Africa: The dilemma of trade in ‘virtual carbon’
By Shout-Africa Cameroon Correspondent – The fact that developing countries do not have carbon emission caps under the Kyoto Protocol has led to the current interest in high-income countries in border taxes on the “virtual” carbon content of imports.
The results present striking evidence on the wide variation in the carbon-intensiveness of trade across countries, with major developing countries being large net exporters of virtual carbon. Tax rates of $50 per ton of virtual carbon could lead to very substantial effective tariff rates on the exports of the most carbon-intensive developing nations. ‘Virtual carbon’ is embedded carbon in goods or carbon content in products – an estimate of the flows of virtual carbon implicit in domestic production technologies.
Carbon trading sprung up as a way of reducing global warming following the Kyoto Protocol. A key provision of the Kyoto Protocol is that signatories take on legally binding caps on their carbon emissions if they are in ‘Annex 1’ to the protocol (essentially all high income and transition economies), while non-Annex 1 countries (developing countries) do not have caps. This has potential consequences for trade competitiveness and carbon leakage, and countries with caps may consider taxing the carbon content of imports from countries without caps to level the playing field – indeed, the Waxman-Markey and Boxer- Kerry bills currently before the US Congress, aimed at instituting a system of cap and trade for climate policy in the US, both include border taxation as a key provision.
Taxing carbon content at the border is potentially trade-distorting, with associated losses in efficiency and welfare for trading countries. Moreover, unilateral carbon taxation at the border may invite retaliation and could damage the multilateral trading system under the World Trade Organisation (WTO). This motivates calculations such as measure the bilateral flows of carbon implicit in international trade, and then calculate how large the effective tariff rate associated with a border tax on embodied carbon – or virtual carbon.
Findings show that the carbon intensiveness of exports is very high in many large developing countries, that there is wide variation in intensiveness across countries and sectors, and that imposition of a border tax could lead to substantial effective tariff rates on imports from developing countries – for example an average tariff rate of 10.3% on Chinese imports to the US if carbon is taxed at $50 per ton of CO2.
Border taxation is important in virtual carbon trading. A growing number of analyses have sought to examine the extent to which carbon is embodied in the international trade of goods and services either with an emphasis on a single country, notably China, trading with the rest of the world or all countries (with some aggregation for blocs of smaller countries) trading with one another. Findings show that if virtual carbon is taxed at $50 per ton of CO2, a level of tax that has already been experienced in the European ETS, then the effective tariff rates faced by developing country exports is significant, up to 10% of the value of the average export bundle, and two to three times this level for specific tradable sectors. This partly suggests that border taxes on virtual carbon will be trade distorting in the sense that the volume and composition of international trade will change as a result, with associated losses in efficiency and welfare, particularly in developing countries.
At least four other perspectives on the findings are possible: first, from the perspective of global climate change policy, the incentive to producers provided by taxing virtual carbon may be welfare-improving if global emissions decline. Second, from a purely trade perspective, it is clear that unilateral moves to tax virtual carbon at the border would exacerbate trade tensions at a time when the international trading system is under severe stress – the potential for a trade war should not be discounted. Third, the WTO compatibility of border taxes on virtual carbon is untested. Treating all tons of virtual carbon the same, whether from domestic or international sources, is potentially compatible with the national treatment clauses of the WTO, but until there is a case brought before the Appellate Body and a decision reached, the question of WTO compatibility is unclear. Fourth, while taxing is potentially welfare-improving at the global level, the fact that developing countries could end up financing a global public good as a result raises ethical concerns, particularly when low income countries have historically made minimal contributions to the source of the problem. Finally, a cautionary note: all countries have a major stake in ensuring that the international trade regime continues to be open, fair and rules-based.
