RPT-ANALYSIS-Carbon tax could help China head off tariff threat

(Refiles to fix date in dateline)

* Carbon tariffs looking "inevitable"

* China's best option to levy carbon tax of its own

* Could be main way to avoid trade dispute with U.S.

By David Stanway

BEIJING, Nov 16 (Reuters) - In a future where exports could be taxed for their greenhouse gas content, Beijing faces a stark choice -- accept a punitive global regime of "carbon tariffs" or impose a national CO2 tax of its own.

Most traders, academics and officials polled by Reuters acknowledged that carbon tariffs -- also known as "border adjustment measures" -- could soon be a part of global trade.

"Inevitably Congress is going to make a carbon tax or a carbon tariff part of its overall plan," said Paul Harris, professor of global and environmental studies at the Hong Kong Institute of Education.

"Insofar as the U.S. government and Congress can agree to measures which will significantly reduce U.S. emissions of greenhouse gases, it is going to be balanced with provisions that others will suffer if they don't do the same thing," he said.

The issue is sure to be on the agenda for Chinese President Hu Jintao and U.S. President Barack Obama, who is on a visit to China. Obama said on Monday both nations must take "critical steps" to tackle climate change.

The move towards taxing the CO2 content of exported goods comes as nations struggle to reach agreement on a broader, legally binding climate deal to expand or replace the Kyoto Protocol. Agreement in 2010, or later, now looks more likely. [ID:nSP284703]

The United States refused to ratify the Kyoto Protocol saying developing countries such as China were not obliged to impose costly emission cuts on their industries, giving them an unfair advantage in world trade.

China is firmly opposed to binding emissions cuts, saying rich nations should make deep reductions first.

The new U.S. climate act, also known as the Waxman-Markey bill, includes provisions designed to give future U.S. administrations the authority to impose "border adjustments" on products made in countries that gain a competitive edge by refusing to reduce their emissions.

China, for its part, has jealously guarded the Kyoto principle of "common but differentiated responsibilities", keeping a keen eye on any plan to impose caps "by stealth".

It has also repeatedly stated that the carbon tariff concept breaches not only Kyoto but also World Trade Organisation rules.

Despite bluster from Beijing, the WTO says carbon tariffs can be consistent with world trade rules and, behind the scenes, Chinese officials recognise they need to be addressed carefully.


"This is a kind of game. The United States is trying to threaten China with tariffs if they don't make CO2 cuts. Finally, the two sides have to come together, sit down and find a way," said Yang Fuqiang, WWF director of Global Climate Solutions.

Officials are also well aware that the United States will find it impossible to impose unilateral carbon tariffs on Chinese products if Beijing has imposed a carbon tax of its own.

"Under WTO rules, if China has its own carbon tax then you cannot introduce this penalty tariff," said Mikael Skou Andersen, a researcher at Denmark's Aarhus University who has studied the impact of similar taxes in Europe.

Climate talks have long been bogged down in issues of trade and lost competitiveness, with the United States concerned about giving Chinese industries a "free ride". The implementation of a carbon tax in China could allay those concerns.

Analysts also point to the irony that part of the growth in emissions from China, the world's top CO2 polluter, is caused by consumer demand for cheaper Chinese goods in the United States and other rich nations.

But Beijing will not be bullied, especially when Washington has so far failed to come out with any binding carbon reduction targets of its own, a government researcher said.

"China has been considering a carbon tax for some time and it will eventually come out, but it shouldn't do it because of pressure from the United States or because of the carbon tariff threat," he said, asking not to be named.

However, the link between tariffs and tax has already been acknowledged by influential government researchers looking into the impact of carbon taxes on the Chinese economy.

"If China does not levy a carbon tax, exported Chinese products will probably pay a carbon tax to foreign countries, but if it levies the tax itself, it could avoid the foreign taxes," the Energy Research Institute of the National Development and Reform Commission said in a report in September.

While the ERI has proposed a rate of 100 yuan ($14.7) per tonne to be imposed as early as next year, Beijing is expected to levy a more cautious 10 yuan per tonne by 2012, as recommended by researchers at the Ministry of Finance.

But haggling may still be required. WWF's Yang said if China wanted to avoid CO2-related trade disputes, it would still have to make proposals the United States found acceptable.


While the Ministry of Finance is expected to support the 10 yuan per tonne scheme, others -- including policy makers in the Ministry of Commerce -- still worry about the impact a carbon tax will have on Chinese economic growth.

Supporters say any scheme would initially cut GDP growth, but would eventually bring energy saving benefits. But implementation remains complicated and expensive.

"They will not happen within the next two or three years because the economic recovery is still very unstable," said Allan Zhang, carbon expert with PricewaterhouseCoopers in Beijing.

Tariffs or no tariffs, China is determined to introduce a carbon tax in order to fulfil its own targets, said Yang, adding China would impose a carbon tax by 2012 at the earliest.

At the very least, a Chinese carbon tax would give China control over revenues, said Hu Tao of China's Environmental and Economic Policy Research Centre.

"China produces goods for the world, takes on all the related pollution and then taxes on the goods will be paid to the U.S. treasury? Will the Chinese people agree to that?" (Reporting by David Stanway, Editing by David Fogarty)