…environmental economics and the implications of environmental policy

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Protectionism always sells, but is it good climate policy

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Carbon tariffs are trade distorting period. They help those that may need help due to relative product price differences attributable to carbon pricing. But all others are worse off, and the economic models show that welfare is always decreased.

So, when I see this I cringe.

We need another carbon tariff

…We don’t need another Kyoto-type protocol in Copenhagen. What we need is to put a price on our own carbon emissions and a carbon tariff on everyone else’s.

First I ask another tariff? We have one already? But that aside, the basic economics are wonky and so Rubin’s assertion is wrong at worst and incomplete at best.

Three points support this. First, who we trade with, second, what we trade in and finally the emission intensity of all this stuff.

Who we trade with. Canada mostly trades with “western” countries who are all contemplating carbon polices. Canadian trade data shows that Canada exported about 85% to 90% of our total exports to Annex 1 type countries (under Kyoto), all of which are working towards carbon pricing of some sort (except of course Canada which speaks to a different risk). On imports, about 80% come from Annex 1 countries. So the risk, and the need for a carbon tariff accounts for a very small share of our imports and exports. Indeed China, that dastardly emitter, accounted for 3% of our exports and 10% of imports in 2008.

What we trade in? Major exports include oil, gas and their derivatives, electricity, a whack of car stuff, smelting products and aerospace. On imports, it is mostly the same, reflecting an integrated Canada-US market. China, on the other hand sends us golf bags, shoes and computers by the container. Not so big a competing overlap here with Canadian firms.

Emissions intensity. The emission intensity of our exports is much larger than of our imports, reflecting energy trade south and imports of manufacturing stuff north. Of our top 25 commodities, energy intensive exports account for about half of total exports whereas it is less than a third for imports. But when you compare what we import from China, the comparison stops cold. Simply the embodied carbon in oil and gas is a tad larger than that of computers.

So, border adjustments can help some, but as a major policy thrust they fall short in Canada. Their widespread use would only distort trade and reduce welfare. They sound sexy, have populous appeal, but from an economic perspective are unwarranted. Which perhaps explains why we may get border adjustments before we get a real carbon policy.

Written by Dave Sawyer

November 23rd, 2009 at 10:23 am