Carbon tariffs, permits and subsidies
Gary Horlick, Washington trade attorney, former senior official of the Commerce Department and a very fine analyst of WTO law, sets out some of the impossibly tricky technical questions in plain langugage
"Perhaps the biggest international trade challenge -- and one on which a lot more work needs to be done -- is how the mechanics of international trade will work if each of the hundred and ninety countries (or even 10-15 regional groupings) has its own individual climate change implementation. What if some of them have border taxes, some require permits for imports, and others instead offset the costs for their domestic industry. Or each country has a cap- and-trade system with different limitations on the permits?" Extract from testimony to the U.S. Senate Finance Committee
A short paper that asks the right questions (to which there are few, if any, satisfactory answers). Thanks to Simon Lester for finding this.
Posted on 07/09 at 07:34 AM.
Your comments
IanC
Gary Horlick made the pertinent point that no less than 20 countries contribute to the making of an Apple iPOD, and asks how those countries are going “to calculate all the carbon impacts and untangle all those permits, taxes and rebates.”
The information required to produce a ballpark estimate probably exists. But surely the answer is that the total greenhouse impacts would be negligible relative to the expenditure incurred or the productive activity generated in the production of iPODs.
The iPod touch model weighs 115 grams or about 4 ounces, so there are nearly 9000 of these instruments to the ton. Thus, at $300 each, a ton of iPODs has a retail value of $2.6 million. Taxes on CO2 wouldn’t make a perceptible difference to this cost, whether the tax was $10, $100, $1000 or $10,000 per ton of CO2.
Hi Ian,
I’m not sure that Horlick meant his example to be taken too literally. I believe his point was that intra-trade (export processing) is now a hallmark of manufactures and increasingly of commodity trades too raising overall trade-intensity of production (the trade componenet of ‘value added’) to a high level. It’s an interlinkage that has some adverse consequences, too.
Given the rent-seeking that the obscure cap-and-trade tax encourages, we can predict that interested parties will seek to over-cook the carbon-tax ‘border adustment’ just as, historically, the anti-dumping laws have encouraged interested parties to over-cook the adjustments for otherwise competitive pricing practices when employed by foreign sellers (G. Horlick has a huge anti-dumping practice.)
In markets/products where trade-intensity is high, this rent-seeking will occur in many different markets along the same value-adding chain (of which the iPod production chain is an exemplar). Horlick implies—and I agree—the opportunity for mischief and the risk of added costs is high.
How high? Let us accept Apple’s estimation (http://images.apple.com/environment/resources/pdf/iPod-touch-Environmental-Report.pdf) that the production + transport + recycling of an iPod account for 72% of the estimated 30kg of carbon equivalent ‘life-cycle’ emissions. This means that value-adding activities account for 21.6 kg of CO2e.
Let us suppose that the value added (including transport) in an iPod touch at retails is 85% of the final price, or $2.21 million per tonne of iPods (at your estimated per-tonne price). We’ll put the price of a tonne of CO2e at the expected (not current) European market price of Euro 30 per tonne which means that the production of a tonne of iPods accounts for CO2e emissions worth (21.6kg * 9000 iPods) = 194.4 tonnes * 30 Euros = 5,2832 Euro per tonne or $A10,435 per tonne.
At your estimated value at retail of $2.6 million, this 30 Euro tax represents is 0.4% of the retail value, but 0.47% of the value-added. Let’s say, a carbon-tariff of half a percent on the value-added.
Since the origin-for-duty of the iPod is China where there is no carbon tax, the border adjustment in Europe (or Australia) is equal to, at least, the full tax of half a percent of value-added. Horlick’s point is that this taxation could have taken place at every step in the production chain, adding to the price of the product at several points. This would raise the FOB price of the iPod (while lowering the ad-valorem incidence of the carbon tax).
