A carbon border tax can curb climate change

 Dieter Helm in the Financial Times:

The Kyoto agreement tried to get countries to set carbon production caps. These were to be translated into permits, and then traded. Europe led the way with such a system with the US supposed to follow (as soon as President George W. Bush had gone). But the strategy came unstuck at Copenhagen and there is now no prospect of a binding worldwide system any time soon. A US system now looks impossible for years to come, while Australia has stalled, and China and India are not playing ball.

In practice, however, even Europe’s system has not worked. The scheme has proved volatile with a carbon price much too low to make a difference. Yes, Europe’s trading system is politically popular mostly because it lets Europeans trumpet their “leadership”. It is profitable for traders and incumbent polluters. But the system mostly gives the illusion of progress whilst heading off more effective policies – such as carbon taxes.

Kyoto’s failed targets remain popular in part because they make Europe look good. But this is mostly because, under the system, carbon consumption is ignored. As Europe continues to de-industrialise relative to emerging economies such as China and India its production of carbon falls, displaced by carbon imports.

All of this looks fine, until you admit that energy intensive industries have been emigrating elsewhere. To give some idea of the scale of these effects, under Kyoto measurements the UK’s production of carbon fell around 15 per cent between 1990 and 2005. But once carbon imports, aviation and shipping are added it actually went up, by around 19 per cent.

The bottom line is that carbon consumption, not production, is what counts. Any serious global climate policy would have those who cause the emissions paying for them. And the obvious answer is to price carbon whatever its source.

Sadly, the power of vested interests is so strong, and the political fallout from abandoning it would be so shattering, that we are stuck with the European Union trading scheme for now. But a carbon tax – initially as a floor price to the trading scheme – would be an improvement. The tax could start low and rise over time. It could also begin “upstream” by taxing coal, gas and oil, instead of finished goods. A cross-party agreement never to lower it would be even better.

Such a set of national carbon taxes would be a step forward. But to bear down on global climate change, there would need to be taxes on imports too, making western consumers pay for the carbon used to make the cars, electronics and clothes they consume from abroad. And this, in turn, means a border carbon price would need to be established, reflecting the carbon content of imports.

There are two objections to such a border tax: it would be protectionist; and it would be impractical. The former is nonsense: at present trade is highly distorted by the fact that some countries price in pollution and some do not. A border tax, however imperfect, reduces this trade distortion.

The latter is more serious: it is practically impossible to work out the carbon content of each and every import. Some approximations are obviously required. But a small number of energy-intensive industries, such as steel and chemicals, actually represent the bulk of carbon imports. So a tax could focus on these imports first.

There is little point trying to salvage the old Kyoto strategy. A floor price for carbon, combined with a new border tax, should be the new priority. It would be nice to have such a tax at the global level, but if the EU is serious about cutting carbon, it should lead the way and push the World Trade Organisation to follow. Doing so would make a real difference in the battle to stop climate change. But just as importantly, it would shatter the illusion that advanced countries that offshore their carbon emissions can at the same time credibly lead the world in its reduction.