Climate Change, Carbon Taxes, and International Tr

ClimateChange,CarbonTaxes,andInternationalTrade:AnAnalysisoftheEmergingConflictbetweentheKyotoProtocolandtheWTODavidRichEnvironmentalEconomicsandPolicy131GlobalizationandtheNaturalEnvironmentProfessorLarryKarp09December20041INTRODUCTIONNationalgovernmentsworldwidearejoiningtogetherinthepursuitoftwoconcurrentobjectives:enhancingeconomicwelfarebyliberalizingworldtradeandslowingglobalclimatechangebyreducinggreenhousegasemissions.Thetwodistinctmultilateralefforts—administeredbytheWorldTradeOrganization(WTO)andtheKyotoProtocoltotheUnitedNationsFrameworkConventiononClimateChange,respectively—operatesimultaneouslyandautonomouslytoachievetheirrespectivegoals.Attheintersectionofthetwoefforts,however,liesthepotentialforconflictbetweenthem.Thetraderegimeisnotinherentlyatoddswithclimatechangemitigation;noristheclimatechangeregimeinherentlyatoddswithtradeliberalization.TheWTOacknowledgestheneedformultilateraleffortstoprotecttheenvironmentandtheKyotoProtocolexplicitlyadmonishesagainstimplementingpoliciesthatadverselyaffectinternationaltrade.1Nevertheless,conflictbetweenthetworegimesislikelytoarisewhencertainpoliciesimplementedtoreducegreenhousegasemissionsinaccordancewiththeKyotoProtocolinadvertentlyaffectinternationaltrade.Bydoingso,suchpoliciesmayviolatetherulesthatgovernworldtrade—namely,thoseoftheWTO.Insuchacase,complyingwithonelegallybindingcommitmentsimultaneouslyunderminestheother.VariousclimatechangemitigationpolicieshavethepotentialtodisruptinternationaltradeandthusviolateWTOrules,includingenergyefficiencystandards,renewableenergysubsidies,andemissionstradingschemes.2Onepolicyinparticular—theintroductionofcarbontaxes—isperhapsthegreatestemergingconflictbetweentherespectiveobjectivesoftheKyotoProtocolandtheWTO.2CARBONTAXESSeveralcountriesthatarepartiestotheKyotoProtocolhaveimplementedtaxesoncarboninanefforttoreduceemissionsofcarbondioxide,akeygreenhousegascontributingtoglobalclimatechange,andmorecountriesarelikelytofollow.WhiletheyoffergreatpotentialtohelpcountriesmeettheircommitmentsundertheKyotoProtocol,taxesoncarbonalsopresentpotentialconflictswithWTOrulesbyaffectingflowsofinternationaltrade.SIGNIFICANCETOTHEKYOTOPROTOCOLTheKyotoProtocol,draftedin1997andscheduledtocomeintoeffectinFebruary2005,legallyrequiresparticipatingdevelopedcountriestoreduceemissionsofsixgreenhousegasestoanaverageof5.2percentbelow1990levelsbytheperiod2008-2012.Sincecarbondioxideisthemostabundantgreenhousegas,reducingcarbondioxideemissionsisacentralobjectiveoftheKyotoProtocol.Amongthemanytoolsatthedisposalofnationalgovernmentstoachievethisgoalistheintroductionofcarbontaxes.Carbontaxes—thatis,excisetaxesbasedonthecarboncontentoffuel—arecentraltonationaleffortstoreducecarbondioxideemissions.Marketpricesforcarbon-basedfuelssuchascoal,oil,andgasdonotcurrentlyreflectthefullsocialandenvironmentalcostsoftheirproductionandconsumption,whichincludethefuturecostsofglobalclimatechange.Becausecurrentfossilfuelpricesaredeceptivelylow,theyleadtolevelsofconsumptionthatexceedthesociallyoptimallevel.Accordingly,theKyotoProtocolcallsfora“progressivereductionorphasingoutofmarketimperfections…inall3greenhousegasemittingsectorsthatruncountertotheobjective”oftheprotocol.3Taxingthecarboncontentoffuelremediesthemarketimperfectionbyincorporatingthenegativeexternalitiesoffossilfuelsintopricesanddecision-making.Bymakingfuelswithhighercarboncontentsrelativelymoreexpensivethancleaner-burningfuels,carbontaxesreducedemandforcarbon-basedfuelssuchascoalandpetroleum,encourageasubstitutiontowardcleanerfuelssuchascleaner-burningnaturalgasorrenewableenergy,andspurincreasesinenergyefficiency—shiftsthatresultindecreasedemissionsofcarbondioxide.Whilecarbontaxesarebutonecomponentofbroadernationalstrategiestoreducegreenhousegasemissions,theyofferseveraladvantagesoveralternativeapproachestocuttingemissions.Byprovidingamarket-basedincentiveforfirmstoshiftawayfromcarbon-intensiveproduction,theyaremoreefficientandcost-effectivethanregulatorymeasuressuchasuniformefficiencystandards.Carbontaxesarealsomoreeffectiveandlesscostlythangeneraltaxesonenergybecausetheyonlytargetthosefuelsthatcontributetoclimatechange.4Inaddition,carbontaxesnotonlyremedythenegativeexternalitiesassociatedwithfossilfuels;theyalsogeneraterevenue.Carbontaxschemesaregenerallyintendedtoberevenueneutral—thatis,allrevenuecollectedfromthetaxistoberecycledbackintotheeconomyinanefforttoenhancewelfare.Forexample,becauseenergytaxesmayberegressive,partoftherevenuecanbeusedtooffsettheburdenonlower-incomehouseholdsbyreducingotherregressivetaxes.5Revenuecanalsobeusedtoeasethetransitionofcertainenergy-intensiveindustriesandtofundinvestmentinnewtechnologies.6Inaddition,increasedrevenuefromcarbontaxescanbeusedtoreduceothertaxessuchasthoseonlaborandcapital.Incertaincases,sucha4schemecanproducea“doubledividend”bycurtailingfossilfuelconsumptionwhilesimultaneouslyincreasingoverallemploymentandwelfare,thusachievingbothenvironmentalandeconomicgoals.7Asaresult,manycountrieshaveadoptedcarbontaxesaspartoftheirstrategiestomeetKyotoProtocolcom