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Obama vs. Krugman: Five Reasons the President's Right on Carbon Tariffs

President Obama and Congress must make sure that U.S. climate policy efforts encourage other countries to reduce their carbon emissions and spur global demand for U.S. clean energy technologies.
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As congressional efforts to regulate U.S. carbon emissions gain steam, carbon tariffs have received a good deal of attention thanks in part to economist and New York Times columnist Paul Krugman.

Mr. Krugman has become a proponent of carbon tariffs, also known as "border adjustment measures," which would tax imports into the United States from countries which have not taken sufficient steps to combat climate change. In his most recent New York Times blog post, he writes that President Obama is "getting it wrong" by expressing skepticism of carbon tariffs and that French President Sarkozy is "entirely reasonable on the subject."

While Mr. Krugman is correct to note that global trade rules may permit the use of carbon tariffs, he fails to provide the economic, environmental and diplomatic contexts that have led President Obama to conclude that, in order to create a level playing field for American manufacturers, "there may be other ways of doing it than with a tariff approach." Here are five reasons why President Obama is right to oppose carbon tariffs:

1. Carbon tariffs are unlikely to advance U.S. environmental goals. A carbon tariff is a blunt instrument which is likely to result in the same tariff being applied to products from both clean and dirty producers in a country such as China or India. As a result, carbon tariffs are unlikely to incentivize the kind of innovation or energy efficiency improvements by foreign companies that will lead to a reduction in global carbon emissions. At the same time, threats by the United States to impose new green tariffs are likely to cause serious diplomatic frictions that will make it more difficult for the Obama Administration to negotiate effectively for a global deal on climate change.

2. Carbon tariffs could ignite a green trade war and harm the U.S. economy.
China and India have called U.S. proposals for a carbon tariff unacceptable and protectionist and have hinted at retaliation. Developing countries have pointed to U.S. per capita CO2 emissions, which are dramatically higher than the world average, as a basis for retaliating against any U.S. efforts to place tariffs on foreign goods. As President Obama noted, "we have to be very careful about sending any protectionist signals out there," particularly while the world continues to deal with the ongoing recession. Sparking a trade war is no way to help the U.S. economy.

3. Carbon tariffs are likely to violate global trade rules. While Mr. Krugman correctly notes that global rules provide for the use of trade measures to address environmental issues, they also require that "a connection must be established between the stated goal of the climate change policy and the border measure at issue" and that "the measure must not constitute a means of arbitrary or unjustifiable discrimination" or a "disguised restriction on international trade." It turns out that it is difficult to design a border measure in a way that satisfies these criteria, particularly when you leave it to politicians. As Jeffrey Frankel of Harvard University has written, "border measures to address leakage need not necessarily violate the WTO or sensible trade principles, but there is a very great danger that in practice they will."

4. Other countries are likely to use carbon tariffs against the United States. Mr. Krugman may think that French President Sarkozy is "entirely reasonable" to call for a European carbon tariff, but he fails to note that the French have implied that they might turn around and use it on the United States, as a group of House Democrats warned in a letter to congressional leaders over the summer. "The U.S.," the Members wrote, "must not provide a template to ignite a global trade war."

5. There are less-controversial ways to help U.S. manufacturers transition to a clean energy economy. The European Union and other major developed countries thus far have relied on giving away credits for free to energy-intensive industries that are hit hardest by climate policies. U.S. legislation would provide similar assistance to domestic manufacturing industries including steel, aluminum, cement and chemicals. As President Obama suggested after the House voted on its climate legislation, "there were a number of provisions that were already in provide transitional assistance to heavy manufacturers." He raised the possibility that carbon tariffs are unnecessary, "given all the other stuff that was done and had been negotiated on behalf of energy-intensive industries."

I'm all for not "fetishizing free trade" as Mr. Krugman suggests, but it is often those who are most opposed to open markets who are most hyperbolic about the supposed effects of trade. The United States imposes all sorts of regulations which lead to higher costs relative to other countries, from other environmental regulations to minimum wage requirements and prohibitions on bribery and corruption. The fact that U.S. anticorruption regulations are more stringent than Russia's has not led American businesses to abandon Minnesota for Moscow.

Neither is a U.S. cap-and-trade program likely to cause the kind of "carbon leakage" -- the movement of production from the United States to countries which do not have similar regulations -- that proponents of carbon tariffs warn. In fact, studies of Europe's carbon regulation system suggest that carbon leakage is "unlikely to be substantial" because of factors like transportation costs and differentiation between local markets.

Certain U.S. manufacturing sectors may face a decline in production, but Eileen Claussen, President of the Pew Center on Global Climate Change, points out,

most of the projected decline in production stems from a reduction in domestic demand for these products, not an increase in imports. In other words, most of the projected economic impact on energy-intensive industries reflects a move toward less emissions-intensive products -- as would be expected from any effective climate change policy, even one with global participation -- and not a movement of jobs and production overseas.

President Obama and Congress must make sure that U.S. climate policy efforts encourage other countries to reduce their carbon emissions and spur global demand for U.S. clean energy technologies, which will help to create a new generation of green jobs in the United States. Carbon tariffs are unlikely to advance either urgent priority.

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