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Experts predict China, others may impose carbon import tariffs on US

Countries such as China and Canada that have adopted carbon dioxide emissions pricing regimes may decide to use import tariffs to both pressure the U.S. federal government to follow suit and ensure that those countries' domestic products remain competitive, according to carbon market experts.

A carbon pricing regime largely is viewed by some experts and environmental advocates as one of the keys to achieving the global emissions reductions goals of the Paris Agreement on climate change. But opponents of cap-and-trade or a carbon tax have argued that the U.S. should not create such a program until China, one of the world's biggest emitters, does the same, said Ron Temple of Lazard Asset Management LLC, which handles US$194 billion in global assets.

As of 2017, 42 countries and 25 subnational jurisdictions such as cities and states were putting a price on carbon, according to a report by the World Bank Group. For instance, China in December 2017 launched a carbon trading system, Mexico has started an emissions trading pilot program and Canada is creating a carbon pricing system.

"At some point, the rest of the world should probably put a tariff on anyone who is not going to participate," Temple said at a March 24 climate conference at The Fuqua School of Business at Duke University. The countries could say to the U.S. that "if you are going to have an unfair competitive advantage by not having climate change standards, we will charge you for that."

Kate Gordon, a senior advisor at the Paulson Institute, agreed that international carbon tariffs "may be where we are going." She noted that China and European nations have been collaborating on their cap-and-trade program designs. "There is a lot of evidence that they're going to start taking that kind of approach, and that would be a real wake-up call for the U.S.," Gordon said of the tariffs idea. The Paulson Institute is a think-tank on improving U.S.-China relations and each country's environmental protections.

Bill Eacho, founder of the Partnership for Responsible Growth, which advocates for a federal price on carbon, agreed with Gordon and Temple that other countries may impose carbon tariffs to ensure that their more expensive local products remain competitive.

China already threatened to create reciprocal tariffs on the U.S. following Trump's recent decision to impose tariffs on up to $60 billion of Chinese imports. Trump has imposed a number of other tariffs in a bid to bolster the competitiveness of U.S. manufacturers, including some on steel and aluminum imports and on certain solar cells and panels.

While some U.S. state governors, as well as Democrats in the U.S. Congress, have proposed creating a carbon tax, no such regimen currently exists in the nation. But two major cap-and-trade programs have been implemented in North America — one involving nine northeastern U.S. states and another among California and the Canadian provinces of Quebec and Ontario.

Mark McDivitt, Managing Director and head of environmental, social and governance solutions at State Street Corp., said both markets and regulatory oversight will be needed. Learning from mistakes made in Europe, where prices dropped to uneconomic levels, California set a price for carbon that ratchets up 5% annually, he noted.

"That's a very robust market right now" and a good example of supply and demand that can make money with resource scarcity and regulatory oversight, McDivitt said. "That's what is going to work."