Can WTO control Kyoto climate tariffs?

A world in which gov­ern­ments sta­bi­lized green­house gas emis­sions at the ‘cen­tral’ Kyoto tar­get (550ppm) this cen­tu­ry might be tougher than most of us imag­ine. Gov­ern­ments will be pres­sured to enforce ‘equi­table’ bur­den-shar­ing, includ­ing trade penal­ties, on coun­tries that don’t meet emis­sion tar­gets. Could they get away with penal­ty cli­mate tar­iffs? Under World Trade Orga­ni­za­tion (WTO) rules, probably.

Owing to pop­u­la­tion dynam­ics, sta­bi­liz­ing at 550 ppm could mean cut­ting aver­age per­capi­ta emis­sions to around the lev­el in India today: 300kg of car­bon equiv­a­lent annu­al­ly. That’s rough­ly as much green­house gas as an indi­vid­ual emits fly­ing one-way from Brus­sels to Wash­ing­ton or Syd­ney to Sin­ga­pore, accord­ing to Euro­pean researchers. They esti­mate such curbs would slash 2–4% off glob­al GDP every year.To put that in per­spec­tive, Australia’s growth rate was 3.4% over the last century.

The Euro­pean Com­mis­sion Pres­i­dent (Jose Barosso) wants for­eign­ers to share the bur­den of such tar­gets, using trade tax­es if nec­es­sary to ‘lev­el the play­ing field’. His own Trade Com­mis­sion­er oppos­es cli­mate tar­iffs, say­ing they would be pro­tec­tion­ist, but the Euro­pean Coun­cil agreed last week to keep the option under review. 

Sur­pris­ing­ly, cli­mate tar­iffs are not ruled out by WTO rules or by its ‘free trade’ principles. 

Cur­rent WTO jurispru­dence is prob­a­bly that a bar­ri­er nec­es­sary to imple­ment the terms of a glob­al envi­ron­ment agree­ment, such as the Kyoto treaty, would get a tick under the rules on ‘excep­tions’ if chal­lenged. In oth­er words, the WTO leaves open the door for a future Kyoto treaty to include tar­gets enforced by trade barriers.

The basis of the argu­ment for free trade is that we’re usu­al­ly bet­ter off allow­ing the market’s Invis­i­ble Hand to deter­mine who trades in what. But there is an excep­tion to this rule where mar­ket prices do not reflect the social costs of pro­duc­tion. In nation­al mar­kets, if pol­luters cre­ate spill-over costs for the rest of the econ­o­my that are not reflect­ed in the price of their prod­uct, econ­o­mists say it makes sense to tax the prod­uct to reflect the (unpriced) spillover, dis­cour­ag­ing pol­lut­ing pro­duc­tion at the mar­gin and maybe pay­ing for clean-up.

Does that work inter­na­tion­al­ly? Is it good pol­i­cy to tax ‘under-priced’ car­bon-inten­sive goods at the bor­der to ensure that the Invis­i­ble Hand doesn’t point in the wrong direction?

Sup­pose instead of car­bon emis­sions in Chi­na and Europe, we talk about New South Wales and Vic­to­ria dis­agree­ing on water prices? It would mad­ness, not to say a dan­ger to the Com­mon­wealth, to give Vic­to­ria an ‘excep­tion­al’ right to impose a uni­lat­er­al tax on NSW food imports (for exam­ple). We would expect COAG to work out an agree­ment based on a shared under­ly­ing val­u­a­tion of water rights.

This is the prefer­able out­come glob­al­ly, too. But it may be infea­si­ble for mul­ti­lat­er­al regimes like WTO, or Kyoto. Should they define shared glob­al val­ues? Do they have the ‘demo­c­ra­t­ic legit­i­ma­cy’ need­ed to work out some­thing like that? For Kyoto and WTO alike the ques­tion is becom­ing acute.

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