Climate change

Carbon duties no answer to China's CO2 emissions

PUBLISHED : Monday, 28 November, 2011, 12:00am
UPDATED : Monday, 28 November, 2011, 12:00am

As delegates gather today in the South African city of Durban for the latest round of international climate talks, hopes have all but faded that the assembled negotiators will clinch a comprehensive deal to replace the Kyoto Protocol, which expires at the end of next year.

After the last high-profile climate summit in Copenhagen two years ago failed to reach an agreement, the prospect of another failure in Durban is prompting calls for developed economies to act unilaterally, reducing their own greenhouse gas emissions while imposing carbon duties on imports from countries that refuse to set limits on their own emissions.

This might initially sound like an attractive solution to the problem of growing greenhouse gas emissions. The Kyoto talks collapsed largely because China, the world's biggest emitter of greenhouse gases (see the first chart below), not only refused to accept any ceiling on its own emissions, but objected to developed economies setting limits on theirs, lest they set an awkward precedent.

The supporters of carbon duties argue that Beijing's refusal to limit its emissions gives Chinese companies a powerful advantage over competitors in countries where companies must bear the cost of reducing their own greenhouse gas output.

As a result, they are calling for the imposition of 'border tax adjustments', which would slap punitive tariffs on imports from countries which have undertaken no emissions reductions of their own.

This, they claim, would benefit the global environment by transferring some of the cost of emission reductions onto countries that refuse to limit their own greenhouse gas emissions.

The potential impact on China's exporters would be enormous.

As the second chart below shows, the greenhouse gases emitted in making all the goods and services produced in China outweighs the greenhouse gases pumped out in making all the goods and services consumed in China by about 20 per cent.

In other words, 20 per cent of all of China's greenhouse gas emissions - or about 1.75 billion tonnes of carbon dioxide last year - are produced by China's exporters. That means China's export sector pumps out more greenhouse gases than the whole of Russia, the world's fourth biggest emitter.

According to one study, the imposition of carbon cost equalisation duties on Chinese exports to Europe could add about 12.5 per cent to their price. If such a duty were imposed on all of China's exports, it would have raised a thumping US$200 billion last year - more than China's entire trade surplus.

Clearly, there is a powerful incentive for countries imposing their own emission limits to slap carbon duties on imports from China.

Unfortunately, there are some major problems with the idea.

First, it is highly likely that carbon duties would contravene World Trade Organisation regulations. That's because WTO rules forbid tariffs which discriminate against the exports of some countries but not others. What's more, they also outlaw the imposition of duties on imports either because of different production methods, or in order to protect domestic industries from competition. Either way, China would have solid grounds on which to fight green taxes on its exports.

Second, it is doubtful whether carbon duties would actually do much to reduce the world's overall emissions of greenhouse gases.

Part of the problem is that if, for example, the European Union slapped green taxes on imports from China, then the revenue raised would go to Europe's cash-strapped finance ministries, not towards reducing the greenhouse gas emissions produced by Chinese industry. As a result, China would have little incentive to add to its costs further by improving production processes to reduce emissions.

There are other problems too. China could easily get around carbon duties on its exports by imposing a nominal carbon tax of its own. Under WTO rules, that would preclude the imposition of green tariffs on its exports by importing countries.

As a result, it ends up looking as if the carbon duties being proposed by developed countries are just a disguised form of protectionism. Certainly it appears that they would do little if anything to reduce overall emissions of greenhouse gases, just like today's meeting in Durban.