Energy-intensive industries will look to return to North America

    TORONTO, March 27 /CNW/ - CIBC (CM: TSX; NYSE) - Imposing a carbon tax on
Chinese imports may be the only way developed nations will be able to achieve
real cuts in global greenhouse gases, finds a new report from CIBC World
Markets.
    The research report notes that while governments in developed nations are
taking painful steps to cut greenhouse gases, carbon emissions from developing
nations - in particular China - have skyrocketed in recent years. Since 2000,
total emissions have climbed by more than 6,000 million metric tonnes (mmt) -
with 90 per cent of that coming from China and other developing nations. China
is now the single largest carbon emitter country in the world, producing more
than 21 per cent of the global total.
    "As OECD countries begin to tax their own economies by charging growing
fees on CO2 emissions, their tolerance of the carbon practices of its trading
partners will diminish rapidly," says Jeff Rubin, Chief Economist and Chief
Strategist, CIBC World Markets. "Particularly when the painful cuts made by
North America, Western Europe and a handful of other OECD economies are
dwarfed by the emission trail spewing from China and the rest of the
developing world.
    "Other than moral suasion, which is likely to fall on deaf ears, the
OECD's only leverage is through trade access. The response is likely to
involve a carbon tariff - an equalizing force that will tax the implicit
subsidies on the carbon content of imports that come from carbon non-compliant
countries."
    The report found that efforts to gradually reduce carbon emissions in the
U.S. by just 10 per cent through a cap and trade system will shave an
estimated 0.6 percentage points off real GDP growth annually for the next five
years - with similar costs expected for Canada and other OECD nations.
    Mr. Rubin notes that these decarbonization efforts will only be effective
in reducing greenhouse gases if done in concert with the developing world.
Otherwise it simply adds costs to consumers, makes domestic industry less
competitive and will increase overall global emissions as more and more
production is shifted to unregulated jurisdictions.
    CIBC World Markets calculates that China's export-related emissions were
approximately 1,700 mmt in 2007. Outside of the entire U.S. economy, China's
export sector is the world's largest carbon emitter.
    In the last seven years, China's overall emissions have grown by close to
120 per cent. Its average annual increase is equal to the total greenhouse gas
emissions of Canada or the United Kingdom. Its cumulative increase in
emissions over the past seven years is equal to the total current level of
emissions from the Canadian, Japanese, Indian, and Spanish economies combined.
    The reasons for this dramatic jump are rooted in the sheer pace of
economic growth in the country and the absence of enforceable and meaningful
environmental regulations. But the more vital factor has been the emissions
intensity of the Chinese economy.
    "Energy use in the manufacturing-intensive Chinese economy as a share of
GDP is four times larger than in the largely services-based U.S. economy,"
says Mr. Rubin. "To make matters worse, China is not particularly carbon
efficient. It produces a third more CO(2) emissions per unit of energy than
does the U.S. economy, and double that of Canada. Combine the energy intensity
of the Chinese economy with the poor carbon efficiency of its energy use and
you have a powerful cocktail for exploding emissions growth."
    By slapping a $45 per tonne cost onto CO(2) emissions, a tariff would
raise roughly $55 billion a year from Chinese exports to the U.S. "Of course,
it's not just Chinese exporters who will have to pay," adds Mr. Rubin. "At
least initially, before other carbon compliant sourcing can be found, it will
be consumers who will have to bear the bulk of the tariff burden in higher
import prices. Based on China's share of U.S. imports, a $45 per tonne tariff
would raise U.S. consumer price inflation by more than 0.6 percentage points.
    "At some point, however, the inflationary impact might be mitigated as
either domestic production replaces some Chinese imports or sourcing is
shifted to a less egregious emitter than China."
    The report notes that given the overall energy inefficiency of the
Chinese economy, a carbon tariff, coupled with triple digit oil prices,
suddenly redefines the meaning of Chinese competitiveness. For many
industries, what will count is how energy efficient they are, and how carbon
efficient they are in their use of energy. On both counts, China and the rest
of the developing world are hugely disadvantaged. As a result, China's wage
advantage would be lost for many energy-intensive industries who who will then
look to return home to North America.
    Mr. Rubin expects Chinese exporters of chemical products, with their
astronomical energy intensity factor, will be the first to see their
businesses migrating back. In fact, chemical exports from China to the U.S.
are already slowing down notably, with shipments in the past two years rising
by only half the pace seen in the first half of the decade.
    Non-metallic mineral products (cement, glass, lime, etc), with energy
intensity 130 per cent higher than the Chinese industrial average, along with
printing, primary metal manufacturing and machinery industries are other
candidates for such realignment.
    "With OECD's carbon tolerance diminishing with every tonne of CO(2)
spread into the atmosphere by non-OECD countries, environmentalism will soon
become a significant barrier to trade," concludes Mr. Rubin. "A carbon tariff
imposed by the U.S. on emissions embodied in Chinese exports would not only
abolish the implicit subsidies on the carbon content currently enjoyed by
Chinese exports, but it would be large enough to start reversing current trade
and offshoring patterns."
    The CIBC World Markets report is available at
http://research.cibcwm.com/economic_public/download/smar08.pdf.

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