I usually think that the benefits of economic reasoning are hugely oversold. However, the efforts to slow global warming have suffered badly from the lack of such reasoning, which is often just commonsense. The NYT has a column today outlining a plan that would tax the carbon emissions associated with goods that are exported from developing countries like China to wealthy countries like the United States. The purpose of the tax is to eliminate a method of avoiding emission caps on wealthy countries – have carbon intensive goods produced in the developing world. While this reasoning is sound, the plan is explicitly designed to avoid taxing emissions in China that are directed towards its own consumption. This one should cause readers to ask “why?” We know that the Chinese, as recent industrializers, can’t be held responsible for the huge accumulation of greenhouse gases (GHG) over the last 150 years. We also know that even with their incredible growth over the last quarter century they emit less than one-fourth as much GHG on a per person basis as we do in the United States. However, many of the easiest reductions of GHG are in the domestic sector of China and other developing countries. Why not give them incentive to take advantage of these opportunities? This can be done without penalizing developing countries, by bringing them into a system of emission caps, like Kyoto, where permits can be freely traded across countries. The developing countries are then given caps that are close to their baseline growth path for a substantial period of time (e.g. 20 years). The caps for wealthy countries are then wedged down to levels that restrain world-wide emissions to acceptable levels. In this story, economic growth in developing countries is not slowed by emission caps. In fact, they can earn money by reducing GHG, creating a clear green path to development. This system has the desirable effect of giving everyone everywhere in the world the same incentive to reduce GHG. That is exactly what we should want. Otherwise, we may be spending $10 in the U.S. or Europe to bring about the same emission reduction that would cost $1 in China. If we had infinite money or infinite time, then we may not care about such discrepancies, but in the real world, this is a big deal.
--Dean Baker
