Protectionism in Green Garb

US legislation to cap-and-trade greeenhouse gas emissions will do little to reduce emissions but will do plenty to reduce economic activity and to increase protectionism, hitting us all and most of all the poorest.

President Barack Obama pushed the Waxman-Markey American Clean Energy and Security Act (ACES) as "a vote of historic proportions ... that will open the door to a clean energy economy." But after it scraped through the US House of Representatives by three votes last month, he worried about its "border tax adjustments", to be enforced from 2020: "At a time when the economy world-wide is still deep in recession, and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there."

He is right. "According to legal opinion, the import tariff is likely to violate some key World Trade Organisation (WTO) provisions," Arvind Panagariya, Professor of Economics at Columbia University and retired Chief Economist at the Asian Development Bank, wrote in India's Economic Times last week.

ACES creates an emissions trading system that sets a maximum amount of greenhouse-gas emissions per industry (the caps) and allocates emission permits to companies, which they can trade: companies that emit above their allowance will have to purchase credits from companies that emit below. This is supposed to create incentives for techniques and inventions to improve fuel efficiency and CO2 reduction. Here is where the rosy picture ends and a number of side-effects come up.

US Commerce Secretary Gary Locke told the American Chamber of Commerce in Shanghai a couple of weeks ago: "it's our own consumption activity that's causing the emission of greenhouse gases, then quite frankly Americans need to pay for that." Translation: carbon taxes on US imports from countries that do not meet its requirements for reducing emissions, mainly China and India.

Indeed, "we are concerned that green is becoming a new label for protection," the Indian Prime Minister's special envoy on climate change, Shyam Saran, said in May.

Trade war is just one of cap-and-trade's heavy direct costs, pushing up the price of energy for everyone and squeezing a number of heavy industries out of business.

Firstly, because of the damage to the economy, not all countries will follow this system. Poor countries greatly need a high rate of development to combat malnutrition, child mortality, disease, drought and so on. So any reduction in emissions in the USA will be insignificant compared with increases elsewhere: in 2007 China overtook the USA in carbon dioxide emissions, while its energy consumption, mainly from coal, is projected to double by 2020, whatever energy efficiency is introduced.

Secondly, those countries which do adopt this system will want to compensate for the added costs, hence the"border tax adjustments." The European Commission is considering a similar "equalization levy." Both mean Green protectionism.

Thirdly, to compensate for the suicidal carbon taxes on production, companies and workers will want the suicidal drugs of protectionism and subsidy. President Obama's stimulus package includes Buy American protectionism and subsidies for US companies, which have already caused US workers to be laid off because their firms use imported components: "I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?" Bob Miller of Pennsylvania steel-maker Duferco Farrell told the Washington Post in May.

Fourthly, to avoid the extra costs, companies may leave countries with cap-and-trade and other energy taxes. Those that remain will complain of unfair competition and seek subsidies for themselves and tariffs on imports--both of which are extra taxes on consumers.

The cap-and-traders say the punitive tax will create incentives for inventing and adopting ways of cutting emissions. But innovation has always arisen from thriving and free economies, not ones in a harsh recession that will be deepened and perpetuated by carbon taxes.

Cap-and-trade creates tariffs, subsidies, energy taxes, trade constriction and job losses in the country that introduces it and among its trading partners, with huge trickle-down costs to all consumers and workers, hitting the poorest hardest.

Growth is the only way to save the poor and to invent and promote energy-saving technology. Stimulating trade is the best way to promote growth and recover from the recession.

Aris Trantides is a researcher at International Policy Network and the Freedom To Trade coalition of 73 think-tanks around the world.