Ahead of the United States in adopting a national scheme to cap and reduce greenhouse gas (GHG) emissions, Canada recently announced the final regulatory framework for its Turning the Corner plan to reduce GHG emissions by 20% from 2006 levels by 2020. Promulgated pursuant to the Canadian Environmental Protection Act of 1999, draft regulations to implement the Turning the Corner plan are expected in the Fall of 2008. In announcing the plan, Canada noted that its performance in reducing emissions “has lagged behind most OECD countries for well over a decade.”

While Canada’s Turning the Corner plan is analogous in many respects to the leading U.S. legislative proposal to cap and reduce GHG emissions – S.2191, the America’s Climate Security Act of 2008 (ACSA), introduced by Senators Lieberman and Warner – one major difference is the lack in Canada’s plan of a mechanism to address the competitive impact to Canadian manufacturing firms of imports produced under less stringent GHG emissions standards. According to the Turning the Corner plan, the final regulations will cover 16 industrial sectors, including refineries, chemical and fertilizer plants, and the cement, steel, and pulp and paper industries. Many of the products produced by these industries compete in Canada’s domestic market (and abroad) with products produced in China, India, and other countries that currently are not planning similar curbs on domestic GHG emissions.

By contrast, under ACSA, importers would be required, in effect, to pay for any GHG emissions-related cost advantage that the imports have over the domestically produced like product. In its current form, the Turning the Corner plan contains no such mechanism to induce exporting countries to reduce GHG emissions.

Responding to this competitiveness concern, Canadian economists Jeff Rubin and Benjamin Tal recently issued a report, The Carbon Tariff, arguing that an import tariff of roughly 17% would be warranted on Chinese-origin imports in order to offset the implicit subsidy associated with China’s lower GHG emissions standards. According to Rubin and Tal, the only real choices that OECD countries have in trying to persuade China and other developing countries to adopt tougher GHG emissions standards are moral suasion and trade access. Only the latter, they argue, is likely to work.

Relying on data from a variety of sources, including the U.S. Energy Information Administration, Rubin and Tal ground their proposal for a carbon tariff in striking facts, including the following:

• China’s GHG emissions have increased by 120% since the beginning of the decade, while U.S. emissions have barely changed over the same period.
• China now exceeds the United States as the single largest GHG emitter, and accounts for more than a fifth of global GHG emissions.
• China relies more heavily on coal-fired power plants, the most GHG-intensive energy source, than do most OECD countries. Between now and 2012, the increase in Chinese coal-based emissions will exceed the entire level of coal-based emissions in the United States.

In light of these facts, Rubin and Tal contend that “[e]fforts in the United States to restrict the growth of new coal-fired generating capacity seem absurdly quixotic when juxtaposed against this rate of carbon expansion in the Chinese and other developing economies.” The authors recognize that a carbon tariff is likely to increase inflation, but also suggest the inflationary impact could be offset if some production of GHG-intensive manufactured goods returns to North America as a consequence of the higher costs of importation.

For further information about this topic, please contact Akin Gump.