Congressional democrats and the Biden administration are seeking to pass a $3.5 trillion tax-and-spending bill. In recent days, the Washington Post reports, Democrats have proposed many new policies and tax credits. These policies are designed to spur clean energy production, reduce carbon usage, and encourage Americans to buy environmentally friendly autos. The plan includes a system of incentives that would pay power companies for reducing their emissions and penalize those that do not. These proposals are aimed at helping to achieve the President’s goal of a carbon-free electricity sector by 2035.
But for the goal of reducing global warming, bills focused on a nation’s internal activities do not do enough to reduce climate emissions caused by global supply chains. A fifth of carbon dioxide emissions come from multinational companies’ global supply chains. Offshoring manufacturing produces an increase of emissions as nations with low-cost labor do not perform well in controlling greenhouse gas emissions.
Externalities pose fundamental economic problems when individuals, firms, or nations do not internalize the indirect costs of the economic activities that benefit them. A multinational with a global supply chain can increase profits, or a nation with poor environmental controls can increase employment, but the environmental costs are borne by the world.
Climate Treaties Don’t Work
There have been a series of global treaties that attempted to reduce global greenhouse emissions and prevent global warming. There was the Kyoto Protocol, signed in 1992, the Doha Amendment adopted in 2012, and the Paris Climate Accords adopted in 2015. These treaties have not been as effective as originally envisioned. Global warming is accelerating.
These treaties have failed for several reasons. First, because not all nations agreed to participate. Secondly, the treaties were insufficiently binding for those nations that did participate – there was little that could be done if a nation did not live up to their pledges. Finally, current pledges under the Paris Agreement are insufficient for reaching the stated global temperature goals.
Tariffs to the Rescue
Wealthy nations could use tariff policy to enforce emission targets. For example, the U.S. Customs and Border Protection (CBP) has expanded their focus on preventing goods made by forced labor from entering U.S. commerce. The CBP defines “’forced labor’ is a form of modern-day slavery that violates international labor standards and universal human rights. Foreign companies use forced labor to produce goods at lower costs, which hurts American businesses that respect fair labor standards. A similar carrot and stick approach could be used by wealthy nations to address climate issues.
Wealthy nations would first have to agree on emissions targets. Satellites, human monitors, and other sensors could be used to monitor the performance of companies, industries, and nations. Nations could comply by regulating industries more tightly or by building plants that suck greenhouse gases out of the environment.
There would need to be a mechanism in place to ensure that these tariffs and sanctions were being fairly applied – something akin to the way the World Trade Organization currently resolves trade disputes.
None of this would be easy. But having nations attack global warming on an ad hoc basis will not work. And treaties have not worked.
Environmental tariffs would weaken free trade. But free trade does not have the cachet it used to. Free trade has led to unhealthy populist politics as the gap between the rich and the poor became wider and wider.
The advantage of environmental tariffs is that the enforcement mechanism is properly aligned with environmental goals. Enforcing such tariffs protects the environment, jobs in nations with strong environmental policies, and generates revenues for the enforcing nation.