Fighting Climate Change on Foreign Soil

Note: This is a less-edited version of my article on Exponents that includes more details and math

Year after year, global CO2 levels reach unprecedented heights. As CO2 levels rise, so does global temperature, and we are faced with catastrophic consequences for the world. As a result, there have been a variety of proposals brought forward as to how we can address this unprecedented problem. Some in the US have proposed so-called “Green New Deals” that revolve around a total restructuring of the US economy in order to reduce domestic CO2 production. However many have noted that in fact the US accounts for only about 14 percent of global carbon output, with that number falling regularly. We need to take the fight against CO2 global, and to do that we need to understand what tools we have available to us, and how to use them best.

The policy landscape today

Before moving further, we need to understand what has been proposed today, and cover why many current plans are insufficient. First and foremost is failing to address global pollution. Green New Deal-style plans tend to be particularly egregious at this, but they are not alone. It’s natural to think first of the things close to us but focusing our climate plan primarily on domestic space at best fails to reduce global emissions as much as necessary, and at worse has almost no effect. This is because, as many of those against climate legislation point out, companies can always move the parts of their businesses that produce a high volume of CO2 elsewhere. Any plan that attempts to reduce the amount of CO2 being generated in the US must also consider the amount of CO2 being offshored by companies with supply chains that reach outside our borders. In the modern world, that’s nearly all of them. This flaw should be immediately visible after brief consideration of any climate plan, and forces an acknowledgement of how necessary it is that our strategy be global, even if we just want to reduce the emissions the US is directly responsible for.

Many climate activists will then talk about forming global agreements on CO2 emissions, but we’ve seen how much of an uphill battle that is. Any sort of multilateral deal is unlikely to be agreed upon by the countries that are the largest polluters, and will continue to languish in UN subcommittees. A functional plan can include multilateral components, but it cannot rely on the cooperation of the entire global community as a precondition. At this point, we near plans that attack the problem effectively, but many of those run into a massive issue: administration and enforcement.

Economists like Noah Smith have proposed a tariff on the carbon content of imported goods, but how exactly would such a tariff be enacted? If China ships a batch of semiconductors or completed iPhones to the US, determining how much CO2 was produced by the factory is far from trivial. Many countries are more than willing to “adjust” data in order to gain more favorable prices, and we shouldn’t expect any different when trying to place a tariff on carbon. Additionally, there’s the issue of 3rd party carbon offshoring. Specifically, if a Chinese company wanted to avoid a tariff they could move some of the high CO2 parts of their manufacturing into Malaysia, finish processing in China, and then ship to the US without facing a tariff on those goods. Perfectly tracking materials as they move through the supply chain would be near impossible. However, we can reach a solution by zooming out and looking at the broader picture.

Going global

What if instead of trying to target individual firms, we left that up to the individual countries? Instead, we simply focus our efforts on the aggregate pollution produced by different nations. We look at the nations we trade with and calculate that a particular country produces an average of N tons of CO2 per dollar of exports they ship to us. This is represented by the total CO2 emissions of the country, divided by the GDP, times the percentage of their GDP made up by exports. If we focus on the nation as a whole, coming up with that number is very easy. Satellite data alongside other tools gives us a highly accurate picture of where CO2 is being emitted, making falsifying data nearly impossible. Such a tariff would be incredibly simple to administer, all products being imported from a particular country get the tariff. In some ways this could be problematic, as you may be punishing foreign low-polluting firms for the actions of higher polluting firms, but with no clear alternative it is preferable to doing nothing. Additionally, if the nation being traded with has its own internal carbon incentive scheme, such as Cap & Trade, that could counterbalance the distortionary effects of the tariff. Such a tariff can also function unilaterally — the EU could implement it today without the cooperation of the US. A nation-level carbon tariff provides an effective, global, and practical tool to reduce global emissions and ensure that we aren’t unintentionally subsidizing the destruction of our environment.

