Why Imports Should be Included in a Cap-and-Trade System

Judith Chevalier on Sunday took full advantage of the fact that her Economic View column in the NYT coincided with the end of the Bali climate-change conference. In it, she worries about "leakage" problems from a cap-and-trade system: the idea that if the US caps its carbon emissions, it will essentially just be exporting those emissions to countries such as China which impose no cap. It's a profound and important problem, and Chevalier has a partial solution, which actually already exists as part of the Liberman-Warner cap-and-trade bill, also known as the Climate Security Act.

A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. This idea derives from a joint proposal by the American Electric Power Company and the International Brotherhood of Electrical Workers. The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods’ production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.
If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.

I think that "elegant" might be putting it a bit strongly: the problems associated with measuring the carbon emissions associated with any given import could be all but insurmountable. As Tim Harford notes, it's pretty much impossible to measure the carbon footprint of any given object: his chosen item was a cappuccino, but it could just as easily have been a Chinese-manufactured flat-screen TV.

But equally I think Dean Baker is guilty of mild utopianism when he complains that Chevalier's solution is second-best, and that what we should really be aiming for is a global system of emissions caps covering every country in the world. Well, yes, that would be nice, but it ain't gonna happen – and indeed Chevalier explicitly puts forward her solution "in the absence of a binding global agreement".

In one of his Bali wrap-up pieces on Sunday, Andy Revkin ended by quoting Stanford's BinBin Jiang making a similar point.

Ms. Jiang also stressed that meaningful change in energy and climate policy within the United States was critical, too. “China is clearly responsible for the largest wedge of emissions in the future, but the United States is still the biggest roadblock,” she said. “The U.S. is not going to be influential by telling China what to do. It has to lead by example.”

This all recalls the nuclear-disarmament debates of the 1980s, except that in this case unilateral action doesn't leave a country open to an increased chance of nuclear attack. The US can and should implement a domestic cap-and-trade system, especially as it will never submit to a global authority setting its caps for it. That's the first step towards getting China to adopt a similar approach.

(By the way, this plan is yet another reason why a cap-and-trade system is superior to a carbon tax.)