*That’s Carbon Adjustment Tariff to you. It’s coming, probably, and here are some ideas for what form it should take.
The basic idea is simple: any country that gets serious about controlling carbon emissions will raise the price of the stuff, directly or indirectly. Because carbon inputs are important in many other goods and services, they will raise those prices too. If some countries take action on climate change and others don’t this will lead to distortions in global markets. Otherwise well-meaning governments might refrain from action, fearing the competitive effects. If the elasticities are particularly unfavorable, it is even possible that stringent regulation in one country could lead to an exodus of industry to places where carbon burns freely, resulting in an overall increase in global emissions.
So put a tariff on goods to offset price differences attributable to different carbon regimes. There isn’t an accepted name for the idea yet, so let’s call it a carbon adjustment tariff. The idea can be found in Warner-Lieberman and has been broached by heads of state in Paris and Berlin. It is difficult to see how individual countries can take the lead without it.
Good ideas can have bad consequences unless they are thought through, however. Here are three principles that ought to govern a CAT you could love.
1. A tariff schedule should be insulated as far as possible from self-interested manipulation. In a better world it would be the product of a representative and accountable global agency. In the shabby one we live in it should at least be the joint product of a subset of countries, rich and developing, that are willing to take some initiative.
2. All the money collected under such a tariff—repeat, all the money—should be returned in some fashion to the countries of origin, to finance green investment. Yes, I know a lot of this cash will be misspent, but it would be misspent in the collecting country too. The CAT must not become another means to suck scarce resources from South to North.
3. Some or all of the revenues should be held in escrow, pending the agreement of the trading partner to enter a “contract and converge” system under which it will approach a common per capita carbon emissions target. This money can sweeten a deal that should be made on its own merits.
It bears repeating: policies to forestall global warming are not only environmental policies. If they take their job seriously, they will have profound effects on national and global economies. They should be designed to be economically progressive and sustainable.