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A new report from CIBC World Markets notes that while governments in the US and Europe 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.

Diminishing tolerance of carbon practices 

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.

He adds that this is particularly likely to be the case 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 equalising force that will tax the implicit subsidies on the carbon content of imports that come from carbon non-compliant countries," Rubin explains.

The report found that efforts to gradually reduce carbon emissions in the US 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 other OECD nations.

Costs to consumers 

Rubin notes that these decarbonisation 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 US 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 Japanese, Indian, Spanish and Canadian 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.

China not carbon efficient 

The more vital factor, however, has been the emissions intensity of the Chinese economy.

Rubin points out that energy use in the manufacturing-intensive Chinese economy as a share of GDP is four times larger than in the largely services-based US economy.

To make matters worse, China is not particularly carbon efficient. It produces a third more CO2 emissions per unit of energy than does the US 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,” Rubin adds.

By slapping a $45 per tonne cost onto CO2 emissions, a tariff would raise roughly $55 billion a year from Chinese exports to the US. Rubin is quick to explain that it is not just Chinese exporters who will have to pay.

He believes that 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.

Redefining the meaning of Chinese competitiveness 

Based on China's share of US imports, a $45 per tonne tariff would raise US 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," Rubin says.