Nicholas Smallwood

[I originally published this post at the Breaking The Logjam blog, where I periodically blog. Here's the original. Here's the post explaining my participation at BTL.]

A big concern with national climate change policy proposals regards the issue of international competitiveness. A national climate change policy like a cap-and-trade system or a carbon tax will impose higher costs on the producers of regulated products, and if foreign producers of competitive goods are not similarly regulated, they will possess a competitive advantage over our domestic producers. Without proper measures, consumers in the U.S. will probably prefer to buy the cheaper (less regulated) imported products over the more expensive (but climate change-regulated) domestic goods. This could not only damage domestic industry (even if producing goods just as efficiently as their foreign competition), but could also lead to more production of unregulated, dirty, carbon-intensive goods (what’s referred to as leakage). A double whammy.

One potentially elegant solution to this problem presents itself in the form of “border adjustments“. With border adjustments, a tariff would be imposed on any product imported into this country from a country that did not impose adequate climate change regulations on its production. A recommendation along those lines has been recommended by two large U.S. Unions (the IBEW and the AFL-CIO), and by the U.S.’s largest coal-burning utility, AEP (strange bedfellows indeed). Their proposal would require “large emitter” countries (read: China & India) to submit allowances to the US for any unregulated emissions created during the productions process of products they intend to export to the US.

A second, much less talked about side to border adjustments regards the exporting of US products regulated under climate change legislation. Using the same competitiveness arguments as with incoming border adjustments, if we want our ostensibly “cleaner” US products to be able to compete with foreign products on their turf, we could offer “rebates” to exporters to strip these products of their regulatory costs when exported to these countries. Without such rebates, we’ll be placing domestically produced exports at a competitive disadvantage with their foreign produced, cheaper, and “dirtier” competition; a situation ripe for leakage.

There are a lot of important issues at stake when thinking about competitiveness and climate change policies. When thinking about these and other issues, it’s been helpful for me to realize that by placing a price on greenhouse gas emissions, a cap-and-trade system or carbon tax will be forcing producers of carbon-intensive goods to cover the true (or at least truer) costs of their products (they will be internalizing an externality). If we agree that unregulated producers in other countries (and currently in this country) are not being forced to pay for these costs, then we can also say they are actually being subsidized by their governments. By imposing border adjustments on such subsidized products, we would just be leveling the playing field.

For more information:

• “Competitiveness Under Climate Policy,” a blog post by Daniel Hall at the environmental economics blog Common Tragedies.
• A paper by Richard Morgenstern at Resources for the Future regarding Competitiveness & Mandatory US Climate Policies.
• “Should a Carbon Tax be Border Adjustable?”, a blog post over at Greg Mankiw’s Blog.