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No tariffs in Copenhagen

07 December 2009

by Steve Howard, CEO of The Climate Group

As countries gather in Copenhagen this week we have been focusing on what should be in a global climate change deal, targets, commitments, and finance etc. But we should also look to what should be out of a deal and as countries strive to reach agreement on a path to treaty, they should not allow the threat of trade barriers to stand in the way of progress.

In theory, carbon tariffs can make economic sense.  A cap on carbon emissions will increase costs for energy-intensive manufacturing, like steel and chemicals.  To avoid giving manufacturers in uncapped countries an unfair competitive advantage, a carbon tariff increases the cost of imports from those countries so that the competiveness impact of the carbon constraint is eliminated.

In theory, this would help prevent capped manufacturers - and their emissions - from losing market share or relocating overseas.  In theory, it would also lead to greater participation in a global deal by reducing the incentive for countries to "free-ride."

But that's in theory.

In reality, carbon tariffs hurt - not help - prospects for a global deal.  And in practice, the economic benefits are far from certain. 

First, it is still unclear whether carbon tariffs will be needed to level the competitive playing field in the early years of a cap.  Despite claims by those who fear climate action to cut emissions, the evidence suggests that the competitiveness impacts of carbon policy are often negligible. A recent report by the Pew Center on Global Climate Change and Resources for the Future estimated that a $15 price on carbon in the US would lead to only a .7 percent shift in US manufacturing production to uncapped countries - and that the impact on US employment is "not statistically discernable."  This is consistent with the results of a recent survey in the EU - completed by the German Marshall Fund and The Climate Group - where capped EU companies said that "they have not relocated their operations, reduced their workforce, or lost market share as a result of carbon pricing." In addition, evidence suggests that ambitious climate policies can actually act as a stimulus to economic growth and job creation.

Where manufacturing companies are impacted by a cap on emissions, compensation can, and likely will, come in the form of free emission allowances and "rebate" programs, as currently envisioned in both EU and US cap and trade proposals.  Unless this compensation proves insufficient, carbon tariffs will not be needed.

Second, carbon tariffs threaten to hamper free trade in low carbon technologies - an absolutely critical part of any successful effort to combat climate change - and to develop a robust global carbon market.  Climate change is essentially a technological and financial challenge.  To significantly reduce emissions, countries need to replace existing technologies with new technologies that use less or cleaner energy.  Their success will rely largely on their ability to access and finance the development and implementation of these new technologies: anything that prevents that from happening would be a major obstacle to progress.

Third, at this stage there is no evidence that countries are seeking unfair advantage by taking on less stringent targets than their competitors.  It has been proposed that carbon tariffs would be applied to countries without "comparable" climate policies.  However, with countries at different stages of development it is widely accepted that comparable policies does not mean the same policies. While the collective effort needs to be greater, all major countries have come forward with promises and plans to cut emissions. Developed countries are committing to absolute emission reductions.  Emerging economies are committing to emission intensity reductions (emissions per unit of GDP).  And least developed countries are committing to capacity building measures.  This difference reflects the agreed upon principle of "common but differentiated" responsibilities, and it is the reason why carbon tariff proposals to date wouldn't begin until 2020, when more directly "comparable" policies might be expected.  At the soonest, tariffs are unlikely to be necessary for more than a decade.

And fourth, the successful implementation of the new climate change agreement will depend on all countries seeing it as in their interest to act. For most this means little or no negative impact on their economic growth. It is commonly accepted that expanding trade is good for growth, while trade barriers have the opposite effect.  The only way to solve climate change - and truly level the competitive playing field - is to reach a global agreement where all countries participate at a level appropriate to their development, and carbon tariffs take us farther away from that goal. If we focus on innovation, collaboration and free trade for low carbon technologies then we will help rather than hinder development and economic growth.

In Copenhagen, let's put carbon tariffs firmly to one side, and focus on building a solid and fair framework for a global deal that will set all countries on a path towards a prosperous, low-carbon future.

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