Tag Archives: carbon tax

Using tariffs to achieve valid goals

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President-elect Trump has called for imposing significant tariffs to “bring back jobs to America.” Unfortunately, this will be a fool’s errand. The Smoot-Hawley Tariffs in 1930 were imposed to “save” farming jobs, but instead exacerbated the Great Depression as shown in the chart above. There’s no valid reason to think tariffs will work any better this time around.

Yet, there are a set of valid reasons to impose tariffs, that in a roundabout way could lead to job growth in the U.S. These tariffs could be useful tools to pursue other policy goals by forcing other nations to play on a level field with U.S. industries. The tariffs could be adjusted downward as those countries adopt policies in line with those in the U.S. The World Trade Organization (WTO) allows these types of tariffs if properly designed. Just trying to save jobs doesn’t count, but achieving valid policy goals does.

The policy areas where using flexible tariffs could be fruitful include:

  • environmental and climate change
  • labor and employment
  • product standards

Tariffs to encourage nations to comply with global greenhouse gas reduction goals is one type of environmentally oriented use. Since U.S. companies comply with a wide range of environmental regulations, many of which are intended to preserve natural habitat that has worldwide value, asking other countries to do the same seems to be a valid request. Those nations can ignore those standards if they choose, but U.S. businesses should be allowed to compete as though imported products have incurred similar compliance costs.

Similarly, the U.S. has a wide range of labor employment, workplace and safety standards. Ensuring the well being of those outside of the U.S. if we’re going to buy those products is similarly valid.

Product standards is a third area. Many U.S. products last longer and perform better because they meet stricter standards. The increased longevity of automobiles is largely a byproduct of the increased stringency of emission standards that require engine performance meet those standards for at least 100,000 miles. Improved standards also can lead to reduced waste and increased productivity.

But to justify these tariffs will require that American corporations fully support the application of these standards within the U.S. Whether they can be persuaded to the advantages remains to be seen.

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Could Trumps win lead to global carbon tariffs?

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Former French President Sarkozy suggested that if the U.S. pulled out of the Paris Climate Accord, that the EU impose carbon tariffs on U.S. goods. Many economists have suggested that this may be the best solution to gaining collected global action. So perhaps Trump’s win will actually further action on climate change rather than delay it.

Ideas on adopting world carbon prices

Two news items showed up today on the idea of adopting a worldwide carbon price to reduce GHG emissions. The general idea is to use one of three approaches: 1) world cap & trade allocations (which has been the underlying notion in negotiations so far); 2) setting a specific carbon price or tax through treaty; or 3) using trade tariffs by a coalition of participating nations to incent non-participating ones to control their emissions. There is evidence that pricing carbon is effective in reducing emissions.

The U.S. Secretary of Energy called for a world carbon price implemented through one of the first two methods listed here.

The new American Economics Review has an article that shows that a trade tariff regime imposed by a coalition can induce other nations to control their emissions.

The Strategic Value of Carbon Tariffs
Christoph Böhringer, Jared C. Carbone and Thomas F. Rutherford
We ask whether the threat of carbon tariffs might lower the cost of reductions in world carbon emissions by inducing unregulated regions to adopt emission controls. We use a numerical model to generate payoffs of a game in which a coalition regulates emissions and chooses whether to employ carbon tariffs against unregulated regions. Unregulated regions respond by abating, retaliating, or ignoring the tariffs. In the Nash equilibrium, the use of tariffs is a credible and effective threat. It induces cooperation from noncoalition regions that lowers the cost of global abatement substantially relative to the case where the coalition acts alone. (JEL D58, F13, F18, H23, Q54, Q58)
Full-Text Access | Supplementary Materials

Is a carbon tax feasible, and is it desirable?

Stephen Cohen posted on the Energy Collective about whether a carbon tax is political feasible in the current environment. He argues that Republicans are likely to block any such attempt, and instead proponents should focus on efforts to reduce the costs of renewables and non-fossil alternatives. He’s particularly interested in the problem of making the purchase of renewable energy in all forms accessible to lower income groups. He proposes that R&D efforts be increased to achieve that goal.

