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Does the Paris Agreement Imperil Global Trade?

Does the Paris Agreement climate treaty imperil global trade? That question may seem odd. The Agreement has no trade provisions. However, absent an enforcement mechanism such as trade sanctions, the treaty is unlikely to achieve its emission-reduction objectives. Tellingly, some foreign officials and climate activists already demand the imposition of carbon tariffs on U.S. firms if President Trump withdraws from the Agreement.

Similarly, some major U.S. corporations argue that, instead of withdrawal—which they claim could shut them out of foreign markets—Trump should swap President Obama’s nationally determined contribution (NDC) emission-reduction pledge with a commitment of lesser “ambition.”

In contrast, this post concludes that the best way to avert an era of carbon protectionism is to withdraw from the pact that implicitly requires and purportedly justifies it.

Background

An NDC is the emission reduction target and corresponding set of policies a Paris party promises to pursue. For example, President Obama pledged to cut U.S. emissions 26-28 percent below 2005 levels by 2025 via several measures, including the legally-dubious Clean Power Plan. Parties are expected to pledge increasingly ambitious NDCs every five years (Article 4.2-3).

The word “enforce” and its derivatives occur nowhere in Agreement, and the pact’s sole compliance “mechanism” is a committee that is to be “facilitative in nature and function in a manner that . . . [is] non-adversarial and non-punitive” (Article 15.2).

That does not mean the Paris Agreement is a toothless tiger. Politics is what drives policy, and the Agreement is designed to mobilize a permanent, global campaign to “name and shame” policymakers who fail to rig domestic energy markets against fossil fuels. Moreover, joining the pact unavoidably endorses the narrative of planetary peril that fuels regulatory and tort litigation on behalf of alleged climate victims.

Nonetheless, whatever political and legal liabilities it may entail, the absence of language concerning either enforcement or trade gives the impression that the Agreement does not contemplate carbon tariffs as an enforcement mechanism. However, after Trump’s election and during the run-up to the President’s June 1 Rose Garden speech, several Paris advocates warned that withdrawal—even though expressly allowed under Article 28—would subject U.S. firms to retaliatory trade restrictions.

Two questions leap to mind. How “voluntary” is this pact, really, if parties may not leave without being hit with trade sanctions? And if tariffs may be deployed against those who withdraw, why not against those who remain but fail to adopt policies reflecting their “highest possible ambition” (Article 4.2)?

Climate Protectionism

The Paris Agreement aims to hold global warming to “well below 2°C” by 2100 (Article 2.1). Satellite data over the past 38 years indicate the rate of warming is 0.13°C per decade, which suggests the world is already on track to meet the target with no new climate policies. However, according to consensus climatology, meeting the 2°C target requires a 40-70 percent cut in global emissions below 2010 levels by 2050 (IPCC WGIII, p. 10).

In a world where more than a billion people have no electricity and billions more have too little commercial energy to sustain development, deep emission cuts may entail enormous economic sacrifices. Again, assuming consensus climatology, current NDCs are nowhere near enough to align global emissions with the mid-century target. Even if all nations faithfully implement their promises by 2030, and maintain those reductions for another 70 years, the bite out of global warming would be vanishingly small, as Bjørn Lomborg points out.

Thus, peer pressure alone is unlikely to motivate the supposedly requisite levels of “ambition.” At some point, Paris partisans may demand trade sanctions to enforce compliance. In fact, some already do.

After Trump’s election victory in November 2016, former French President Nicolas Sarkozy warned he “will demand that Europe put in place a carbon tax at its border, a tax of 1-3 percent, for all products coming from the United States, if the United States doesn’t apply environmental rules that we are imposing on our companies.”

Officials in Mexico and Canada similarly warned of carbon tariffs if Trump pulls out, claiming the World Trade Organization (WTO) will rule that U.S. industries “are operating under an unfair trade advantage by avoiding any cost for their pollution.” Former Clinton administration climate official Dirk Forrister agreed, opining that “if one big country backs out [of the Agreement] it could trigger a whole wave of trade responses.”

