Could U.S.-Brazil relations watershed survive commodity crash?

A very high percentage of "Event X was a true watershed" articles turn out to be crap, but this one on U.S.-Brazil relations (via MR) is pretty good. (Maybe because that narrative device is totally extraneous - this change has been coming for years and Obama's visit didn't actually change that much). Worth reading in full, but the punch line is:

... the major strategic interests of the US and Brazil are so closely aligned that cooperation between the two countries will be one of the building blocks of the new century... [Brazil’s] its instinct for “order and progress” (the slogan appears on its flag) dovetails very closely with what the United States wants to see in the world.

I agree except for a nagging doubt - with Brazil's economic ascendancy so dependent on commodities, how much of this unravels if resource scarcity isn't all it's cracked up to be and prices crash? After all, we've heard the same arguments before (ahem Paul Ehrlich).

Let me back up a bit to build up the logic. Brazil has historically been commodity-dependent...

In the 19th century Brazil was part of Britain’s ‘informal empire’; Britain was the dominant foreign investor in the country and Britain controlled the markets for the primary commodities (sugar, rubber, cotton, coffee) whose falling and rising prices set the tempo for Brazil’s growth. But the system seemed rigged in Britain’s favor; Brazil could never escape its role as a commodity producer — a hewer of wood and a drawer of water in the international community. Brazil did the backbreaking labor; Britain grew rich.

... but isn't it still? I don't have the stats on hand about how much soy, iron ore, etc. etc. Brazil exports, but it's a lot; it's not clear to me that the economy has fundamentally transformed, rather than simply ridden the latest commodity wave on the way up.

The premise continues that Brazil has demonstrated a successful new model...

Lula’s Brazil stuck up for Venezuela at international gatherings and danced with it at parties. But all the while, Lula’s Brazil was destroying the political logic of the Bolivareans by demonstrating that a pluralistic democracy integrated into the global market can do more for the poor than incompetent populist blowhards. Chavez talked; Lula delivered

(again, on the back of a commodity boom...)

What that means is that Brazilians, even those on the left like former president Lula, are now less inclined to think that Brazil needs to overturn the global economic system.

I have lived in Brazil and I agree with this sentiment, and that "Brazilians have an immense capacity for hard and focused work." But in a world with lower commodity prices (and, again, I don't think this is the most likely scenario, but remember it's been less than 30 months since crude oil was in the low $30s), how will the Brazilian economy hold up, and if it falters, won't that popular support as well?

This is very much a preliminary perspective and I would welcome debate and pushback on it.

India and China initiate domestic climate change action

The developed world reacted with consternation to India's announcement that they would accept no greenhouse gas emissions limits from the international community, so it's great news to see that a domestic cap-and-trade system has been proposed:

India has approved in principle new trading plans centred on energy efficiency as part of efforts to shift to a greener economy to fight climate change, opening up a potential market worth more than $15 billion by 2015.

Even better, China appears to be taking its own steps in the right direction:

China's top legislature, for the first time in its history, is specifically addressing climate change with the review of a draft resolution, after hearing a report on the growing environmental problem Monday.

Ni Yuefeng, a vice-chairman of the National People's Congress (NPC) environmental and resources protection committee, said the resolution shows the NPC is taking the issue seriously. The details of the resolution are expected to be on the agenda today.

The resolution will pave the way for future environmental legislation, Yang Fuqiang, director of global climate change solutions at environmental group WWF, told China Daily Monday.

This is in fact doubly good news, as not only does it signal greater willingness by the two most populous countries to take action to control their own emissions, but it also weakens the arguments of those Americans who would protest that the U.S. "taking the lead" on emissions reduction wouldn't have any impact. Simplistic game theory says so... but luckily that doesn't appear to be holding in this case.

P.S. I was once eating dinner in Beijing when they "made it rain" (see picture with the linked article), and the results were pretty astounding - a torrential downpour kept us in the restaurant for the next three hours.

Cross-border carbon trading

Here's an example of a cap-and-trade system tentatively exploring cross-border expansion - how timely.

The United States has agreed to work with Canada and Mexico to develop a North American carbon market that would allow Canadian emitters to meet some portion of their targets through purchasing credits in the vast NAFTA marketplace.

The agreement by leaders from the three countries could help keep down compliance costs for Canadian emitters, while expanding the market for renewable energy companies and others that create carbon credits with projects in Canada. "This is the first time the three North American leaders have been together and have started to flesh out the elements of a continental approach to this," Environment Minister Jim Prentice said in a telephone interview.

