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Applying National Treatment to Carbon Tax

By Peter Morici | January 26, 2007

CREDIT: Rohit Saxena (CC).

Americans are poised to contribute to an international solution to global warming. Nancy Pelosi, newly elected Speaker of the U.S. House of Representatives, is moving the environment and energy to the top of the Congressional agenda, and several senators have introduced bills that would reduce carbon dioxide emissions in the United States.

However, the solutions being offered to save the planet from rising temperatures will likely hasten the calamity and inflict harm on U.S. industries that could otherwise contribute importantly to a sustainable solution.

Shrinking global ice shelves and mountain glaciers offer compelling evidence that global temperatures are rising, threatening to push back continental shorelines, submerge island nations, and radically alter global agriculture.

Carbon dioxide accounts for more than four-fifths of U.S. greenhouse gas (GHG) emissions and an even larger share of what may be curtailed by government policies. Carbon dioxide emissions are created by processing and burning petroleum, coal, and natural gas, and any meaningful solution boils down to regulating fossil fuel use.

Implemented in 2005, without the United States, the Kyoto Protocol commits virtually all other industrialized countries to reducing GHG emissions by 6 to 8 percent below 1990 levels. Developing countries are absolved, though, and industrialized countries can avoid some reductions by implementing cleanup programs in developing countries or creating carbon sinks through reforestation projects. A private market has emerged in Europe for trading emissions permits.

Unfortunately, this regime encourages energy-intensive industries, such as metals and metal fabrication, to move from industrialized countries, where they face rising costs for using fossil fuels, to such places as China and India, where carbon dioxide emissions standards remain much less stringent. Global emissions therefore increase and gross domestic product (GDP) is reduced, because developing countries use fossil fuels, capital, and labor less efficiently to make the same energy-intensive goods.

This madness is best illustrated by the fact that China already emits more carbon dioxide than the European Union, with less than one-fifth the European GDP, and about as much as the United States.

Every two years, Chinese emissions growth adds the equivalent of another country the size of Japan. It is hard to imagine that two years of China's growth, which comes to 500 billion, could replace Japan's $5 trillion economy, but that's the kind of economic accounting international environmentalists advocate.

Bills are pending in the U.S. Congress that would cap and then roll back U.S. emissions over the next two decades by establishing a national limit on carbon dioxide emissions, and then allocating that cap among energy-intensive industries and businesses. Those plans would allow companies to buy and sell their permits—a process called cap and trade.

In essence, cap and trade would extend the Kyoto process into the U.S. economy, and impose the same kind of bureaucratic management on U.S. business that has resulted in economic stagnation throughout much of continental Europe and Japan. The very process of allocating carbon use among businesses would create a playpen for lobbyists and Washington dealmakers that would feed corruption and exacerbate the economic damage.

The international community has determined that global warming can be arrested by rolling back carbon dioxide emissions and fossil fuel use. The economic impact would be best minimized by pricing fossil fuel use, and its effects on the global commons, the same everywhere and letting markets do the work of allocating industries and jobs.

Without equal requirements for China and other developing counties, Kyoto will not solve global warming. By encouraging energy-intensive industries to move to the developing world, it will only exacerbate the condition and make the world poorer in the bargain.

The United States should do its share by implementing a regime that encourages participation and sacrifice by all nations. This could be accomplished by negotiating global emissions standards for energy-intensive activities such as aluminum and steel production and carbon use in automobiles, and quickly building out supplies of alternative energy such as nuclear power. However, negotiating emissions standards would be lengthy and difficult now that Kyoto has its own momentum, and we are all familiar with the resistance to nuclear initiatives in such places as Germany and New England.

More realistically, the United States could impose a carbon tax on domestic energy-intensive products and on imports not subject to comparable levies. The tax could be set at levels necessary to hit U.S. emissions goals and would encourage other nations to put in place comparable policies.

The World Trade Organization has upheld measures to protect the global commons if those apply equally reasonable standards to domestic and foreign producers. That would accomplish reductions of carbon dioxide emissions in the United States without encouraging U.S. energy-intensive industries to leave for China and other developing countries where they make the problem worse, not better.

© 2007 Peter Morici. Republished with permission from the Asia Times Online. Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

Read More: Environment, Tax, China, United States, Americas, Asia, Europe, Global

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