Given that basic framework, there are a few details to work out. First of all, this is meant to be a neoliberal proposal, and that means that we actually do want foreign trade. This is not meant to be a tool to encourage domestic manufacturing for its own sake, or as a way to raise revenue. As a result, we should take the profits generated by these tariffs and reinvest them as subsidies into countries that manage emissions well. If we take the total target CO2 production for the world, minus our own emissions, and divide that by our total imports, we end up with our target CO2 produced per dollar of stuff imported. If a country is below that line we can redistribute the profits of the tariff relative to how far below the line they are in the form of general import subsidies. You can think of this as an attempt to emulate the redistributive effects of Cap & Trade in a scenario where Cap & Trade isn’t viable. This means that we are still encouraging imports and trade, and simultaneously rewarding countries that are ahead of the curve in emissions reduction. If you want to be slightly aggressive, a portion of the revenue could be set aside as a fund to invest in carbon reduction technologies that will be released patent-free and available for use in the developing economies that need them most. Given that basic framework, there are a few details to work out. First of all, this is meant to be a neoliberal proposal, and that means that we actually do want foreign trade. This is not meant to be a tool to encourage domestic manufacturing for its own sake, or as a way to raise revenue. As a result, we should take the profits generated by these tariffs and reinvest them as subsidies into countries that manage emissions well. You can think of this as an attempt to emulate the redistributive effects of Cap & Trade in a scenario where Cap & Trade isn’t viable. This means that we are still encouraging imports and trade, and simultaneously rewarding countries that are ahead of the curve in emissions reduction. If you want to be slightly aggressive, a portion of the revenue could be set aside as a fund to invest in carbon reduction technologies that will be released patent-free and available for use in the developing economies that need them most. You can think of this as an attempt to emulate the redistributive effects of Cap & Trade in a scenario where Cap & Trade isn’t viable. This means that we are still encouraging imports and trade, and simultaneously rewarding countries that are ahead of the curve in emissions reduction. If you want to be slightly aggressive, a portion of the revenue could be set aside as a fund to invest in carbon reduction technologies that will be released patent-free and available for use in the developing economies that need them most.

Enemies into Friends

One of the unique parts of this proposal is that it is designed to take one of the great boogeymen of trade relations — retaliatory tariffs — and turn it into a feature. When this tariff structure is enacted, alongside it we would actively encourage our trade partners to put similar measures in place, resulting in our own exports being hit with these carbon tariffs. This has a massive side benefit of making our trade partners stakeholders in the accuracy of the data we ourselves are releasing. If the US just applies a carbon tax internally, lobbyists have a huge incentive to try and repeal any legislation, or at least weaken it. However, US lobbyists would have very limited power over foreign countries that want to keep the US honest so that they aren’t taken advantage of. The very antagonistic pressures that make trade wars hard to avoid and back out of, would make unilaterally withdrawing from the agreements a pointless endeavor, and instead would actively encourage more nations to become party to the same trade rules.

Firms within the US, and other nations, would then have a large incentive to work towards broad base CO2 reductions in order to lower the tariffs on them. They also have much less of a reason to stand in the way of internal CO2 redistribution schemes like Cap & Trade. An additional incentive to encourage multilateral cooperation comes in the form of our strategy to handle a hurdle addressed earlier, 3rd party carbon offshoring. Firms within the US, and other nations, would then have a large incentive to work towards broad base CO2 reductions in order to lower the tariffs on them. They also have much less of a reason to stand in the way of internal CO2 redistribution schemes like Cap & Trade. To account for offshoring with a trade partner who is not a member of the tariff bloc, we simply look at their imports, calculate the CO2 per export dollar for each country they import from, and add that to our total for the amount of CO2 they were responsible for. This results in some level of overcounting, but the solution is simple: if a trade partner has the same tariffs in place, they are exempt from this additional calculation. Once they are part of the tariff bloc, they are already accounting for the CO2 produced by their imports. This encourages members to join the bloc via the same tariff structure instead of implementing their own non-CO2 based tariff because the alternative is facing higher rates via overcounting.

Necessarily imperfect

This strategy for carbon reduction attacks a variety of potential loopholes in schemes to reduce global CO2 emissions, but it’s far from perfect. The core reason for this broad target strategy is that calculating the true CO2 emissions involved in producing a product is too difficult, even though that’s our end goal. To balance that, we could introduce the ability for individual firms to provide emissions data voluntarily. If that data is of adequate quality, they could then be granted an exemption from the broad tariffs and have rates applied only to their specific emissions. With some tweaking, that becomes a pathway towards the more ideal and granular approach of actually levying tariffs on individual firms based on their emissions, and eventually towards global carbon pricing. However, the need for CO2 reduction is urgent, and a plan like this one allows for targeted action with the information and tools we have today. Additionally, with the recent surge of anti-globalist sentiment, it’s easy to imagine convincing voters who might not otherwise welcome carbon reduction policies to support such a policy, even if the end goal isn’t to reduce the global connectedness of our economy.