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Keith Rankin: Carbon Emissions and Free Trade

16 May 2002

I am ambivalent on global warming. I am sure it is happening, while sceptical that it is happening to the extent that many environmentalists claim. I am not at all sure that human activity is the principal cause of global warming. I certainly dislike politically motivated science, and I feel that much of the 'science' used to support both of the contrary positions in the global warming debate fits into the 'politically motivated' category.

I do however support the Kyoto process of getting the amount of carbon in the atmosphere down to levels more like those of centuries prior to the twentieth. We should not need the threat of imminent climatic disaster to motivate us to do the right thing.

When I watched the Assignment (TVNZ) documentary about global warming last week, I was disheartened by crass economic nationalism of the opponents to our ratification of the Kyoto greenhouse emissions' agreement. Yet I was enheartened by Pete Hodgson's (the Energy Minister) recognition of the need to provide "protection" to firms who might be placed at a competitive disadvantage on account of their compliance with any new regime of emissions standards and carbon taxes.

When taken to its logical conclusion, the notion that we must pollute to save business costs because other nations pollute to save business costs is, for humankind, a lose-lose outcome. Yet what can one nation do when other nations refuse to see the bigger picture?

The argument for tree trade makes good sense in a world with full employment, and with governments that understand the logic of collective action and the need to follow common processes in dealing with 'externalities' such as carbon emissions. However, in a world in which individual nation's governments (or business roundtables) feel inclined to break the rules in order to give their own higher cost firms a competitive advantage over other countries' lower cost firms, what does a morally correct government do?

The answer is to protect domestic producers from the effects of cost-avoidance by foreign producers, and to do so in such a way that the protected firms receive the efficient world price for what they sell. That price would include a carbon tax that "internalises" the social costs of carbon emissions.

The reasoning applies in other situations. For example, the theory of free trade does not apply to a world without full employment. If a country decides to follow the standard macroeconomic remedies for unemployment, but other countries refuse to, the country that does the right thing (ie that boosts its spending) will start to import much more without increasing its exports. It will develop an unsustainable balance of payments problem.

Free trade only works if all countries follow a collective macroeconomic commitment to full employment, and a collective policy of limiting global emissions of carbon or any other pollutant. In the absence of effective collective remedies (Kyoto being an attempt at such a remedy) a general policy of protection is vastly superior to a policy of free trade that requires each country to relieve producers of the third party costs that their foreign competitors have been allowed to avoid.

In the process of being pragmatic, and protecting our producers who face subsidised foreign competition (with relief from third party costs such as pollution being clearly understood as a subsidy), we must also recognise the rights of other nations to be pragmatic.

Thus, the United States' Farm Security and Rural Investment Act 2002 (passed last Monday) should be seen as a worthy attempt to protect rural communities in America, and not as an attempt to subvert world trade (as a recent NZ Herald editorial suggests). As I understand it, this bill provides social subsidies (which are good because they save communities) rather than export subsidies (which are bad because they cause certain products to be overproduced on a global scale).

Countries must be able to protect themselves from any globally counterproductive actions of other countries. Protective policies that, if pursued in each country can eliminate unemployment in all countries, are also superior to the laissez faire alternative of pseudo-competitiveness through cost avoidance. Protective policies - in the form of social subsidies - that enable communities to survive (and avoid the social costs arising from their deaths) should also be supported. New Zealand should not be promoting policies that would force high-country sheep farmers in America and small-scale dairy farmers in France to walk off their land.

If all countries can agree to a common programme to achieve global full employment and to compensate for market failure, then free trade can be said to be the best policy.

Global warming may well be a consequence of uncompensated market failure. Carbon pollution certainly is such as example, regardless of whether it causes global warming. If we want to support and promote global free trade, we must also support global protocols such as the Kyoto agreement on carbon emissions.

© 2002
Keith Rankin

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