International trade is a third reason that this bill is so complicated, because we are trying to use domestic legislation to handle a global externality. If America charges for the carbon emissions involved in making an industrial product but our trading partners do not, then American producers will be at a competitive disadvantage.(via reader Marc)
This would not only hurt America’s industrial base but would also make a domestic cap-and-trade program less effective at reducing carbon emissions. At the extreme, a sufficiently high energy charge could lead an American industry to shut down and be replaced by new production in places with no restrictions on carbon leading. This scenario results in 100 percent "carbon leakage" and no net reduction in emissions.
The bill tries to deal with this problem with abundant exhortations to sign effective international carbon-control treaties. If such treaties fail to materialize, the United States may start charging imports for the carbon used in their production.
While I understand the economic and political logic behind this approach, it is a distinctly dangerous path. Our trading partners will argue that these charges are tariffs in disguise. Moreover, the United States won’t have the data to figure out which international producers are green and which are brown, making us singularly ill-suited to impose carbon charges.
Friday, May 28, 2010
Harvard econ prof Edward Glaeser about the international ramifications of the Kerry-Lieberman climate change bill, in the New York Times Economix blog: