Cap-and-trade-war

by on June 30, 2009 at 7:28 am in Political Science | Permalink

Eric Posner and Paul Krugman defend the use of tariff threats against polluting countries, such as China.  I'll outsource my response to an earlier post by Matt Yglesias:

The bottom line about the international aspects of climate change is that the very idea of an effective response assumes
the existence of a generally cooperative international environment. It
doesn’t assume the non-existence of the odd “rogue” state here or
there, but it assumes the absence of any kind of serious great power
rivalries. Not just China, but also India and probably Russia, Brazil,
and Indonesia as well are going to need to cooperate in a serious way
with the OECD nations on this. And I just don’t see how you’re going to
get where you need to get through coercion. If anything, I think
attempted economic coercion of China is more likely to wind up breaking
down solidarity between the US, EU, and Japan than anything else.
First, we impose our carbon tariff. Then suddenly Airbus and European
car companies are getting all kinds of sales because the EU hasn’t
followed suit. Now not only are the Chinese mad at us, we’re mad at the
Europeans. Optimistically, at this point everyone decides coercion is unworkable and we start to back away.

I'll say it again: the current version of Waxman-Markey will make things worse.  Keep in mind by the time we are slapping those 2020 tariffs on China, we won't have made much progress on emissions ourselves.  How would we feel, and how would it influence our domestic politics, if the Chinese demanded we pass Waxman-Markey, while polluting at a high level themselves, or otherwise they will stop buying our Treasury securities?

odograph June 30, 2009 at 8:35 am

Doesn’t a 2020 tariff “deadline” sound like negotiation? Wouldn’t it be easy for China to offer a pseudo program to match our pseudo program by then (and get a retraction of the tariff)?

I don’t like Waxman-Markey for its unseriousness, but I don’t see it as a threat to any trading partner. It’s too easy for everyone to play the same game.

John Thacker June 30, 2009 at 9:41 am

I’ll say it again: the current version of Waxman-Markey will make things worse. Keep in mind by the time we are slapping those 2020 tariffs on China, we won’t have made much progress on emissions ourselves

And by the time 2020 rolls around, will we really be able to suddenly cut all those free emissions credits after that, to get the real gains, or will we do like EUrope and postpone the pain? The current bill has a lot of rent-seeking and bureaucracy now, with the net emissions reduction and pain almost all postponed until “later.” I’m afraid that giving away those credits will create a strong constituency for them that will make it difficult to eliminate them, like sugar quotas, or the bought out tobacco quotas.

President Obama campaigned in favor of auctioning the emissions permits, but he and his party also campaigned on emissions cuts being a free lunch. In fact, they continue to argue that it’s a free lunch, and that Waxman-Markey is really a jobs bill, an energy bill.

In some sense, yes, the American people demanded to be told that free lunch, believing in saving the planet without paying any price, just like they believe in health care reform and savings without having to change anything about their own care. But since the President and his party won by promising those free lunches (against a candidate who said that employer health care should be taxed as part of replacing it with a universal credit), I don’t feel too sorry for them.

Would not a consumer tax, like taxes on gasoline, nearly eliminate the problem of tariffs? If all gasoline, or whatever, is taxed regardless of country of origin, there’s no need to worry about tariffs. Of course, that would be too transparent for both the politicians and the people.

Young Economist June 30, 2009 at 9:57 am

For environmental economics, the tax or subsidy for environmental purpose can improve the efficiency on the negative and positive externality. I agree on the climate change bill can improve the environmental issue but it is wrong to tax only the domestic producers, rather equally both domestic and foreign producers by sale tax or other kinds of tax. This bill cannot improve the environment but it will destroy the domestic businesses and jobs because, under trade theory, the cost of production of domestic producers will increase from climate change bill or it is like subsidy for foreign producers and the domestic producers will lose the competitiveness and they have to close their businesses. The foreign producers still have the more carbon emission without control and they can produce more with more carbon emission.

Therefore, the domestic business will have to close the business in US and move to produce elsewhere or they just close the businesses. Surely, first consequence is American will be more unemployed. The price of consumption will increase from lower supply from domestic producers and the foreign producers get the higher profit from this subsidy policy. US government revenue will decrease because the foreign subsidy program and government debt and budget deficit will increase. Finally, the US still faces the ongoing trade deficit.

I start to believe whether we are having the government for American or Asian or foreigners? Federal reserve reduce interest rate to zero and government spoil the taxpayers’ money to cause the jump in oil price and shoot up in the long-term interest rate. Expenditure related to oil price will be around 10-15% of income and now the zero rates and reckless spending cause double in oil price or 10-15% higher cost of living and now the long-term rate is higher or higher borrowing cost. This is not the way to solve or reduce cost of living for American who face the risk of unemployment and lower salary. But this is the policy to create the wealth for the oil producer countries and the countries who lend us the money like China to get more income.

And now the climate change bill is the way to subsidy the foreign producers. I think if we tax equally both domestic and foreign producers, it can solve environmental problems and protect the jobs and competitiveness of domestic businesses.

I am tired with the say of trade protection from government but now they use trade subsidy for foreigners and tax for domestics. I think now American is the second-class businessman and Chinese is the first-class businessman.

Jokily, now US dollar is not controlled by US policy makers but controlled by foreign countries like China, Japan or Russia. Russia, China say reserve currency is needed, dollar drop. One day they said we do not need reserve currency, dollar is up. Bernanke and Geithner say strong dollar, but dollar is down. I think now this government is showing American are like beggar, rather than the most power countries in the world like other past governments.

Why don’t we show that if we do not want to buy imported products? The foreigners must beg to sell us the goods. How can that foreign country survive if we do not wish to buy imported goods? Stupid policy and stupid action from this government will make American like joke nowadays.

a student of economics June 30, 2009 at 10:56 am

Cap and trade is meant to internalize the negative externality of carbon emissions. Production should be treated equally regardless of where it occurs. Hence, a tariff equal to the implicit carbon tax of cap and trade is optimal on goods from any country that doesn’t already internalize this externality.

In fact, imposing cap and trade (or carbon taxes) without a tariff can make things worse, as per the Theory of the Second Best. Contra Yglesias, optimality of the tariff does not depend on any international cooperation to be true and will, in general, increase global welfare (including the value of emissions reductions, of course). It’s not so different from, say, requiring foreign cars to meet NOx and SOx standards.

Tyler, do you disagree with this economic analysis or are you making a political argument?

Doc Merlin June 30, 2009 at 12:08 pm

@ Mat Wilbert

“Congress also has to deal with perceptions in the US, and since it is completely reasonable to believe that meaningful carbon charges without tariff offsets would result in industries like refining moving offshore, for no real economic reason,”

This is silly, of course there is an economic reason, lower costs in countries like mexico due to them not having a carbon tax/C&T. Now a shift like that would take ages to actually happen, due to the huge costs of refineries, but the increase in costs is a definite economic reason.

Yancey Ward June 30, 2009 at 1:14 pm

The tariffs would have, at best, a slight marginal effect on emissions. The simple fact is this- China, India, and Brazil will consume most of their own production. Unless those societies are willing to enact caps like the US, US citizens will become relatively poorer as a result as long as fossil fuels are relatively cheaper than the alternatives, and by cutting their own use of such fuels, Americans make those fuels even cheaper for the rest of the world to use.

John Thacker June 30, 2009 at 2:22 pm

It’s not so different from, say, requiring foreign cars to meet NOx and SOx standards.

student, a tax on producers is quite different from a tax levied at the point of consumption. A requirement that all cars registered in the US, domestic and foreign, meet the same NOx and SOx standards, or mileage standards, would be relatively non-distortionary, yes, and very unlikely to set off a trade war. So too would raising the tax on gasoline, etc.

But here we’re not talking about a tax at the consumer end, but a tax levied at production. That causes a great deal more distortion absent a tariff. Yes, you can institute such a tariff and then, like Europe, make exceptions for all export industries, but it seems inefficient.

I don’t personally think that the political benefits of being able to lie about free lunches when imposing a producer tax outweighs the transparent benefits of a consumer tax, especially since the consumer tax avoids having to consider a tariff and the possibility of a trade war. Then again, I’m not a politician who wins office by pandering.

John Thacker June 30, 2009 at 2:32 pm

Moving on to a second issue, we compare the cap-and-trade system to producer regulations on SOx and NOx. Here, the difference is, as also noted by supporters of the tariff, that the negative externalities of SOx and NOx are mostly, albeit not exclusively, felt within the same country. If SOx and NOx restrictions cause industrial jobs to go to China, then at least the US enjoys the benefits of no acid rain and cleaner skies. Quite obvious CO2 is different, due to its impacts being felt almost exclusively globally regardless of place of emissions.

So, yes, I think that there is a strong chance that CO2 regulations imposed on producers and export industries simply will not work absent a tariff. But surely there is and still is room to adopt useful policies on the consumer end that are not subject to these problems. The problem, I assume, is the very transparency. People want to get something for nothing, and politicians pander to that.

For example, I strongly suspect that increased taxes on residential, but not industrial, electricity consumption (based on CO2 emitted) would not be popular.

Matt June 30, 2009 at 5:00 pm

So MN Pundit is willing to shoot the US in the foot to stop “carbonating” as he calls it. What do you call what is done to your beer or soda may I ask? Them being hypocritical has nothing to do with it. It is a selfish move on the part of the Chinese if they were to do this since it benefits them immensely as the US would lose even more heavy industry and become more dependent on outside sources of steel/trucks/etc.

kurt9 June 30, 2009 at 10:02 pm

I would be much more supportive of any climate legislation if it were coupled with a China-like one-child policy. Energy usage and environmental degradation fundamentally correlates with population. The U.S. is the only developed country that still has positive population growth.

Rob July 1, 2009 at 1:30 am

I hate the fact the AGW debate falls so much along political lines. Whenever I make my points, I get yelled at as a presumed bible-thumping conservative, yet I’m not one. I agree with Democrats (social issues, foreign policy, redistribution of wealth) on many more issues than I do Republicans, but not this one. We know for a fact that poverty is a causative factor of human suffering. Economic growth tends to reduce poverty. We do not know for a fact to what degree CO2 levels cause global warming. But we do know that any scientist who claims to know for a fact is a LIAR because that is not how science works.

