The linked article summarizes the Obama administration’s plans for a “cap and trade” system that has a two-fold purpose: cutting carbon emissions to combat global warming and reducing our dependence on foreign oil. The basic idea is that the program would begin with the government auctioning permits to industry that would allow them carbon emissions – essentially paying for the privilege of burning fossil fuel. Once auctioned off, permits can be traded and sold. This would cap carbon emissions at a certain level. It would also have the effect of raising the price of fuel and energy, forcing efficiency and a shift to clean and renewable forms of energy.
In crafting such a plan, each nation will have a tendency to draw a line along its borders and apply the program to industries located within. But there’s one industry that, lying within no one’s borders, may tend to fall through the cracks – the shipping industry. For example, each year thousands of container ships arrive from China, Japan, Korea and other exporting nations. On average, each arrival has burned about 2 million gallons of fuel crossing the ocean, just on the inbound leg. Obviously, since the U.S. has an enormous trade deficit, many of these ships return empty, burning nearly as much on the outbound leg of the trip. This amounts to many billions of gallons of fuel per year. Someone needs to fold this industry into their cap and trade plans.
The obvious approach may be for each nation to sell permits to shipping industries operating within its borders. But this would be exactly the wrong approach. It would simply drive shipping operations offshore to nations without cap and trade programs. The right approach is to apply a tax to all inbound ships, including ships delivering imported oil. Each nation has control of its imports, and no control of exports. Taxing the fuel burned by inbound ships would encourage domestic manufacturing and have the desired effect of dramatically reducing carbon emissions from the shipping industry. It would also encourage the spread of cap-and-trade programs around the world, forcing other nations to tax the fuel burned by inbound ships in order to prevent their exports from being put at a competitive disadvantage. On the other hand, taxing the fuel burned by outbound, export-laden ships would encourage other nations not to subject their outbound ships to cap-and-trade, worsening our competitive position and intensifying the global trade imbalance that has collapsed the global economy.
For the U.S., this would have the highly desirable side effect of reducing our trade deficit. Sure, nations like China would also tax imports from the U.S. but, since we’re the ones with the trade deficit, any overall reduction in trade will ultimately work in our favor.
Also, let’s not forget that there may be no industry more capable of switching to renewable energy than the shipping industry. Until the invention of the steam engine, all trans-ocean commerce was carried in sailing ships. The wind is still there and could be utilized again. Sure, ships will be smaller and slower, so we’d need bigger fleets – a boon to the ship-building industry.
When it comes to a cap-and-trade program, let’s not forget the hundreds of billions of gallons of oil being burned on the high seas.