Climate Protectionism?

Tyler Cowen criticizes the Waxman-Markey bill for imposing tariffs on goods from countries that do not reduce their greenhouse gas emissions. (See also VC contributors linked at the end of this post (and scroll down).) Tyler gives lots of good reasons why trying to punish (say) China would be counterproductive. Clearly, doing so is not costless: we can punish China only at great cost to ourselves in the short term. But the fact is that there is no alternative.

To see why, recall that climate change is a collective action problem. In the most extreme form of the problem, a single nation or a group of nations can do nothing about climate warming, because if they tax emissions (directly or through a cap and trade scheme) industry will simply migrate to other countries and export back to the regulated countries. Costs go up, with no gain for the climate.

In an ideal world, a treaty would be negotiated, one that would require all states (or, at least, all states capable of hosting industry) to reduce emissions. States like China would have to be persuaded that they can't afford to stay out of the treaty. China appears to realize that global greenhouse gas abatement serves its long-term interests, but prefers other countries to pay most of the cost—through financial and technological assistance, which has been its bargaining position so far. But the rest of the world can't afford to pay China to reduce its emissions to an adequate level. Only tough bargaining will ensure that China signs on at reasonable cost for the rest of the world. Note also that any realistic climate treaty would provide for sanctions against states that violate their obligations. Bombing harbors and seizing customs houses having gone out of fashion, these sanctions would almost certainly take the form of trade sanctions.

Many people have criticized Waxman-Markey for putting the cart before the horse. We should first negotiate a climate treaty, and then pass laws implementing its limits. This has been my view but I wonder whether it is too ivory-tower. The administration seems to think that it will not have a credible negotiating position unless it signals that the U.S. is capable of passing a climate bill, even a minimal one that doesn't do much for the climate like Waxman-Markey. The fact that this law imposes costs on the United States while providing no real benefits is consistent with the classic signaling model, with the United States trying to persuade the rest of the world that the public will support climate regulation. If this is true, and it is plausible even if not obviously correct, then unilateral restrictions could be desirable, but they also create a problem by simultaneously weakening the American bargaining position. The U.S. having taken abatement steps, China and others can hold out for even more. This may well be a rationale for threatening to punish states that don't climb onto the climate bandwagon. The U.S. will move first (at least, relative to China, not to Europe) but its threat to disrupt trade relations makes it clear that China will pay a price if it tries to take advantage of the U.S. move by holding out for an even better deal in climate talks.

Then why does the Obama administration say that it opposes the tariff? It may fear that the provision will start a trade war, injure relations with China and other countries, and cause much more mischief at a time of economic fragility. Given everything that is going on, it may be impossible to send a good message about climate without sending a bad message about other forms of international cooperation. Therefore, the messages need to be ambiguous. Maybe this is right, but sooner or later, the United States and other countries will have to make it clear that they are prepared to impose sanctions on states that refuse to take on climate obligations and to comply with them—eve at the risk of ending up at the worst equilibrium in which trade is disrupted and a climate deal is not reached. This is a high-stakes game but there is no clear alternative.