Climate change – HubbardOBrienEconomics.com Blog

U.S. Carbon Dioxide Emissions in a Global Context

As we discuss in Microeconomics and Economics, Chapter 5, Section 5.3, carbon dioxide (CO₂) emissions contribute to climate change, including the increases in temperatures that have been experienced worldwide. We’ve found that students are interested in seeing U.S. CO₂ emissions in a global context.

The first of the following figures shows for the years 1960 to 2020, the total amount of CO₂ emissions by the United States, China, India, the 28 countries in the European Union, lower-middle-income countries (including India, Nigeria, and Vietnam), and upper-middle-income countries (including China, Brazil, and Argentina). The second of the figures shows the percentage of total world CO₂ accounted for by each of the three individual countries and by the indicated groups of countries. in the United States and in the countries of the European Union both total emissions and the percentage of total world emissions have been declining over the past 15 years. Emissions have been increasing in China, India, and in middle-income countries. The figures are from the Our World in Data website (ourworldindata.org). (Note that the reductions in emissions during 2020 largely reflect the effects of the slowdown in economic activity as a result of the Covid-19 pandemic rather than long-term trends in emissions.)

Governments in many countries have attempted to slow the pace of climate change by enacting policies to reduce CO₂emissions. (According to estimates by the U.S. Environmental Protection Agency, CO₂ accounts for about 76 percent of all emissions worldwide of greenhouse gases that contribute to climate change. Methane and nitrous oxide, mainly from agricultural activity, make up most of the rest of greenhouse gas emissions.) In August 2022, Congress and President Biden enacted additional measures aimed at slowing climate change. Included among these measures were government subsidies to firms and households to use renewable energy such as rooftop solar panels, tax rebates for some buyers of certain electric vehicles, and funds for utilities to develop power sources such as wind and solar that don’t emit CO₂. The measures have been estimated to reduce U.S. greenhouse gas emissions by somewhere between 6 percent and 15 percent. Because the United States is responsible for only about 14 percent of annual global greenhouse gas emissions, the measures would likely reduce global emissions by only about 2 percent.

The figures shown above make this result unsurprising. Because the United States is the source of only a relatively small percentage of global greenhouse emissions, reductions in U.S. emissions can result in only small reductions in global emissions. Although many policymakers and economists believe that the marginal benefit from these reductions in U.S. emissions exceed their marginal cost, the reductions can’t by themselves do more than slow the rate of climate change. A key reason that India, China, and other middle income countries have accounted for increasing quantities of greenhouse gases is that they rely much more heavily on burning coal than do the United States, the countries in the European Union, and other high-income countries. Utilities switching to generating electricity by burning coal rather than by burning natural gas has been a key source of reductions in greenhouse gas emissions in the United States.

The two figures above measure a country’s contribution to CO₂ emissions by looking at the quantity of emissions generated by production within the country. But suppose instead that we look at the quantity of CO₂ emitted during the production of the goods consumed within the country? In that case, we would allocate to the United States CO₂ emitted during the product of a good, such as a television or a shirt, that was produced in China or another foreign country but consumed in the United States.

For the United States, as the following figure shows it makes only a small difference whether we measure CO₂emissions on the basis of production of goods and services or on the basis of consumption of goods and services. U.S. emissions of CO₂ are about 7 percent higher when measured on a consumption basis rather than on a production basis. By both measures, U.S. emissions of CO₂ have been generally declining since about 2007. (1990 is the first year that these two measures are available.)

Sources: Hannah Ritchie, Max Roser and Pablo Rosado, “CO₂ and Greenhouse Gas Emissions,” OurWorldInData.org, https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions; Greg Ip, “Inflation Reduction Act’s Real Climate Impact Is a Decade Away,” Wall Street Journal, August 24, 2022; Lisa Friedman, “Democrats Designed the Climate Law to Be a Game Changer. Here’s How,” New York Times, August 22, 2022; Hannah Ritchie, “How Do CO₂ Emissions Compare When We Adjust for Trade?” ourworldindata.org, October 7, 2019; and United States Environmental Protection Agency, “Global Greenhouse Gas Emissions Data,” epa.gov, February 22, 2022.

Should Tariffs Be Used to Slow Climate Change?

Why do countries impose tariffs on imported goods? As we discuss in Economics Chapter 9 and MacroeconomicsChapter 7 (particularly in Section 5 of these chapters) countries primarily use tariffs to protect domestic industries from foreign competition. Protectionism appeared to be the main motivation when the Trump administration imposed tariffs on imports of steel, aluminum, and some other products from China, Canada, and countries in the European Union. It was also the main reason that the Biden administration decided in 2021 to retain many of those tariffs.

