Warner Lieberman Cap and Trade Bill Levels Competitive Playing Field for Manufacturers

Buried within the 1000+ page Warner-Lieberman climate change act is a provision for something called “international reserve allowances” and what is quickly being dubbed a “Carbon Tariff.”  Essentially the provision applies a cross-border, per ton, carbon tax on imported goods that are manufactured in countries that do not have limits on carbon emissions.  If an item creates 2 tons of carbon dioxide in its manufacture and a 1 ton carbon credit trades for $30 – then the tariff would be $60 on that item.  I don’t know if the bill requires the government to use the revenues to purchase carbon offsets – though that or putting it into an environmental clean up fund would be sensible.

I think this is a very important, if not the most important, development in green economic policy that I have seen to date.  As Frank Zappa would say the Carbon Tariff, “gets to the crux of the biscuit”, regarding the challenge to success that renewable energy and other green technologies face – unwinding the entrenched subsidies and externalities, which are ecouraged or created by government policies, that traditional approaches enjoy as a barrier to competition from green alternatives.

That this provision is in a cap and trade bill is exceptionally smart (and I really never thought I would say that about something coming out of congress).  The provision exists to level the competitive playing field for manufacturers that bear the cost of clean manufacturing under a cap and trade system with those that do not.  Carbon emissions, and pollution in general, is an perfect externality to attack first because its a… well, cross-border issue.  As an example, researchers have found that a signifcant amount of mercury from Chinese coal burning electrical plants ends up in the west coast ecosystem, and the costs of that pollution are not – though should be – borne by Chinese industry that created the pollution – not Californians or Americans through our tax dollars.  Second, unlike oil subsidies, where there are huge entrenched American interests and lobbying power to overcome – this tariff is like a hotel tax – its mostly painless to U.S. citizens by forcing the costs offshore.

Ultimately this is an excellent way to start that conversation about external costs and government policy by making incremental progress.  Properly assigning those costs and removing subsidies (both for green technologies and traditional approaches) are, in my mind, the keys to getting to rational broad market-based demand for renewable energy and green technologies.

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