« Are U.S. Threats to Restrict Trade with China Credible? | Main | How Will You Pay for That Free Lunch? »

Saturday, December 15, 2007

Carbon Consumption Caps

Judith Chevalier argues that, in the absence of an international agreement to limit greenhouse gas emissions, a carbon consumption cap is "a more limited but still useful approach":

A Carbon Cap That Starts in Washington, by Judith Chevalier, Economic View, NY Times: The United Nations conference on climate change wrapped up in Bali ... without a firm commitment from the United States or China to reduce emissions of ... greenhouse gases. While a binding global agreement would be the best way to cut back on those emissions, a more limited but still useful approach is available, and it is wending its way through Congress.

In its current version, the Lieberman-Warner Climate Security Act, as the bill is known, would cap American carbon consumption through a tradeable permit plan. ...

One goal of a tradeable permit system is to force consumer prices for goods to reflect the harm that the production of those goods causes the planet. For example, if a television were made using a high-emission process, the factory would have to buy many carbon permits, driving up the TV’s price. A television made in a low-emission factory would require fewer permits, lowering its relative price. Consumers, of course, would have an incentive to choose the TV from the low-emission factory, and all factories would have an incentive to lower emissions.

A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.

A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. ... The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods’ production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.

If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.

Of course, such a plan would have an immediate cost for Chinese producers and American consumers. Chinese production methods are now much more carbon-emission-intensive than American methods, so the plan would probably raise the average price of Chinese imports. The alternative, however, is to try to force the Chinese to adopt binding carbon caps similar to those considered in the United States. But that would also raise the Chinese imports’ price. Moreover, Chinese adoption of carbon caps would apply to the whole economy and would be much more costly for China; an American carbon consumption permit system would shield the Chinese domestic sector.

“The best policy ... would be to have all countries take on binding emissions caps under an international agreement,” said Nathaniel Keohane, director of economic policy and analysis at Environmental Defense... “But we have to recognize that’s not going to happen overnight.” In the meantime, he said, the United States and other developed countries “need to take the lead.” He called carbon consumption caps “a good first step.”

“From an environmental point of view,” Mr. Keohane said, “it would ensure that the pollution we cut here at home doesn’t simply end up coming out of a smokestack somewhere else. It levels the playing field for American companies in the global economy. And it also helps us move toward a truly international system, by providing an incentive for developing countries to take on binding caps of their own.”

The carbon consumption provision will face scrutiny under current trade agreements, but there is sound logic for including it in any emissions legislation. Most important, it would eliminate an excuse for doing nothing.

    Posted by on Saturday, December 15, 2007 at 02:07 PM in Economics, Environment, Policy, Regulation | Permalink  TrackBack (0)  Comments (14)

    TrackBack

    TrackBack URL for this entry:
    https://www.typepad.com/services/trackback/6a00d83451b33869e200e54fa5dae78833

    Listed below are links to weblogs that reference Carbon Consumption Caps:


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.