Carbon has no place in global trade rules

Friday, 13 November 2009
imagee/FT.jpg Crunch time for an international agreement to tackle global warming is only weeks away. In December, the world will meet in Copenhagen to negotiate a new agreement on cutting global emissions of greenhouse gases, with prospects for a meeting of minds still far from certain, says

Developed countries’ fears that the competitiveness of their industries will be undermined by weak emission-reduction pledges from developing countries are clouding hopes for progress. These fears have led to calls in some advanced countries, such as France and the US, for taxes on imports from countries that do not adopt stringent greenhouse gas targets.

Calls for border taxes on imports divert attention from the fundamental issue: the need for everyone to take action on greenhouse gas emissions. Developed countries acknowledge that they have a responsibility to lead action to combat climate change. But their calls for import tariffs are antagonising developing countries anxious to provide improved living conditions for their citizens.

Governments that have taken or are contemplating ambitious action to reduce greenhouse gas emissions are facing intense opposition at home based on two major concerns. Developed economies are major producers of emission-intensive products, and businesses in these countries fear a loss of competitiveness if their domestic industries face tougher restrictions on carbon emissions than those in emerging economies. At the same time, politicians worry that efforts to reduce emissions may be undermined by increased emissions elsewhere – so-called “carbon leakage”.

Developing countries, confronted with pressing needs to provide energy, clean water and sanitation services for their citizens, understandably feel threatened by proposals for border taxes. India, with the support of China and the G-77 developing countries, has called for any agreement coming out of the United Nations climate negotiations in Copenhagen to ban import restrictions and tariffs against developing countries based on climate issues.

Amid this face-off, the danger is that arguments over border taxes could make an agreement even more difficult to negotiate. There is no need for this distraction, as fears about the potential impact of leakage and loss of competitiveness are exaggerated.

In reality, if agreement on action to address climate change is reached, carbon leakage is likely to be small and to decline rapidly as participation in the agreement broadens. According to analysis by the Organisation for Economic Co-operation and Development, even if the European Union was to act alone and reduce its greenhouse gas emissions by half by 2050 compared with 2005 levels, emission increases in other parts of the world would counteract only 12 per cent of the EU reductions. If all industrialised countries took action to reduce emissions, then this “leakage rate” would be reduced to just 2 per cent.

Although climate policies can add to a company’s costs, in most cases this would not be large enough to lead to a shift in production. When deciding where to locate a facility, companies consider many other factors, such as skills and size of available labour pool, proximity to raw materials and final demand, and ease of doing business.

Border taxes, while doing little to protect competitiveness, would have significant negative effects. Trade restrictions can lead to welfare losses for both the country implementing them and trading partners, making combating climate change more difficult. They are also hard to implement, as there is no agreement on how to account for the emissions embodied in a given manufactured product. Furthermore, they may lead to trade friction, creating further losses.

Clearly, the best solution is to level the playing field by broadening participation in a climate agreement to include as many countries and sectors as possible. Any small competitiveness or leakage impacts that might arise will decrease rapidly as more countries and industrial sectors act on climate change. Instead of imposing border taxes, we need to find ways to encourage key emitting countries and economic sectors to act by providing financial and other support for the transition to low-carbon development paths. This is the most productive way to dispel anxiety about competitiveness and leakage impacts, while keeping the doors open to free trade.

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