Capped trade

This bothered me this morning.

WASHINGTON — President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution.

“At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

He added, “I think there may be other ways of doing it than with a tariff approach.”

[...]

The House bill contains a provision, inserted in the middle of the night before the vote Friday, that requires the president, starting in 2020, to impose a “border adjustment” — or tariff — on certain goods from countries that do not act to limit their global warming emissions. The president can waive the tariffs only if he receives explicit permission from Congress.

The provision was added to secure the votes of Rust Belt lawmakers who were wavering on the bill because of fears of job losses in heavy industry.

In the floor debate on the bill Friday, one of its authors, Representative Sander M. Levin, Democrat of Michigan, said, “As we act, we can and must ensure that the U.S. energy-intensive industries are not placed at a competitive disadvantage by nations that have not made a similar commitment to reduce greenhouse gases.”

I mean, isn't that the point? If an industry in another country is not going to act to limit emissions, shouldn't there be some mechanism by which that industry pays a price?

Well, don't take my word for it. Take Krugman's.

The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade. The way to think about it is in terms of a well-established theory — the theory of non-economic objectives in trade policy — that owes its origins to Jagdish Bhagwati, who certainly can’t be accused of being a protectionist. The essential idea is that if you have a non-economic objective, such as self-sufficiency in food production, you should choose policy instruments to align incentives with that objective; in normal circumstances this leads to consumer or producer intervention, rarely to tariffs.

But in this case the non-economic objective is to reduce greenhouse gas emissions, never mind their source. If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.

And they’re also probably OK under trade law. The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. It has long been accepted that a VAT is essentially a sales tax — a tax on consumers — which for administrative reasons is collected from producers. Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.

And the same would be true of carbon tariffs.

Dean Baker agrees.

What Does "Free Trade" Have to Do With Taxing Greenhouse Gas Emissions

That is the question that the NYT should have been asking in an article that reported President Obama's opposition to taxing imported items from countries that have not taken steps to curb greenhouse gas emissions. The point of his cap and trade program is to make items that require large amounts of greenhouse gas (GHG) emissions more expensive, thereby discouraging their consumption.

If goods can just be imported from countries that have no tax on GHG, then the point of cap and trade is undermined, as goods that require large amounts of fossil fuels will just be produced abroad. It is understandable that importers and other special interest would be opposed to measures that prohibit this sort of evasion, but that has absolutely nothing to do with "free trade."

Krugman and Baker. Resolved.

So what's going on here?

Obama's a pretty smart guy, and he's surrounded himself with extremely capable economists and climate change experts. Eliminating the tariff creates an opening for opposition voices threatening "job losses because of the 'energy tax.'" Sometimes I worry that Obama makes one mistake his predecessor never made: negotiating with himself. If this is some sort of free trade "reasonableness" intended to win over sensible Republicans and "moderate" Democrats, it seems a poor choice.

UPDATED to correct idiosyncratic spelling