NEWS

‘Carbon tariffs’ could help revive western manufacturing—report

03/28/2008

Ben Geman, Greenwiresenior reporter

Want to see manufacturing return to the United States and other western countries? Then hope China drags its feet on curbing its soaring greenhouse gas emissions.

So says a report by the Canada-based investment bank CIBC, which predicts that Organisation for Economic Co-operation and Development member nations that require domestic emissions limits will levy "carbon tariffs" on imports from China and other developing countries, if those nations do not also limit global warming pollution.

"As OECD countries begin to impose greater economic sacrifices on its own economies as part of decarbonization efforts, tolerance for the carbon practices of its trading partners, or more precisely the lack thereof, will diminish dramatically," Jeff Rubin, the chief economist with CIBC World Markets, writes.

And these tariffs—especially in light of inefficient energy use in China and other developing nations—will help make western countries attractive to big industry despite higher labor costs, the report finds.

Imposing carbon import tariffs on countries that do not curb emissions—an idea already under discussion in the European Union and in proposed legislation in the Senate—is seen as a way to prevent a competitive disadvantage.

The report finds that a carbon tariff, combined with triple-digit oil prices, "could reverse the migration of certain manufacturing industries that have left North America for much cheaper labour markets in China."

"Wage advantages may no longer be as decisive in determining overall competitiveness for energy-intensive industries in today’s energy-starved world economy," the report finds. "All the more so if exports from those industries will be assessed relatively punitive tariffs for their carbon content upon entering North American or Western European markets."

Rubin, in an interview, was more succinct. "All of sudden," he said, "maybe you don’t want your steel plant in China."

His report notes that other developing countries could also face disadvantages, but singles out China because of its growing energy use and reliance on coal in particular. Coal, the most carbon-heavy major energy source, provides about two-thirds of China’s total energy needs and roughly 80 percent of its electric power, the report states. And export-related emissions account for 27 percent of China’s total emissions, CIBC finds.

Rubin says industries that would take part in his predicted reverse migration would be energy-hungry sectors like chemicals, metal manufacturing, cement, glass and others. The report finds that if carbon were priced at $45 per ton in the United States, applying this cost to Chinese goods would raise about $55 billion per year from Chinese exports to the United States, the equivalent of a 17 percent tariff.

The report notes that efforts to curb heat-trapping emissions in western nations will be "absurdly quixotic" absent action by developing nations. China has overtaken the United States in total emissions, the report states, accounting for more than 21 percent of the global total, compared to 19.4 percent for the United States.

Overall, the report notes that the vast majority of global emissions growth since the beginning of the decade has come from outside the OECD. Over the last seven years, non-OECD nations—largely developing economies—contributed 90 percent of the total worldwide emissions increase, and now account for nearly 55 percent of the global total, it states.

Trade wars over carbon?

The nexus between climate and trade policy is becoming increasingly prominent in debates over global warming. The Lieberman-Warner bill moving through the Senate would require the world’s major emerging economies to set their own stringent climate policies or purchase allowances in the new U.S. carbon market for their exports to the United States.

Backers of the provision argue it can be crafted to withstand challenges from the World Trade Organization, but others have cautioned against setting off trade wars when crafting climate policy (E&E Daily, March 6).

Critics include top Bush administration trade official Susan Schwab. Schwab, who is the U.S. Trade Representative, earlier this year warned that "attempting to force others to act on climate change through trade saber-rattling carries enormous risks" and that "unilateral imposition of restrictions can lead to retaliation" and harm global economic growth (E&ENews PM, Jan. 17).