Australia should preemptively introduce tariffs on carbon-content of its own exports

Rohan Pitchford and Rabee Tourky

The Morrison government has committed Australia to a net zero carbon future. At present, it is less of a plan than a hope that technology will rapidly change so that we don’t need to do much to achieve our 2050 targets. A main international trade policy fear is that perceived substantive inaction by Australia will lead to retaliatory tariffs by Europe on the carbon content of our exports.

Having in mind classic literature on strategic trade policy and tariff wars (see here and here, for surveys), in this blog post we propose that Australia preemptively introduce a tariff on carbon content of its exports (emphasising, coal, gas, iron ore etc., where emitted carbon is easier to measure and where Australia has international market power).

We argue that this may well have the following consequences:

1. Make Australia better off by transferring foreign consumer surplus to Australia without greatly affecting Australian exporters
2. Provide incentives to producers outside Australia to innovate their way out of reliance on fossil fuels; and thus provide an opportunity to “free ride” on these innovations helping achieve our 2050 net-zero goals at little cost
3. Enhance Australia’s diplomatic standing in the world, by decisively establishing how seriously we take climate change mitigation policy

Incidence of these tariffs in sectors where Australia has market power

Preemptive tariffs on carbon content of our exports has the advantage of shifting cost of climate change mitigation to foreign buyers in sectors with inelastic demand, such as coal and energy. In sectors with inelastic demand, our proposed policy of preemptive tariffs, dominates waiting for Europe and other foreign countries to impose tariffs on our exports; because the latter transfers foreign consumer surplus to foreign governments, while our proposal involves transfers of foreign consumer surplus to Australia.

Foreign retaliation to proposed carbon content tariffs on own exports

The political economy in foreign countries makes standard retaliatory action difficult. Imposing import carbon tariffs on Australian products in sectors with inelastic demand such as energy doubles the negative incidence of the trade war on their consumers. Of course, sectors such as food exports where Australia has limited market power are vulnerable to retaliatory novel import tariffs, but Europe already greatly regulates food imports and we don’t anticipate that any further harm to our food exporters is probable, though this needs deeper analysis than this blog post.

Foreign innovation response to proposed carbon content tariffs on own exports

In the medium term, a carbon tariff on Australian exports in sectors with inelastic demand, adds to the incentive for foreign innovations aimed at mitigating the incidence of our tariffs. These innovations will take various forms, and will certainly be both costly for the innovator and importantly readily adopted by Australia, when mature, at low cost. In short, Australia can adopt technological innovation induced by our tariffs without having to participate in costly research investment.

Are the proposed tariffs on own exports allowed under international trade agreement?

In normal times, imposing strategic tariffs on own exports in sectors with inelastic demand and in which Australia has market power; will likely run foul of a number of our free trade agreements and international commitments to free trade. However, the proposal is not for a normal tariff, it is a tariff on carbon content of mainly energy exports. It can be argued that the exceptional need for the world to reduce carbon emissions, requires such exceptional tariffs and that Australia benefiting from these is incidental to the pressing need for global coordination on climate change mitigation.

The issue of diplomatic optics

Climate change mitigation has emerged as a politically pivotal issue of our times. It is an issue that affects elections in democratic countries and an issue that affects diplomatic relations between countries. Elected governments need to be seen to be implementing effective policy to address carbon emissions. We anticipate that our proposed tariffs on the carbon content by Australia imposed on own exports will be well received diplomatically. It is an innovative policy that combines strategic trade policy with the need for a grand narrative on how Australia is doing its bit for the environment.

Rohan Pitchford and Rabee Tourky are Professors of Economics at the Australian National University