Taxing imports the only way to get China and other nations to reduce greenhouse gas emissions, finds a new CIBC World Markets report

Energy-intensive industries will look to return to the U.S.

Mar 27, 2008, 01:00 ET from CIBC World Markets

    NEW YORK, March 27 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) -
 Imposing a carbon tax on Chinese imports may be the only way developed
 nations will be able to achieve real cuts in global greenhouse gases, finds
 a new report from CIBC World Markets.
     The research report notes that while governments in the U.S. and Europe
 are taking painful steps to cut greenhouse gases, carbon emissions from
 developing nations - in particular China - have skyrocketed in recent
 years. Since 2000, total emissions have climbed by more than 6,000 million
 metric tonnes (mmt) - with 90 per cent of that coming from China and other
 developing nations. China is now the single largest carbon emitter country
 in the world, producing more than 21 per cent of the global total.
     "As OECD countries begin to tax their own economies by charging growing
 fees on CO2 emissions, their tolerance of the carbon practices of its
 trading partners will diminish rapidly," says Jeff Rubin, Chief Economist
 and Chief Strategist, CIBC World Markets. "Particularly when the painful
 cuts made by North America, Western Europe and a handful of other OECD
 economies are dwarfed by the emission trail spewing from China and the rest
 of the developing world.
     "Other than moral suasion, which is likely to fall on deaf ears, the
 OECD's only leverage is through trade access. The response is likely to
 involve a carbon tariff - an equalizing force that will tax the implicit
 subsidies on the carbon content of imports that come from carbon
 non-compliant countries."
     The report found that efforts to gradually reduce carbon emissions in
 the U.S. by just 10 per cent through a cap and trade system will shave an
 estimated 0.6 percentage points off real GDP growth annually for the next
 five years - with similar costs expected for other OECD nations.
     Mr. Rubin notes that these decarbonization efforts will only be
 effective in reducing greenhouse gases if done in concert with the
 developing world. Otherwise it simply adds costs to consumers, makes
 domestic industry less competitive and will increase overall global
 emissions as more and more production is shifted to unregulated
     CIBC World Markets calculates that China's export-related emissions
 were approximately 1,700 mmt in 2007. Outside of the entire U.S. economy,
 China's export sector is the world's largest carbon emitter.
     In the last seven years, China's overall emissions have grown by close
 to 120 per cent. Its average annual increase is equal to the total
 greenhouse gas emissions of Canada or the United Kingdom. Its cumulative
 increase in emissions over the past seven years is equal to the total
 current level of emissions from the Japanese, Indian, Spanish and Canadian
 economies combined.
     The reasons for this dramatic jump are rooted in the sheer pace of
 economic growth in the country and the absence of enforceable and
 meaningful environmental regulations. But the more vital factor has been
 the emissions intensity of the Chinese economy.
     "Energy use in the manufacturing-intensive Chinese economy as a share
 of GDP is four times larger than in the largely services-based U.S.
 economy," says Mr. Rubin. "To make matters worse, China is not particularly
 carbon efficient. It produces a third more CO(2) emissions per unit of
 energy than does the U.S. economy, and double that of Canada. Combine the
 energy intensity of the Chinese economy with the poor carbon efficiency of
 its energy use and you have a powerful cocktail for exploding emissions
     By slapping a $45 per tonne cost onto CO(2) emissions, a tariff would
 raise roughly $55 billion a year from Chinese exports to the U.S. "Of
 course, it's not just Chinese exporters who will have to pay," adds Mr.
 Rubin. "At least initially, before other carbon compliant sourcing can be
 found, it will be consumers who will have to bear the bulk of the tariff
 burden in higher import prices. Based on China's share of U.S. imports, a
 $45 per tonne tariff would raise U.S. consumer price inflation by more than
 0.6 percentage points.
     "At some point, however, the inflationary impact might be mitigated as
 either domestic production replaces some Chinese imports or sourcing is
 shifted to a less egregious emitter than China."
     The report notes that given the overall energy inefficiency of the
 Chinese economy, a carbon tariff, coupled with triple digit oil prices,
 suddenly redefines the meaning of Chinese competitiveness. For many
 industries, what will count is how energy efficient they are, and how
 carbon efficient they are in their use of energy. On both counts, China and
 the rest of the developing world are hugely disadvantaged. As a result,
 China's wage advantage would be lost for many energy-intensive industries
 who who will then look to return home to the U.S.
     Mr. Rubin expects Chinese exporters of chemical products, with their
 astronomical energy intensity factor, will be the first to see their
 businesses migrating back. In fact, chemical exports from China to the U.S.
 are already slowing down notably, with shipments in the past two years
 rising by only half the pace seen in the first half of the decade.
     Non-metallic mineral products (cement, glass, lime, etc), with energy
 intensity 130 per cent higher than the Chinese industrial average, along
 with printing, primary metal manufacturing and machinery industries are
 other candidates for such realignment.
     "With OECD's carbon tolerance diminishing with every tonne of CO(2)
 spread into the atmosphere by non-OECD countries, environmentalism will
 soon become a significant barrier to trade," concludes Mr. Rubin. "A carbon
 tariff imposed by the U.S. on emissions embodied in Chinese exports would
 not only abolish the implicit subsidies on the carbon content currently
 enjoyed by Chinese exports, but it would be large enough to start reversing
 current trade and offshoring patterns."
The CIBC World Markets report is available at CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC World Markets