But, keeping it simple, suppose we say that Horlick is wrong and that the iPod would face a carbon tariff only at the last point in the production chain: the Australian (or European) border. That is, the full incidence of the tariff is 0.5%. This is, in fact, an infinite increase in the duty on iPods because, under the Information Technology Agreement of WTO, the duty on electronics and parts is zero.
A theoretical infinitude? Yes. But we also agreed that the margin at retail on our iPod was only 15% (competition being what it is). So the new tax is a 3.3% impost on the retailer… who will, of course, mark it up and pass it on to the customer as a 5% price increase which the retailer (naturally) “grosses up” for GST to a 5.5% increase.
Best wishes,
Peter
IanC
Peter,
Thanks for responding in such detail to my figuring, and especially for drawing my attention to Apple’s estimates of the CO2e “life-cycle” emissions from an iPOD touch. Those estimates show that the CO2e content of an iPOD at the stage of purchase by a final consumer is rather greater than was implied by my guesses. Of course I agree with you that the opportunity for mischief and the risk of added costs along the value-added chain for products such as these is high.
I have been thinking about physical indicators of a country’s output or expenditure since reading in the Financial Times editorial of 22 June (“China will not save the world economy”) the claim that China “generates only 7 per cent of global output, at market prices.” The FT went on to argue that “The rapid past expansion of [China’s] gross and net exports is not going to return. China must move, instead, ... towards labour-intensive services rather than capital-intensive industry and towards reliance on domestic rather than foreign markets.”
I can’t believe that China produces only 7% of global output and I’m not at all sure that Chinese exports won’t return to the rapid growth exhibited in the recent past (although their huge export surplus will have to contract).
As a test of the FT’s 7% figure, I’ve used the US Geological Survey’s “monthly summaries” to calculate some indicators of China’s share of global heavy industry. In 2008 China produced an estimated 50% of the world’s cement, 50% of the pig iron, 38% of the steel and 34% of the aluminium. Its share of the INCREASE in the global output of these commodities between 2000 and 2008 was 90% for pig iron, 75% for steel, 70% for aluminium and 67% for cement.
What the FT neglected to say was that the 7% figure was not only measured at market prices (which is correct), but that China’s GDP at market prices had been converted into a common unit using prevailing exchange rates (which is NOT correct).
Unfortunately the erroneous measure of global output using exchange rate converters is still widely used by researchers. The “Demystifying the collapse in trade” paper to which you provided a link is an example. The researcher’s conclusion about the growing trade intensity of production is undoubtedly right, but her ratios are suspect. The exchange rate-converted GDP data used by the Bank gives an excessive weight to countries with high price levels (Japan and Western Europe) and inadequate weight to developing countries with low average levels of prices. Since the growth rate of the latter group of countries has been consistently higher than the former group, the Bank has consistently understated global growth (and, in 2009, overstated the decline).
Ian, I entirely agree.
The Bank (and Fund) also supply PPP (USD) GDP and GNI estimate which puts China at about 11.3% of world output in 2008, ranked #2 behind the USA, whose value added is roughly double that of China’s. But they use several bases for comparison as I recall (market exchange rates, and semi-indexed ‘Atlas’ rates).
Thanks for pointing out that the “Penn” error also creeps into the estimates used in the VOXEU paper. I’ll have to check that.
IanC
Thanks Peter. The Bank’s Atlas method converts GDP in national currencies into a common unit using average exchange rates over a 3-year period. This introduces a further confusion and has nothing to commend it.
As between the use of “market” exchange rate (MER) or PPP weights when measuring weights for the world as a whole, essentially the Bank uses MERs and shows PPP as a memorandum item, and the Fund does the reverse.
The IMF reveals its confusion in the latest (April 2009) World Economic Outlook by contrasting annual changes in per capita world GDP using “PPP weights” and “Market weights” (Box 1.1, p. 12). In fact, PPP weights are calculated entirely from market prices and values. The difference is that the weights that the Fund calls “market weights” use exchange rate converters to translate values in national currencies into a common unit. There is no justification for this in relation to transactions within national borders.
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