Costly, ineffectual and protectionist carbon tariffs: why carbon tariffs shouldn't be adopted to offset the cost of carbon

1.0 ABBREVIATIONS

CAT = Cap and Trade
EPA = Environmental Protection Agency
ETS = Emissions Trading Scheme
EU = European Union
EU ETS = European Union Emissions Trading Scheme
GATT = General Agreement on Tariffs and Trade
MFN = Most Favoured Nation
PPMs = Process and Production Methods
ROOs = Rules of Origin
UN = United Nations
US = United States
USD$ = United States Dollar
WMO = World Meteorological Organisation
WTO = World Trade Organisation

2.0 EXECUTIVE SUMMARY

• Few countries will have domestic carbon price signals in the short to medium term.  As a consequence, governments which have adopted carbon price signals are considering the introduction of carbon tariffs to offset the extra costs imposed on domestic industries.
• Based on author's calculations (see Annex), to appropriately reflect the added cost of a carbon price signal in the United States, it is likely a ten and a half per cent average carbon tariff would be required for carbon-intensive products adding billions of dollars onto imports for consumers.
• This cost will harm the competitiveness of the domestic industries that carbon tariffs are designed to protect, by increasing the price of imported components into manufactured products.
• Calculating the carbon-input component of an individual product is extremely complex.  Attempting to do so would require a vast regulatory structure.
  • The complexity is substantially worsened when a product includes components developed in a global supply chain, where carbon emissions vary from country to country, as will the value of potential carbon price signals.
• The introduction of carbon tariffs is likely to violate the obligations on World Trade Organisation members under the General Agreement on Tariffs and Trade.
• Carbon tariffs are costly, ineffective and protectionist and their costs that far exceed their benefits.

3.0 INTRODUCTION

Many developed country governments are in the process of negotiating for the introduction of carbon price signals to incentivise business and consumers to reduce their carbon footprint.  Individual European countries and the European Union already have Emissions Trading Schemes, Australia's Parliament is still considering the introduction of its scheme, and the United States Senate is currently considering a proposal for the introduction of a CAT scheme to be voted on in early 2010.

But the inclusion of a carbon price signal raises serious concerns about their impact on domestic industries competing against imports that don't include the cost of carbon.  As a consequence some activists and politicians are arguing for the introduction of carbon tariffs on imported goods that come from countries that do not have a domestic carbon price signal.

The French President, Nicholas Sarkozy, has argued for the introduction of carbon tariffs, and a requirement for their introduction is included in the Waxman-Markey Bill before the United States Senate.

This research paper will explore the issues surrounding carbon tariffs.  In particular this paper will seek to define what a carbon tariff is, where proposals for them came from, what is currently being proposed and where they are likely to be introduced, their legality under World Trade Organisation rules, the complexities of their introduction and what their cost will be.

4.0 WHAT IS A CARBON TARIFF?

A carbon tariff is a unilaterally-imposed trade-restrictive measure levied on imports of goods and services from countries that do not have a domestic price signal.  Carbon tariffs can take the form of a direct tax reflecting the perceived carbon footprint of a good or service, or the obligation that carbon emission credits must be purchased from a CAT/ETS to reflect the carbon footprint of the imported good.

The implementation of a carbon tariff differs depending on how the domestic emissions regulation is imposed, that is, as a carbon tax, or as part of a CAT/ETS.  While there is no certainty about how a carbon tariff would reflect the domestic regime, it is speculated that under a domestic carbon tax it would be most straightforward to impose an equivalent border tax reflecting the nature of the domestic scheme;  and in a CAT/ETS environment for emissions credits to be purchased reflecting the carbon footprint of the goods or services. ⁽¹⁾

There are other options for implementing a carbon tariff such as countervailing duties ⁽²⁾ or by requiring importers to meet a carbon intensity standard equivalent to that applied to domestic producers ⁽³⁾ but these options have been given less consideration than those above.

Carbon tariffs aim to neutralise the cost of a domestic carbon price signal, to prevent the leakage of business activity into economies without a carbon price signal commonly referred to as carbon leakage, and to encourage other countries to adopt similar emission reduction policies. ⁽⁴⁾

Carbon leakage a concern because the consequences could include consumers and business buying goods from countries without carbon price signals or that industries will move countries to those without carbon price signals.  In both situations global carbon dioxide emissions will not be reduced and the purpose of introducing a carbon price signal will be undermined. ⁽⁵⁾  For example, in the EU, with a carbon price signal there are significant economic gains to be made from moving carbon-intensive industries like cement, steel, aluminium and chemical sectors to countries without a carbon price signal.

Carbon tariffs are considered necessary in the absence of a comprehensive, binding international agreement to reduce carbon emissions.  Because of "the truly global nature of climate change and the limited ability of any one country to address it unilaterally" ⁽⁶⁾ the absence of global obligations could prompt carbon leakage to countries without a carbon price signal.  It is speculated that domestic industries are more likely to accept the obligations of a carbon price signal if they are afforded the protection of a carbon tariff to offset any impact it may have on their competitiveness.

4.1 THE HISTORY OF CARBON TARIFFS

The first concrete proposals for the introduction of a carbon tariff originated in the European Union (EU), and specifically France, as a response to concerns about the impact the introduction of a carbon price signal under an ETS would have on the competitiveness of local producers against imports from countries that do not have a carbon price signal, including the United States. ⁽⁷⁾

By 2002 a United States Business Council for International Business Report flagged the emerging push by international NGOs, including Greenpeace International and Friends of the Earth Europe, for trade measures to be introduced against the imports from countries that were not compliant with their obligations under a ratified Kyoto Protocol. ⁽⁸⁾  In 2006 the idea resurfaced when the French Prime Minister, Dominique de Villepin, suggested that carbon taxes be introduced against countries refusing to join the successor agreement to the Kyoto Protocol. ⁽⁹⁾

Current proposals for carbon tariffs are wide and varied, but the biggest proponents are in the EU and US.  In response to the introduction to the EU ETS, ⁽¹⁰⁾ European governments proposed the introduction of a carbon tariff to offset their self-imposed carbon price signal.

But to date there is no consensus on whether a carbon tariff should be imposed.  Current French President, Nicolas Sarkozy, has publicly supported the introduction of carbon tariffs that would require importers to buy emissions permits from the EU ETS that reflect the carbon footprint of manufactured goods. ⁽¹¹⁾

However there has been longstanding opposition in European governments with then EU Trade Commissioner, Peter Mandelson, dismissing the idea in 2006 describing proposals as "highly problematic under current WTO rules and almost impossible to implement in practice" ⁽¹²⁾ as did Germany's former State Secretary for the Environment, Matthias Machnig, who argued in mid-2009 that carbon tariffs would be imposing "eco imperialism" on developing nations, ⁽¹³⁾ supported by the Swedish government that stated it is "absolutely against each try to make use of green protectionism." ⁽¹⁴⁾

The German government's opposition has continued following their recent election stating they are "oppose(d to) the introduction of climate tariffs and CO2 taxation… at the EU level." ⁽¹⁵⁾  However the EU has recently taken a step toward climate trade measures by directing member States to limit biofuel imports sourced from products that don't dramatically reduce emissions against fossil fuel alternatives. ⁽¹⁶⁾

By comparison, the inclusion of carbon tariffs is well-advanced in the US.  US Senate Finance Committee Chairman Max Baucas has declared that the US "must devise a border measure, consistent with (its) international obligations, to prevent the carbon leakage that would occur if US manufacturing shifts to countries without effective climate change programs." ⁽¹⁷⁾  To this end the American Clean Energy and Security Act, commonly referred to as the Waxman-Markey Bill, is currently being considered by the US Senate following its recent passage through the House of Representatives.  The purpose of the Bill is principally to establish a US CAT/ETS scheme, but includes a requirement for carbon tariffs on goods imported from jurisdictions with less stringent emissions regulations. ⁽¹⁸⁾  Under the Bill the implementation of a tariff would not come into effect until 2018, should the President be unsuccessful in negotiating an international agreement to reduce global carbon emissions. ⁽¹⁹⁾

Equivalent legislation currently being considered by the Senate, The Clean Energy Jobs and American Power Act, commonly known as the Kerry-Boxer Bill, includes under Section 765 the flexibility for the inclusion of a carbon tariff "designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries." ⁽²⁰⁾  And it remains the expectation of the current Obama Administration that any Bill that finally passes the House of Representatives and the Senate will include provisions for "fair competition" between US and foreign producers, which is considered a thinly veiled reference to a border measure. ⁽²¹⁾

As an interesting comparison, the design of the Australian ETS has explicitly rejected the inclusion of a carbon tariff.  Instead the Australian scheme includes the allocation of free permits for emissions-intensive trade-exposed industries recognising that "challenges exist in implementing border adjustments for imports in a simple, transparent and verifiable manner." ⁽²²⁾

5.0 CARBON TARIFFS, FREE TRADE AND
THE WORLD TRADE ORGANISATION

Despite enthusiasm for carbon tariffs, their legitimacy under international trade rules is questionable.  The principle of free trade is that countries should produce goods and services that take advantage of their comparative advantage.  Imposing a carbon price signal to devalue carbon-intensive industries, goods and services is an anathema to that principle because it devalues each country's comparative advantage.