Why do so many scientists claim to believe in the dangers of AGW? Peer pressure? Yes, I think that’s exactly what it is. If Carl Sagan, early warming warner himself, were alive today, I think he would be shocked at the level of hysteria.

But let’s act on the side of “caution” here and screw the world economy for the next century. It’s only those humans living on the margin who will suffer and die anyway. The rest of us can pat ourselves on the back for our do-gooder morality.

JSK July 1, 2009 at 5:14 am

@doctorpat: Perhaps he’s talking about *natural* population growth cq minus migration. And calling Israel a developed country is a bit of a strech.

kurt9 July 1, 2009 at 12:37 pm

Except, you know, all the other ones.

Did you even google this? I found Australia, Canada, UK and Israel within seconds.

Wrong-o. Fertility rates (kids per woman) for the U.S. is 2.05, U.K. is 1.82, Australia is 1.79, and Canada is 1.53.

I stand by my point. I lived in a high energy cost country for 10 years (Japan) and have traveled to others (Europe). What they all have in common is relatively low birth rates, the continent being lower than the U.K.

The long term result of cap and trade will be the end of suburbia for most people. The lack of good jobs means the kids stay home and live off their parents (just like Japan), becoming permanent slackers. Marriage and birthrates will drop off as a result (again, just like Japan). If one cannot afford to buy a decent house in the suburbs and large cars to transport the kids around, far fewer people will be motivated to have kids. If they do have them, they will have their one designer kid at age 39. This is what Steve Sailor calls “affordable family formation”. If one cannot afford to have a family, due to a zero-sum economy and the like, many will say “what the hell” and decide to go through life as a permanent slacker, doing the budget-style trip to South East Asia every other year (even with climate change legislation, this will still remain afforable, especially compared to other options like buying houses and having kids) just like the kids in Europe and Japan.

I think it actually is the intent of the liberal-left to make us more like Europe, as far as they are capable of forming intent. I think we will become more like Japan. The difference being that people are as much into their consumer electronics and other goodies, they just stop having kids. If our demographics were like Japan, but not Europe, this kind of steady-state economy might actually work. However, there is a problem with this scenario with the U.S. We have a large underclass, composed of whites and NAMs (non-asian minorities) who lack any concept of future time orientation, a flaw Japan does not have. So, the zero-sum economy that cap and trade will create will kill reproduction by the middle-class, but not the underclass, because these people don’t think about costs and other issues with regards to having kids. They just don’t think period. The wealthy will continue to have one or two kids, since they can easily afford to live in big houses and send them to good private schools, have nannies, pay for their piano lessons, vacation in the hamptons, etc.

If this is the kind of society that most Americans want, then who am I to argue? Unlike most, I have two competitive advantages. One, I have technical abilities (thin film materials science, plasma physics, etc.) and two, I lived in Japan, Taiwan, and Malaysia; speak Japanese, and generally have business and technical contacts in Asia. If the U.S. economy craters (but Asia recovers), I can always go back to Asia.

Most Americans do not have this option.

Again, who am I to argue?

kurt9 July 2, 2009 at 12:43 pm

Just as I predicted, the Chinese have increased the planned amount of nuclear generating capacity by 2020.

http://nextbigfuture.com/2009/07/chinas-nuclear-energy-target-for-2020.html

derrida derider July 6, 2009 at 10:30 pm

kurt9 and doctorpat are both right – the 4 countries doctorpat mentions all have growing populations due to immigration (at least 3 of them have substantially higher rates of immigration per head than the US – I’m not sure about the UK). From a global point of view they’re not adding to world population because they’re not breeding fast enough.

Kart Driver April 14, 2010 at 10:39 am

A report to the authority has outlined proposals to implement a 50p minimum price per unit on alcohol to cut the numbers drinking too much and reduce booze-fuelled crime.

Drinkers will have to pay at least £4.50 for a standard bottle of wine and £6 for a six-pack of lager. A two-litre bottle of cider will cost at least £5.50, while a 700ml bottle of whisky would cost at least £14 under plans to impose a minimum price on alcohol.

The report from the Association of Greater Manchester Authorities points to research which identifies 50p as an amount which “would target irresponsible drinking, impacting on binge-drinkers and harmful drinkers, while imposing a minimal financial effect on moderate drinkers and on-trade sales.”

But Coun Paul Prescott, cabinet champion of lifestyles, has raised concerns over the proposed minimum alcohol price. He said: “I’m unsure whether the introduction of a minimum alcohol price reduces alcohol consumption. Increasing prices could hit sensible people who are responsible when they have a drink.

“If you use smoking as an example, which is heavily taxed, has the price rise reduced the use of cigarettes smoking?

“There are additional measures the Government are proposing under new mandatory conditions, on April 6, which will ban irresponsible drinks promotions in licensed premises. This would include a ban on the £12 entry “all you can drink” offers.”

five fingers September 22, 2010 at 1:06 pm

I gree with it!

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