Combating “carbon leakage”—where industry moves from countries with a carbon cap to countries outside the cap—has become a hot-button issue in the domestic debate over climate change. Among the solutions that have been offered is a carbon tariff that will penalize goods that are imported from countries without greenhouse gas controls.

In general, tariffs are a bad idea—they inhibit economic growth, raise consumer prices, and at best, protect outdated and noncompetitive businesses. While protectionism has occasional political benefits, the long-term economic consequences can be dire.

Even some types of “environmental tariffs” are ill-advised. For example, wealthy countries may be willing to impose high costs in order to avoid pollution that has adverse health or local environmental consequences. Poorer countries may not be willing to impose the same costs, preferring instead to spend money on infrastructure, education, or development and incur the pollution costs. Environmental tariffs in these contexts are simply powerful nations imposing their preferences on those that are less well off—which is neither fair nor sound economic policy.

But a carbon tariff is different because climate change is a global environmental problem. Greenhouse gas pollution anywhere on the globe increases the risks of climate change, so the costs of pollution are not internalized within a nation’s borders. This means that people in other countries benefit from a cap in the U.S., and countries that do not control emissions impose costs on us. In this context, a tariff to avoid carbon leakage and protect industries from unfair competition may be justified.

Because of the global character of greenhouse gas emissions, the law of the WTO is likely to help, rather than harm, U.S. efforts to impose a carbon tariff. Some have expressed fears that the WTO could stop a carbon tariff. But many international lawyers that have already addressed this question have found it unlikely that the WTO would block a carbon tariff designed to facilitate a domestic carbon cap. In large part, this stems from the global consequences of greenhouse gas emissions.

In fact, the WTO can be a big help by stopping other countries from trade retaliation, short-circuiting a trade war before it can start. If China were to respond to a carbon tariff with a border tariff of its own, that second, retaliatory tariff would be subject to challenge by the U.S. or Europe, and it would be on shaky ground. The carbon tariff would “protect human, animal or plant life or health” and conserve “exhaustible natural resources”—both recognized as legitimate reasons for countries to limit trade. But the retaliatory tariff would have no such justification, making it vastly more difficult to justify under the WTO. Instead of the WTO being a sword to strike down a carbon tariff, it may be the shield that makes it possible.

How should the U.S. address the adverse international competitive impact of federal legislation that puts a price on carbon, which would increase the cost of energy, materials and manufactured goods to business and citizens? One proposed answer is to make foreign imports more expensive so all goods, American and foreign, are more expensive to business and consumers. This solution is being proposed so that American business is not disadvantaged by lower cost foreign competition!

Let me see if I understand what such a proposal means to the U.S. First it will make energy significantly more expensive for our industry and consumers and then the carbon tariff would make all imports more expensive so cheap foreign products would no longer be so cheap – yet another hit to the consumers’ pocketbooks. All these gyrations occur because the proponents of a carbon tariff have some weird assumption that the rest of the world will willingly pay the tariff in return for continued access to the U.S market and that these same foreigners will continue buying our expensive products in their home country while refraining from imposing tariffs or filing a WTO action against us as retaliation to our imposition of a carbon tariff.

So if enacted what would the imposition of a carbon tariff achieve:

1. U.S. products would be more expensive because energy would be more expensive. This would make us non-competitive in the world market and workers would lose jobs to foreign companies that would make cheaper products and would sell those products to Free Trade countries that did not impose carbon tariffs.

2. Foreign exporters would not want to send their cheap products to the U.S. to be taxed and made more expensive.

3. Our already expensive products would then be taxed by foreign nations to retaliate against our tariffs; so we would sell fewer products.

Specifically, in this time of economic uncertainty, Congress should not risk provoking a trade war with countries like China and India, where the U.S. exported almost $83 billion worth of goods combined in 2007. Otherwise, the United States could face retaliation on our exports as was the case when the WTO ruled against the Foreign Sales Corporation (FSC)/Extraterritorial Income (ETI) legislation and the Byrd amendment where billions of dollars of U.S. exports, on a broad range of products, were subject to retaliation.

Oh, what a tangled web such a proposal would weave as it practices to deceive. Why can’t we as a country just try to develop a solution to the climate change issue that works rather than undertake a Rube Goldberg device that requires more contortions than a double jointed acrobat? In the Age of Transparency all such proposals should clearly set out what such a carbon tariff would do in the real world. Such transparency would describe a carbon tariff as:

1. Imposing a tax on all forms of energy produced from fossil fuels.

2. This tax will make all products, foreign and domestic, substantially more expensive.

3. Foreign nations will not lightly accept it and will either impose sanctions in retaliation or lessen trade with the United States.

4. The U.S. will have less and less energy to run the economy in the future because as fossil fuels are reduced in the amounts available for use, there will not be a sufficient supply of available clean fuels because we just can’t produce these fuels in sufficient amounts to replace the massive amounts of fossil fuels taken out of the system. For example, coal is the energy source that supplies 50% of our electricity whereas solar is only 0.01% or our electricity today. It simply cannot be produced in sufficient quantities to be a substitute for coal.

5. If we are lucky the foreign nations will continue to free trade among themselves and we won’t have a global depression which was the case in the 1930’s when similar tariffs were imposed.

Bad ideas are just what they are; bad ideas and the only reason bad ideas like a carbon tariff continue to linger is because those selling the idea mislead the public with undocumented claims that somehow more jobs will be created than lost; that clean fuels will make the U.S. energy independent; and that we need to take these steps in order for the rest of the world to just get in line and follow our leadership. So in closing we all need to keep in mind the Pied Piper and his leadership.

Putting tariffs (or Border Tax Adjustments) on imported goods from countries that do not impose limits on GHG emissions could have serious economic consequences for global trade and economic growth and could add to the instability of the U.S. financial system. In addition, BTAs are unlikely to reduce the growth of global GHG emissions.

First, trade barriers are likely to be challenged under the WTO and countries will tend to retaliate as Mexico has done by imposing tariffs on U.S. imports in response to new U.S. restrictions on Mexican trucks hauling freight in the U.S.

Second, higher prices on imported goods will mean declining living standards because prices will be higher than they would under a free trade regime and household income simply will not go as far.

Third, if China were to stop its purchases of U.S. assets (or begin to unload them) in response to the U.S. imposing "carbon taxes" on imported Chinese goods it will be much more difficult to right our tottering financial system because we depend on Chinese saving.

Finally, the threat of BTA's reflecting the price of carbon under a U.S. system requiring GHG reductions is not likely to stop countries like India and China from burning coal and other fossil fuels (which they have in abundance) or significantly curbing emissions from the millions of new motor vehicles their citizens are busily acquiring (see recent ACCF testimony at House Energy and Commerce Subcommittee hearing at
http://www.accf.org/media/dynamic/3/media_329.pdf