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Carbon ‘subsidy’: policy favours polluters

Most countries subsidize polluting industries and impose higher tariffs on cleaner firms, shows a new study.  (Photo: Ramesh Pathania/Mint)Premium
Most countries subsidize polluting industries and impose higher tariffs on cleaner firms, shows a new study. (Photo: Ramesh Pathania/Mint)

Last year, the IMF had recommended a carbon tax of $75 per tonne of emissions to fight the climate crisis.However, the trade policies of most countries negate the effect sought to be achieved by such a tax as they result in subsidizing industries that emit more carbon

MUMBAI : Last year, the International Monetary Fund had recommended a carbon tax of $75 per tonne of emissions to fight the climate crisis. However, the trade policies of most countries negate the effect sought to be achieved by such a tax as they result in subsidizing industries that emit more carbon, a study finds.

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 giving industries an effective “subsidy" of $85 to $120 per tonne of emissions, or $550 billion to $800 billion per year, finds the working paper. More polluting industries pay lower import taxes, whereas cleaner ones face higher tariffs and quotas, the study finds.

However, this need not mean that countries make such policies intentionally, says the author of the working paper, Joseph S. Shapiro of the University of California at Berkeley. Shapiro 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.

The 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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