By Paul Krugman
This time it really is Infrastructure Week. Democrats have agreed on the broad outline of a big public investment program, to be passed through reconciliation on top of a much smaller bipartisan “hard” infrastructure program. As I noted in my column yesterday, big spending has gotten its groove back.
But there has been another major policy development: It’s Infrastructure Week, but it’s also Carbon Tariff Week. The Democratic proposal says in general terms, although without specifics, that we should levy tariffs on imports from countries that don’t take sufficient steps to limit greenhouse gas emissions. On the same day, the European Union laid out, in much greater detail, plans to impose a carbon border adjustment mechanism — which I’m afraid everyone will call a carbon tariff, even though CBAM is a great acronym. (See? Bam!)
So how should we think about carbon tariffs? From past experience, I know that we’ll hear a number of voices denouncing them as a new form of protectionism and/or asserting that they’re illegal under international trade law. These voices should be ignored.
First, let’s talk about priorities, people. Yes, protectionism has costs, but these costs are often exaggerated, and they’re trivial compared with the risks of runaway climate change. I mean, the Pacific Northwest — the Pacific Northwest! — has been baking under triple-digit temperatures, and we’re going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?
And some form of international sanctions against countries that don’t take steps to limit emissions is essential if we’re going to do anything about an existential environmental threat. Developing countries, especially but not only China, are already responsible for most carbon dioxide emissions; even a big effort to decarbonize on the part of the United States and Europe will accomplish little unless it’s matched by efforts in other nations. Furthermore, “industry will just move to China” is a favorite argument of domestic opponents of climate action, so the politics of such action depend crucially on having an answer to that claim.
Given these considerations, it seems almost trivial to point out that carbon tariffs aren’t actually protectionist and should be considered legal under international trade law. But I do think those are points worth making, if only because this happens to be a topic I’ve thought about and worked on for many years.
To understand the law and economics of carbon tariffs, it’s helpful to consider the economics and legality of value-added taxes (VATs), a major revenue source in many countries (although not the United States). Trust me, it’s a highly relevant comparison.
A VAT is, on paper, a tax paid by producers: If a country has a 15 percent VAT, a company that produces, say, furniture must pay a tax equal to 15 percent of its sales — minus the taxes it can show were paid by the companies selling it wood, fabric and so on. The advantage of such a system is that the private sector does a lot of the work of enforcement, since each company has an incentive to make sure that its suppliers pay their fair share.
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