Thread by @DavidKleimann

Thx to @Tim_L_Meyer for his thoughtful & honest response to my critique of @ChrisCoons & @RepScottPeters carbon border adjustment bill. Genuine debate is what US America needs & allows me to elaborate on why the C/P bill - & Tim - are wrong on law, politics & policy. A 🧵

https://twitter.com/Tim_L_Meyer/status/1422954693605662726

First, and fundamentally, the professor and I disagree on the target of my critique. The core problem w the C/P bill isn’t the lack of a US carbon tax or a cap & trade scheme (an explicit price for carbon). The problem w the proposed policy is that it...

https://twitter.com/Tim_L_Meyer/status/1422955542469828609?s=20

1⃣would only coincidentally – if at all - mitigate carbon leakage & CC

2⃣would tax the US economy w/o effectively combating carbon leakage, render it less competitive, and eventually decrease net employment

3⃣is a dysfunctional approach to CC diplomacy in procedure (confrontational) & substance because it makes transatlantic and international policy cooperation on carbon leakage mitigation prohibitively complex.

Having said that, Tim is almost right in two aspects:

1⃣Not crediting *any* carbon costs incurred by foreign producers @ home & exempting them from the US charge *only* if their home jurisdiction is as ambitious as the US is blatantly WTO inconsistent

https://twitter.com/Tim_L_Meyer/status/1422965591774797825?s=20

The C/P bill's petition procedure doesn’t do anything to rectify the issue b/c its scope only covers the amount of emissions used for the calculation of the charge but not whether the importer is exempted or not.

https://twitter.com/Tim_L_Meyer/status/1422962654373728260?s=20

More importantly, the professor considers the effect of these design flaws on legality, but not on carbon leakage! Not crediting importers & only exempting them if equal 2 US standards puts a double charge on those who pay carbon costs at home benefiting other importers who don’t

The perverse result of this policy twist could well be a *higher* share of carbon intensive imports and thus the opposite of the legitimate policy objective protected by GATT Article XX(g).

Hence back to the law: If the policy is found to effectively benefit carbon intensive over carbon efficient imports, it would be ‘unrelated’ to the "conservation of natural resources" & not provisionally justified under Article XX(g)

https://twitter.com/Tim_L_Meyer/status/1422964307436900357?s=20

2⃣The second instance where Tim & I agree in principle, I believe, is on the blatant WTO inconsistency of what he calls the ‘reciprocity condition’

https://twitter.com/Tim_L_Meyer/status/1422966164645453836?s=20

What does Tim refer to as the 'reciprocity condition'❓

Answer: It is the provision in the C/P bill, which allows for an exemption importers from equally or even more ambitious jurisdictions *only if they DO NOT apply a carbon adjustment on US exporters*

Now, it seems entirely rational that such a discrimination cannot be considered *related* to the objective of CC mitigation and GATT Art. XX(g), b/c punishing a more ambitious jurisdiction (the target here is the EU) for combating carbon leakage runs counter to that objective

But Tim believes that such a conditionality should be allowed because it is ‘politically pragmatic’. Now, imagine such conditionality being applied by the US to a small developing country & you see why WTO law protects against such attempts of coercion.

https://twitter.com/Tim_L_Meyer/status/1422966777554903044?s=20

That leads us @ the anachronistic understanding of transatlantic CC & economic diplomacy that the bill projects & Tim defends: it is unnecessarily confrontational, extortive & counterproductive in a period when the Biden admin is embraced by Brussels.

https://twitter.com/Tim_L_Meyer/status/1422960834746146824

The confrontational approach of the bill frustrates hopes for a fresh start in transatlantic relations after the acrimonious last 4 1/2 years. For the current EU approach to transatlantic relations, see e.g. bloomberg.com/news/articles/… and

The politics of the C/P bill, however, rather belong to this period and cast dark clouds over transatlantic cooperation towards MC-12 and COP-26 euronews.com/2018/03/03/jun…

But most importantly, let's get to the policy design issues of the C/P bill itself. It gets a bit technical here, please bear with me…

The fact that the C/P bill aims to adjust for implicit reg adaptation costs instead of a carbon tax is an underlying problem, not b/c of political preference but b/c it makes effective int. cooperation on carbon leakage *prohibitively complex*.

https://twitter.com/Tim_L_Meyer/status/1422957868249141250?s=20

I’m not an economist but @bruegel’s @Tagliapietra_S & @McwilliamsBen certainly know what they are talking about when they write the following (here bit.ly/2WWQQLW):

Note that both @chriscoons & @RepScottPeters support @senwhitehouse efforts to introduce a carbon tax (an explicit price for carbon) via the #SaveOurFutureAct for good reasons: it is the by far superior policy domestically & internationally!

https://twitter.com/SenWhitehouse/status/1421173861975003151?s=20

Relying on an explicit carbon price for a carbon border adjustment combines functionality & legality: it disincentivizes carbon intensive domestic production & imports in the same way and allows the CBA applying government to credit carbon costs incurred @ home w relative ease

It is in this way that relying on an explicit price for carbon (carbon tax or emissions cap & trade scheme) makes the CBA both least trade restrictive AND laser focused on the objective of effective carbon leakage mitigation.

https://twitter.com/Tim_L_Meyer/status/1422955542469828609?s=20

Crediting *implicit* regulatory adaptation costs incurred by importers @ home, however, is so complex & administratively burdensome that a requirement to do so cld easily prevent the adoption of a #CBAM that is effective in mitigating carbon leakage.

https://twitter.com/Tim_L_Meyer/status/1422957121851871232?s=20

That’s why the EU’s #CBAM wouldn't credit (implicit) reg adaptation costs of foreign importers in general (not just from the US). But It also doesn’t include EU producers’ implicit environmental adaptation costs in the baseline.

https://twitter.com/Tim_L_Meyer/status/1422958319539531779?s=20

More importantly, there seems to be a general misunderstanding of the likely effect of the EU CBAM on US importers to the EU. Because US production almost as carbon efficient as EU production, US exporters will be hardly be worse off. They will probably be better off b/c...

🅰️ ...compared to pretty much all other importers, US producers are extremely carbon competitive & would gain competitive edge b/c the EU #CBAM would be calibrated to actual carbon intensity of production. More on America's Carbon Advantage here
clcouncil.org/report/america…

🅱️... compared to EU producers, US exporters would only be worse off if

*US reg adaptation cost > EU reg adaptation costs + EU explicit carbon costs* at an equal level of carbon intensity of production.

4 that eventuality, better adopt a US domestic carbon tax.
🛑 #tradewars

For more information on why a US price for carbon is the right policy solution follow @prgrowth and see partnershipforresponsiblegrowth.org