A declaration signed by Prime Minister Stephen Harper, U.S. President Barack Obama and Mexican President Felipe Calderon in Guadalajara on the weekend committed the three governments to work together on climate-change issues, including co-operating on the construction of their emissions-trading systems.

This reminds me that Europe has had a cross-border carbon market for some time, so Thomas Crocker's argument that carbon taxes are better suited to the global nature of the problem is looking increasingly weak.

Outsourced responses to cap-and-trade originator

Greg Mankiw and Environmental Capital both pointed quickly to an article in the WSJ citing one of the originators of the cap-and-trade idea, Thomas Crocker, who is now in favor of a carbon tax. But Felix Salmon (my favorite finance blogger, mind you) shows his versatility by turning Crocker's arguments on their head:

Let’s take Crocker’s arguments one by one, with the proviso that they’re coming second-hand, via the WSJ, rather than directly from Crocker himself.

First, Crocker says that a carbon tax “would be easier to enforce” than a cap-and-trade system. But it’s hard to see why that should be the case: both of them involve measuring the same carbon emissions. It’s certainly easier to enforce when you measure upstream rather than downstream, but that applies equally to carbon taxes and to cap-and-trade.

Crocker then gets into the meat of his argument:

Mr. Crocker sees two modern-day problems in using a cap-and-trade system to address the global greenhouse-gas issue. The first is that carbon emissions are a global problem with myriad sources. Cap-and-trade, he says, is better suited for discrete, local pollution problems. “It is not clear to me how you would enforce a permit system internationally,” he says. “There are no institutions right now that have that power.”

Yes, cap-and-trade is better suited for local pollution problems than it is for global pollution problems. But that doesn’t mean that a carbon tax is better for global pollution problems than cap-and-trade is. Indeed, the opposite is true. In theory, once a number of jurisdictions implement a cap-and-trade system, carbon traders will start arbitraging the various different carbon permits, and we will end up with something approaching a global system. Carbon taxes, by contrast, are ever and always local. Crocker is right that a US cap-and-trade system wouldn’t necessarily slow global carbon emissions if China and India refuse to play ball. On the other hand, neither would a carbon tax. But at least a cap-and-trade system has the ability to scale into China and India.

But moving on:

The other problem, Mr. Crocker says, is that quantifying the economic damage of climate change — from floods to failing crops — is fraught with uncertainty. One estimate puts it at anywhere between 5% and 20% of global gross domestic product. Without knowing how costly climate change is, nobody knows how tight a grip to put on emissions.

In this case, he says Washington needs to come up with an approach that will be flexible and easy to adjust over a long stretch of time as more becomes known about damages from greenhouse-gas emissions.

Agreed, 100% — which is exactly why we need a flexible cap-and-trade system rather than an inflexible carbon tax. A cap-and-trade system can be tweaked much more easily than a carbon tax, both in terms of the level of the cap and in terms of the proportion of the permits which is auctioned off rather than given away. Crocker says it’s hard to adjust a cap once it’s in place — but he neglects to mention that it’s harder still to adjust a tax once it’s in place.

John Whitehead at Environmental Economics arrives at the same conclusions, noting sagely that:

Unfortunately, there is no good solution to the global nature of the problem. Protectionism, voluntary agreements and war are three ways to enforce international "policy."

... and the interesting factoid that

Crocker, a 2008 AERE Fellow, won the 2001 AERE Publication of Enduring Quality Award for his work on cap-and-trade.

The versatility of cap-and-trade is such that it's hard to come up with arguments against it that don't apply to a carbon tax as well - other recent failures include admin costs and the distortionary effect of taxes.

Informed thoughts on Iran refined products embargo

On the topic of a refined products embargo on Iran, an anonymous and knowledgeable source writes:

A petroleum product embargo on Iran would be devilishly difficult to achieve -- too many porous land borders, especially with Turkmenistan, Afghanistan and Pakistan -- and very liable to escalate to full-scale conflict. That said, I support the effort by Congress to add that particular card to the President's hand because Iran's petroleum product imports is one area in which the United States has considerable leverage. The very threat of such action could effect change in Tehran's strategic calculus.

