Carbon Taxes

The emission of Carbon Dioxide gas is a negative externality[1] towards the global community. The European Union which increasingly advocates a ‘green' policy is being pressured by several lobbies and political parties to impose a Carbon Tax[2] on goods imported from Carbon inefficient economies. According to a World Bank investigation[3], 500000 people a year die because of poor air quality, resulting to about a 2% annual GDP output loss, spent on healthcare. In the long run if the environmental problem results into irreplaceable cost such as an end to oil reserves or violent climate change the economic cost would be innumerable. Thus a positive rather than normative nature of the proposal emerges, which is particularly attractive. The tax's purpose is to reflect the social costs production in order to internalize the costs associated to this production. Simultaneously China would be pressured to decrease Carbon emissions and thus contribute to global welfare by reducing pollution. Consequently, ‘green' industries would be rendered more competitive and expand, resulting in positive externalities such as more jobs and cleaner air. The motive is that the benefits are global and not merely national. The EUs' desired outcome would be the macroeconomic goal of sustainable development[4] on an international level.

In the Chinese goods create a negative externality and output is at Q2 rather than the allocatively efficient Q1. The Carbon tax imposed is numerically equal to the externality and is shown in the diagram with the red arrow. That value is estimated from normative researches as not all costs can be calculated in terms of money. The MPC line shifts leftwards by the amount of the Carbon tax. Demand shifts to Q1 because of the higher price P1 and thus the allocation becomes more efficient. The disproportional amount paid by third parties is neutralized and the ‘polluters pay principle' is applied.

One must not forget that a Carbon tax imposed on a foreign good is a specific tariff[7]. Tariffs are a form of protectionism[8], and thus arises the issue on whether the whole Carbon tax deal is not just protectionism in a ‘green', ethical disguise, against the emerging economic superpower from the East. Harsh critics call it “Eco Imperialism”. China is in the takeoff stage of its economy and as services become more important than industry, emissions should decrease automatically. Most Chinese exports are toys or cheap electronics whereas the energy demanding steel and cement industries are rather focused on domestic consumption. Thus progress that could threaten the dominance of EU goods in Europe would be hindered. The notorious ‘race to the bottom' idea argues that negative externalities are exported from MDCs to LDCs in order to avoid internal regulations. These countries (EU) now impose Carbon tariffs to limit the demand for environmentally hazardous goods- but this is clearly protectionism. Asides from the Chinese reaction it is unclear if the WTO would permit this since empirical evidence shows that Article XX has been interpreted in diverging ways. Whether covert or unintentional the reaction from China is expectable.

Since the net benefit of Carbon emissions is debatable the Chinese would be expected to retaliate with the ‘same coin' and argue that this is clear protectionism (historically it is by no means the first time the EU imposes environmental trade barriers on LDCs and not MDC[9]s such as the USA). In the short term global protectionism is not what the world economy need, it being as it is, since even demerit goods result in some varying degree of utility and benefit that provides employment. A unilateral decision will certainly worsen the economic ties of the two parties and result in economic nationalism.

Citizens ought to be encouraged (fiscally) to buy products from clean producers.

[1] Burden endured by third parties from the production/consumption of a good, when marginal social benefits > marginal private costs.

[2] Indirect tax on transactions from China to the EU targeting the negative externality of Carbon emissions, aka Pigovian tax.


[4] Development where the use of resources does not compromise the future generations' use of them.

[5] Occurs when the allocation mechanism does not allocate goods efficiently.

[6] M is Marginal, S is social, P is Public, B is Benefit.

[7] Tax levied on imported good.

[8] Protecting domestic industries from foreign competition via methods such as tariffs or quotas.

[9] Less/More Economically Developed Countries. China is an accepted to be an LDC and the EU is an MD ‘C'

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