The case for climate tariffs

As Australia heads toward a federal election on May 18, the national debate on cutting carbon dioxide emissions is heating up. Yet the discussion highlights the limits of what Australia or any other individual country can do to combat global warming. Rather, the world must step up its collective efforts to tackle climate change. And, strange as it may sound, US President Donald Trump’s aggressive trade policies could point to a way forward.

In Australia, the opposition Labor Party wants the country to reduce its greenhouse-gas emissions by 45per cent relative to their 2005 level by 2030. But achieving this lofty goal would impose high costs on Australians in terms of foregone income and actual taxes — estimated by economist Brian Fischer to be AUD10,000-20,000 ($7,000-14,000) per capita over a decade. Even if Australia manages to cut emissions by this amount, the overall impact would be small, because the country accounts for less than 2 per cent of the global economy.

The Labor Party’s claim that the benefit of the plan would be fewer floods, hurricanes, landslides, and other natural disasters is only half true, because Australian actions alone will not have much effect on the frequency and severity of such events. Enough other countries would have to cut their own greenhouse-gas emissions further to make a difference.

Until recently, the world’s best hope for combating global warming was the 2015 Paris climate agreement, which has been signed by 197 parties, including the world’s two largest cumulative emitters of greenhouse gases (the United States and the European Union) and the leading current emitter (China). All signatories have pledged to meet numerical targets to lower drastically their own emissions relative to a business-as-usual path.

At the time, many thought that the Paris agreement was the limit of what was politically feasible. Yet most climate-change models predict that even if all countries fulfilled their pledges, their efforts would not keep the increase in global temperature below 2°C above pre-industrial levels — the critical threshold beyond which catastrophic outcomes, including higher sea levels and more frequent natural disasters, would become inevitable.

Worse still, the US under Trump has taken a giant step backward by withdrawing from the Paris agreement and pushing for more coal production and coal-fired power plants without carbon-capture requirements. This is doubly damaging: In addition to increasing America’s emissions, Trump has given other countries an excuse to avoid meeting their own Paris commitments.

Leading US progressives such as Democratic Congresswoman Alexandria Ocasio-Cortez have championed a “Green New Deal” based on publicly financed investment. This initiative faces a similar problem to the Australian Labor Party’s proposal: It would impose costs on US firms and households, while the benefits of lower emissions would be diffused around the world.

True, a successful Green New Deal would have a bigger global effect, because the US accounts for about one-quarter of the world’s economy. But even America cannot save the world if other countries fail to take equally aggressive steps to reduce emissions. In fact, others might even emit more, because US actions could reduce the cost of tradable emissions permits.

Ironically, Trump’s own readiness to impose large import tariffs could provide the basis for a new collective approach. Because the US is the world’s biggest economy and possesses enormous political and military power, most countries have to accommodate America’s demands in some way. In that respect, Trump’s tariff wars have “worked” (although whether they are good for the US economy is another matter).

A future US government could perhaps use tariffs, or the threat of them, to push other countries to reduce their emissions more aggressively — especially those countries that are, or will be, sizable contributors to global warming. This would be different from a border-adjustment tax based on the carbon content of the imports, but a way to raise the cost of inaction for countries that are not making sufficient contributions to the global effort.

Such measures might run counter to existing global trade rules. But they could be justified on efficiency grounds, because avoiding the destruction of the planet is good for everyone. Moreover, this approach would be fair if it resulted in all countries sharing the costs of combating climate change more evenly (all of them would share the benefits of a healthier planet).

Ideally, such an initiative would also acquire a legal basis through future reforms of World Trade Organization rules. It would be even better if many countries committed to coordinating their tariff policies to help enforce any agreement on further emissions cuts.

Of course, tariffs are not — and should not be — the only tool for combating global warming. Nonetheless, given the lack of a powerful enforcement mechanism in the current climate agreement, they could be a useful and potentially effective complement to the next round of global climate negotiations. This, however, requires that America has a leader who understands the climate-change threat.

Shang-Jin Wei, former chief economist of the Asian Development Bank, is Professor of Finance and Economics at Columbia University and a visiting professor at the Australian National University. 

Copyright: Project Syndicate, 2019