Imposing a carbon tariff further exacerbates the tension between a carbon price signal and each country's capacity to exploit their comparative advantage by forcing the devaluation of their carbon-intensive industries, goods and services.

But carbon tariffs are not just philosophically inconsistent with free trade, they are also likely to be legally inconsistent. ⁽²³⁾  In order to introduce carbon tariffs without the consequences of retaliatory measures from other countries governments would need to design them to be consistent with their existing obligations under the WTO.

Assessing their legality under the WTO is difficult because they have not been introduced in a WTO member country and hence have not been considered by a WTO dispute settlement panel. ⁽²⁴⁾

Consistent with the principles of free trade, the WTO Director-General, Pascal Lamy, has noted that "the WTO allows members certain flexibilities to adopt border adjustment policies to equalize costs related to carbon controls, as long as they do not distort or disrupt trade." ⁽²⁵⁾  But as policy instruments carbon tariffs are deliberately designed to distort trade.  And while Director General Lamy has argued that climate change policies are the first priority over trade obligations, the WTO Secretariat has yet to take a position on the legality of carbon tariffs instead preferring the issue be addressed through an international climate change agreement.

Although no accurate determination of WTO consistency can be made in advance as WTO panel decisions must necessarily be "highly fact-specific," ⁽²⁶⁾ it is considered likely that the measures proposed by the US and EU would violate the GATT, particularly Articles I and III.

Article I of the GATT includes the most favoured nation clause requiring countries to offer to WTO members the same treatment of imported goods into their country as the nation with the most favourable treatment.  Article III covers national treatment provisions requiring imports to be treated equivalent to domestically produced goods beyond the border.

5.1 ARTICLE I | MOST FAVOURED NATION

Article I requires member states to provide imports from all WTO members the same treatment "immediately and unconditionally" to "like products" originating in the country afforded the most favourable treatment. ⁽²⁷⁾  In principle a carbon tariff would violate this principle by imposing a trade barrier on some WTO members, but not others.

5.1.1 Like products

A key to assessing an Article I violation is the question of whether a carbon-intensive and a non-carbon intensive product are 'like products'.  WTO case law on this question is mixed.  There are cases where a like product test has been interpreted from "the relevant facts of a case," where likeness has been equated "with direct competitiveness," ⁽²⁸⁾ or based on the "the nature and extent of a competitive relationship between and among products" ⁽²⁹⁾ and because they compete directly in the marketplace. ⁽³⁰⁾  The general assessment of a like product test is based on whether the two products have the same physical characteristics, end use, carry the same consumer preferences and are included in the same tariff schedule.

But in the case of a carbon intensive good an assessment of a like product is difficult because comparable physical characteristics are difficult to assess and it remains vague whether the same consumer preferences are maintained.  The role of PPMs in a like product test also remains unclear under the GATT. ⁽³¹⁾

It is likely that imported products will be considered as like products to those domestically produced even though the carbon emissions associated with their production vary, ⁽³²⁾ and as a consequence an importer could challenge "a border adjustment that required it to purchase more allowances to reflect the higher carbon content by claiming its like product was being treated less favourably," or through the application of a tax adjustment. ⁽³³⁾

5.1.2 Process and production methods

Another key to assessing an Article I violation is whether products can have a carbon tariff imposed at a rate that reflects their PPMs, rather than in accordance with physical characteristics.  As Pauwelyn argues, until December 2006, the WTO stated that "under existing GATT rules and jurisprudence, 'product' taxes and charges can be adjusted at the border, but 'process' taxes and charges by and large cannot." ⁽³⁴⁾  By example, Pauwelyn demonstrates that "a tax on the energy consumed in producing a ton of steel cannot be applied to imported steel." ⁽³⁵⁾

Therefore any carbon tariff levied based on the carbon footprint of a production process would violate this principle.  However Dispute Settlement Panels have ruled in favour of assessing PPMs ⁽³⁶⁾ and imposing border tax adjustments based on process so long as they are non-discriminatory, ⁽³⁷⁾ however panels have not made it clear whether they could be levied on inputs unincorporated into the final product, such as carbon inputs during the production process. ⁽³⁸⁾  And because WTO dispute settlements don't recognise jurisprudence the impact of these rulings remains unclear.

Arguments have been proposed that a carbon tariff would not violate MFN because the adjustment was not made according to origin but according to production processes, ⁽³⁹⁾ but while a novel argument, it is unlikely to be accepted by a WTO dispute settlement panel because it would be "applied only to countries that do not have comparably effective policies." ⁽⁴⁰⁾  A measure may also be inconsistent with Article I if some countries are exempt, such as the least developed countries are from the Kyoto Protocol. ⁽⁴¹⁾

The degree to which climate change policy from the originating country is taken into account by the country imposing the tariff will be an important point.  Even if PPMs are a valid basis by which to calculate a tariff, the measure may nonetheless be discriminatory if applied at a higher rate to countries without climate change abatement policies.

5.2 ARTICLE III | NATIONAL TREATMENT

Article III requires "national treatment" for imported products to the same degree afforded to a locally produced products.  Nations must accord to imported products "treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements" ⁽⁴²⁾ and "internal taxes and other internal charges and laws, regulations and requirements … should not be applied to imported or domestic products so as to afford protection to domestic production." ⁽⁴³⁾

In the case of carbon tariffs it is difficult to assess whether the obligations to buy permits or the imposition of a tax would be an Article III violation.  Previous Appellate bodies found that national treatment obligations can be violated if products are discriminated against based on their input characteristics. ⁽⁴⁴⁾

Whether Article III is violated will principally depend on the manner in which any punitive cost is added to imports.  For example, the cost of an average carbon footprint for all countries would be considered discriminatory. ⁽⁴⁵⁾  To avoid violating the principles of national treatment a carbon tariff would have to apply exactly the same punitive cost of its domestic carbon price signal to the imported product. ⁽⁴⁶⁾  The capacity to do so is virtually impossible, however case law may be available shortly should the United States challenge EU limitations on biofuel imports in the WTO. ⁽⁴⁷⁾

5.3 ENVIRONMENTAL EXEMPTIONS

If a carbon tariff is found to be discriminatory under Article I or III governments could argue for exemptions under Article XX which includes environmental exemptions.

5.3.1 Article XX(g)

The most likely exemption to be invoked is Article XX(g) which includes an exemption for those measures "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption." ⁽⁴⁸⁾  However whether the threat of anthropogenic climate change is sufficient to warrant invoking an environmental exemption remains a considerable source of contention in the literature.

A requirement is that the measure relates to conservation of the climate or atmosphere.  In a range of cases ⁽⁴⁹⁾ it has been determined that "relating to" should be interpreted to mean "primarily aimed at" and/or having a "substantial relationship" with conservation, rather than requiring the measure to be "necessary or essential" to the goal.

