Home / News / India /  Carbon ‘subsidy’: how policy favours polluters

Last year, the International Monetary Fund recommended a carbon tax of $75 per tonne of emissions to fight the climate crisis. But far from taxing emissions, the trade policies of most countries in effect end up subsidizing industries that emit more carbon, a new study finds.

The study, a working paper published by the US National Bureau of Economic Research, looks at data from 48 countries and 163 industries to estimate carbon subsidies. The trade policies of these countries are found to be giving industries an effective “subsidy" of $85 to $120 per tonne of emissions, or $550 billion to $800 billion per year. More polluting industries pay lower import taxes, whereas cleaner ones face higher tariffs and quotas, the study finds.

But this need not mean the countries make such policies intentionally, says the author, Joseph S Shapiro of the University of California at Berkeley. He studies 20 factors that could potentially explain this pattern, such as labour and capital share, worker wages, firm size and location, trade exposure, and lobbying power.

Shapiro finds that industries such as iron and steel, which do not directly sell to the final consumer, emit more carbon, yet face fewer trade restrictions, unlike the automobile industry, which is consumer-facing. The author also finds that final-goods industries, which are also cleaner, lobby better than consumers to get cheap inputs from more-polluting raw-material industries. This distorts tariffs in favour of large emitters.

The extent of the implicit carbon subsidy in trade policy varies by country. The study finds it to be as large as $175 per tonne in European nations, but lower for India and China. Imposition of similar tariffs on both more and less polluting industries could lead to a fall in global carbon emissions without affecting global income, the study concludes.

Also read: The Environmental Bias of Trade Policy

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