Thumbs up on cooperation, thumbs down on substance

The Kerry-Graham NYT op ed on climate policy is a welcome sign of collaboration across the aisle, but its substance is mixed. The five main points are:

1. "We agree that climate change is real and threatens our economy and national security." [good!]
   


2. "While we invest in renewable energy sources like wind and solar, we must also take advantage of nuclear power, our single largest contributor of emissions-free power." [fine]
   


3. "Climate change legislation is an opportunity to get serious about breaking our dependence on foreign oil." [i.e. we need clean coal and offshore drilling]


4. "We cannot sacrifice another job to competitors overseas." [i.e. we need carbon tariffs]


5. "We will develop a mechanism to protect businesses — and ultimately consumers — from increases in energy prices." [good]

As a friend points out, clean coal is nice, but it won't do much to displace oil imports, since the vast majority of oil is used for transportation fuel, whereas coal is entirely used for power. (NB: this could change if CNG or coal-to-liquids ever took off in the U.S., but the former is still a Pickens pipe dream for now, and the technology for the latter has bad economics even without carbon pricing, which would make it completely untenable).

But the worst point is clearly the nearly naked defense of climate-inspired trade protectionism. Kerry-Graham claim that such tariffs will incentivize other countries to adopt environmentally friendly policies; this is the best possible outcome, but sparking a global trade war is another one, and it’s not clear to me why the latter is any less likely.

Protectionism in Kerry-Boxer

Like in Waxman-Markey, the new Kerry-Boxer bill features concerning provisions which hint at carbon tariffs.

The Boxer-Kerry bill devotes a single sentence to what has become an increasingly thorny question: Should the U.S. slap carbon tariffs on imports from countries that don’t curb their own greenhouse gases, as the House climate bill did? To wit:

"SEC. 765. INTERNATIONAL TRADE. ‘‘It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.’’

“Border measure” seems to mean “border adjustment,” which is how the House version of the bill labels tariffs on imports from environmentally-unfriendly countries. The House bill says those tariffs have to be “consistent with international agreements;” the Senate speaks of “international obligations.” Both appear to refer to the questionable legality of carbon tariffs under World Trade Organization rules.

This is triply concerning because the House has already passed a bill with similar provisions, and Obama hasn't exactly distinguished himself as the stalwart defender of free trade.

Ugly protectionism

Yikes - Obama has slapped tariffs on Chinese tires and China is already retaliating. Greg Mankiw is justifiably disappointed. I hope Obama isn't trying to drum up support for healthcare through protectionism. Healthcare reform is not worth the negative impact a trade war would have on living standards worldwide.

Update: Condemnation in the econoblogosphere is rapid and unanimous, cutting across ideological lines. E.g. Brad DeLong: "Barack Obama Does Something Really Stupid". The WSJ's Real Time Economics rounds up others, including this gem from Ferris Bueller's Day Off:

“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.”

Carbon tariffs reach the Senate

After the House set a poor example, I was hoping the Senate would take a more mature view on carbon tariffs and steer clear of protectionism, despite the temptation. Sadly not:

Today, ten Democratic senators sent President Obama a letter demanding a “level playing field” for U.S. manufacturing in any climate plan. In plain English: If you want your climate bill, you better include “carbon tariffs” to make sure U.S. jobs don’t scurry off to unregulated China.

The list of senators includes some heavyweights, but all are swing votes for the bill—Debbie Stabenow and Carl Levin of Michigan; Robert Byrd of West Virginia; Arlen Specter of Pennsylvania; Evan Bayh of Indiana; and Al Franken of Minnesota. Without the support of these lawmakers, you can stick a fork in the climate bill—it’s done.

... The ten senators take the opposite approach: “By eliminating the competitive benefit of not acting to address this global problem, it should spur countries to reach a comprehensive accord.”

One hopes this can be negotiated around - signed climate legislation enshrining carbon protectionism into law would be a scary thing.

Carbon leakage is bad, a trade war would be worse

Environmental Economics articulates the best argument I've heard for carbon tariffs:

The economics here are simple: If the U.S. prices carbon domestically (through Cap and Trade), then imports have to be priced accordingly, or the world price for similar products will be lower than the domestic price. The result will be more domestic purchases of foreign produced carbon intensive products and potentially leakage of U.S. industry to non-carbon pricing nations who potentially produce similar products with lower carbon efficiency than domestic manufacturers currently use. This has been the U.S.'s stance in international carbon negotiations all along and the primary reason the U.S. never signed onto Kyoto. Now, domestic carbon policy without border price adjustments puts domestic producers at a competitive disadvantage and will likely result in more imports of carbon intesive products and potentially higher carbon emissions globally.

All true... but it doesn't change that a global trade war would be disastrous. I continue to believe our best hope is the quaint idea that American "leadership" can inspire other countries to follow with their own climate change policies. The stick of carbon tariffs is too dangerous.

Protectionism in Waxman-Markey

Although I'm glad Waxman-Markey passed the House, it's scary to learn from Green Sheet and MR that potentially protectionist measures were smuggled in via the late-night Thursday night addition. According to the NYT:

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.

Carbon tariffs could conceivably spark a disastrous trade war. One good sign is that Obama promptly stated his opposition to the potential sanctions.

Update: Tyler Cowen reemphasizes his skepticism.