Bordoff advises that as estimates suggest tariff provisions will do little to reduce leakage, there is an insufficient relationship to warrant an exemption ⁽⁵⁰⁾ and that carbon tariffs are not likely to be considered an "effective tool." ⁽⁵¹⁾  Further WTO case law demonstrates that carbon tariff legislation must not be "disproportionately wide in its scope and reach in relation to the policy objective of protection and conservation" of the atmosphere and climate. ⁽⁵²⁾  However, Pauwelyn suggests that unless the climate change legislation displays blatant protectionism it may be capable of invoking an exemption. ⁽⁵³⁾  There also remains a legitimate question surrounding the effectiveness of a carbon tariff implemented by a single country and its limited capacity to impact a global problem.  Bordoff suggests that just because carbon tariffs would have a "limited impact on total emissions should not necessarily count against them," ⁽⁵⁴⁾ but this remains untested.

Some question whether the abatement of climate change can even be considered conservation of exhaustible natural resources, ⁽⁵⁵⁾ although as Pauwelyn argues "it would be surprising if the WTO would not accept that the planet's atmosphere (that is, the layer of gases around the earth that regulates the planet's climate) is an "exhaustible natural resource." ⁽⁵⁶⁾  Especially because the WTO relies on advice from other UN specialised agencies including the WMO which is likely to give advice to this affect.

Another requirement is that the restriction on imports be made "in conjunction with" domestic restrictions which has been described as a requirement only of "even-handedness" rather than identical treatment. ⁽⁵⁷⁾

5.3.2 Article XX(b)

It is also possible that an exemption may be made under Article XX(b) which allows for measures that are "necessary to protect human, animal or plant life or health". ⁽⁵⁸⁾  However Article XX(b) requires necessity, unlike Article XX(g) which only requires a relationship, to the environmental goal and is less likely to be invoked in defence of a carbon tariff because it would be significantly harder to substantiate.

5.3.3 Article XX Chapeau

Even if a carbon tariff is granted an exemption under Article XX(g), it would still need to satisfy the tests prescribed in the Chapeau that it is "not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." ⁽⁵⁹⁾

The chapeau requirements are a considerable hurdle for any measure to overcome and within all Appellate Body jurisprudence, those measures that failed to qualify for the Article XX exceptions did so because of their failure to satisfy this requirement. ⁽⁶⁰⁾

WTO cases have also identified that it is desirable that countries engage with exporters in "serious, across-the-board negotiations with the objective of concluding bilateral or multilateral agreements for the protection and conservation" of the resource of concern for Article XX(g) exemptions. ⁽⁶¹⁾  This requirement may be satisfied by the system put in place by the Waxman-Markey bill for the introduction of tariffs only if an international agreement is not reached by 2018, but the Senate version of the bill, and any similar legislation in the EU or elsewhere would have to ensure it similarly took this requirement into account.

And it is certainly possible a WTO panel would consider a carbon tariff to constitute a "disguised restriction on trade" given the "larger impact on protecting certain US firms than on reducing overall GHG emissions." ⁽⁶²⁾  Further, with the objective of carbon tariffs clearly being to influence the environmental policies of other countries it is unlikely that an exemption would be granted under the Chapeau. ⁽⁶³⁾

5.4 ACHIEVING WTO COMPLIANCE

The WTO compliance of any carbon tariff remains unknown.  The literature has diverse perspectives on their legality drawing on different WTO decisions from Dispute Settlement Panels and Appellate Bodies.

But because jurisprudence doesn't carry weight in the WTO it is difficult to draw conclusions for a border measure that crosses over so many different policy priorities, potential breaches of WTO agreements and may be capable of invoking environmental exemptions depending on how narrow, or wide, they are interpreted.

The only way that the WTO compliance of a carbon tariff can reasonably be assessed is through a dispute following their establishment.

However, if a country was intending to introduce a carbon tariff it would at least need to engage in good faith negotiations with affected countries to achieve a consensual multilateral agreement as the experience through the WTO shows that Dispute Settlement Panels are reluctant to accept unilateral measures unless those genuine attempts have been made. ⁽⁶⁴⁾

Further, to be consistent with the GATT a carbon tariff would be best designed as a straight border tax, rather than a requirement to buy into permits, ⁽⁶⁵⁾ which would be considerably more complex because of their fluctuating prices. ⁽⁶⁶⁾  By comparison a carbon tariff as a border tax could be imposed in a much more straightforward manner and could be added at each stage "as the product moves through the various stages the taxes levied in previous stages are rebated, so only the carbon added in a particular stage is taxed at that stage.  Hence, when the product reaches the final stage, the tax is on the cumulative value of carbon emissions i.e. on the sum of the amounts of carbon added at each stage." ⁽⁶⁷⁾

But even in the form of a border tax adjustment a carbon tariff would still face problems.  While indirect taxes such as a value added tax may be replicated at the border under WTO law, this does not automatically permit such an adjustment for carbon emissions during production elsewhere.  Article II:2(a) of the GATT provides that a border tax adjustment is permissible only when it constitutes "a charge equivalent to an internal tax … in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part." And this article leaves open the discussion about the capacity to impose a carbon tariff on the PPMs of a product.

Ultimately the main problem is that efforts to properly recognise importer's different production methods and avoid arbitrary discrimination would likely become an "administrative nightmare." ⁽⁶⁸⁾

Therefore, short of the establishment and testing of a carbon tariff in a dispute, the only way that certainty can be provided for countries seeking to impose a carbon tariff is through the development of a WTO agreement addressing the consequences of border measures to reflect domestic carbon price signals.

To date no serious effort to create such an agreement has been made, and it remains questionable whether such an agreement would be given approval.  Such an agreement would be difficult to successfully negotiate because it would, first and foremost, send a bad signal as the WTO sanctioned a new form of potential protectionism.  Second, WTO agreements are negotiated by consensus and it would be unlikely to secure consensus when so many WTO members don't have binding emissions reduction targets under the Kyoto Protocol, and also may not under a post-Kyoto agreement.

6.0 THE COMPLICATIONS OF CARBON TARIFFS

Irrespective of their WTO compliance, carbon tariffs remain an incredibly complex instrument to impose, especially because of the preference for carbon price signals via a floating price under a CAT/ETS.

To ensure that it is WTO compliant any carbon tariff would need to be imposed equivalent to the same cost imposed on domestic producers which would require a "mind-blowingly elaborate carbon-measurement scheme, created on a global scale." ⁽⁶⁹⁾  Further, Corcoran suggests that implementing these tariffs would be "so complicated it would become a dangerous threat to trade stability." ⁽⁷⁰⁾

Even supporters of carbon tariffs concede "the devil is clearly in the implementation details," ⁽⁷¹⁾ suggesting that to impose carbon tariffs properly a panel of international carbon auditors would be required to measure carbon emissions for goods and "would have to be able to determine how much carbon emissions are embedded in the power drill that is nominally made in China, but is actually assembled from parts made in a dozen other countries.  Some of those countries may or may not have carbon control programs in place," ⁽⁷²⁾ giving rise to ROO issues.

For example, "a car from Mexico may have an engine from Brazil and electronics from Japan.  If we are going to account for this properly, we would need to know the carbon tax equivalent of each part of each good that was in effect at the time that part was produced.  If we need to come up with a weighted average carbon tariff, we'll also need to know how much each part contributed to the value of the overall good.  That varies over time and it varies by producer." ⁽⁷³⁾

These kinds of calculations would also rely on foreign manufacturers providing carbon content details for their products which they may be unwilling or unable to do. ⁽⁷⁴⁾  As Elizabeth Lynch highlights, any data collected from places like China where "implementation and enforcement on the local level is a perpetual struggle" may not be reliable. ⁽⁷⁵⁾

Further these decisions would need to be made at the border for both the direct and indirect carbon content of imports, including the content assessed as part of each product's PPMs. ⁽⁷⁶⁾  As the National Trade Board report highlights," given the number of variables in terms of production methods, capital stock, and energy sources, it is nearly impossible to accurately assess embedded emissions of goods at the border on a case-by-case basis without the assistance of fairly rigorous emissions monitoring and reporting in the country of origin." ⁽⁷⁷⁾

Wisely, the complexity of introducing a carbon tariff was the reason the Australian government rejected their use as part of its CAT/ETS arguing "border adjustments will be difficult at best, or in most cases unworkable.  The extensive foot printing of so many products with components across so many international boundaries makes this exercise nigh on impossible." ⁽⁷⁸⁾  Because of the complexity there is a general consensus in the literature that carbon tariffs could only reasonably be imposed to primary energy or basic products rather than final manufactured goods. ⁽⁷⁹⁾

In reality between the issues of legality and the complexity of their operation the benefits of carbon tariffs are likely to be massively outweighed by their costs caused by the administrative complexity of their application. ⁽⁸⁰⁾

7.0 WILL CARBON TARIFFS BE EFFECTIVE?

Putting aside the lack of certainty about their compliance under WTO law and the complexity of their introduction, carbon tariffs are also a questionable policy instrument to address the claimed risks of carbon leakage and the loss of domestic industry competitiveness.

