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More on the BTA debate

As I cautioned in my comments on posts by Paul Krugman and John Quiggin it is by no means clear that the recent WTO-UNEP report does give the green light to border tax adjustments (BTAs) which penalise with tariffs the exports of countries which do not mitigate their emissions.  This report which was, by luck or design, timed to coincide with the passing of the Waxman-Markey bill (it was released the same day!) is now proving to be a bone of contention in the US Senate vote on the bill with some seeking to remove the BTA provisions and other Democrats asserting that the bill won’t pass without them.  The fear is that if the bill is approved with the inclusion of the BTA amendments that this may derail the prospects for a successor treaty to the Kyoto Protocol in Copenhagen later this year.

On the legality and retaliation implications of the BTA moves:

“It concerns me that [the WTO] is flashing a green light rather than a yellow caution signal,” said Gary Clyde Hufbauer, an expert on trade policy at the Peterson Institute for International Economics. “What I take from the WTO/U.N. press release is that the director general of the WTO is trying to advertise that the WTO is not a hidebound opponent of all carbon border measures. That’s a correct sentiment, but not a slam-dunk pass for Waxman-Markey.”

Regardless of the proposed BTA’s legality, the U.S. needs to ask itself from a practical perspective whether it wants other countries imposing similar measures in retaliation, said Gary Horlick, an international trade lawyer well-versed in WTO case law who also spoke at the hearing.  Jagdish Bhagwati, a prominent free trade advocate and economics professor at Columbia University, agreed, saying such tariffs “will lead to massive, justified, WTO-legal retaliation by India and China.”

The jibe about the WTO wanting to be with it makes sense if one agrees with Dong and Whalley that linking trade and the environment is likely to make the WTO irrelevant in a post-Kyoto world.

Moreover I still don’t see however BTAs that are country specific can be consistent with Article 1 of the GATT (treating different countries the same) when BTAs are country specific.

The main difficulty with these measures is that countries such as India have stated they will not set emissions targets and hence will eventually be subject to the BTA. China didn’t say this at the recent G8 meeting but is implacably opposed to BTAs. Whatever the efficiency-creating potential of these measures their global equity implications are atrocious for countries with a fraction of US per capita incomes and a fraction of US energy consumption and per capita emissions.

The call is clear – if China and more specifically countries like India with 1/16th of US energy consumption are to levy charges on carbon usage that are comparable to those in the US they will need to be compensated with generous carbon allocations (current + half GDP growth of current?) which can be traded plus assistance in R&D and switches towards green energy-based electricity.

To compound the complexity on the US side John Kerry has made it clear that he believes that even if the Senate approve this bill that they may reject approving an international treaty unless it contains BTA types of provisions.

3 comments to More on the BTA debate

  • IMO the best outcome on BTAs would be if they were included in Waxman-Markey, but only applied to countries who were not in compliance with an international treaty. My understanding is that we will have to wait until something like 2014 to find out if countries are in compliance with the allocations in the Kyoto committment period. This may put some pressure on countries like Canada, Japan and New Zealand to comply (although the non compliance of the US complicates things).

    Kerry’s comments are interesting, and 67 Senate votes will be extremely difficult to obtain (60 is hard enough). The whole treaty negotiation process can be thought of as an extensive form game with two stages. The first stage involves the negotiations themselves. The second stage involves getting countries to ratify. To find the subgame perfect equilibrium we need to think about the second stage first.

  • Uncle Milton

    “they will need to be compensated with generous carbon allocations”

    So give them the allocations.