The idea makes sense from an economic perspective in that Iran spends quite a bit to subsidize petrol consumption (these price controls are the reason the Iranian refining sector endures chronic underinvestment). A petroleum product embargo would raise the price of petroleum products such that the Iranian treasury would be drained of funds at a greater rate. Tehran could enact stricter rationing of petrol, as is already the case, but this could provoke substantial domestic unrest (as it has in the past). Alternatively, Tehran could slacken its petrol subsidies, causing higher prices at the pump for Iranian motorists, but this is also unlikely to make people happy.

I pushed this person on the feasibility of smuggling:

Granted the land borders you mentioned are porous, but Turkmenistan and Afghanistan are themselves effectively landlocked, and I can't imagine they're long refined products... and if I remember correctly Pakistan is also a net importer of gasoline and diesel. So it seems that, until the new port at Gwadar is online (not sure when that is), the most likely sanction-breaking smuggling path is via Karachi and across Baluchistan, which doesn't strike me as a particularly easy route (particularly with recent unrest in Baluchistan)... and if we are talking about anywhere near 40% of Iran's refined products (which is what I heard they import), that is a huge volume to push through a long, unstable and illicit supply line.

... and they pushed right back:

Your thinking is on the mark. But I wouldn't underestimate human ingenuity. Iraq also subsidizes petroleum products, which has been the source of a great deal of smuggling -- purchase petrol or diesel in Iraq at a low price, re-sell in Turkey, Syria or elsewhere for a large profit. If Iran were under some kind of onerous petroleum product sanctions, there are probably large networks of Shia in Iraq sympathetic to Iran which would smuggle petroleum products across the border for an even larger profit.

As for the Baluchis, they need money to fund their insurgency as well. Getting in on the smuggling business could be very lucrative for them. To a certain extent, I am making the assumption that large shortages of petroleum products in Iran plus long porous borders plus a ton of opportunistic (and economically self-interested) actors in the region will lead to large-scale smuggling. The refined petroleum products will be able to find their way.

So not only difficult to implement, but the military threat to the Strait of Hormuz is substantial:

Think small motorized skiffs, something like the Somali pirates in the Gulf of Aden, with rocket launchers or rocket-propelled grenades swarming more cumbersome US naval vessels and/or oil tankers. (There was a war game to this effect and the virtual Iranian forces handed a serious defeat to the US Navy.)

Finally, one more subtle option would be to put pressure on the banks that finance petroleum product importers - apparently "this is what the US has been doing with regards to North Korea for years."

Iran imports refined petroleum products

In the NYTimes today:

The Obama administration is talking with allies and Congress about the possibility of imposing an extreme economic sanction against Iran if it fails to respond to President Obama’s offer to negotiate on its nuclear program: cutting off the country’s imports of gasoline and other refined oil products.

The option of acting against companies around the world that supply Iran with 40 percent of its gasoline has been broached with European allies and Israel, officials from those countries said. Legislation that would give Mr. Obama that authority already has 71 sponsors in the Senate and similar legislation is expected to sail through the House.

The fact that Iran imports refined products like diesel and gasoline may come as a surprise to the general public, which sees Iran as an "oil producer" (in the Persian Gulf region which of course supplies "all of our oil") under "economic sanctions." Turns out refined products are exempt from the sanctions - at least until now.

However, given Iran's likely retaliation - they've threatened "cutting off oil exports and closing shipping traffic through the Strait of Hormuz, at a moment that the world economy is highly vulnerable" - these extreme sanctions seem too risky for the U.S. to actually push, which reduces their credibility as a threat and negotiating tool.

Update: FP Passport ponders whether the threat of nuclear Iran might convince China to join.

... Beijing surely sees the unacceptable danger in risking its existing Saudi oil supply for an as-yet nonexistent Iranian oil supply.

Right, but in light of the Strait of Hormuz chokehold, would Beijing be willing to risk short-term Saudi oil supply to "assure" long-term Saudi oil supply through sanctions which may or may not dissuade Iran from becoming a nuclear power?

India tells Clinton 'no' on climate

Remember when India refused to reduce its greenhouse gas emissions at all?

Well, they haven't backed down yet.

Schelling interview, Part II: The importance of specificity in international commitments

One interesting part of Conor Clarke's Thomas Schelling interview was Schelling's take on the nature of international cooperation on climate change. The man won the Nobel Prize for game theory, so it's worth paying attention:

CC: What do you think of Waxman-Markey bill, the American Clean Energy and Security Act? It sets a cap on emissions, but as I understand it the real value is in the effect it might have at Copenhagen.