The evidence supporting the effectiveness of carbon tariffs to stop carbon leakage is questionable.  While governments have argued that they may be an effective policy instrument, Bordoff found that "though estimates vary, most (studies) suggest that roughly 10 percent of the reduction in US emissions will be replaced by increases in foreign emissions," ⁽⁸¹⁾ the US EPA found US emissions would only be reduced by half a per cent with the introduction of a carbon tariff.  Lynch came to similar conclusions finding rigorous emission standards will not necessarily result in production shifting to countries without those standards. ⁽⁸²⁾  The Lowy Institute found that the impact of carbon "tariffs would be small on most traded goods, would reduce leakage of emissions reduction very modestly, and would do little to protect import-competing industries." ⁽⁸³⁾

And carbon tariffs are unlikely to have the effect of prompting countries without a carbon price signal to adopt one because of the threat posed to exports.  Colvin suggests that "carbon tariffs are unlikely to incentivize the kind of innovation or energy efficiency improvements by foreign companies that will lead to a reduction in global carbon emissions" because the measures are insufficiently responsive to an increase by individual firms in the carbon-efficiency of their production processes. ⁽⁸⁴⁾  Bordoff supports Colvin's conclusions arguing that "while some argue that border adjustments will induce developing countries to adopt greener practices, only a very small fraction of (carbon-intensive) products made in China are exported to the United States, so a border adjustment in the US would be a small stick with which to pressure China to implement more costly low-carbon production processes." ⁽⁸⁵⁾

Irrespective of their effectiveness, the introduction of carbon tariffs could prompt retaliatory trade measures.  Former US Trade Representative, Susan Schwab, highlighted a US carbon tariff would prompt retaliatory measures from trade partners that could "unfold long before any potential disputes were concluded in the WTO." ⁽⁸⁶⁾ James correctly identifies that the countries, notably the US, would find themselves "diplomatically isolated precisely when it was seeking to encourage closer international cooperation to combat climate change" ⁽⁸⁷⁾ if it introduced a carbon tariff.  And these concerns are supported by statements from Chinese Trade Representative, Zhang Xiangchen, who stated recently that retaliation from China is inevitable should the US impose carbon tariffs. ⁽⁸⁸⁾

Carbon tariffs are clearly a blunt policy instrument in addressing potential carbon leakage, especially in comparison to the costs they will impose.

8.0 THE COST OF CARBON TARIFFS

The actually financial costs of imposing carbon tariffs are unknown.  A study completed by the Samsung Economic Research Institute has estimated that "if a carbon border tax was imposed on South Korea, exports would fall by 3.9 per cent annually, equal to about $4.3bn per year." ⁽⁸⁹⁾

But some assessments of a potential carbon tariff can be assessed.  Table 1 includes calculated data for the approximate cost of carbon tariffs had those products been produced in the United States.  The carbon tariff rate for the five select (steel, aluminium, chemicals, paper and cement) carbonintensive products is based on import data into the US from all countries, excluding Annex B countries under the Kyoto Protocol who are bound to reduce their emissions.  Based on calculations for these five products alone the US would need to impose a carbon tariff worth more than USD$8.6 billion to offset the cost of a domestic carbon price signal, with most of the cost being imposed on imports from Asia.  With the cost of these imports in total amounting to more than USD$80.5 billion, an USD$8.6 billion tariff is equivalent to an average ten and a half per cent tariff imposed on carbon-intensive goods.

Table 1 | Carbon tariff values for select carbon-intensive products
by region, excluding countries bound under the Kyoto Protocol, USD$

Region	Steel	Aluminium	Chemicals	Paper	Cement	Regional total
Africa	$137,645,268	$35,980,980	$117,267,453	$3,270,453	$3,373,118	$297,537,272
Asia	$2,629,261,153	$431,615,953	$1,340,219,110	$381,951,943	$257,062,488	$5,040,110,647
Caribbean	$79,146,458	$2,597,631	$453,628,979	$1,049,693	$1,299,259	$537,722,020
Central America	$1,759,663	$10,300	$1,793,206	$1,437,235	$2,206,665	$7,207,069
Europe	$139,402,107	$13,454,318	$80,115,697	$582,981	$54,094,041	$287,649,144
Middle East	$21,502,589	$66,440,455	$117,937,443	$5,858,471	$15,925,654	$227,664,612
North America	$609,601,422	$141,020,748	$144,084,602	$77,596,905	$57,101,719	$1,029,405,396
Oceania & Australia	$4,583,323	$5,711	$6,545	$11,908	$33,425	$4,640,912
South America	$513,817,541	$224,084,969	$342,054,539	$81,399,500	$97,882,799	$1,259,239,348
Global total						$8,691,176,420

Source: Author's calculations, methodology outlined in Annex

And the cost could be more than just raising the price of imports into countries that have carbon price signals.  In a global supply chain Wolfram identifies that a carbon tariff is likely to harm the very industries it seeks to protect by imposing tariffs on imports from China which may be components and inputs into production in countries with carbon price signals.  The cost of doing so further reduces the competitiveness of the goods produced in countries with these price signals into export markets without them.  In particular industries like car manufactures that participate in a global supply chain will "have to pay tariffs on any steel or auto parts that they purchase from China ... driv(ing) up the cost of making automobiles in the United States relative to making them elsewhere.

A carbon tariff may also lead to retaliatory tariffs being placed on the goods we export to other countries.  Since China will be one of the largest consumers of cars in the next decade, we will be ensuring that General Motors, Ford, and Chrysler will have no choice but to make their cars in China in order to be competitive in that market." ⁽⁹⁰⁾  Other reports have found that "carbon tariffs could boost inflation and reverse the march toward offshoring as manufacturers who have relocated to countries like China move to more energy-efficient environments back home." ⁽⁹¹⁾

9.0 CONCLUSIONS

Despite rhetoric in their favour, there is clearly under-consideration by policy makers and politicians about the merit of carbon tariffs.

Carbon tariffs have been recommended as a policy instrument to assist domestic industries exposed to the cost of a carbon price signal through a CAT/ETS in competing against imports that are not, and the possible risk of carbon leakage as a consequence.  But the research shows that carbon tariffs are not an effective policy instrument for offsetting any leakage that may occur.

Further, the introduction of carbon tariffs is likely to breach the obligations of WTO members in violation of the most favoured nation principle and national treatment obligations.  And it remains unclear whether environmental exemptions will cover these violations.

Instead the most likely avenue for introducing WTO-compliant carbon tariffs is through the separate negotiation of a new WTO agreement.  But any such agreement is highly unlikely to secure passage through the WTO's consensus-based decision making model.

The research also shows that the practical implementation of carbon tariffs is a nightmare, and can only realistically be introduced as a border tax adjustment which conflicts strongly with the current design of carbon price signals through CAT/ETS.

Even if a carbon tariff operates as a border tax adjustment the capacity to assess the carbon-component and rate of the application of a tax would require regulation and administration far in excess of the benefit of such a scheme.

And while there are no concrete estimates of the cost imposed from a carbon tariff, a conservative estimate of a possible US carbon tariff imposed on only five select carbon-intensive products would be equivalent to the imposition of a new ten and a half per cent tariff worth USD$8.6 billion.

Instead of being a panacea to the international trade consequences of domestic carbon price signals, carbon tariffs are likely to only inflict further damage.  They are not an effective policy instrument to achieve the desired policy outcome and they bring with them substantial costs that far exceed their benefit.

10.0 ANNEX | CARBON TARIFFS
CALCULATION METHODOLOGY

Estimating the cost of a carbon tariff on five select products is based on data provided by the Peterson Institute, the US government's TradeStats Express and the Heritage Foundation.

