Government CO2 Pricing and Protectionism: Two Peas in a Pod (trade wars and worse as potential costs of GHG mitigation)

“From the East Coast to the West and across the political spectrum, House lawmakers remain divided over how to protect America from losing a competitive edge to China and other nations under climate change legislation.

“At issue is how to prevent cement, steel, aluminum and other energy-intensive industries from responding to proposed new laws that could have the effect of slashing emissions by shuttering factories only to reopen them in countries unfettered by costly regulations.”

– Lisa Friedman, “Climate law poses trade risks; lawmakers unsure how to respond” E&E News, April 28, 2009 (subscription)

Marlo Lewis’s post, Is Cap-and-Trade Inherently Protectionist?, linked carbon dioxide regulation, U.S.-side tariffs (“border adjustments”), and international protectionism. Indeed, the interventionist dynamic–regulation expanding from its own complications and shortcomings–is a major theme of political economy.

Lewis explained:

“Beyond the power shifts in Washington, D.C., there are basic reasons why cap-and-trade and protectionism are joined at the hip. First, how do you enforce compliance with a treaty like Kyoto? It’s a typical collective action problem. Even if one assumes that it is in the common interest of all nations to mitigate global warming, it is in the individual interest of each nation to bear less than its negotiated share of the collective burden—to reap the climate benefits (if any) of other nations’ compliance efforts, but to employ creative accounting on behalf of one’s own industries to give them an edge in international commerce.”

And there is another link that troubles students of international trade: protectionism fosters militarism. Lewis warns:

“But a moment’s reflection tells us that any [protectionist] campaign would fail, because developing countries would retaliate with economic sanctions of their own. We would get trade war, not compliance. Trade wars do not always end peacefully, and, as classical liberal thinkers have long warned, protectionism and militarism go hand-in-hand.”

“If goods do not cross borders, armies will,” a maxim in classical liberal circles goes.

Chu’s Trial Balloon–and China’s Reaction

And indeed, when Energy Secretary Stephen Chu raised this prospect last month, the verbal rebuke from China was swift.

Chu testified on March 16 before a House science panel that a carbon tariff would work to “level the playing field” if other countries lagged behind the U.S.’s greenhouse-gas reduction mandates. In Chu’s words: “If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost.”

In response, as reported by the Wall Street Journal, Li Gao, a senior Chinese negotiator from the National Development and Reform Commission, called such policy a “disaster” that would violate the World Trade Organization agreements and lead to a trade war. “It does not abide by the rule of [the] WTO and, secondly, it’s not fair,” said Gao.

U.S. Industry: Already Lobbying for Carbon Protectionism

Unfortunately, political capitalism is rearing its ugly head, where business leaders in a carbon-constrained world are advocating protectionism in the name of equity. Here is a letter from Scott N. Paul, Executive Director of the Alliance for American Manufacturing, a trade group in Washington, D.C., that was published in the Wall Street Journal (April 1, 2009, p. A22). It read:

“Your editorial “Cap and Trade War” (March 30) completely misses a big point on climate policy and protectionism. If the goal of climate policy is reducing carbon emissions, ensuring that manufacturing takes place with the smallest carbon footprint possible is essential. American steel mills emit about 1.2 tons of carbon for every ton of steel produced. China’s steel mills emit at least double that, and probably more, yet China’s share of world steelmaking is growing rapidly. China has the technology to reduce emissions of carbon and currently regulated pollutants, but it lacks the economic incentives because it externalizes the costs onto its citizens and ours: Air pollution causes 750,000 premature deaths in China, while 25% of the particulate matter over Los Angeles originates in China, which has become the world’s largest carbon emitter. Many voices in American industry, labor and the environmental movement are calling for border adjustments on carbon because it will be the most effective way to reduce greenhouse-gas emissions and promote manufacturing with the smallest carbon footprint (emphasis added).”

But what is bad news for global economics and prosperity is good news for the anti-growth wing of the party in power for several reasons. One, it creates a business constituency for carbon caps of some kind–tax or cap-and-trade. Two, it increases government dependency for business and labor to keep the party in power in power. Third, it is likely to incite a trade war that will reduce international trade and world economic activity, thus reducing carbon emissions further.

Do not think for a moment that the Malthusians do not see this perverse dynamic as their best hope for a fundamental reordering of society. The fact that economic decline, or at least foregone economic growth, and even militarism, might complicate the equation is not of concern to them now.