1. Gary Hor­lick made the per­ti­nent point that no less than 20 coun­tries con­tribute to the mak­ing of an Apple iPOD, and asks how those coun­tries are going “to cal­cu­late all the car­bon impacts and untan­gle all those per­mits, tax­es and rebates.”

    The infor­ma­tion required to pro­duce a ball­park esti­mate prob­a­bly exists. But sure­ly the answer is that the total green­house impacts would be neg­li­gi­ble rel­a­tive to the expen­di­ture incurred or the pro­duc­tive activ­i­ty gen­er­at­ed in the pro­duc­tion of iPODs.

    The iPod touch mod­el weighs 115 grams or about 4 ounces, so there are near­ly 9000 of these instru­ments to the ton. Thus, at $300 each, a ton of iPODs has a retail val­ue of $2.6 mil­lion. Tax­es on CO2 wouldn’t make a per­cep­ti­ble dif­fer­ence to this cost, whether the tax was $10, $100, $1000 or $10,000 per ton of CO2.

  2. Hi Ian,

    I’m not sure that Hor­lick meant his exam­ple to be tak­en too lit­er­al­ly. I believe his point was that intra-trade (export pro­cess­ing) is now a hall­mark of man­u­fac­tures and increas­ing­ly of com­mod­i­ty trades too rais­ing over­all trade-inten­si­ty of pro­duc­tion (the trade com­ponenetof ‘val­ue added’) to a high lev­el. It’s an inter­link­age that has some adverse con­se­quences, too.

    Giv­en the rent-seek­ing that the obscure cap-and-trade tax encour­ages, we can pre­dict that inter­est­ed par­ties will seek to over-cook the car­bon-tax ‘bor­der adust­ment’ just as, his­tor­i­cal­ly, the anti-dump­ing laws have encour­aged inter­est­ed par­ties to over-cook the adjust­ments for oth­er­wise com­pet­i­tive pric­ing prac­tices when employed by for­eign sell­ers (G. Hor­lick has a huge anti-dump­ing prac­tice.)

    In markets/products where trade-inten­si­ty is high, this rent-seek­ing will occur in many dif­fer­ent mar­kets along the same val­ue-adding chain (of which the iPod pro­duc­tion chain is an exem­plar). Hor­lick implies—and I agree—the oppor­tu­ni­ty for mis­chief and the risk of added costs is high.

    How high? Let us accept Apple’s esti­ma­tion (http://images.apple.com/environment/resources/pdf/iPod-touch-Environmental-Report.pdf) that the pro­duc­tion + trans­port + recy­cling of an iPod account for 72% of the esti­mat­ed 30kg of car­bon equiv­a­lent ‘life-cycle’ emis­sions. This means that val­ue-adding activ­i­ties account for 21.6 kg of CO2e.

    Let us sup­pose that the val­ue added (includ­ing trans­port) in an iPod touch at retails is 85% of the final price, or $2.21 mil­lion per tonne of iPods (at your esti­mat­ed per-tonne price). We’ll put the price of a tonne of CO2e at the expect­ed (not cur­rent) Euro­pean mar­ket price of Euro 30 per tonne which means that the pro­duc­tion of a tonne of iPods accounts for CO2e emis­sions worth (21.6kg * 9000 iPods) = 194.4 tonnes * 30 Euros = 5,2832 Euro per tonne or $A10,435 per tonne.

    At your esti­mat­ed val­ue at retail of $2.6 mil­lion, this 30 Euro tax rep­re­sents is 0.4% of the retail val­ue, but 0.47% of the val­ue-added. Let’s say, a car­bon-tar­iff of half a per­cent on the val­ue-added.

    Since the ori­gin-for-duty of the iPod is Chi­na where there is no car­bon tax, the bor­der adjust­ment in Europe (or Aus­tralia) is equal to, at least, the full tax of half a per­cent of val­ue-added. Horlick’s point is that this tax­a­tion could have tak­en place at every step in the pro­duc­tion chain, adding to the price of the prod­uct at sev­er­al points. This would raise the FOB price of the iPod (while low­er­ing the ad-val­orem inci­dence of the car­bon tax).

    But, keep­ing it sim­ple, sup­pose we say that Hor­lick is wrong and that the iPod would face a car­bon tar­iff only at the last point in the pro­duc­tion chain: the Aus­tralian (or Euro­pean) bor­der. That is, the full inci­dence of the tar­iff is 0.5%. This is, in fact, an infi­nite increase in the duty on iPods because, under the Infor­ma­tion Tech­nol­o­gy Agree­ment of WTO, the duty on elec­tron­ics and parts is zero.

    A the­o­ret­i­cal infini­tude? Yes. But we also agreed that the mar­gin at retail on our iPod was only 15% (com­pe­ti­tion being what it is). So the new tax is a 3.3% impost on the retail­er… who will, of course, mark it up and pass it on to the cus­tomer as a 5% price increase which the retail­er (nat­u­ral­ly) “gross­es up” for GST to a 5.5% increase.

    Best wish­es,


  3. Peter,

    Thanks for respond­ing in such detail to my fig­ur­ing, and espe­cial­ly for draw­ing my atten­tion to Apple

  4. Ian, I entire­ly agree.

    The Bank (and Fund) also sup­ply PPP (USD) GDP and GNI esti­mate which puts Chi­na at about 11.3% of world out­put in 2008, ranked #2 behind the USA, whose val­ue added is rough­ly dou­ble that of China’s. But they use sev­er­al bases for com­par­i­son as I recall (mar­ket exchange rates, and semi-indexed ‘Atlas’ rates).

    Thanks for point­ing out that the “Penn” error also creeps into the esti­mates used in the VOXEU paper. I’ll have to check that.

  5. Thanks Peter. The Bank’s Atlas method con­verts GDP in nation­al cur­ren­cies into a com­mon unit using aver­age exchange rates over a 3‑year peri­od. This intro­duces a fur­ther con­fu­sion and has noth­ing to com­mend it.

    As between the use of “mar­ket” exchange rate (MER) or PPP weights when mea­sur­ing weights for the world as a whole, essen­tial­ly the Bank uses MERs and shows PPP as a mem­o­ran­dum item, and the Fund does the reverse.

    The IMF reveals its con­fu­sion in the lat­est (April 2009) World Eco­nom­ic Out­look by con­trast­ing annu­al changes in per capi­ta world GDP using “PPP weights” and “Mar­ket weights” (Box 1.1, p. 12). In fact, PPP weights are cal­cu­lat­ed entire­ly from mar­ket prices and val­ues. The dif­fer­ence is that the weights that the Fund calls “mar­ket weights” use exchange rate con­vert­ers to trans­late val­ues in nation­al cur­ren­cies into a com­mon unit. There is no jus­ti­fi­ca­tion for this in rela­tion to trans­ac­tions with­in nation­al bor­ders.

  6. Sor­ry guys, what is GST? I’ve searched in acronymser­ach and I found out that GST can be Gen­er­a­tion-Skip­ping Trans­fer (Inter­nal Rev­enue Ser­vice), Goods and Ser­vices Tax, Guam Stan­dard Time [+1000], Glu­tathione-S-Trans­ferase (enzyme). Which one do you mean?

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