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July 30, 2009

An Inconvenient Tariff

By

The current cap-and-trade debate is generating a lot of noise in the United States. Much of that noise is coming from the halls of Congress, where phone lines are ringing off the hook from citizens expressing their support, but mostly expressing their disapproval, of the U.S. Clean Energy and Security Act passed in the House of Representatives on June 26. And buried in the 1,427-page bill are protectionist carbon tariff provisions that have government officials from across the globe making noise, too--and rightly so.

The idea behind cap and trade is to reduce carbon dioxide emissions by putting a price on the right to emit carbon and other greenhouse gases on businesses. Since 85 percent of America's energy needs come from carbon-emitting fossil fuels, cap and trade would be massive tax on energy consumption if enacted. How high a tax? The Heritage Foundation's Center for Data Analysis estimates the energy tax to be $3,000 per family a year.

Electricity bills, gasoline prices and home heating bills would, as President Obama put it, "necessarily skyrocket." But the direct tax on household energy use is just the beginning, because just about everything we produce uses energy. The energy tax also hits businesses, and the higher production costs ripple through the economy.

If companies in the United States don't move overseas to make efficient use of cheaper labor and capital, they will be forced to pass those costs onto the consumers by raising sticker prices. And all of this economic pain is for virtually no environmental benefit as climatologists project this bill would only change global temperatures by two 10ths of a degree Celsius by century's end.

Artificially raising the price on goods produced in the United States places those firms at a competitive disadvantage, meaning imports suddenly become cheaper. Some members of Congress and Secretary of Energy Steven Chu suggest a carbon tariff would "level the playing field."

As if the economic perils of cap and trade weren't bad enough, adding a tariff to carbon-intense imports will make them worse--not only for the United States, by making goods we buy from other countries more expensive, but also for developing countries relying on tradeto better their own economies.

Developing countries heavily depend on free tradeto prosper. Countries which hold a comparative advantage in producing certain goods know exports are critical for their economic growth, just like they are in the United States. George Mason University economist Russ Roberts says it bluntly, "We export so we can have money to buy the stuff that's hard for us to make--or at least hard for us to make as cheaply. Self-sufficiency is the road to poverty."

A carbon tariff would severely hinder free trade. Protectionism often begets more protectionism. Countries already berating the U.S. cap-and-trade bill because they view this as unfair could very well respond by implementing tariffs of their own in retaliation. Zhang Haibin, a professor of environmental politics at Peking University and an adviser to the Ministry of Commerce on tradeand climate change policies, warned the U.S. cap-and-trade bill "could spark big tradedisputes, a tradewar even." Furthermore, trying to measure the carbon intensity of goods produced by different countries to create some sort of one-size-fits-all balancing act will be a bureaucratic nightmare and highly subjective.

According to the U.S. Census.gov, the United States imported $24 billion worth of goods from China in May 2009 alone. The specialization of production makes it cheaper for the United States to import certain goods from other parts of the world while freeing up resources to produce other goods and services at home.

We are a much wealthier nation because of China and every other country with whom we trade. Disturbing that important reliance with a cap-and-trade policy that will raise costs on consumers and change the global temperature by an amount too small to even notice is almost laughable until you realize how downright frightening it is.

It's that lack of environmental benefit, along with the high costs, that makes other countries unwilling to implement carbon-reduction schemes. Other countries' governments don't find it in their interests, or for that matter necessary, to pursue a carbon-capping policy. China's emissions are rising six times faster than in the United States, but that's not necessarily a bad thing. It's a sign of development and a booming economy. The same can be said for India and other developing nations.

The common battle cry among advocates of cap and trade is that once the United States paves the way for a carbon-reduction plan, other countries will follow suit. Yet, in a case of international cooperation, India, China and the rest of the developing world would likely have to revert to emission output levels that are pure fantasy. On a per-capita basis, China would backtrack to about one 10th of what the United States emitted in 2000. India and most of the developing world would have to drop to even lower levels. This is a de-developing strategy which no country will adopt.

Worse, carbon capping actually punishes the developing world for using cleaner technology. The developing world is doing just that: developing. For that reason, the technologies they use and the infrastructure they build are newer, cleaner and more efficient. Penalizing nations for developing, with tariffs or by forcing them into global warming treaties, is morally wrong. Instead, Senior tradeAnalyst Daniella Markheim of The Heritage Foundation suggests, "policymakers should maintain the integrity and freedom of global markets as a means to transfer clean technologies, keep international investment flowing, and promote economic growth and prosperity in the United States and around the world."

The upper house of Congress, the U.S. Senate, will begin working on a bill in the early fall but has already commenced hearings to discuss the costs and benefits of cap and trade. Energy is the lifeblood of our economy, but free tradeis one of the fundamental aspects of prosperity, not only in the United States but worldwide. Instead of leveling the playing field, we'll be leveling economies by tearing down their growth potential.

Nicolas Loris is a Researcher Assistant in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in The Beijing Review

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