Manufacturing Industry

To revive Mfg., bank proposes carbon tax on Chinese imports

Manufacturing & Technology News, June 30, 2008

Imposing a carbon tax on Chinese imports would lead to a resurgence of the U.S. manufacturing industry, according to a report from Canada's largest banking firm, CIBC World Markets. A carbon tariff on imported goods, "may be the only way developed nations will be able to achieve real cuts in global greenhouse gases," says the firm.

The United States and other developed nations are rejecting carbon reduction programs because China and India would be exempt, providing their companies with an unfair advantage.

"As OECD countries begin to tax their own economies by charging growing fees on [CO.sub.2] emissions, their tolerance of the carbon practices of its trading partners will diminish rapidly," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. "Particularly when the painful cuts made by North America, Western Europe and a handful of other OECD economies are dwarfed by the emission trail spewing from China and the rest of the developing world."

Other than moral suasion, which is likely to fall on deaf ears, "the OECD's only leverage is through trade access," Rubin argues. "The response is likely to involve a carbon tariff--an equalizing force that will tax the implicit subsidies on the carbon content of imports that come from carbon non-compliant countries."

China is now the world's largest emitter of carbon, producing more than 21 percent of the global total, and 90 percent of the 6 billion metric tonnes of growth of carbon emissions since 2000 are from China.

A cap-and-trade system in the United States would reduce carbon emissions in the U.S. by 10 percent, but would reduce U.S. GDP by 0.6 percentage points. Such a system will make U.S. manufacturers less competitive against Chinese companies, which produces one-third more carbon emissions per unit of energy consumed.

By slapping a $45 per tonne cost onto [CO.sub.2] emissions, a tariff would raise roughly $55 billion a year from Chinese exports to the U.S," says CIBG. Such a tariff would increase consumer price inflation by 0.6 percentage points. "At some point, however, the inflationary impact might be mitigated as either domestic production replaces some Chinese imports or sourcing is shifted to a less egregious emitter than China," says CIBC. Given the overall energy inefficiency of the Chinese economy, a carbon tariff, coupled with triple digit oil prices, could redefine the meaning of Chinese competitiveness. "For many industries, what will count is how energy efficient they are, and how carbon efficient they are in their use of energy. On both counts, China and the rest of the developing world are hugely disadvantaged. As a result, China's wage advantage would be lost for many energy-intensive industries, some of which will then look to return home to North America."

Rubin says Chinese exporters of chemical products, with their "astronomical" energy intensity factor, will be the first to see their businesses migrating back. "In fact, chemical exports from China to the U.S. are already slowing down notably, with shipments in the past two years rising by only half the pace seen in the first half of the decade."

Next would be non-metallic mineral products (cement, glass, lime, etc), with energy intensity 130 percent higher than the Chinese industrial average, along with printing, primary metal manufacturing and machinery industries.

"With OECD's carbon tolerance diminishing with every tonne of [CO.sub.2] spread into the atmosphere by non-OECD countries, environmentalism will soon become a significant barrier to trade," says Rubin. "A carbon tariff imposed by the U.S. on emissions embodied in Chinese exports would not only abolish the implicit subsidies on the carbon content currently enjoyed by Chinese exports, but it would be large enough to start reversing current trade and offshoring patterns."

The CIBC report is available at http://research.cibcwm.com/economic_public/download/smar08.pdf.>