Illustration by Jac Depczyk

IN AMERICA they call it the China question. In Europe they call it the America question. In every country that has contemplated regulating greenhouse gases, it is seen as a problem: how can policy ensure that legal limits on emissions do not put local firms at a disadvantage to their foreign competitors? After all, if the cost of compliance puts factories in countries with strict rules out of business, while those in grubbier places flourish, a regulation is worse than useless. The planet's emissions stay the same, or rise, while the country doing its bit for the environment loses investment and jobs.

Politicians have been quick to spot this threat. Back in 1997 America's Senate voted by 95-0 to reject any international treaty on climate change that did not embrace industrial rivals such as China. A bill to limit emissions that came close to passing the Senate earlier this month included fearsome “carbon tariffs” on imports from such countries, to help shelter American factories from unfair competition. But warnings from manufacturers that the bill would still cost millions of jobs helped to ensure its defeat. The European Union has already adopted an emissions cap, but France's president, Nicolas Sarkozy, wants it to build in a “carbon tariff” too.

How grave is the danger that these tariffs would counter? By a variety of methods, economists are trying to assess which industries are most at risk, how much they would suffer under different climate regimes and how best to respond. Their findings do not support the shrill protectionist rhetoric.

Lost in the hot air

The authors of “Leveling the Carbon Playing Field”, published recently by the Peterson Institute for International Economics, a think-tank based in Washington, DC, argue that the damage would be small. Most manufacturers (let alone service industries) do not use much energy, the main source of emissions, and so would not suffer big costs. Energy makes up less than 1% of the cost of making cars, furniture or computers. Even some energy-intensive industries, such as power generation, should not be much affected. Since they have no foreign competition, they could pass on extra costs to their customers.

Only a few industries—metals, paper, chemicals, cement and the like—are both global and profligate enough to be at risk. These accounted for just over 3% of America's output in 2005 and less than 2% of its jobs. Much the same is true in Europe: those industries, plus refining, account for less than 5% of output and an even smaller share of jobs, according to the interim report* of a group of academics studying the effects of Europe's carbon-trading scheme.

Even those supposedly vulnerable industries do not seem to have wilted in the face of a carbon price, according to two contributors to the study, Richard Baron and Julia Reinaud of the International Energy Agency, a Paris-based consultancy-cum-watchdog for energy-consuming nations. Ms Reinaud cannot even detect any impact on aluminium, which is as energy-intensive and widely traded as any good. She points out that a shuttered smelter in Germany reopened in 2007, despite the rising cost of emissions.

There are many explanations for this resilience. One is that booming demand for aluminium and other commodities has kept all manufacturers profitable. Product specifications that vary from country to country, meanwhile, help to protect refiners from foreign competition. And Europe has handed out so many free permits to pollute that the costs of meeting its emissions cap have been negligible so far.

But putting a price on carbon may still do some harm in the future, Ms Reinaud cautions. Europe is planning a tighter cap and fewer free permits. Many blueprints for emissions-trading in America call for no free allocations whatsoever. What is more, the biggest effects may come not in the short term, as factory closures, but later, as lower investment in new plant.

A study sponsored by Resources for the Future, an American think-tank, has tried to describe how American industry would meet a carbon price, albeit one of just $10 a ton—much less than the European price of over €25 ($39). Based on economic modelling, it concludes that industrial output would fall by less than 1%. The hardest-hit industry would be metals, but even that would shrink by only 1.5%. Better yet, the damage could be offset by granting energy-intensive firms enough free permits to cover just 15% of their emissions.

Another study under way at the Pew Centre on Global Climate Change, another think-tank, sizes up a $15 carbon price using data on the past effects of rising energy prices on industry. It concludes that output would fall by 2% or less in 80% of cases. Paper and glass would face a bigger contraction, of 5%. Still, even the most vulnerable industries would not suffer the Armageddon that lobbying groups are predicting.

That is important, since it suggests that the politicians are over-reacting, and that their remedies may actually make matters worse. A carbon tariff, for example, would be hard to implement. Customs officials would either have to assess the emissions embedded in imports, an impossibly complicated task, or make arbitrary assumptions, a recipe for a trade war. Moreover, it would do nothing to protect exports of energy-intensive goods from cheap competition.

Many studies also point out that carbon caps could bring benefits, in the form of factories making windmills, say, or solar panels. But these are even harder to quantify than the costs—and so they are even easier for the politicians to ignore.





*“The European Carbon Market in Action: Lessons from the First Trading Period. Interim Report,” by Mission Climat of Caisse des Dépôts, MIT CEEPR and University College Dublin. www.aprec.net