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Don’t provoke a cap-and-trade war

Marketplace Staff Mar 25, 2009
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Don’t provoke a cap-and-trade war

Marketplace Staff Mar 25, 2009
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Bob Moon: Details of the new climate bill are emerging from Washington this week, and Congress is examining the implications of legislation designed to restrict carbon gas emissions. But we can’t fight the battle against global warming alone. How do we get other countries to do likewise? Commentator Will Wilkinson observes we may already be off to a bad start.


Will Wilkinson: Last week, Energy Secretary Steven Chu said the U.S. should be open to slapping tariffs on imports from countries that fail to implement their own carbon reduction policies. Meanwhile, China has threatened trade war if faced with carbon duties, which it says are illegal under World Trade Organization agreements.

Trade restrictions tend to leave all involved poor, making trade war a frightening prospect during an already immiserating recession. So how did we come to have the Energy Secretary provoking threats of mutually destructive trade sanctions?

Here’s how. Either all the big, carbon-intensive economies reduce their emissions, or there’s little chance of reducing warming. If the climate modelers are right, we’ll all be better off if everyone pitches in. But each has an incentive to hold out, since countries that don’t pitch in will enjoy lower energy costs and a competitive advantage in international markets.

Chu rightly points out that Obama’s proposed cap and-trade scheme will put American manufacturers at a relative disadvantage. So how do we avoid this, and make sure countries like China don’t get a leg up?

In short, we can’t. There is no mechanism, no global government, to compel compliance. And it is dangerously naive to think that China, who is the world’s largest owner of dollar-denominated assets, is in a weaker bargaining position than the U.S. We poke the dragon at our peril.

Cap-and-trade is sure to raise costs for struggling American consumers. But it won’t much reduce warming unless countries like China and India fall in line. Yet neither the U.S. nor Europe can just force this to happen. If we try by imposing carbon duties, we’ll hurt consumers even more by raising the cost of imports, and possibly start a trade war no one will win.

Chu’s remarks highlight the fact that cap-and-trade is a costly, risky gambit. But now’s not the time. Suffering workers and consumers can’t afford to lose again.

Moon: Will Wilkinson is a fellow at the Cato Institute.

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