The other main justification for imposing tariffs is for reasons of national security. For instance, as we note in the textbook, the United States would not want to import its jet fighter engines from China. In fact, the Trump administration relied on Section 232 of the Trade Expansion Act of 1962 when it imposed tariffs, particularly tariffs on steel and aluminum. The Biden administration also cited this section of the law when continuing the tariffs. (In October 2021, the Biden administration negotiated with the European Union a partial reduction of these tariffs.) Under that section of the law, if the president decides that imports of a good threaten nationals security, “he shall take such action, and for such time, as he deems necessary to adjust the imports of such article and its derivatives so that such imports will not so threaten to impair the national security.” In other words, presidents have the power to impose tariffs on imports of a good if they assert that doing so protects the national security of the United States.

When they invoked this section of the law, both the Trump and Biden administrations were criticized for stretching its application beyond what Congress had intended. Critics argue that using this section of the law to impose tariffs on such close allies of the United States as the countries of the European Union was a violation of Congress’s intent because it was unlikely that imports of steel or aluminum from Europe threaten the national security of the United States.

If used as intended, Section 232 is a rare example of imposing tariffs for reasons other than protecting domestic industries. (It’s worth noting that during the 1800s and early 1900s, before there was a federal income tax, Congress relied on revenues from tariffs as the main source of funds to the federal government. In recent years tariff revenues have been very small compared with income taxes and the federal government’s other sources of revenue.) In 2021, some policymakers were proposing using tariffs for another purpose unrelated to protecting domestic industries: Slowing climate change.

In November 2021, the United States and the European Union announced that they would explore imposing tariffs on imports of steel from countries that impose few regulations on carbon emissions from steel mills. (These climate tariffs are sometimes referred to as border carbon adjustments (BCAs).) The tariffs might be extended to include imports of aluminum, chemicals, and cement. The rationale for these tariffs is that in the United States and Europe, steel producers must install expensive equipment to reduce carbon emissions or must pay a tax on those emissions.

These regulations raise the cost of producing steel and, therefore, the price of steel produced in Europe and the United States. As a result, U.S. and European firms that use steel, such as automobile companies, have an incentive to import lower-priced steel from countries that have few regulations on carbon emissions. According to one estimate, the production of steel being imported into the United States generates 50 percent to 100 percent more carbon dioxide emissions than does the production of domestic steel. An article in the Wall Street Journal noted that a report from a consulting firm argued that “the emissions that many developed countries claim to have eliminated were ‘outsourced to developing countries,’ which generally have fewer resources to invest in cleaner and more advanced technology.”

Critics of using tariffs as a means of slowing climate change note that there are other measures that countries can use to reduce their own CO2 emissions and that attempts to use economic coercion to prod countries into changing policies have not generally been successful. They also note that Section 232 of the Trade Expansion Act of 1962 was intended to be used only for reasons of national security but has been used by the Trump and Biden administration more broadly to protect domestic industries. They fear that the same thing may happen if climate tariffs are allowed under international agreements: The tariffs may be used to protect domestic industries for reasons that have nothing to do with reducing climate change. In fact, an article on barrons.com noted that the agreement between the United States and the European Union to impose climate tariffs on steel imports was “aimed, according to administration officials, at countering the flood of cheap steel from China, which accounts for roughly 60% of production worldwide.”

In addition, some economists and policymakers fear that imposing climate tariffs may undermine the rules of the World Trade Organization (WTO), which do not authorize countries to impose tariffs for this reason. This outcome is particularly likely if some countries see the tariffs as aimed more at protecting domestic industries than at slowing climate change. As we discuss in Section 5 of Chapter 9 in Economics (Macroeconomics Chapter 7), the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT) resulted in decades of multilateral negotiations that greatly reduced tariffs. The tariff reductions spurred a tremendous expansion in world trade, which significantly increased incomes in the United States and most other countries—although it also disrupted some domestic industries in those countries. If the WTO were to cease to be effective, the world might return to the situation of the 1930s and earlier when countries used tariffs for a variety of policy reasons. The trade war of the 1930s, during which most countries raised tariff rates, led to a collapse in world trade and helped to worsen the Great Depression.

If climate tariffs become common, the effect on both the climate and on the international trading system may be significant.

