Tuesday, July 7, 2009

Cap and trade or Smoot-Hawley?

Emblematic of the problems buried in the flawed "cap and trade" bill is a provision that only came to light in the final moments of the House debate.

A last-minute amendment, inserted in the early morning hours on the day of the vote, would tax goods that we import from countries that are unwilling to adopt carbon-reducing measures. So, the question becomes: Should our nation really levy trade penalties on countries that don't agree to limit their carbon emissions?

The provision is fraught with potential negative consequences. Some fear it's the return of the Smoot-Hawley Act, which raised tariffs on imported goods to record levels in the 1930s. Others, however, argue the provision is absolutely necessary should the bill, sponsored by Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass., become law.

President Barack Obama, who pushed hard for the Waxman-Markey legislation, has rejected the trade penalty measure. "At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there," Obama said.

We are inclined to agree with the president on this issue.

But if Obama thinks the provision could harm global trade, he also ought to realize the competitive disadvantage that Waxman-Markey creates at home. Because if it does become law, the U.S. may have no choice but to levy a carbon tariff.

Nobel-Prize winning economist Paul Krugman argues that Obama is making a mistake by rejecting what he calls "the border adjustment."

The economist, a fierce advocate for "cap and trade," says that without the tax, the environmental benefits of the bill will be undermined.

Companies, he argues, would stop buying U.S.-made goods, which would cost more due to the demands to limit greenhouse gas emissions in the production process. Instead, they would buy goods produced by countries that are not saddled with the extra expense and regulation.

"The truth is that there's perfectly sound economics behind border adjustments," Krugman argues, claiming that imposing tariffs for non-economic reasons, such as cutting carbon dioxide emissions, isn't protectionism, but is simply leveling the playing field.

The argument, added to fears from industry that overseas competition would benefit at America's expense as a result of cap and trade, should be a key part of the upcoming Senate debate on this bill.

Waxman-Markey's tariff provision, as written, would begin imposing the tax in 2020. The president can waive the tariffs, but only if Congress approves the waivers.

Observers say the House bill wouldn't have passed without the tariff, because industrial state lawmakers feared job losses.

Now that it's out in the open, we hope the Senate can evaluate it carefully.

We oppose the bill because it relies far too much on theoretical clean-energy technology break-throughs to achieve the desired drops in greenhouse gas emissions. It also creates a new, complicated market for trading emissions that is susceptible to abuse.

It's a hugely transformative measure — which would lower global CO2 emissions by only a few percentage points — that risks crippling our economy.

No comments: