Via Paul Krugman and the Financial Times news that the World Trade Organization has indicated that it will endorse border taxes on imports from countries that don’t participate in an international agreement to reduce carbon dioxide emissions.
That means the end of the free rider problem. Provided the big players (US, EU and China) sign up to an agreement, any country that chooses to hold out will be committing economic suicide. And, in the initial bargaining between the developed countries and China, the pressure on China to reach an agreement has been greatly increased.
Obviously a great deal hangs on getting the Waxman-Markey bill through the Senate in the US. If necessary, the US Administration should be prepared to dump the absurd 60-vote convention that has developed in recent years, making it clear to the Republican minority that they can only have a say if they are willing to make a positive contribution.
Among the developed countries, the government that must be most concerned is that of Canada. Although Canada was a leader in early negotiations, the minority Harper government has repudiated its Kyoto obligations, rejected proposals for a carbon tax, and given lots of encouragement to delusionists. It would be a good idea for the Canadian Parliament to dump Harper forthwith, and install a government capable of avoiding the rocks towards which Harper has been steering.
For developing countries, the need now is to focus on getting a “contract-and-converge” agreement in which existing inequalities in emissions entitlements are phased out over time.
John Quiggin 
It doesn’t endorse them – it says that such taxes – provided they are viewed as excises – are not inconsistent with GATT rules. Even if they are not viewed in this way such taxes can be probably justified under Article XX that justifies levies provided that they protect ‘human, animal and plant life’.
This isn’t anything new. It is a way of interpreting BTAs in terms of the current rules of the GATT. These interpretations have always existed – they are till subject to challenge.
Agreed, but this is certainly a signal that such a challenge is unlikely to succeed, esp if the US & EU are agreed on the desire to impose such taxes.
I imagine that the Canadian government would not want border carbon taxes imposed on its exports to the US (assuming that this can be done under the NAFTA agreement). Even if NAFTA appears to be an obstacle, the Candians will do what what the Americans tell them to do, as always.
But I wouldn’t be so confident about Waxman-Marley getting 50 votes in the senate. There are a lot of Democrat senators from coal mining states and states that are really struggling at present. Obama will really have to offer them something big to get them on board.
“[E]nd of the free rider problem” – Steady on. We’re still a fair way off assurance game territory. But this is good news.
I think this option has to be on the table. It would seem to leave little wriggle room for free permits and offsets though no doubt some will try. It would be impossible to assess the carbon intensity of all traded goods so I think countries not goods would have to be declared as ‘compliant’ or ‘non-compliant’. Imports from the latter would be slapped with a general punitive carbon tariff of say 20% of landed value. Carbon tariffs would have to include not only physical goods but bulk services such as Indian call centres working for Australian banks. When all countries are compliant then the tariff is removed. Revenues would go to a UN administered fund that doles out green subsidies anywhere in the world.
Of course greenhouse rogue nations like China and India will cry foul. Other countries (probably Australia) will demand relaxed standards to be classified as compliant. An administratively simple option in Australia’s case would be to put a levy on coal exports and to a lesser extent LNG. At say $10 a tonne of coal (~$25t/CO2) it would raise about $2.5 bn. The customers could claim some of that back from the UN for coal displacing green technology in their home country.
Hermit,
you’re showing fair nerve to call China and India rogue nations. They aren’t the free riders, whereas fat bastard nations like Australia are hogging the donuts and not keen to even scrimp on icing, chocolate topping and sprinkles. The UNFCCC is quite clear on international obligations and, despite the fact India and China could become the largest national emitters at some stage, have not acted roguishly in that light.
This is not an end to the free rider problem, but it is extremely helpful. It will increase the stability of any agreements on global warming. That means that agreements that are closer to the social optimum are more likely to be stable.
The question is whether the current bargaining process can produce an outcome that is close enough to the social optimum — and whether it can do so in a sufficient amount of time. Or will the current bargaining process lead to outcomes that instead reflect the lowest common denominator?
If enacted this will be disastrous see Smoot-Hawley Tariff Act and contribution to Great Depression.
@Roger Jones
I suggest that as the world approaches Malthusian limits the bottom billion people in both China and India have no hope of ever achieving the happy motoring lifestyle. Both countries must know this but want to get as far along this path before it all goes bad. With such massive populations these countries are to some extent the architects of their own misfortune.
Hermit,
Malthus has been proven wrong time and again. To keep using his ideas in this way is the triumph of desperation over evidence.
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I would agree with Uncle Milton, though – the give-aways that are going to be needed to get this through the Senate are likely to be huge. There are a lot of Democrats from states with substantial coal mining industries that form the basis of their support and funding base.
Following on from my comments on another thread, though – I am sure they will not act corruptly to advantage their own voters and donors over the general well-being of the rest of the planet. Surely not. đŸ™‚
Peter Wood, I am not sure it will be a race to the bottom. Countries that mitigate only a little will be still subject to BTAs. They will lose tax revenues to countries which mitigate a lot.
The difficulties with this proposal are practical. How to work out the carbon contents? How to account for non-tax constraints on carbon emissions? It is tough.
You are probably correct hc.
Some of the literature on “non-cooperative solutions” to cooperative outcomes provide grounds for optimism. The cooperative solution (such as the core) becomes a subgame perfect equilibrium in a bargaining game.
[…] See the original post: John Quiggin » Even more good news […]
Peter Wood, do you have Rubinstein type bargaining models in mind?
Andrew, Malthus has never been proved wrong. He was just ahead of his time. Endless growth within a finite system just isn’t possible, which is really all that Malthus and the authors of Limits to Growth were pointing out.
Ernestine, the bargaining games have some similarities to Rubinstein’s two player bargaining games. They are closer to Rubinstein’s approach than to Nash’s axiomatic approach. They do not neccessarily involve a discount factor or a time cost associated with bargaining however.