In its report Levelling the carbon playing field the Peterson Institute outlined a series of US carbon-intensive products and their principle source of carbon emissions through energy consumption, and the contribution of energy as a percentage of their total price.

Value data was then extracted from TradeStats Express for all imports for these products from all countries, excluding those with binding emissions reduction targets under the Kyoto Protocol.  The TradeStats data selected for each category is provided in Table 2.

Table 1 | TradeStats classifications for five select
carbon-intensive goods, and energy shares of value

Category	TradeStats Specific classification	Peterson Institute energy share
Steel	72 -- Iron and steel 73 -- Articles of iron and steel	11.62% 11.62%
Aluminium	76 -- Aluminium and articles thereof	19.83%
Chemicals	28 -- Inorganic chemicals, precious and rare earth metals & radioactive compounds 29 -- Organic chemicals 38 -- Miscellaneous chemical products	16.64% 11.47% 4.28%
Paper	48 -- Paper & paperboard & articles 49 -- Printed books, newspaper etc;  Manuscripts etc 47 -- Wood pulp etc;  Recovered (Waste & scrap)	7.27% 7.27% 7.27%
Cement	68 - Cement (Includes art of stone, plaster, cement, asebestos, mica, etc.).	16.58%

Notes:

The energy share for Inorganic chemicals, precious and rare earth metals & radioactive compounds is the average for all inorganic chemicals

The energy share for miscellaneous chemical products was the standard share for all chemical products

This value data was then multiplied by the relevant percentage of energy as a contribution to the final cost of the product provided by the Peterson Institution.  This calculation provided an approximation of the energy cost for all of these imports into the United States.

This value data was then multiplied by the estimated increase in the cost of electricity, presumed to be the principle energy component of these products, by the Heritage Foundation. ⁽⁹²⁾  The remaining value data is an approximate of the overall cost increase of these five select carbon intensive products that would be required to reflect the increase in cost if they were exposed to a US carbon price signal.

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---

ENDNOTES

1.  Houser, T et al., 'Leveling the Carbon Playing Field:  International Competition and US Climate Policy Design', Peterson Institute for International Economics, World Resources Institute, 2008, retrieved 18/11/09, page 30.

2.  A countervailing duty is an import duty added to imports in order to offset subsidies granted to exporters by the exporting country in an attempt to return the imported product to its market price and ensure a level playing field.

3.  Houser, T et al, above n 1, page 30.

4.  Houser, T et al, above n 1, page 30.

5.  James, S 'A Harsh Climate for Trade:  How Climate Change Proposals Threaten Global Commerce', Trade Policy Analysis, CATO Institute, September 2009, no. 41, retrieved 18/11/09.

6.  Bordoff, J 'International Trade Law and the Economics of Climate Policy:  Evaluating the legality and effectiveness of proposals to address competitiveness and leakage concerns', Forthcoming in Climate Change, Trade and Competitiveness:  Is a Collision Inevitable?, Brookings Global Economy and Development, 2008, retrieved 18/11/09, page 27.

7.  Houser, T et al, above n 1, page 29.

8.  Deal, T 'WTO Rules and Procedures and their Implication for the Kyoto Protocol', A discussion paper, United States Council for International Business, 2008, retrieved 18/11/09, page 3.

9.  McKibbin, W & P Wilcoxen, 'The Economic and Environmental Effects of Border Tax Adjustments for Climate Policy', International Economics, Lowy Institute for International Policy, February 2009, no. 109 retrieved 18/11/09, page 3.

10.  Ellerman, D & P Joskow, 'The European Union's Emissions Trading System in Perspective', Massachusetts Institute of Technology, retrieved 18/11/09.

11.  Wynn, G 'EU Considers Carbon Tariff as Part of Climate Push', Reuters, 7 January 2008, retrieved 18/11/09.

12.  Deal, T, above n 6, page 4.

13.  Shanley, M and I Wissenbach, 'Germany calls carbon tariffs “eco-imperalism”', Reuters, 24 July 2009, retrieved 18/11/09.

14.  Ibid.

15.  German Coalition Agreement 2009 retrieved 18/11/09 and English translation of relevant provision.

16.  Oxley, A 'Oxley:  Bill Could Create a Trade War', Roll Call, 9 November 2009, retrieved 18/11/09.

17.  Johnson, K 'Trade Tensions:  Sen. Baucas Says Climate Bill Must Protect US Industry', The Wall Street Journal, 10 November 2009, retrieved 19/11/09.

18.  Yu, V 'New Climate Protectionism:  Analysis of the trade measures in the US climate bill', South Bulletin, Issue 40, 10 September 2009, pp. 5-7, page 6.

19.  'American Clean Energy and Security Act of 2009', as passed 26 June 2009, retrieved 18/11/09.

20.  'Clean Energy Jobs and American Power Act' as Introduced 30 September 2009, retrieved 18/11/09 Section 765.

21.  Power, S 'US Official Expects Commitment to Climate Financing', The Wall Street Journal, 17 November 2009, retrieved 18/11/09.

22.  'Carbon Pollution Reduction Scheme:  Australia's Low Pollution Future', Department of Climate Change, 2008, retrieved 23/11/2009, Volume 2, Chapter 12, Page 15.

23.  Carbon tariffs are not the only potentially inconsistent trade measure to offset the cost of a domestic carbon price signal, a discussion of the potential impacts of subsidies is included in Wood, R.J., 'Australia's delinked and non-compliant emissions trading scheme', 2009

24.  Pauwelyn, J 'US Federal Climate Policy and Competitiveness Concerns:  The Limits and Options of International Trade Law', Nicholas Institute for Environmental Policy Solutions, 2007, retrieved 18/11/09, page 41.

25.  Bergsten, F & L Wallach, 'Cooling the Planet without Chilling Trade', The Washington Post, 14 November 2009, retrieved 18/11/09.

26.  Lincicome, S 'Germany Hates on Carbon Tariffs', Scott Lincicome Personal Blog 26 July 2009, retrieved 18/11/09.

27.  The General Agreement on Tariffs and Trade 1947 (GATT), in 'The Legal Texts -- The Results of the Uruguay Round of Multilateral Trade Negotiations', World Trade Organization, Cambridge University Press, 2007 pp. 424-492, Article I.

28.  'Japan -- Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages', Report of the Panel, World Trade Organization, 1987, retrieved 18/11/09 at 3.11 and 3.12.

29.  'European Communities -- Measures Affecting Asbestos and Asbestos-Containing Products', Report of the Appellate Body, World Trade Organization, 2001, retrieved 18/11/09, para 99.

30.  'United States -- Import Prohibition of Certain Shrimp and Shrimp Products', Report of the Appellate Body, World Trade Organization, 1998 retrieved 18/11/09.

31.  De Cendra, J 'Can Emissions Trading Schemes be coupled with Border Tax Adjustments?  An Analysis via-a-vis WTO Law', Review of European Community and International Environmental Law, 2006, vol. 15, no. 2, pp. 131-145, page 142.

32.  Bordoff, J, above n 2, page 12.

33.  Ibid, page 10.

34.  Pauwelyn, J above n 25, page 19.

35.  Ibid.

36.  'US-Shrimp', above n 30 and 'Brazil -- Measures Affecting Imports of Retreaded Tyres', Report of the Panel, World Trade Organization, 2007, retrieved 18/11/09.

37.  'United States -- Taxes on Petroleum and Certain Imported Substances', Report of the Panel, World Trade Organization, 1987, retrieved 18/11/09.

38.  Cosbey, A & R Tarasofsky, 'Climate Change, Competitiveness and Trade', Chatham House, 2007, retrieved 18/11/09.

39.  Bordoff, J, above n 2, page 15.

40.  Ibid, page 17.

41.  Shoyer, A 'WTO Background Analysis of International Provisions of US Climate Change Legislation', Sidley Austin, retrieved 18/11/09, page 2.

42.  GATT, above n 27, Article III:4.

43.  Ibis, Article III:1.

44.  'United States -- Standards for Reformulated and Conventional Gasoline', Report of the Appellate Body, World Trade Organization, 1996, retrieved 18/11/09.

