Thursday, March 19, 2009

China is Right about Who Should Pay for Carbon Emissions

In the runup to a new round of negotiations on a global climate agreement, China is calling for a “consumer pays” principle: those who import goods from China should pay for their embedded carbon emissions. According to this Reuters Report, Gao Li, the top Chinese official for climate change policy says, “About 15 percent to 25 percent of China's emissions come from the products which we make for the world....this share of emission should be taken by the consumers, not the producers.”

This is not only correct, it is the natural outcome of a rational climate policy regime.

Suppose China requires anyone introducing a carbon fuel into its economy, such as an oil, gas or coal company, to have a permit, and that it caps these permits to curb emissions. Prices of the fuels rise, and these prices are passed along to direct consumers including manufacturers who use these fuels as inputs. This in turn means that prices rise for the manufactured products, paid by the ultimate consumers—in this case, often US and European importers.

If all the permits are auctioned, their combined value will approximately equal the extra revenues derived from consumers. The government could then rebate this money back to its citizens. Since China is a net exporter (even during the current crisis), the money received by its households will exceed the money they pay in higher prices. This means China could, if it wished, rebate somewhat less than the total auction proceeds, use its cut to finance investments in energy efficiency and non-carbon alternatives, and still protect the real income of its population.

This process, which meets the conditions laid down by Li, can be set in motion by the Chinese themselves, unilaterally. The only need for international coordination concerns the problem of leakage, i.e. how to prevent Chinese domestic and export markets from being captured by producers in countries that don’t require carbon permits. The first-best solution would a global agreement to require permits everywhere with a single, global cap. Such permits would be universally tradeable, which means that artificial barriers to their efficient allocation would be removed. Since there would be a single global price, the leakage problem would be eliminated too.

A second-best approach would be to institute a system of border taxes calibrated to the differences in production costs stemming from different national carbon regimes. Establishing a common set of procedures for calculating and applying this tax should be a high priority for negotiators.

Developing countries with trade surpluses, and particularly China, should be eager to enter a system of carbon emission controls. The rest of the developing world will need other inducements.


Dan said...

This seems like a rational, workable and market-friendly solution.

Of course it took the Chinese to come up with it.

TheTrucker said...

That solution sucks. The money collected from the sale of the permits should be employed in some globally beneficial manner for all the citizens of the planet. The Chinese should not derive a benefit from screwing up the planet nor should any other nation benefit from such destruction.

I have my own pet uses for that dough, But all such uses should be of benefit to all persons equally because all persons are equally entitled to and dependent upon the air we all breathe. This is no different then economic rent in regard to the distribution of the funds. Egalitarian redistribution is probably even more important in the "economic rent" is just unearned. This stuff is an actual assault on the people.

Peter Dorman said...

Well, Trucker, I respectfully disagree. The economic impact on individuals should depend on their carbon footprint. If you consume less, and especially less of the stuff that's heating up our planet, you should come out ahead on the deal, otherwise behind. This is both an ethical argument and an appeal to incentives.

Anonymous said...

I don't know why the Chinese favor this.

If western consumers pay, then that is in effect an added tax on imported goods, driving up their price relative to domestic goods. It seems to me this would hurt chinese exports.

Peter Dorman said...

If the Chinese goods are made with the same carbon input as domestic (US) equivalents, and if the caps generate similar prices, there is no reason to expect substitution on that basis. If there are differences in carbon intensity, however, that will show up at the level of consumer prices -- which it should. China would be against this strategy only if they thought that their production methods use much more carbon than their competitors, and that there is little they can do about it.

Martin Langeland said...

If the consumer pays, Where is the incentive for the producer to find less harmful means of production?
Why are producers exempt from all responsibility for care of the commonweal -- e.g: our common atmosphere.
This is an assertion of privilege. The producer claims the right to pass any and all costs to consumers and neighbors without their participation in the production decisions. That is, it is a form of taxation without representation. This may be good economics, but it is lousy economic democracy.

hapa said...

why the chinese "favor" this is because they are simultaneously fighting against green trade standards. volunteering simultaneously to price pollution (which can then be negotiated down into the weeds) is clever and standard bargaining practice, right? "no need for strict rules, let the market take care of it"?

TheTrucker said...

Glad to see you in the discussion, Peter. And certainly no need to be respectful:)

It seems that the Chinese would be applying a tax to the carbons and then redistributing the tax proceeds to the Chinese people. In that scenario either the Indians or the Japanese or the Martians will leave the carbon untaxed and put the Chinese out of business and/or the Chinese will benefit from polluting the planet.

OTOH, if the governments of the consuming nations apply the tax (as an excise tax) and redistribute the funds to all citizens within their respective countries then this sort of thing will work. The problem, of course, is in policing the actual carbon pollution and maintaining a fair system that reduces the carbon emissions. It is not possible to estimate the carbon footprint of a hula hoop or a brake rotor such that reductions in the carbon output of manufacture of these goods is gracefully rewarded.

The other means to a good end is to simply tax the carbon at its source (your original proposal) and use the proceeds of the tax in some way that benefits all earthlings equally. I will not be so bold as to suggest any particular use of the funds, but perhaps policing the carbon taxation system would be a good start. It is the sort of thing that the UN could do a pretty good job of.

There is no disagreement over the proposition of user (consumer) pays. The disagreement is over the disposition of the funds so paid and the fact that the Chinese cannot do it alone.

For Blogger Martin Langeland:

The more this carbon fuel costs the more incentive there will be for the producers to use it efficiently so as to maximize their profits in a competitive market. It becomes a redistribution of economic rent in that the suppliers are supplying a fixed natural resource and the supply can be taxed as much as is needed to reduce the emissions. Actual production of consumable goods is not being taxed. It is an "depletion fee" applied to the taking of a naturally occurring fixed resource (coal, oil, trees, or whatever).

Martin Langeland said...

"...taking of a naturally occurring fixed resource (coal, oil, trees, or whatever)"
Which explains why we currently pay $10 a gallon for oil?
Seems to me we are not treating these resources as scarce. We treat them as unlimited until we slam into a wall.
Yes the consumer pays, inevitably. But the question remains, to my pea brain anyway, how do we incentivize a green economy not based on raging consumption. Merely passing money around from consumer to producer to government back to consumer doesn't seem likely to do this.

TheTrucker said...

If you can do it, what you want to do is to tax the actual "stuff" at the source and to then just redistribute the proceeds equally to all. That increases the cost of the "stuff" and synthesizes more scarcity. It dramatically increases the move toward conservation, efficient utilization, and alternatives. The oil, coal, trees, whatever are just THERE until they "run out". They are not produced and hence they have only extraction costs and rents. And the extraction costs do not change. It costs no more or no less to "deliver" the oil/coal than it did before the tax. The delivered price of the oil or coal will rise but the people will be getting a "citizen's dividend" that offsets a good deal of the price rise. There will be conservation and search for alternatives while not harming the poor. The question is one of how to do this in a global system. If China has lots of coal then they will probably pollute the world regardless. Who is going to stop them? Who is going to stop the US from doing it also? That is where I always turn to something like the UN. None of this stuff works unless it can be enforced. And enforcement has costs.