Cap and Trade Calamities

One of the differences in the Senate version of cap and trade is that it leaves the door wide open on how to deal with countries that do not adopt carbon capping systems. China, India and other developing countries have made it clear they will not implement carbon cabs that would hurt their economies. The passed Waxman-Markey House cap and trade bill would impose a carbon tariff if countries do not implement some sort of carbon capping regime by 2020.

Since cap and trade would artificially raise the price on goods produced in the United States and place American firms at a competitive disadvantage, imports suddenly become cheaper. Some members of Congress and Secretary of Energy Steven Chu suggests a carbon tariff would “level the playing field” and ensure that Americans don’t begin purchasing goods from other countries.

But protectionism is not the answer. As if the economic perils of cap and trade weren’t bad enough, adding a tariff to carbon-intense imports will make them worse—not only for the United States, by making goods we buy from other countries more expensive—but also for developing countries relying on trade to better their own economies.

A carbon tariff would severely hinder free trade. Protectionism often begets more protectionism. Countries already berating the U.S. cap-and-trade bill because they view this as unfair could very well respond by implementing tariffs of their own in retaliation. Zhang Haibin, a professor of environmental politics at Peking University and an adviser to China’s Ministry of Commerce on trade and climate change policies, warned the U.S. cap-and-trade bill “could spark big trade disputes, a trade war even.” Furthermore, trying to measure the carbon intensity of goods produced by different countries to create some sort of one-size-fits-all balancing act will be a bureaucratic nightmare and highly subjective.

India and China’s carbon emissions are rising at rapid rates; in fact, China’s emissions are rising at rates six times faster than ours. The developing world is still developing. One Indian energy official recently said, “It is morally wrong for us to agree to reduce [carbon dioxide emissions] when 40 percent of Indians do not have access to electricity.” The path to a cleaner environment is not to prevent economic growth abroad but instead enhance it. As these countries develop and secure the fundamental needs for their citizens, they will be able to turn their attention to the environment. And we can help. Senior Trade Analyst Daniella Markheim of The Heritage Foundation suggests, “policymakers should maintain the integrity and freedom of global markets as a means to transfer clean technologies, keep international investment flowing, and promote economic growth and prosperity in the United States and around the world.”

It will be interesting to see how the Senate deals with this situation. Stay tuned.