This article from the Economist opens a number of discussions around sustainability and pricing of externalities. Essentially, it considers the impact that enforced carbon emission reductions in developed markets might have on the competitiveness of their manufacturers, relative to markets where no emission restrictions are applied. The study suggests that an import tax from “dirty” countries is justified on the basis that it levels the playing field between importers and domestic producers. We need to consider:
- With a growing effort to encourage free trade, would introducing a carbon import tax come to be seen as a protectionist measure by “dirty” manufacturers, and trigger retaliatory measures?
- What competitive advantage accrues to countries where externalities are not priced into the production process?
- Without universal governance, how can penalties for carbon-heavy production be enforced on a global level?
Lawrence Summers makes the case (posted on FT.com yesterday) that the fall in oil prices now makes the case for a carbon tax overwhelming – precisely on the grounds of pricing-in the climate externality. A whole raft of possible questions arises – including, but not limited to: is an import tax the best way? How do you set it? Do you compensate losers? Who determines what’s ‘fair’ (either of the tax level, or implied target emissions for emerging countries)?