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Martin Laplante

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Fri, 18 Dec 2009

Border Adjustments: A Solution to Climate Change Action

Amidst the gloom of climate change talks in Copenhagen not living up to their potential, there is a possible solution to the current lack of agreement. Although it's usually presented as a bad thing, border adjustments could help the world out of the current impasse.

Some countries, like Europe, want to move more aggressively than some other countries, but less so than yet other countries would like them to move. Some, like the US and Canada, will only agree to binding aggressive targets if other countries like China and Brazil have such targets. No one will move unless everyone else moves first, and unless others are bound to greater reductions than the other believes is their fair share. The reason, purportedly, is trade. It is unfair to have carbon restrictions, which drive up the price of our exports, unless our competitors have similar restrictions. So countries will not even bind themselves to the less-than-fair share that they are willing to accept unless everyone else agrees to a more-than-fair share.

This is an impasse that can relatively easily be resolved with border adjustments. The US, France, and Germany, among others, have draft laws ready to go that allow them to charge border adjustments. Say that your country has carbon pricing such as cap-and-trade or a carbon tax. Every product that you produce for internal consumption has had to pay a fee proportional to the amount of carbon emitted to produce it and to produce its inputs. If you were to allow duty-free imports of similar products from a foreign country that didn't have carbon pricing, it would have an unfair advantage. Border adjustments let you charge the carbon fee at the border. That way, the fact that this country does not charge for emitting carbon no longer gives it an unfair advantage.

This solution is imperfect, of course, but it does get past the "you first" impasse. It doesn't matter, for trade relations, if a foreign country doesn't agree to reductions. As long as we and our trading partners have border adjustments, that doesn't help them compete unfairly. Not only that, but we're the ones that keep the money from taxing the carbon content of their product, not them. That should be an incentive for them to set up their own carbon tax program.

The problem is how much? How do you know how much CO2 is emitted in the supply chain leading to the production of each product? How much do you charge per tonne? The amount that it costs on your domestic market or the amount that would need to be charged in the producing country to have an equivalent effect? And what would be an equivalent effect? The per-capita emissions of the UK are half of the per-capita emissions of Canada or the US. UK workers drive less and buy more local food. If they don't happen to implement a carbon price, they're still emitting less than us. Would we charge them the same carbon price as, say, Spain or Italy whose emissions are rising out of control?

So what it comes down to is a solution that lets each country cut unilaterally without worrying about unfair competition, and that encourages reluctant countries to act in the interests of the world, even if they are only driven by self-interest. I wouldn't worry too much about finding the correct price for border adjustments. They should only be a transitional measure while waiting for the more reluctant countries to join in.

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