45.  Houser, T et al, above n 1, page 35.

46.  Courchene, T & R Allan, above n 3, page 63.

47.  Oxley, above n 14.

48.  GATT, above n 27, Article XX(g).

49.  'Canada -- Measures Affecting Exports of Unprocessed Herring and Salmon', Report of the Panel, World Trade Organization 1988, retrieved 18/11/09 at 4.6, 'US-Gasoline', above n 44 and 'US-Shrimp', above n 30.

50.  Bordoff, J, above n 2.

51.  'US-Shrimp', above n 30, para 26.

52.  Ibid, para 141.

53.  Pauwelyn, J above n 25, page 36.

54.  Bordoff, J, above n 2, page 18.

55.  James, S, above n 4.

56.  Pauwelyn, J above n 35.

57.  'US-Gasoline', above n 44, page 21.

58.  GATT, above n 27, Article XX(b).

59.  GATT, above n 27, Article XX.

60.  Pauwelyn, J above n 37.

61.  'US-Shrimp', above n 30, para 166.

62.  Bordoff, J, above n 2, page 20.

63.  Cosbey, A & R Tarasofsky, above n 38, page 17.

64.  Shoyer, A above n 41, page 1.

65.  Pauwelyn, J above n 23.

66.  McKibbin, W & P Wilcoxen, above n 7, page 14-15.

67.  Courchene, T 'Climate Change, Competitiveness and Environmental Federalism;  The Case for a Carbon Tax', Background Document for a Canada 2020 Address, June 3, 2008, retrieved 18/11/09, page 9-10.

68.  James, S, above n 4, page 12.

69.  Corcoran, T, 'Blowing up the WTO', Financial Post, 1 April 2008, retrieved 18/11/09.

70.  Ibid.

71.  Courchene, T & R Allan, above n 3, page 62.

72.  Corcoran, T, above n 69.

73.  Levy, P 'Krugman's Carbon Fetish', The Enterprise Blog, 14 September 2009, retrieved 18/11/09.

74.  Bordoff, J, above n 2, page 13.

75.  Lynch, E 'the US Climate Change Bill:  International Trade Implications & China', China Law & Policy, 7 September 2009, retrieved 18/11/09.

76.  McKibbin, W & P Wilcoxen, above n 7, page 12.

77.  Houser, T et al, above n 1, page 34.

78.  Department of Climate Change, above n 20, page 16.

79.  Lucenti, K 'Carbon tariff might be legal as a VAT', Financial Post, 30 April 2008, retrieved 18/11/09.

80.  McKibbin, W & P Wilcoxen, above n 7, page 20.

81.  Bordoff, J, above n 2, page 4.

82.  Lynch, E above n 74, page 107.

83.  McKibbin, W & P Wilcoxen, above n 7, page 14-15.

84.  Colvin, J 'Obama v Krugman:  Five Reasons the President's Right on Carbon Tariffs', The Huffington Post, 16 September 2009, retrieved 18/11/09.

85.  Bordoff, J, above n 2, page 5.

86.  Schwab, S, Letter to Honorable Joe Barton, 4 March 2008, retrieved 18/11/09.

87.  James, S, above n 4, page 13.

88.  Stanway, D & W Lan, 'Carbon tariff proposals unworkable -- China WTO rep', Reuters, 29 October 2009, retrieved 18/11/09.

89.  Chan, Y 'South Korea pledges to set carbon emissions target for 2020', BusinessGreen.com, 4 August 2009, retrieved 18/11/09.

90.  Wolfram, G 'Government intervention may have unintended consequences to US industries', Mlive.com, 20 October 2009, retrieved 18/11/09.

91.  Rubin, J & B Tal, 'The Carbon Tariff', CIBC World Markets Inc, Economics & Strategy Report, 27 March 2008, retrieved 18/11/09 and Thorpe, J 'Possible carbon tariffs could have an impact on growth:  report', National Post, 27 March 2008, retrieved 18/11/09.

92.  Heritage Foundation calculations were based on data from IHS/Global Insight Energy Modelling.

The Climate is Changing

When I say the climate is changing, I do not mean, as many people do, that man-made global warming is destroying Planet Earth.  I mean that the politics of climate change is changing rapidly all over the globe.  Al Gore's moment has come and gone.

In the United States, Democrats, nervously facing midterm elections, are calling on President Obama to jettison the cap-and-trade bills before the Senate.  In Canada, the emissions-trading scheme -- another term for cap-and-trade -- is stalled in legislative limbo.  In Britain, Tories are coming out against David Cameron's green stance.  In the European Union, cap-and-trade has been the victim of fraudulent traders and the carbon price has more than halved to $18.50 per ton.  In France, the Constitutional Council has blocked President Nicolas Sarkozy's tax on carbon emissions that was set to take effect in the New Year.

In Copenhagen, meanwhile, the United Nations' climate-change summit went up in smoke.  And in Mexico City later this year hopes for any verifiable, enforceable and legally binding agreement to reduce greenhouse gases -- and to bring in developing nations such as China and India that were, insanely, omitted from the Kyoto protocol in 1997 -- are a chimera.

Add to this that Washington was buried by record-breaking snowfalls last month, that hurricane activity is at a 30-year low in the U.S., that London is bracing itself for its coldest winter in decades, and that there has still been no recorded global warming this century, and it is no wonder public skepticism is rising across the world.

Nowhere is the changing climate more evident than in Australia.  Last month, the Senate voted down the Labor Government's legislation to implement an emissions-trading scheme.  Polls show most Aussies oppose the complicated cap-and-trade system if China and India continue to chug along the smoky path to prosperity.  The center-right Liberal-led opposition, moreover, is now led by Tony Abbott, a culture warrior who has described man-made global warming in language unfit to print in a family newspaper and cap-and-trade as "a great big tax to create a great big slush fund to provide politicized handouts, run by a giant bureaucracy".

Until Mr. Abbott's election as opposition leader last month, the climate debate in Australia had been conducted in a heretic-hunting, anti-intellectual atmosphere.  Prime Minister Kevin Rudd claimed that climate change is the "greatest moral, economic and social challenge of our time".  In clear breach of the great liberal anti-communist Sidney Hook's rule of controversy -- "Before impugning an opponent's motives, answer his arguments" -- Mr. Rudd linked "world government conspiracy theorists" and "climate-change deniers" to "vested interests".  Much of the media, business and scientific establishment deemed it blasphemy that anyone dare question his Labor Party's grand ambitions.

Australians had heard a lot of science, much of it poorly explained.  But the "dismal science" had been conspicuously absent from the climate debate.  There was very little serious analysis of the economic consequences of climate change:  What choices did we have to mitigate its effects, and how much would these choices cost us?  Labor ministers had emitted a lot of hot air about global warming and the urgency with which resource-rich Australia (which accounts for only 1.4% of global emissions) must act.

All of this has now utterly changed:  Australia's debate has entered a new phase, one that goes beyond the religious fervor and feel-good gestures that had held sway all too often.  Suddenly, political strategists are thinking the unthinkable:  far from presaging an electoral debacle that was inevitable under Mr. Abbott's green predecessor Malcolm Turnbull, the issue could be a godsend for conservatives Down Under.

Already, Mr. Abbott -- an Anglophile, Rhodes scholar, patron saint of Australian conservatives and protégé of former Prime Minister John Howard -- is gaining ground in the polls.  In their first test at the ballot box since they killed the government's climate legislation last month, his Liberal Party recorded impressive victories in by-elections in Sydney and Melbourne -- confounding the conventional wisdom that opposition to cap-and-trade will damage a center-right party in metropolitan seats.

In this environment, Mr. Abbott deserves praise for persuading Australia's conservatives to fight Labor on climate change -- even when the liberal wing of his own party would happily bow to Mr. Rudd.  Not only will he raise the temperature over the inevitable higher costs in energy, transport and groceries under the next tax -- and thus appeal to Labor's working-class and coal mining and other energy-intensive constituencies -- Mr. Abbott will also radiate the technological optimism that has characterised the human species since time immemorial.  His case is not an appeal to do nothing, but to avoid doing something stupid.  And unilateral Australian action in a post-Copenhagen world would be stupid:  Economic Pain For No Environmental Gain.  Not a bad slogan during an election scare campaign.

