Is Cap-and-Trade Inherently Protectionist?

You might not think so, judging from climate doomsters’ oft-repeated claims that Kyoto-style policies will spur innovation, efficiency, and green-job creation, making us more competitive. Such claims imply that if anyone needs protection, it’s those benighted countries that refuse to embrace the hard-cap, soft-energy-path to a low-carbon future.

Yet, European politicians warn (see here and here) that they will impose border taxes (carbon tariffs) on goods from countries—chiefly the United States, China, and India—that refuse to limit emissions. Carbon protectionism is popular with some U.S. politicians as well. Section 6006 of the Lieberman-Warner Climate Security Act (S. 2129), for example, provided for de-facto carbon tariffs (dubbed “international reserve allowances”) on imported goods from non-emission-constrained countries, beginning in 2020.

This discussion was on the back burner last year, when Congress had no real prospect of passing, much less enacting a cap-and-trade bill. But the Obama Presidency, Rep. Henry Waxman’s (D-CA) chairmanship of House Energy and Commerce, and the Democrats’ bigger majorities in Congress are fueling speculation that 2009 may be the breakthrough year for climate legislation. Unsurprisingly, demands for carbon tariffs have become more audible. Last week, Bloomberg.com reported that U.S. Steel Corp., American Electric Power Co., and the AFL-CIO “are all pressing lawmakers for protection against imports from countries that won’t have to bear the costs of any measures to curb global warming.”

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.

To ensure that each nation’s individual interest is aligned with its collective interest, there must be sanctions to deter and punish cheating. If public censure is insufficient (it often is), and military force is not an option (more on that later), then trade penalties—carbon tariffs—are pretty much all that’s left.

Then there’s the more delicate matter of how you persuade major developing countries such as China, India, and Brazil to adopt policies that restrict their access to affordable energy.

The United Nations Intergovernmental Panel on Climate Change (IPCC), the European Union (EU), and numerous environmental groups contend that Kyoto II should reduce global greenhouse gas (GHG) emissions at least 50% below current levels by 2050. Achieving this goal could require developing countries to make extreme sacrifices, because most of the growth in global emissions is projected to occur in the developing world.

The EIA projects that energy-related CO2 emissions in OECD countries will increase from 14 billion tons in 2005 to 16 billion tons in 2030—a 14% increase. In contrast, non-OECD energy-related CO2 emissions are projected to increase from 14 billion tons in 2005 to 27 billion tons in 2030—a 92% increase. Similarly, the IEA projects that global energy-related CO2 emissions increase from 28 billion tons in 2006 to 41 billion in 2030, with three-quarters of the projected increase occurring in China, India, and the Middle East, and 97% occurring in non-OECD countries as a whole.

A recent presentation by Stephen Eule of the U.S. Chamber of Commerce quantifies the emission reductions developing countries would have to make under a global 50% emissions reduction target. Even if industrialized countries somehow reduce their emissions to zero in 2050, developing countries would have hold their total emissions almost constant over the next four decades, reducing emissions by 20.1 billion tons or 62% below the baseline projection (see page 10). In terms of emissions intensity, developing countries would have to reduce annual per capita emissions from 4.4 metric tons in 2000 to 1.7 metric tons in 2050 (see page 11). That’s asking a lot from the 1.6 billion people in poor countries who currently have no access to electricity and the 2.4 billion who rely on traditional biomass—wood, crop waste, and dung—for heating and cooking.

Miraculous breakthroughs that dramatically lower the cost of emission-free base-load electric power and non-petroleum-fueled transport might occur, allowing developing countries to limit emissions without dooming themselves to perpetual poverty. However, it is in the nature of breakthroughs that they elude planning and prediction. A Kyoto II with a legally-binding 50% global emission-reduction target could put developing countries in an economic straightjacket.

This suggests that the EU, the United States, Canada, Russia, and Japan would have to mount an extraordinary, coordinated, campaign of trade sanctions to bring China, India, and other developing countries into compliance with a 50% global emissions reduction target.

But a moment’s reflection tells us that any such 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.

The international delegates gathering at the COP 15 conference in Copenhagen later this year should contemplate two fundamental realities:

(1) The world cannot reduce emissions 50% by mid-century unless China, India, and other developing countries stop fueling their development with new coal-fired power plants and more petroleum-fueled transport (see here, here, and here).
(2) Economic pressure in the form of carbon tariffs will very likely not be enough to make them stop.