The West's next weapon in the fight against global warming may be a carbon tariff on imports from the developing world, a strategy that could have a profound impact on the global economy, a new report argues.
Not only will new charges for carbon emissions trim growth in developed countries, but carbon tariffs could boost inflation and reverse the march toward offshoring as manufacturers who have relocated to countries such as China move to more energy-efficient environments back home, CIBC World Markets said in a report released yesterday.
"As OECD countries begin to tax their own economies by charging growing fees on carbon emissions, their tolerance for the carbon practices of their trading partners will diminish rapidly -- particularly when the painful cuts made by North America, Western Europe and a handful of other OECD countries are dwarfed by the emission trail spewing from China and the rest of the developing world," Jeff Rubin, chief economist at CIBC WM, said in the report with Benjamin Tal. "The response is likely to involve a carbon tariff -- an equalizing force that will tax the implicit subsidies on the carbon content of imports that come from carbon non-compliant countries."
In an interview, Mr. Rubin said it looks increasingly likely the United States will join Europe in imposing a charge on carbon emissions either through a tax or a "cap and trade" system, where companies are allowed to emit a certain amount of carbon but must pay to go over the limit.
"If you look at the McCain platform, the Obama platform or the Clinton platform, irrespective of who captures the White House, the next administration is going to impose a price on carbon," Mr. Rubin said.
That would be the precursor for the United States to attempt to impose a carbon tariff on developing-world imports, he said. In effect, a carbon tariff would be similar to a countervailing trade duty, imposing a charge for unfair energy subsidies that Chinese exports reap from their cost-free carbon emissions, Mr. Rubin said.
At US$45 per tonne of carbon dioxide -- about the going rate under current European trading schemes -- such a tariff would raise roughly US$55-billion a year from Chinese exports to the United States or equivalent to an average 17% tariff, almost six times bigger than the current 3% effective tariff on Chinese goods.
"At least initially, before other carbon-compliant sourcing can be found, it will be U.S. consumers who will have to bear the bulk of the tariff burden in higher import prices," Mr. Rubin wrote. Based on China's share of U.S. imports alone, that would raise the annual U.S. consumer price index by more than 0.6 percentage points.
Canada would likely face a similar increase, and costlier goods prices would hit growth as well.
Mr. Rubin estimates U.S. efforts to curb emissions will shave 0.6 percentage points off growth in real gross domestic product per year for the next five years, and that is if emissions are only cut by 10%.
The inflationary impact may be mitigated however, if North American industries shift production back home, a trend Mr. Rubin fully expects to materialize as companies try to escape the tariff and improve their energy efficiency.