Trade saber rattling subsided for a while but resumed in the weeks before Trump’s Rose Garden speech. In May, two dozen large companies including Google, Levi Strauss, and Microsoft admonished Trump in newspaper ads that withdrawal from Paris “could expose us to retaliatory measures.”

On June 1, Quarts.Com posted “A simple way the rest of the world could punish Trump for quitting the Paris climate agreement.” The article cites climate economist Chris Hope’s proposal to slap a 6-10 percent carbon tariff on U.S. goods—effectively a $25 billion-$40 billion tax on U.S. imports. On June 6, Salon chimed in with an op-ed titled “After Trump’s exit from Paris Accord, just sanction the bastards!”

Ironically, the trade sanctions talk comes from some of the same people claiming there’s no risk in staying in the Agreement because the U.S. NDC is “non-binding,” hence Trump “may” adjust it any way he likes.

As explained elsewhere, Article 4.11 allows parties to adjust NDCs to make them more ambitious but not less ambitious. In contrast, Article 28 of the Agreement expressly allows parties to withdraw. Yet Paris proponents now threaten to penalize U.S. exporters if Trump chooses to exercise a lawful option. Wouldn’t they do the same were America to remain in the Agreement but submitted an NDC based on Trump’s pro-growth “energy dominance” agenda?

While the Agreement does not authorize trade sanctions for failure to pledge and implement increasingly ambitious NDCs, neither does it prohibit parties from pursuing such “remedies,” individually or in concert with others. The sanctions talk reveals that Paris creates a coalition of the ambitious primed to retaliate, via carbon “border adjustments,” against any U.S. leader, like Trump, who champions the American people’s freedom to develop the nation’s energy resources. In short, the Agreement is a classic bait-and-switch. Thanks to Trump’s rejection of Obama’s climate agenda, we already see the fist in the velvet glove.

Bigger, Badder IRS?

Imposing carbon tariffs would not be as simple as the “sanction the bastards” crowd imagines. There is no necessary connection between the carbon intensity of a particular company’s products and its host nation’s climate policies. If a company is truly carbon-neutral, why should its products be tariffed for government policies over which it has no control? It seems unlikely the World Trade Organization would condone such indiscriminate retaliation.

On the other hand, calculating and administering border adjustments based on the carbon footprint of particular products would be complicated, vulnerable to political manipulation, and “likely to yield a large increase in governmental regulatory activity outside the EPA,” warns economist Benjamin Zycher.

Although several nations and sub-national governments have explicit carbon pricing policies (either carbon taxes or emissions trading schemes), many more also have implicit carbon taxes such as appliance efficiency standards, emission performance standards, fuel economy standards, and renewable electricity standards. Some, like the United States, also restrict energy production and transport. Establishing numeric equivalencies among such policies across jurisdictions would be a daunting task.

The pervasiveness of international supply chains further complicates calculation of the carbon intensities of goods in trade. Many imported goods “embody components and other inputs from other nations—perhaps many other nations—in vastly different proportions, and those nations’ policies on [greenhouse gas] emissions almost certainly will vary considerably,” Zycher observes. Moreover, the percentage of inputs and value additions from country X to product Y is likely to change as prices and other market conditions change. Zycher concludes that administering a U.S. system of carbon border adjustments would require “a new bureaucracy, or perhaps an expanded one at the Internal Revenue Service,” to develop, administer, and audit compliance with the new trade regulations.

An explosion of new IRS-style regulatory intrusion in U.S. businesses would not help make America great.

In the long run, the best way to avert an era of newfangled carbon protectionism and the associated red-tape nightmare is to withdraw from, and thereby weaken the cohesion and legitimacy of, the Paris Agreement.

If Paris parties pursue tariff penalties against the United States, Trump should call out the duplicity of the supposedly “voluntary” Agreement, and encourage other nations concerned about their sovereignty, domestic energy supply, and freedom to trade to exit the pact.