Thursday, January 24, 2008

Man the Green Barricades: Trade War over Carbon

There is nothing this blog likes to see more than a news piece that combines international trade and environmental economics in one, short, story.

Now we are really talking "Globalisation and the environment".

There is already an established literature in economics that examines the question of whether "environmental regulations act as trade barriers". Ederington and Minier in the CJE is a good starting point.

Warning of trade war over carbon import taxes [FT]

Plans to force importers to pay the same greenhouse gas emission charges as domestic producers could provoke a trade war of retaliation and litigation, officials and lawyers have warned.

The plans, being considered by the US Senate and floated by the European Commission, are intended to prevent production shifting to laxer regimes abroad after countries impose carbon controls. But although supporters argue they will comply with the General Agreement on Tariffs and Trade (Gatt), the treaty that underlies the World Trade Organisation, officials and lawyers say that affected countries such as China and India are likely to resort to litigation or retaliation.

Ujal Singh Bhatia, India's ambassador to the WTO, said: "If the countries imposing such measures invoke Gatt provisions to justify them, the dispute settlement mechanism in [the] WTO would face serious challenges and create divisions along North-South lines."

Lawyers said that although the measures might be made compatible with WTO rules, it is likely there would be years of uncertainty and conflict. Greg Mastel, adviser at the law firm Akin Gump, said: "Meeting the standards for compliance will be hard, and this is a high-stakes case." Settling this through litigation "could put a lot of strain on the [WTO] system".

Mr Bhatia warned against hasty action. "Even within the EU and the US the discussion has only recently begun and there appears to be no consensus as yet," he said. "Unilateral measures at this stage would create contentiousness and lead to charges of protectionism."

A much longer and indepth FT article appears in today's issue. Essential reading.

Green barricade [FT]

Traditionally, many trade officials, particularly from developing countries, have been suspicious that environmental provisions in trade agreements are covert protectionism by rich nations. Sure enough, several wealthy countries are mulling taxing imports to take account of greenhouse gases emitted during their manufacture. The plans are in their early stages, but they may at the very least serve as a negotiating tactic to get reluctant countries to agree to control emissions themselves.

Environmentalists and companies in energy-intensive sectors say that by adopting carbon taxes or quotas without requiring that others do the same, economies such as Europe's merely encourage freeriding and "carbon leakage" - carbon emissions rising as industries decamp to less regulated countries. They have argued for the playing field to be levelled by levying a "carbon border tax" - a tariff that taxes imports from unregulated countries as though the foreign companies that made them were domestic businesses.

Two separate bills being considered by the US Senate would combine a new national cap-and-trade system for carbon emissions with charges on imports from countries that do not tax carbon, by requiring them either to buy US or equivalent emission credits - in effect a border tax - or pay a fee. The proposal had substantial input from American Electric Power, one of the US's largest electric utilities, and the International Brotherhood of Electrical Workers (IBEW), which represents many power employees. The latter in particular is a familiar opponent of liberalisation that has lobbied against the US signing bilateral trade deals and setting up guest-worker programmes for immigrants.

Although the European Commission opposed the adoption of a direct border tax in this week's proposals for the EU's carbon emission regime, it floated the same idea of requiring importers to buy credits in the future. Carbon equalisation measures have been repeatedly demanded by France, traditionally one of the most trade-sceptical EU member states, while European parliamentarians called for a "Kyoto carbon tax" to be imposed on imports from the US after it failed to join the international emissions protocol (see chart).

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