Tuesday, November 27, 2007

Equalizing the Cost of Emissions

One of the few benefits of air travel these days is the opportunity to catch up on one's reading. This trip I took along a few back issues of the Economist, the most recent of which included an article criticizing a key aspect of pending US climate change legislation as "Green protectionism." While I often agree with its editorial positions, I think the Economist misses the mark on the Lieberman-Warner Bill, which I examined here a couple of weeks ago. If viewed purely as trade policy, they might be correct about its provision to assess an emissions charge on imports into the US. However, they assign too little importance to its role in neutralizing US critics of climate agreements. This could prove to be the key to enabling a more aggressive US response to climate change.

The Economist strongly supports the idea of pricing carbon emissions by means of cap & trade mechanisms, but they raise two reasonable arguments--one stronger than the other--against the imposition of a trade barrier along the lines contemplated in the Lieberman-Warner climate bill. They see little incentive over the long-term for emissions-intensive industries to flee a cap & trade system, on the basis that environmental regulation has not been bad for economic growth in the past. Fair enough, though regulating the primary byproduct of combustion works on a vastly different scale than dealing with fuel or exhaust impurities. They also appear to doubt the necessity of external financial pressures to compel China and India, among others, to regulate their emissions, arguing that the US is not now approaching emissions regulations because of such pressure from Europe.

However, it is precisely the need to break the who-goes-first deadlock between the US and developing Asia with regard to binding commitments on emissions reductions that the trade element of Lieberman-Warner seems both pragmatic and sensible, even as a short-term measure that could be phased out once all major emitting countries are on board. And by denying domestic climate change critics the cover of rapidly growing emissions from China and India, it could finally clear the way for a federal emissions policy as tough as that of some of the states, and also for full US participation in the follow-on agreement to the Kyoto Protocol.

The Economist is right to be concerned about the protectionist rhetoric emanating from several of the presidential campaigns and from influential groups such as labor unions, but I believe they err in attributing this aspect of Lieberman-Warner to the populist-protectionist camp. The cap & trade mechanism is aimed squarely at a major unpriced externality in our market system, and emissions-equalizing import assessments would merely globalize the treatment of that externality, closing an obvious loophole. And while some believe that China and India would bow to the moral authority of a US government that has joined with other developed countries to regulate our own emissions, the more pragmatic path to their necessary participation lies in helping to monetize that same externality for them.

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