In a prior post, I argued that the cost-benefit analysis for aggressive actions to reduce greenhouse gas emissions presented by Paul Krugman is flawed, even if we assume a globally-coordinated program. But if we can not get broad participation from the major developing countries, the costs that any country that prices carbon will impose upon itself will dwarf the benefits that it will create for itself. In the case of the U.S., the costs of a cap-and-trade regime like that envisioned under Waxman-Markey would be at least ten times its benefits if it were done without international cooperation. It would be very difficult to imagine an effective global emissions mitigation program that does not include the major economies of the developing world.
Krugman clearly recognizes this. How does he suggest that we get, for example, China, India, Brazil and others to participate if they say they don’t want to?
Then you need sticks as well as carrots. In particular, you need carbon tariffs.
A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods. Suppose that China refuses to reduce emissions, while the United States adopts policies that set a price of $100 per ton of carbon emissions. If the United States were to impose such a carbon tariff, any shipment to America of Chinese goods whose production involved emitting a ton of carbon would result in a $100 tax over and above any other duties. Such tariffs, if levied by major players — probably the United States and the European Union — would give noncooperating countries a strong incentive to reconsider their positions.
They sure would. But isn’t it obvious that the targeted countries might consider other reactions beyond either just joining the carbon-pricing regime or choosing to pay the tariff? What if they reacted with counter-tariffs, or set up an outside-the-tariff trading bloc with various resource-rich African and Asian countries, or reduced purchases of U.S Treasuries, or any of a thousand other ideas? Krugman has this to say:
To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important.
But if for the next century “planetary catastrophe” = an expected cost of 2 percent of economic output 100 years from now (and if avoiding this will likely cost more than this amount, even if such a program works), then maybe running the risk of inciting a global trade war isn’t such a great bet.
He goes on to describe the legality, but not the effectiveness, of such tariffs. Why do we think they will work, and not be met by aggressive counter-action? Here is the argument in its entirety:
Needless to say, the actual business of getting cooperative, worldwide action on climate change would be much more complicated and tendentious than this discussion suggests. Yet the problem is not as intractable as you often hear. If the United States and Europe decide to move on climate policy, they almost certainly would be able to cajole and chivvy the rest of the world into joining the effort. We can do this.
Maybe a direct, aggressive confrontation with countries representing several billion people and a good chunk of world economic output would work, and maybe it wouldn’t; but this is exhortation and wishful thinking in the place of analysis.