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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