Sources: Josh Zumbrun, “U.S.-EU Steel Tariffs Deal Is Onerous for Smaller Importers,” wsj.com, November 5, 2021; Yuka Hayashi and Jacob M. Schlesinger, “Tariffs to Tackle Climate Change Gain Momentum. The Idea Could Reshape Industries,” wsj.com, November 2, 2021; By Reshma Kapadia, “The EU Tariff Deal Doesn’t Mean the Trade War With China Is Over,” barrons.com, November 2, 2021; Jennifer A. Dlouhy and Ari Natter, “Democrats Propose Tax on Carbon-Intensive Imports in Budget,” bloomberg.com, July 14, 2021; and Billy Pizer, “The Trade Tool that Could Unlock Climate Ambitions,” barrons.com, November 5, 2021.

Is Subsidizing Electric Cars an Effective Way to Slow Climate Change?

Some governments have been subsidizing purchases of electric vehicles, or more broadly, fuel-efficient vehicles to slow climate change. How well do such policies work? Are they more or less efficient than other policies intended to reduce carbon dioxide emissions?

A subsidy is a payment by the government that provides an incentive for people to take an action they otherwise wouldn’t, such as buying an electric car. Subsidies have the potential downside that they may involve payments to people to do something they would have done anyway. For instance, in the United States in 2021, buyers of electric cars were eligible for a credit of up to $7,500 against their federal income taxes. Suppose that you become aware of this subsidy only after you have already purchased an electric car. In that case, the federal government has wasted $7,500 because you would have bought the electric car even without the subsidy. The same would be true if you knew about the subsidy before you bought but because of the subsidy you bought a higher-priced electric car rather than a lower-priced one.

These complications make it difficult for policymakers to assess the efficiency of subsidizing fuel-efficient cars as a means of slowing climate change. Two recent academic papers address this difficulty.

Chia-Wen Chen of Academia Sinica in Taiwan, We-Min Hu of National Chengchi University in Taiwan, and Christopher Knittel of the Massachusetts Institute of Technology have analyzed a Chinese government program that subsidizes the purchase of fuel-efficient cars. Because the study used data from 2010 and 2011, these vehicles were fuel-efficient gasoline powered cars rather than electric cars. They find that only about 44 percent of the subsidies went to car buyers who would otherwise not have bought a fuel-efficient car. “Thus, about 56 percent of the program’s payments were ineffective ….”

The authors calculate that the subsidy cost about $89 per metric ton of carbon dioxide reduced, which is high relative to other policies, such as a carbon tax. With a carbon tax, the government taxes energy consumption on the basis of the carbon content of the energy. (We discuss a carbon tax in the opener to Chapter 5.) The authors conclude: “Paying more than $89 for a metric ton of carbon dioxide is not a cost effective way to reduce carbon dioxide; if the main policy objective of China’s subsidy program on fuel-efficient vehicles was to reduce carbon dioxide emissions, then our results suggest that it was an ineffective way to achieve this goal.”

Jianwei Xing of Peking University, Benjamin Leard of Resources for the Future, and Shanjun Li of Cornell University analyze the efficiency of the U.S. federal income tax credit for purchasing an electric vehicle. As with the study just discussed, they find that consumers who use the credit to buy an electric vehicle were likely to have otherwise bought a hybrid vehicle (a vehicle that combines an electric motor with a gasoline engine) or a relatively fuel-efficient gasoline powered car. They also find, as with the other study, that the federal subsidy is inefficient because while it increased electric vehicle sales by 29 percent, “70 percent of the [tax] credits were obtained by households that would have bought an EV without the credits.”

Because the design of a particular subsidy for buying an electric car will affect the subsidy’s efficiency, these studies are not conclusive evidence that all programs of subsidizing electric cars will be inefficient. But their results show that two existing programs in large markets—China and the United States—are, in fact, inefficient.

As we note in Chapter 5, many economists favor a carbon tax as a way to reduce carbon emissions rather than policies, such as the federal electric vehicle tax credit, that target a particular source of carbon emissions. Economists can contribute to debates over public policy by using economic principles to identify programs that are more or less likely to efficiently achieve policy goals. They can also, as the authors of these two papers do, use statistical methods to analyze the effects of particular policies.

Sources: Chia-Wen Chen, We-Min Hu, and Christopher R. Knittel, “Subsidizing Fuel-Efficient Cars: Evidence from China’s Automobile Industry,” American Economic Journal: Economic Policy, Vo. 13, No. 4, November 2021, pp. 152-184; Jianwei Xing, Benjamin Leard, and Shanjun Li, “What Does an Electric Vehicle Replace,” National Bureau of Economic Research, Working Paper 25771, February 2021.