Global carbon taxes — a perfect solution, says the FT

In its lead editorial today, “The greening of globalisation,” the Financial Times looks at a potential new wave of trade protectionism that could arise from a push for unilateral carbon border taxes on goods whose manufacture is carbon-intensive. As the FT notes:

The latest vehicle within which protectionism can shelter is a concern for the environment which, though right and proper in itself, is vulnerable to manipulation by sectional trade interests. Both EU and US politicians — the European voices unsurprisingly emanating from Paris, the American ones from the power industry and its unions — have called for some version of a carbon border tax, which would impose new tariffs on imports according to the amount of greenhouse gases emitted during their manufacture.

The FT rightly points out how such unilateral taxes could lead to other countries hit by high tariffs countering by imposing import tariffs on other goods. That, of course, would happen and would further cloud the murky issue of when countries under World Trade Organization rules can restrict imports based on their process and production methods (PPM). Lots of disputes and retaliation would result. (For an early example of such a dispute, see CEI’s article on the WTO’s shrimp-turtle decision.)

But the FT in all its wisdom takes a global view: Why not do away with messy unilateral carbon taxes and institute global carbon taxes instead? In one fell swoop, all the climate change problems would be solved. It would let the market work and it would be fair.

Making globalisation an ally of the environment depends on getting the prices right and then letting the market, where possible, work. Global carbon taxes would be a good way of doing this, ensuring that the price of each product reflected the environmental cost of making it. A global trade in carbon emissions would be another.

Sure, all one has to worry about are simple things, like “getting the prices right” and making sure the price reflects the environmental cost of its manufacture. The FT’s leap to equate taxes with prices is mind boggling. It’s time for a quick review of the differences. Here’s a good riposte by Terence Corcoran on the nopigouclub blog from a couple of years ago:

The proper view of prices in a market economy is that the price contains thousands of pieces of information about a product: the unmeasurable individual wants of millions of people, the costs of hundreds of inputs, the supply and demand circumstances at a point in time, assessments of future conditions, the relationship of all the prices for similar and competing products, etc. Price is part of a process, jam packed with unmeasurable information, not a fixture in time that just needs to be tweaked to get a desired result. Taxes are not prices.

A global carbon tax would have to be substantial to have any effect on behavior. Right now, gasoline in the US costs about $3 per gallon; in the EU, with high gas and VAT taxes, the cost is almost $6 a gallon. Besides the negative effect on individuals trying to cope with much higher energy prices resulting from a carbon tax, every industry that uses energy significantly — not just smoke-stack industries but computer-related sectors, hospitals, etc. — would be hit hard, without viable alternatives. The poor would be hurt the most, as well as people living in non-urban areas. The shock to the economy would be immense.

And what would the federal government do with those new tax revenues? Refund some carbon taxes through decreases in payroll taxes? Don’t bet on it. Give rebates to those hard hit? Watch out for special interests maneuvering to get their piece of the pie. Subsidize alternative energy sources? Sure, let’s create another ethanol boondoggle.

The other alternative the FT suggests is a global cap-and-trade scheme. For a critique of cap and trade, read Fred Smith’s testimony last year here.