I see two problems with this approach. First is that it’s not clear the achieving increased R&D investment is any more feasible given likely GOP resistance. Even if the solar R&D investment program was successful on net, the prominence of the Solyndra failure stands in the way.

The second is that failing to internalize the social cost of carbon emissions can lead to future distortions. The biggest problem is not so much the subsidies themselves, which may be justified on a short run basis to spark a market, but rather the difficulty of ending them when they are no longer needed. In one example, California’s Central Valley Project provided subsidized water to farmers with contracts with 40 year terms. The original subsidies were supposed to expire at the point, but the 1992 Central Valley Project Improvement Act provided for renewal of those contracts on similar terms, which was actually expected by farmers for many years prior. Those subsidies were capitalized into land prices and eventually captured by the landowners resulting in a large wealth transfer from tax payers. While the “average” price of water now likely reflects the opportunity cost of water, the marginal price of that water is still below the actual true cost, and farmers still don’t have as strong of an efficiency signal as they should. (In contrast, State Water Project and groundwater pumping costs have little or no real subsidies.) This illustrates how a subsidy has long outlived it’s usefulness and the extreme difficultly in ending them when a political constituency is created.

As a counter point, Martin Weitzman proposes that a carbon tax be created essentially through the backdoor of tariff negotiations. Weitzman points out the difficulty of negotiating quantity targets through such instruments such as the Kyoto Protocol. In contrast, successful tariff negotiations are the norm in the World Trade Organization. The President conducts those negotiations with relatively more independence, even as the current controversy over the Trans-Pacific Partnership has highlighted the exceptions to the rule. That implies that a carbon tariff probably can make it deeper into the federal legislative process than a straight up carbon tax, and the probability of a successful outcome increases significantly.

How do we best induce technological innovation? We’ve already run that experiment

Improvement in new and existing technologies’ performance and costs is a function of responses to a mix of market and regulatory signals. Finding empirical measures of differing innovation influences is difficult due to confounding influences. Yet we may be able to look at broader economic trends to discern the relative merit of different approaches.

The most salient example could be the assessment of comparative performances after the fall of the Berlin Wall. The Allies conducted a 45-year experiment in which Germany was first split after World War II with largely equivalent cultures and per capita endowments, but one used a largely market-based economy and the other relied on central economic planning. When the two nations reunited in 1990, the eastern centrally-planned portion was significantly behind in both overall well-being and in technological innovations and adoption. West Germany had doubled the economic output of centrally-planned East Germany.

More importantly, West Germany had become one of the most technologically-advanced and environmentally-benign economies while East Germany was still reliant on dirty, obsolete technologies. For example, a coal-to-oil refinery in the former East Germany was still using World War II-era technology. West Germany’s better environmental situation probably arose from the fact that firms and the government were in an adversarial setting in which the firms focused on the most efficient use of resources and were insulated from political interest group pressures. On the other hand, resource allocation decisions in East Germany had to also consider interest group pressures that tended to protect old technologies and industries because these were state-owned enterprises.

The transformation of the West German economy, both technologically and institutionally, was akin to what we will need to meet current GHG reduction goals and beyond. This more clearly than any other example demonstrates how reliance on central planning, as attractive as it appears to achieving specific goals, can be overwhelmed by the complexity of our societies and economies. Despite explicit policies to pursue technological innovations, a market-based system progressed much more rapidly and further.

Think Globally, Act Beyond Locally

Two blog posts of interest on how climate change policy needs to focus on the much bigger picture and not just on local, or even statewide, strategies. If local and state policies are not attractive and readily transferable to other jurisdictions then we’re wasting our time (, California…)  Getting the last ton can be counterproductive if it creates too much complexity or becomes politically unpalatable.
Severin Borenstein from UC Berkeley on California’s policies.

And Jeffrey Rissman from Energy Innovation on three policy approaches.