To be sure, Mr. Rudd remains politically popular on the back of a strong local economy that has weathered the global financial storm.  But as the changing climate shows, Mr. Abbott is tapping into a more skeptical mood about climate change.  If he wins the federal election later this year, Australia's opposition leader will be a role model to conservative skeptics around the world.

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Lost property: home in deed but not in fact

Debates over public policy rarely pivot on philosophical questions.  But here's one:  what does it actually mean to "own" your property?

NSW farmer Peter Spencer is coming up to the 50th day of his hunger strike.  Spencer is arguing that he should be adequately compensated for native vegetation regulations that prevent his chopping down trees on his land.

Fair enough.  Compensation for loss of property rights is part of the Commonwealth constitution.

But native vegetation laws are state laws, and state constitutions don't require state governments to pay just compensation for property they take.  Spencer claims these laws were enacted at the behest of the Federal Government, allowing Canberra to meet its Kyoto greenhouse emissions targets without the hassle of paying those who own the native vegetation carbon sinks.  (Constitutional limitations on government power must be pretty annoying.)

Certainly, the nuances of regulations governing the clearing of native vegetation sound dull, but they're actually very important.  A mountain of regulation imposed by all three levels of government is eroding one of our basic human rights -- the right to own property.

This might seem a bit counter-intuitive.  The Government hasn't literally taken Spencer's property away.  He hasn't been kicked off:  he's still allowed to wander his land at his leisure.  He still holds the title.  But his right to use the land has definitely been taken.  Put it this way:  what if the Government told you that you could keep your house, but couldn't live in it?  Sure, you'd technically still own it, but you bought that house because you thought it would be a nice place to sleep.  You don't really "own" it in any useful sense.

It's the same with farmland.  Spencer may not have been physically deprived of his land, but what's the point if he's not allowed to farm it?  And if Spencer is not compensated for this regulatory taking, how is it much different from legalised theft?  Spencer's is not an isolated problem.  In urban areas, planning regulations and heritage restrictions are increasingly onerous as state and local governments try to micro-manage the "character" of suburbs.

Karl Marx called the right to property "the right of selfishness", and property rights are believed by many to be a synonym for individualistic greed.  Sounds like greed, looks like greed, sure -- but it's not greed.  More than anything else, property rights are essential for prosperity and growth.  Nowhere is this clearer than in the developing world.  Influential Peruvian economist Hernando de Soto has found that where property rights are not respected or recognised by governments and bureaucracies, countries are poor.  After all, if you can't demonstrate you have assets to your name, it's very hard to get a loan to start a business.

Property rights are the foundation of social mobility.  Indeed, property is pretty much just another word for accumulated savings.  Savings help us up the economic ladder.  By contrast, a society that regularly violates property rights is an unstable society, and one where the road to personal advancement is blocked.

The right to property is so important it has long been recognised as one of our basic human rights, like free speech or the right to a fair trial.  The 17th century philosopher John Locke said we had three fundamental rights:  life, liberty, and "estate" -- property.

But in the late 20th century, the right to property became the mistreated stepchild of human rights law.  Related, but unloved.

In 1948, property rights got their own article in the United Nations' Universal Declaration of Human Rights ("No one shall be arbitrarily deprived of his property").  But when they finally got around to turning the declaration into a legally binding commitment in 1966, property was thought to be passe, like Dean Martin and the patriarchy:  neither the International Covenant on Civil and Political Rights nor the International Covenant on Economic, Social and Cultural Rights mention property rights.

The European Convention of Human Rights says "no one shall be deprived of his possessions except in the public interest".  The phrase "public interest" is meaningless.  What government has ever thought it wasn't acting in the public interest?  The 2006 Victorian Charter of Rights says no one's property can be taken "except in accordance with law" -- not much of a defence from eager legislators.

Peter Spencer's hunger strike in defence of his human right to property is drastic and dangerous.  We can only hope it won't be tragic.  But his desperation must make us rethink our attitude towards this essential, but increasingly neglected, human right.

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Government to blame for costly housing

Many businesses are facing softer prices as a result of competitive pressures.  However, house prices are soaring.  Over the past year, Australian Property Monitors estimates house and unit prices rose by 10 per cent Australia-wide and by 15 per cent in Melbourne.

One reason for these price hikes is government-imposed costs on new homes.

Government energy saving requirements, for example, boost new house prices by up to $15,000.  These regulations force buyers of new homes to incur costs to brifng about lower greenhouse gas emissions for the community in general.

In other words, the ruling class of home-owning baby boomers gets parliament to pass laws forcing their children to bear the burden of meeting their environmental goals.  No wonder the generation born after World War II was named the "me-generation"!

In the pipeline are other regulatory cost impositions on the aspiring home owner.  Among these are requirements for new house designs that facilitate usage by people with disabilities.

But the main factor boosting house prices in Australia is a shortage of land for housing.  This is caused by governments tightly controlling permits for land development.

As with any other shortage, the upshot is higher prices and lower affordability.

Last year, the Urban Development Institute examined trends in the availability of land for new housing.

In Sydney over the past 10 years, the number of new lots zoned for housing fell by two thirds.  Not surprisingly, lot prices have soared.

And in spite of all the whingeing by the anti-development brigade in Victoria, the government here has also kept the lid on permits for new areas.  This has brought on more than a twofold increase in Melbourne's housing land prices over the past decade.

Not all governments around the world follow Australian-style price-inflating building restraint policies.

In Texas, most of Canada and Germany, governments have never prevented land from being used for housing.  New housing in these markets is readily available at half the price we pay in Australia.

In some other markets, supply restraint caused price bubbles that have since burst.

In England, Ireland, Florida and California -- like here -- governments keep a strict lid on land permits for new housing.  These places saw house-price escalations that were reversed once the global financial crisis caused housing demand to collapse.

The mild impact of the global financial crisis prevented this happening in Australia.  But the downside is that aspiring Australian new home buyers continue to pay excessive prices caused by restrictive government policies.

Australian new home building recovered in the second half of last year.  Even so, new supply remains inadequate.  Many younger people are kept out of the market or priced into small housing blocks and units.

The noisiest baby boomers prefer to see more compact cities.  Governments have responded to their demands and enacted stringent land and housing regulation, causing reduced new building and higher prices.

One upshot is that the baby boomers' children are staying at home longer, which at least means baby boomers themselves are now sharing some of the burden they've created.

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People's Bank idea is folly

It is one week into 2010 and most people will already have broken their New Year's resolutions.  Promises of less chocolate, less alcohol and more exercise have gone the same way as Kevin Rudd's pre-election commitment to be a fiscal conservative.

When confronted by the temptation of a slice of birthday cake at the year's first office morning tea, many will utter Saint Augustine's famous plea "give me chastity and continence -- but not yet".

For all their good intentions politicians face not dissimilar temptations.  In the next 12 months a federal election, plus state elections in Victoria, South Australia and Tasmania, mean there's going to be a higher than normal percentage of good policy sacrificed to populist temptation.  And there'll be many popular but bad policies announced, too.

At the moment there's one particularly bad policy that stands out It's the idea that the government establish, own and, operate a "People's Bank".  Last year some Australian economists floated the concept, and speculation about it reignited in December with the appointment of former National Australia Bank boss Ahmed Fahour as chief executive of Australia Post.

The suggestion is that the nation's post offices be turned into bank branches.  Supposedly, a people's bank would compete against the Big Four and fill a market niche in regional and remote areas.

There's a nice historical symmetry to this debate.  Next Thursday marks the 50th anniversary of one of the few significant economic reforms of the Menzies government.  On January 14, 1960 the commercial banking and central banking functions of the Commonwealth Bank of Australia were separated, and the Commonwealth Bank Corporation, and the Reserve Bank of Australia were created.  Menzies understood that a central bank shouldn't also be a trading bank in competition with privately owned banks.  Paul Keating, when he sold the Commonwealth Bank in 1991, understood that governments shouldn't own banks in the first place.

The political temptations of a government bank are obvious.  What could be more popular with voters who are sick and tired of uncaring, profit hungry banks?  There's lots of precedents.  Kiwibank is owned by New Zealand Post, which in turn is owned by the New Zealand government.

