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Cap and Trade Equals Reduced Trade (Part 6 in a 10-Part Series)

Posted By Nicolas Loris On May 11, 2009 @ 5:32 pm In Energy | Comments Disabled

The economic costs associated with a cap and trade policy are real. Republicans and Democrats alike realize this and have urged caution that a bill must protect American consumers and businesses. One idea floating around to protect American business and manufacturers is a protectionist carbon tariff. Secretary of Energy Steven Chu appears to be open to the idea [1]:

Energy Secretary Steven Chu on Tuesday advocated adjusting trade duties as a ‘weapon’ to protect U.S. manufacturing, just a day after one of China’s top climate envoys warned of a trade war if developed countries impose tariffs on carbon-intensive imports.

Mr. Chu, speaking before a House science panel, said establishing a carbon tariff would help ‘level the playing field’ if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one President Barack Obama plans to implement over the next couple of years. It is the first time the Obama administration has made public its view on the issue.

‘If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost,’ Mr. Chu said.”

When businesses are faced with the higher costs from an energy tax through a carbon capping policy, they can certainly make production cuts. Another logical solution is for these companies to move overseas where they can make more efficient use of labor and capital

The economic perils of a cap and trade are bad enough; adding a tariff to carbon-intense imports simply makes it worse, not only for the United States but also for developing countries relying on trade to better their own economies. A carbon tariff would:

Increase costs for consumers. Not only will our energy costs be higher but now everything we import will be more expensive too. Say goodbye to affordable foreign goods.

Cause a trade war. Protectionism begets more protectionism. Other countries will view this as unfair, because it is, and respond by implementing more tariffs in retaliation. Other country’s governments may not find it in their interest to pursue a carbon capping policy; punishing them for this decision could ruin trade relationships.

De-develop the developing world. Developing countries rely heavily on free trade to prosper. Exporting goods in which countries hold a comparative advantage is critical their economic growth, just like it is ours.The developing world is doing just that, developing. For that reason, the technologies they use are newer, cleaner, and more efficient. Penalizing nations for developing is nonsensical.

Energy is the lifeblood of our economy, but free trade is one of the fundamental aspects of prosperity, not only in the United States but everywhere. When the United States specializes in the production of certain goods and services they can produce more efficiently, it allows other countries to do the same with other products. The result is lower prices and a higher standard of living for us and our trading partner. And Heritage’s Senior Trade Analyst Daniella Markheim adds that this could be, in effect, worse for the environment [2]:

The gains from trade include economic growth and rising incomes in all countries. For developing countries–which would likely be hardest hit by trade restrictions in climate legislation–the economic stress will be particularly great. This, perversely, will likely increase the harm done to the environment: Economic growth increases the ability for developing countries to afford protecting the environment.

Historically, as a nation’s prosperity increases, its desire–and more importantly, the resources available–to adopt environmental protections become stronger and result in policies that accommodate the individual needs of the country. Engaging in freer trade can better promote the evolution of good regulations by empowering countries with the economic opportunity to develop and raise living standards.”

A more prudent and far less costly approach would be to open up trade to share cleaner technologies and increase growth and prosperity.


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URL to article: http://blog.heritage.org/2009/05/11/cap-and-trade-equals-reduced-trade-part-6-in-a-10-part-series/

URLs in this post:

[1] idea: http://online.wsj.com/article/SB123733297926563315.html

[2] environment: http://www.heritage.org/Research/tradeandeconomicfreedom/wm2408.cfm

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