WSJ Editorial Page: Cap and Trade War

Cap and Trade War. WSJ Editorial
Team Obama floats a carbon tariff.
WSJ, Mar 30, 2009

One of President Obama's applause lines is that his climate tax policies will create new green jobs "that can't be outsourced." But if that's true, why is his main energy adviser floating a new carbon tariff on imports? Welcome to the coming cap and trade war.

Energy Secretary Steven Chu made the protectionist point during an underreported House hearing this month, when he said tariffs and other trade barriers could be used as a "weapon" to force countries like China and India into cutting their own CO2 emissions. "If other countries don't impose a cost on carbon, then we will be at a disadvantage," he said. So a cap-and-trade policy won't be cost-free after all. Apparently Mr. Chu did not get the White House memo about obfuscating the impact of the Administration's anticarbon policies.

The Chinese certainly heard Mr. Chu, with Xie Zhenhua, a top economic minister, immediately responding that such a policy would be a "disaster" and "an excuse to impose trade restrictions." Beijing's reaction shows that as a means of coercing international cooperation, climate tariffs are worse than pointless. China and India are never going to endanger their own economic growth -- and the chance to lift hundreds of millions out of poverty -- merely to placate the climate neuroses of affluent Americans in Silicon Valley or Cambridge, Massachusetts. And they certainly won't do it under the threat of a tariff ultimatum.

But give Mr. Chu credit for candor. He had previously told the New York Times that "The concern about cap and trade in today's economic climate is that a lot of money might flow to developing countries in a way that might not be completely politically sellable." He is admitting that one byproduct of cap and trade is "leakage," by which investment and jobs are driven to nations that have looser or nonexistent climate regimes and therefore lower costs. At greatest risk are carbon-heavy industries such as steel, aluminum, paper, cement and chemicals that are sensitive to trade and where business is won and lost on the basis of pennies per unit of product. But the damage could strike almost any industry when energy prices "necessarily skyrocket," as Mr. Obama put it last year.

So in addition to all the other economic harm, a cap-and-trade tax will make foreign companies more competitive while eroding market share for U.S. businesses. The most harm will accrue to the very U.S. manufacturing and heavy-industry jobs that Democrats and unions claim to want to keep inside the U.S. A cap-and-tax plan would be the greatest outsourcing boon in history. And it may even increase CO2 emissions overall, because the developing nations where businesses are likely to relocate -- if they don't simply close -- tend to use energy less efficiently than does the U.S.

Meanwhile, carbon trade barriers would almost certainly violate U.S. obligations in the World Trade Organization. Since carbon energy cuts across so many industries, a tariff would presumably have to hit tens of thousands of products. Any restriction the U.S. imposes on imports can also just as easily be turned around and imposed on U.S. exports, whatever their carbon content.

Run-of-the-mill protectionism is already adopting a deeper shade of green. In January, the president of the European Commission said he may slap tariffs on goods from the U.S. and other non-Kyoto Protocol nations to protect European business. After Mr. Chu's comments, the U.S. steel lobby began calling for sanctions against Chinese steelmakers if Beijing doesn't commit to its own carbon limits, knowing full well that it won't. Look for more businesses to claim green virtue to justify special-interest pleading, a la the 54-cent U.S. tariff on foreign ethanol.

Democrats are already careless about trade -- i.e., the Mexican trucking spat, the "Buy America" provisions in the stimulus, and blocking the Colombia and South Korea free-trade pacts. Now cap and nontrade may lead to a retreat from the open global markets that have done so much to boost economic growth and innovation. The closer we get to the cap-and-trade dreams of Mr. Obama and Congress, the more dangerous they look.