During the US election campaign, Donald Trump said that he would dismantle the country’s domestic climate change policies, and withdraw the US from international climate agreements, most notably the Paris agreement which came into force earlier this month. In the week since he became President-Elect, he has given every indication that he is serious in his intentions.
So how should the rest of the world respond? It is tempting to indulge in wailing and gnashing of teeth, but in the real world of a Trump Presidency, this is unlikely to be effective. What is needed is a proportionate response. In France, Nicolas Sarkozy has proposed what may well be the most efficient and effective measure, a climate change tax levied upon all US goods imported into Europe.
How large should such a tax be? If it is to be proportionate, it should cover the harm caused to the Earth from the production of the goods, a harm that will not be reflected in their price if the US presses ahead with the unfettered use of fossil fuels. Let’s consider some ballpark numbers. The Gross Domestic Product of the US in 2015 was about $18 trillion. The US emissions of greenhouse gases in the same year were about 7 billion tonnes of CO2 equivalent. Dividing one quantity by the other, we find that every thousand dollars of US production involves the emission of about 0.4 tonnes of CO2 equivalent.
The best estimate we have of the global harm caused by these emissions comes from integrated assessment models, like my PAGE09 model which gives a mean value of about $150 per tonne of CO2 if valued by an average citizen in Europe, or $250 per tonne of CO2 if valued by an average US citizen (US citizens are on average about 50% richer than European ones, so they should value an equivalent physical harm more highly).
Applying these mean values as an ad valorem tax on imports of USA goods to Europe results in a tax of about 6%, if the European valuation of harm is used, or 10% with the US valuation. These are higher, but not dramatically so, than Sarkozy’s proposal of a 1-3% tax on US imports.
How much might such a climate tax on US imports raise? The EU presently imports about 400 billion Euros of US goods and services per year. So a 6% tax rate would raise about 25 billion Euros per year, and a 10% rate would raise about 40 billion Euros. If imports of US goods and services have a price elasticity of -1, these revenues would be about 6% or 10% lower respectively.
If adopted, this idea could be refined further by levying higher rates on US goods that released a great deal of greenhouse gases during their production, and lower rates on others. And of course, in order not to be hypocrites, we in Europe would introduce a strong, comprehensive climate change of about $150 per tonne of CO2 equivalent on our own activities too. But that is only common sense.