec_sum.pdf Whether or not you agree with Stern’s conclusions or his use of a low discount rate to estimate intergenerational costs it is useful to look at the inertia of the climate system with a rising disturbance term see: http://www.atmosphere.mpg.de/enid/1wl.html At some future higher concentration of CO2 the positive feedbacks will swamp what natural negative feedbacks we have experienced so far that has kept the warming below the worst estimates from climate models. This is basic and simple radiative physics, the warmer a volume of atmosphere the more water vapor it will hold and the warmer it will again (positive feedback) potentially be in the presence of infrared radiation. In most of the absorption bands of CO2 the atmosphere is opaque to infrared energy but on the lobes of the absorption spectrum the atmosphere is less opaque and it is here that additional potential warming can accelerate but it requires higher concentrations of CO2. At concentrations higher than 560ppm these lobes of the spectrum will absorb and re-radiate more infrared energy downward and the earth will radiate to space at a higher temperature. This says nothing about the positive feedback of additional water vapor. This is the real uncertainty. This is where climate sensitivity estimates are subject to error hence the differing confidence intervals for higher concentrations of CO2 that you see in the Stern Review and the IPCC WGI report here: http://www.ipcc.ch/ipccreports/ar4-wg1.htm
On a more sanguine note I see possible emerging worldwide trends toward de-carbonizing here http://www.eia.doe.gov/pub/international/iealf/tableh1gco2.xls (requires excel) Policy can exploit these trends as we become wealthier and have better technology but that doesn’t mean that the situation is getting worse in all ways it is actually getting better in many ways one of them being carbon intensity per unit of world GDP. (Everyone keep in mind I am a conservative, a republican, a fiscal conservative but I have an open mind and in the absence of a better theory of what will happen in the future we must at least listen to what the IPCC says, it is actually very circumscribed if you would only read it.)
Trying to attack a position by questioning people’s motives without proof is the sign of a piss-poor argument. For this example, I could turn around and say that all conservative opposition to global warming compensation is rooted in a short-term, “I’ve got mine and screw everyone else!” mentality, but I’d be just as wrong as you are right now.
Don’t presume to know my motives. For that matter, most people on the “Left” have proposed mechanisms that use market incentives, like a carbon tax, to reduce emissions.
What do you define as “freedom”? Do you judge a proposal for more police funding and officers in terms of how much “freedom” it will give you to abuse the law and/or your fellow citizens?