Kiwibank's advertising is shameess and its description of itself on its website is revealing:  "The movement began in 2002 [when Kiwibank was established] -- a little Kiwi-owned bank [actually a bank owned by the government] taking on the Aussie banks.  New Zealand needed a better banking alternative -- a bank that would provide real value for money, that had Kiwi values at heart, and that would keep your money where it belongs -- right here, in New Zealand.  And so the resistance was forged ... The resistance to foreign bank ownership grows stronger every day."

That's strong stuff.  If the New Zealand government is so concerned about foreign-bank ownership it could simply ban foreign banks.  It's been done before.  If ever we had a Koalabank it's interesting to speculate who it would bash.  The Americans?  The Dutch?  Maybe it would just bash the other banks for being too big.

There are numerous philosophical and practical reasons why governments shouldn't own banks.  For starters, if Australia Post became a bank, the cross subsidy and transfer-pricing issues would be mind-boggling.  Australia Post is now trying to increase the price of basic postage stamps by 5¢.  What might the reaction be if in the future its customers had to pay more for stamps so that Australia Post could offer cheaper home loans?  It would be a tragedy to reintroduce these sorts of rorts in public corporations after we've just spent two decades trying to get rid of them.

Do we really want Rudd's government (or Tony Abbott's) running a bank?  A government-run bank is susceptible to the political pressures that apply to any government activity.

Anyone in doubt about how the current government runs its financial operations can simply read the Auditor General for Australia's report into the OzCar affair.  Or they could investigate the history of Rudd Bank and the failed efforts to bailout over-leveraged property developers.  Or they could ask the Prime Minister why the government is undertaking the largest infrastructure building program in the country's history without having first done a cost benefit analysis.  The list goes on.

Instead of fantasies of government-run banks or making post offices into bank branches, we should contemplate real reform.  Like selling Australia Post and exposing it to genuine competition.

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Don't expect too much down Mexico way

It has been said that Copenhagen was all about attitudes and aspirations and the meeting this year in Mexico City will be about results.  But without the leadership of the US -- which accounts for 20 per cent of all greenhouse gases -- the prospects of an enforceable, verifiable and legally binding new global treaty on emissions reductions are virtually zero.

All the evidence indicates that President Barack Obama won't be able to lead the world to a post-Kyoto deal.  This is because the politics of the environment have shifted dramatically in recent months.  There are many reasons for the changing climate in Washington.  Here are four of them:

First, both Congress and the White House remain pre-occupied with other policy priorities from overhauling the healthcare and immigration systems and increasing 30,000 troops to Afghanistan to implementing new Wall Street regulations and tackling double-digit unemployment and skyrocketing debt and deficit.

Second, polls and surveys Pew, Gallup, Zogby, Rasmussen show Americans are quickly losing faith in the science of man-made climate change.  A Harris Poll found that those who believe that carbon dioxide leads to global warming have dropped from 71 per cent two years ago to only 51 per cent today.  And this poll was conducted before Climategate erupted.

It may be the case that the thousands of leaked emails and documents from the University of East Anglia's Climate Research Unit do not disprove the science of man-made global warming.  But it is also true that the uproar over allegations that some IPCC scientists manipulated data, hid inconvenient evidence and tried to silence dissenting views has led to calls for government inquiries and congressional hearings into the scandal.  After all, US tax dollars fund many climate scientists.

Third, world leaders are recognising that reaching a global consensus on climate change is even more difficult than reaching a global consensus on multilateral trade.  China and India insist they won't be part of what they see as an economic suicide pact.  In Canada, a Kyoto signatory that has increased its emissions much faster than the US, the ETS bill is stalled in legislative limbo.  In Australia, the conservative opposition parties just defeated Prime Minister Kevin Rudd's Carbon Pollution Reduction Scheme.

In the EU, cap and trade has not only been the victim of fraudulent traders; emissions from the 27 member states have increased by nearly 2 per cent since the ETS was implemented in 2005.

Copenhagen itself failed to produce a climate deal of any substance.  In this environment, the argument goes, why should the US go out on a limb and disadvantage industry?

Fourth, this year is an American election year.  A huge new energy tax that threatens to cut wages and jobs unnerves politicians facing a mid-term vote.  And not just Senate Republicans either.  "Blue Dog" Democrats from the South as well as "Brown Dog" Democrats from the Midwest and Great Plains, whose states are dependent on coal and manufacturing, are uneasy about the administration's energy policies.

Secretary of State Hillary Clinton says the US will help raise $US100 billion ($111bn) a year to defray the cost of climate-change mitigation in the developing world.  But although the idea that rich nations should pay for poor nations to adapt to non-carbon technology may be accepted wisdom at Harvard University and The New York Times, it is hardly a vote winner in middle America during a recession.  Imagine a Democrat senator from a Rust Belt state telling his coal mining constituents that they should pay higher taxes to help China become more energy efficient and more economically competitive.

Not surprisingly, nine Democrat senators recently set out the terms of their support for an emissions trading scheme, including that every other nation, especially China and India, enact and enforce carbon laws of their own.  With the failure of Copenhagen, that won't happen.

Contrary to expectations, the ETS legislation that the House of Representatives narrowly approved last June failed to pass the Senate this year.  Only 41 senate votes are required to filibuster the vote.  And now some moderate Senate Democrats are urging the White House to ditch the ETS bill this year.  At this stage, most seasoned observers in Washington think cap and trade is dead.

The administration does have one card up its sleeve:  the Environmental Protection Agency.  It could override Congress and impose taxes and regulation across the entire economy under clean-air laws.  But such action would almost certainly be tied up in litigation for years.

Having struggled to get his landmark healthcare plan through Congress, Obama faces an uphill battle in trying to enact his energy and climate policy.  If he fails at home, then expect another debacle and more disappointment at this year's climate change conference in Mexico City.

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Rivalries keep the market buzzing

First Data, Finland's highly regarded retail energy markets authority, rates Victoria as the world's most competitive energy market.

Victoria was among the first jurisdictions in the world to introduce full retail competition and, unlike other Australian markets, has dispensed with government control over retail pricing.

Last year, 600,000 electricity and 400,000 gas customers switched suppliers.  With 14 electricity and 10 gas retailers, there is plenty of competition.

Surveys undertaken for the Essential Services Commission show different price schedules make it worthwhile for customers to shop around.  The big three -- Origin, TRU and AGL -- are not always the cheapest supplier.

Green energy specialist, Jackgreen, was actually the cheapest for many customers but has recently gone into receivership.  Jackgreen fell victim to wafer thin margins on its wholesale energy purchases.  The market took that company's failure in its stride and no customer was disadvantaged.

The intensity of the competition in Victoria has provided not only sharper prices but also great incentives for suppliers to ensure high service levels.  Hence, when AGL ran into systems problems a year or so back, it very quickly moved to correct these knowing that its market share was vulnerable to fleet-footed businesses keen to exploit any weaknesses in a rival.

Such beneficial outcomes are due to competition.  This requires an ability of newcomers to enter the market and for all operators to unwind positions that have become unprofitable.  Also necessary is a capacity of suppliers to win market share if they have a better price and this involves them getting out and promoting their products.

Customer irritation with marketing campaigns is a small price to pay for the low prices and good service we enjoy.  However, a strong retailing sector is only one component of supply.

NSW customers have regulated electricity prices and competition is far less vigorous.  Regulation in NSW therefore requires periodic adjustments to all electricity price components.

This month, the NSW energy regulator recommended electricity price increases of 62 per cent for smaller customers.

The recommended NSW price increase involves a 60 per cent hike in the energy cost component and a similar increase in network costs.

As in other jurisdictions, Victoria's electricity network prices are regulated, because "poles and wires" are natural monopolies.  Inevitably, in Victoria those prices will also be increased, though less than in NSW, partly because the privatised businesses here operate more efficiently than their state-owned counterparts north of the Murray.

However, Victorians will see increases in the energy component of their electricity bills comparable to those in NSW.  At about $300 per customer and growing, these increases stem from the Commonwealth-proposed Emissions Trading System tax.

The Brumby Government has endorsed the ETS tax, which as well as hitting consumers would also severely damage Latrobe Valley generators.

Astonishingly, Victoria's state Liberal MPs also supported the tax, though they may yet reverse course and follow the changed Abbott-led Liberal Party position.

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