No Free Ride for New Climate Outlaw

Jan. 24, 2017 update: French presidential candidate (and former prime minister) Manuel Valls yesterday renewed Nicolas Sarkozy’s Nov. 2016 call for a carbon border tax on imports from the United States, saying “When Donald Trump declares some kind of economic war on Europe, we must be ready.” More in this Fox News (!) story. 

This post is by Chris Hope, a prominent U.K. climate change policy researcher who served as a lead author and review editor for the Third and Fourth Assessment Reports of the Intergovernmental Panel on Climate Change. It is lifted more or less intact from Chris’s Nov. 15 post, A proportionate response to Trump’s climate plans. We have edited slightly for grammar and added several notes. — CTC.

During the U.S. election campaign, Donald Trump said he would dismantle the country’s domestic climate change policies and withdraw the U.S. from international climate agreements, most notably the Paris agreement which came into force earlier this month. In the week since he became President-Elect, he has given every indication that he is serious in his intentions.

A British economist has a policy response to the world’s #1 climate denier.

So how should the rest of the world respond? It is tempting to indulge in wailing and gnashing of teeth, but in the real world of a Trump Presidency, this is unlikely to be effective. What is needed is a proportionate response. In France, former president (2007-2012) Nicolas Sarkozy has proposed what may well be the most efficient and effective measure, a climate change tax levied upon all US goods imported into Europe.

[CTC: Chris is referring to “border tax adjustments” — import fees levied by carbon-taxing countries on goods manufactured in non-carbon-taxing countries. World Trade Organization rules permit countries with carbon taxes to adopt “non-discriminatory harmonizing tariffs” to protect energy-intensive trade-exposed industries by eliminating the competitive advantage enjoyed by exports from countries that don’t tax carbon emissions. These tariffs also create incentives for non-carbon taxing countries to adopt carbon taxes, since harmonizing tariffs represent revenue that the exporting country could garner by imposing its own carbon tax. Our Border Adjustments Web page has more information.]

How large should such a tax be? If it is to be proportionate, it should cover the harm caused to the Earth from the production of the goods, a harm that will not be reflected in their price if the U.S. presses ahead with the unfettered use of fossil fuels. Let’s consider some ballpark numbers. The Gross Domestic Product of the US in 2015 was about $18 trillion. U.S. emissions of greenhouse gases in the same year were about 7 billion tonnes of CO2 equivalent. Dividing one quantity by the other, we find that every thousand dollars of U.S. production involves the emission of about 0.4 tonnes of CO2 equivalent.

[CTC: Chris’s 7 billion tonne CO2-equivalent figure is sourced to definitive USEPA data and comprises somewhat more than 5 billion tonnes of CO2, one billion tonnes of CO2-equivalent from methane, and perhaps 0.6 billion tonnes of CO2 equivalent from nitrous oxides, hydrofluorocarbons (HFC’s) and other heat-trapping gases.]

The best estimate we have of the global harm caused by these emissions comes from integrated assessment models, like my PAGE09 model which gives a mean value of about $150 per tonne of CO2 if valued by an average citizen in Europe, or $250 per tonne of CO2 if valued by an average U.S. citizen (U.S. citizens are on average about 50% richer than European ones, so they should value an equivalent physical harm more highly).

Applying these mean values as an ad valorem tax on imports of USA goods to Europe results in a tax of about 6%, if the European valuation of harm is used, or 10% with the U.S. valuation. These are higher, but not dramatically so, than Sarkozy’s proposal of a 1–3% tax on US imports.

How much might such a climate tax on U.S. imports raise? The EU presently imports about 400 billion Euros of US goods and services per year. So a 6% tax rate would raise about 25 billion Euros per year, and a 10% rate would raise about 40 billion Euros. If imports of U.S. goods and services have a price elasticity of -1, these revenues would be about 6% or 10% lower respectively.

[CTC: The implied revenue reduction of 25-40 billion euros, or $27-$43 billion in U.S. currency, represents potential U.S. trade losses. They equate to around $100 per capita, or roughly $400 per U.S. family of four.]

If adopted, this idea could be refined further by levying higher rates on U.S. goods that released a great deal of greenhouse gases during their production, and lower rates on others. And of course, in order not to be hypocrites, we in Europe would introduce a strong, comprehensive climate change of about $150 per tonne of CO2 equivalent on our own activities too. But that is only common sense.