Finding a plug for carbon leaks
Toronto Star, Dec. 3, 2005. 01:00 AM
JENNIFER ARDIEL, CHRISTOPHER BARRINGTON-LEIGH AND KATHERINE MUNCASTER
December is a crucial month for international negotiations.
Two major summits --- one in Montreal discussing plans to address
climate change after the Kyoto Accord expires in 2012, and WTO talks in
Hong Kong on reducing trade barriers --- are occurring nearly
The timing is purely coincidental. Yet the two institutions involved,
the United Nations and the World Trade Organization, are struggling to
address two closely linked global problems --- climate change and
Climate change is a daunting problem that has yet to be dealt with
effectively. One of the biggest issues with the Kyoto Accord has been
its lack of global coverage.
Signatory nations represent only 61 per cent of global greenhouse gas
emissions, and that number is rapidly decreasing as developing
economies like China come into their own.
Faced with increasingly stringent regulation in Kyoto nations,
emission-intensive industries are likely to pack up and move to
countries that haven't imposed such restrictions. And nothing prevents
them from selling their products right back to the countries they left.
It's a phenomenon economists label "carbon leakage," and as trade
barriers are torn down, the leak gets bigger. The resulting distortion
affects not only industry --- it also ties the hands of any government
wanting to lead the way with climate policy.
Countries that wish to impose climate-change regulations will find
themselves stymied by business and labour groups competing with foreign
producers who are not paying for their carbon emissions.
As it stands now, the WTO prohibits any border taxes that are based on
environmental standards for production processes, asserting that what
each nation does in its own backyard is its own business.
The rationale for this ideology fails, however, when damage from
emissions extends across borders. The reality is that greenhouse gas
emissions have an impact on all nations, not just the producer.
These WTO rules need to change. One novel solution would be to allow
nations to apply "carbon tariffs" in order to level the playing field
For instance, if widgets from China (where there are fewer regulations)
were imported by Sweden (where there are more regulations), Sweden
could apply a tariff. The tariff level would be set to account for the
difference in carbon regulations between Sweden and China.
This system would complement any new emission quotas agreed to at the
Montreal talks. They would also be consistent with other popular
national policy tools, such as carbon taxes and permit trading schemes.
The result would be a world in which go-getter nations wanting to excel
in their commitment to climate-change reduction --- innovators whose
advances usually benefit the rest of the world --- would be free to
What about fairness to developing nations?
When faced with carbon tariffs abroad, exporting countries would always
find it in their interest to apply their own carbon tax, at least on
exports. The premium paid by consumers in the importing nation would
not change, but the tax revenue would go to the producing nation rather
than to the importing nation. These revenues could be directed back to
economic development and investments in sustainability.
Without reconciling trade rules with plans for climate stabilization,
it is hard to see how a new climate accord can encourage firms in
advanced economies to make the investments needed to lead the way to a
low carbon future. Instead, Canada is likely to continue to lose
manufacturing jobs abroad --- even when those jobs, given their true
costs, would be performed more efficiently if kept at home.
It's time for bold initiatives, and it is time for Canada to lead the way in forging a more global climate accord.
Canada's own carbon dioxide emissions make up only 2 per cent of the
global total, yet Canada is expected to suffer from climate change more
than any other industrialized country.
That makes our negotiations with others paramount. There is an
opportunity to rehabilitate the oft-maligned WTO and pave the way for
still greater trade barrier reductions in the future, by making the WTO
part of the post-Kyoto solution. With two major summits at hand, now is
the time to seize that opportunity.