How can we effectively fight carbon emissions, while at the same time limiting trade conflicts that result from such measures? Geoff Carmody explains that the answer is to focus on consumption rather than production:
But an emissions production model only works if all nations sign on at the same time. History tells us they won’t. The EU has tried to get acceptance of this model for a long time and has failed.
Why? When nations act at different times or to different degrees, production models undermine trade competitiveness of early movers compared with others. This causes concern about “carbon leakage”, job losses, and little or no net reduction in global emissions. Nations won’t sign, or want “carve outs”.
So the production approach has a fundamental flaw. If every country signed on to a similar model, it might work. But they won't, so it won't. By contrast, with a consumption model:
A consumption model is trade competitiveness-neutral. Imports are priced the same as domestically produced substitutes. Exports are affected when received as imports. National concerns about “carbon leakage” and job losses are eliminated. National efforts in reducing emissions count as net contributions to lower global emissions. Emissions are not “exported”. Nations can act unilaterally.
Because it is trade-competitiveness neutral, the consumption model is an international “confidence building” approach. This is important when the current international financial crisis threatens more trade protectionism while attempts are being made to revive the Doha Round.
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A consumption model (i) is better in principle; (ii) is practical; (iii) is WTO-compliant; (iv) is more likely to secure a global deal; (v) has lower welfare losses than a production model; and (vi) while delivery via a carbon tax is better than an ETS (especially for investment certainty), either could do the job.
It's no contest, right? Focus on carbon consumption, not production, and you will get more effective policies and fewer trade conflicts. Unfortunately, the perception is that consumption models are much harder to sell to the public. This may be true, but I wish more people would try to push them anyway.
