Finding a plug for carbon leaks

[link to original on Toronto Star site] [The paper copy included the authors' photos]

Toronto Star, Dec. 3, 2005. 01:00 AM

December is a crucial month for international negotiations.

Two major summits --- one in Montreal discussing plans to address climate change after the Kyoto Accord expires in 2012, and WTO talks in Hong Kong on reducing trade barriers --- are occurring nearly simultaneously.

The timing is purely coincidental. Yet the two institutions involved, the United Nations and the World Trade Organization, are struggling to address two closely linked global problems --- climate change and unfair trade.

Climate change is a daunting problem that has yet to be dealt with effectively. One of the biggest issues with the Kyoto Accord has been its lack of global coverage.

Signatory nations represent only 61 per cent of global greenhouse gas emissions, and that number is rapidly decreasing as developing economies like China come into their own.

Faced with increasingly stringent regulation in Kyoto nations, emission-intensive industries are likely to pack up and move to countries that haven't imposed such restrictions. And nothing prevents them from selling their products right back to the countries they left.

It's a phenomenon economists label "carbon leakage," and as trade barriers are torn down, the leak gets bigger. The resulting distortion affects not only industry --- it also ties the hands of any government wanting to lead the way with climate policy.

Countries that wish to impose climate-change regulations will find themselves stymied by business and labour groups competing with foreign producers who are not paying for their carbon emissions.

As it stands now, the WTO prohibits any border taxes that are based on environmental standards for production processes, asserting that what each nation does in its own backyard is its own business.

The rationale for this ideology fails, however, when damage from emissions extends across borders. The reality is that greenhouse gas emissions have an impact on all nations, not just the producer.

These WTO rules need to change. One novel solution would be to allow nations to apply "carbon tariffs" in order to level the playing field between countries.

For instance, if widgets from China (where there are fewer regulations) were imported by Sweden (where there are more regulations), Sweden could apply a tariff. The tariff level would be set to account for the difference in carbon regulations between Sweden and China.

This system would complement any new emission quotas agreed to at the Montreal talks. They would also be consistent with other popular national policy tools, such as carbon taxes and permit trading schemes.

The result would be a world in which go-getter nations wanting to excel in their commitment to climate-change reduction --- innovators whose advances usually benefit the rest of the world --- would be free to lead.

What about fairness to developing nations?

When faced with carbon tariffs abroad, exporting countries would always find it in their interest to apply their own carbon tax, at least on exports. The premium paid by consumers in the importing nation would not change, but the tax revenue would go to the producing nation rather than to the importing nation. These revenues could be directed back to economic development and investments in sustainability.

Without reconciling trade rules with plans for climate stabilization, it is hard to see how a new climate accord can encourage firms in advanced economies to make the investments needed to lead the way to a low carbon future. Instead, Canada is likely to continue to lose manufacturing jobs abroad --- even when those jobs, given their true costs, would be performed more efficiently if kept at home.

It's time for bold initiatives, and it is time for Canada to lead the way in forging a more global climate accord.

Canada's own carbon dioxide emissions make up only 2 per cent of the global total, yet Canada is expected to suffer from climate change more than any other industrialized country.

That makes our negotiations with others paramount. There is an opportunity to rehabilitate the oft-maligned WTO and pave the way for still greater trade barrier reductions in the future, by making the WTO part of the post-Kyoto solution. With two major summits at hand, now is the time to seize that opportunity.