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Cap and Trade Part 2: Walking the International Tightrope

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This is the second post in a series on cap and trade.

Suppose the United States adopts a cap on greenhouse gas emissions and China does not? What then?

The international thing: it's a bear. Addressing global warming requires an international effort. Especially critical is the participation of the United States and China -- the two largest emitters of greenhouse gases, collectively responsible for some 40 percent of the world's emissions.

Any international climate treaty that omits an eventual cap on China's emissions will be a treaty that fails to prevent dangerous anthropogenic interference on the climate. But so will one that does not include a cap on U.S. emissions.

Right now, in the run-up to negotiations in Copenhagen, the two countries look to be far apart. The United States has indicated a willingness to take a declining cap on its emissions but wants China to do the same. China finds the U.S. cap lenient (too small and too slow to reduce emissions) and opposes a cap for itself. China also wants developed countries to significantly fund its low-carbon technological transformation.

In This Series
Part 1: It's About the Cap, Stupid
Part 2: Walking the International Tightrope
Part 3: You Ask, "What?" I Say, "How Wide?"

In reality, the distance between the two countries may not be quite so large.

  • First of all, it's possible that China's statements do not reflect its actual position but rather an opening negotiating gambit.
  • Secondly, China has already implemented ambitious mandates for renewables (see here and here) and high-mileage automobile standards (here, here and here), and it has announced intentions [pdf] to significantly reduce the carbon intensity of its greenhouse gas emissions.
  • Plus, to avoid dangerous anthropogenic interference to the climate, it's not necessary for countries like China to decrease emissions immediately but to agree to begin doing so within about 15-20 years.

What's a Country to Do?

Still, China's stated position raises the question of what the United States should do -- go forward or wait?

Some argue that the United States should not enact climate legislation now and should go into international negotiations uncommitted. Under this scenario, America doesn't agree to cap emissions until China does. (I'm reminded of two kids in a fight and the parents tell them to shake hands and make up but they can't because each is waiting for the other to extend his hand first. "You go first." "No, you go.")

Personally, I don't think waiting and allowing international negotiations to frame our climate policy is in America's best interest. For one, we tried that with Kyoto back in 1997 and we saw how well that worked out. Secondly, doesn't it make more sense for America to figure out what we want and then go to the international community to work out a global arrangement that fits it?

But Suppose We Cap and China Won't Play?

Okay, you say, suppose America goes first by enacting climate legislation like Waxman-Markey and then an intransigent China refuses to accept any constraint on its emissions? Here arises what I call the cry of the "cap and ... business wolves." Not only do our efforts to address climate change fail, but all our jobs and industries flow to China with its huge uncapped economic advantage. Right? Maybe not.

One Scenario: United States Wins With a Cap

Some folks, most notably New York Times columnist Tom Friedman, actually see advantages to being a first-mover with climate change legislation. Why? Because it would force us to innovate and develop the new, low-carbon technologies of the 21st century.

In this scenario, America doesn't end up importing products from a cap-less China; instead, China imports from us. The net result: the United States wins economically and China's emissions go down because the Chinese effectively adopt our low-carbon technologies and buy up our low-carbon products.

Possible? I guess so. A slam dunk? Hardly.

Another Scenario: Carbon Tariffs

If countries like China refuse to cap, we can level the economic playing field by imposing a carbon tariff on their imports. The amount of the tariff would be related to the greenhouse gas emissions embedded in the imports and the price of carbon allowances (in the case of cap and trade) or the cost of carbon emissions (in the case of a carbon tax).

This approach, recently mentioned by New York Times columnist and Nobel Prize-winning economist Paul Krugman, is in the Waxman-Markey climate bill making its way through the House. (In Waxman-Markey, the president is empowered to impose a carbon tariff on imports after 2025.)

This idea has a lot going for it, given the size of the combined economies of the United States and the European Union. The adoption of a carbon tariff by all these countries could have the effect of forcing hypothetically cap-less countries to adopt a virtual cap or abandon their international trade aspirations. Sort of a win-win.

Which is not to say that a carbon tariff comes free of complications. For one, experts in international relations point out that there are issues relating to trade agreements. It is not clear that carbon tariffs would even be legal under the World Trade Organization (WTO), and if not, changes to the WTO would have to be made. And then there's the specter of a trade war.

There's also the problem of "secondary imports" wherein products from a cap-less country may contain materials originating from the United States. For a tariff to be imposed appropriately, the composition of imported products and their provenance would have to be established.

The Bottom Line: We Have Options

So yes, the international thing is a bear. But it's not at all clear that it should be viewed as a deal breaker to U.S. climate change legislation. Going forward unilaterally with our own climate change legislation will not necessarily leave us powerless and vulnerable to economic exploitation by intransigent nations. And being a first mover may have significant advantages.

Next post in the series comes tomorrow -- what goes under the cap and what does not.

Dr. Bill Chameides is the dean of Duke's Nicholas School of the Environment and a member of the National Academy of Sciences. He blogs regularly at theGreenGrok.com.

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