TS: Well let me first respond about Copenhagen. I don't think anything's going to be accomplished at Copenhagen. But they might agree that they will cap the global temperature increases at 2 degrees Celsius -- that's one of these useless things that people love to talk about. Or they might come up with an agreement that the amount of CO2 in the atmosphere should not exceed 450 parts per million. Again, that's no commitment because it's just setting a goal that's supposed to be aspirational.

CC: And you say that because there's no enforcement mechanism?

TS: Not just because there's no enforcement mechanism. I don't worry much about enforcement. I think that if the major countries reach an agreement they'll do their best to do what they said they would do. But if you say what you're going to do is get emissions down by 15% in 20 years, none of them knows what that means. That's not a commitment to something they're going to do; that's a commitment to some vague aspirational goal or something.

Schelling is very emphatic on the importance of committing to specific, measurable actions, and cites NATO as a successful example:

TS: [In NATO], their commitments were not, "How much will we reduce the likelihood of a Soviet attack?" or, "How much will we slow down a soviet attack?" The commitments were about how many young men they would draft into their armed forces. About how much they would spend on guns and ammunition and vehicles. How much real estate they would provide for military housing and pipelines and military maneuvers. They were all commitments to things they could do. So you could look and see that the French were doing what they said they would do. And the French themselves would know if they were dong what they said they would do.

So in Schelling's view, the importance of having American climate legislation in place by Copenhagen is less in showing global leadership (something at best neutral and at worst detrimental in a standard game theory framework) and more in having something concrete around which to negotiate, rather than meaningless emissions targets. This differs from (and I believe complements well) the standard argument for urgency on the Senate climate bill.

Engage Iran by paying attention to Cuba instead

Like Andrew Sullivan, I loved this suggestion from one of his readers, in response to long-time engagement proponent's Roger Cohen's assertion that now is not the time:

The point is, what we hoped to have achieved by engaging with Iran has already occurred (partly by walking very softly during their election). Thus the aim of any talks now can achieve nothing but strengthening the legitimacy of the regime while before talks weakened it.

In fact, the best move I believe the president can make is talking, loudly, to Cuba. If you can disregard the legitimacy of the stolen election in Iran and push directly for more openness and economic prosperity in an equally adversarial country, there's your carrot and stick, without directly meddling in Iranian affairs.

India takes a hard line - no GHG cuts

India's new stance on climate change is unambiguous and unencouraging:

India said it will reject any new treaty to limit global warming that makes the country reduce greenhouse-gas emissions because that will undermine its energy consumption, transportation and food security.

Cutting back on climate-warming gases is a measure that instead must be taken by industrialized countries, and India is mobilizing developing nations to push that case, Environment Minister Jairam Ramesh told the media today in New Delhi.

“India will not accept any emission-reduction target -- period,” Ramesh said. “This is a non-negotiable stand.”

India's moral argument is that 1), most of the excess greenhouse gases in the atmosphere now were pumped out by the now-industrialized countries, and 2), their emissions are still >15x below those of developed countries like the U.S. on a per capita basis:

Ramesh reiterated India’s previous offer to contain CO2 emissions per capita below those of developed nations.

India, the second-most populous nation, only emits 4.6 percent of the global carbon-dioxide emissions, while the U.S. produces 20.9 percent, he said.

Hard to tell if this is a negotiating tactic or genuinely drawing an ideological line in the sand, but particularly if it's the latter it will make it much harder to reach a global accord on reducing emissions (let alone if India gets China and Brazil on board).

The thin line between food safety and protectionism

From the WSJ (subscription required):

China is expected to ban imports of U.S. chicken in coming days, a move likely to deliver a blow to the struggling American chicken industry and escalate trade tensions between the two nations.

James H. Sumner, president of the Georgia-based USA Poultry & Egg Export Council, said he learned Tuesday from "several importers" in China that the U.S. wouldn't receive any import permits from the country's ministry of commerce starting July 1.

To the U.S., it is a food safety issue, whereas to China it looks like protectionism:

Mr. Sumner says the potential ban appears to be tied to a provision in the most recent U.S. spending bill that prohibits the USDA from allowing Chinese chicken plants to send poultry products to the U.S. Lawmakers question whether China's chicken processing plants meet U.S. standards.

A ban on U.S. chicken would be the latest example of food safety and trade colliding. In recent months the U.S. has been under pressure from lawmakers and trade groups to crack down on goods coming from China. China has responded with allegations of U.S. protectionism.

Both sides may have a legitimate point, so add this to a growing list of tricky trade issues on the table.