As part of its new action plan to combat climate change, the Biden administration is considering a new and unproven trade barrier called a carbon border adjustment. Rather than imposing a tariff based on the value of a product, a carbon border adjustment would be levied based on the amount of carbon emissions used to produce it.
Around the world, policy makers are feeling the growing urgency for all people to take visible action to avoid the worst costs of climate change. Yet without an international coordination model, action at the national level risks falling short of ambitious climate goals. Bold climate action can also expose the country to economic risks. This combination does not appeal to any decision maker.
Border carbon adjustments aim to avoid some of the domestic costs. Essentially, the idea is to mirror a national emissions charge or standard, charging imported products based on the embodied emissions that have escaped national mitigation efforts. The putative goal is to avoid “leakage”, or a rebound in emissions beyond a first mover’s borders.
Consider how leakage might occur if an emissions policy increased costs for a domestic producer of, say, steel. The domestic producer would try to pass on the higher costs to the consumer. However, the consumer would consider replacing the imported steel with the now more expensive domestic variety. And where would this steel come from? More than likely, from an exporter not subject to the same emissions restrictions. If the emissions of one ton of domestic steel are avoided, they are replaced by the emissions of one ton of imported steel.
It is even conceivable that the import creates more emissions than the avoided domestic production. Not only does the domestic producer lose its market, but the environmental objective is also undermined.
This aims to level the playing field for domestic and foreign producers, so that they have to pay the same costs for the shows. The idea that trade policy can be used to shift costs to foreigners often turns out to be more complicated than it first appears. It was a central assertion of Trump tariff advocates, though evidence suggests the world is more complicated. In the end, the consumer often ends up paying more of the cost in the form of higher prices – and can therefore buy less.
On the political blackboard, this climate policy seems simple and logical. The adoption of the carbon border adjustment will require an overhaul of the international trade machinery.
Any changes will be controversial. International trade policy is not for the weak. Even close allies have been known to fiercely contest trade issues. Changing the tariff basis from product value to embodied emissions is a major change that will surely present unforeseen challenges. Discussions on how to measure and assess emissions will be endless. This will create a whole new arena for trade friction.
A real risk is that these new tariffs degenerate into a new form of protectionism. It would be a short slide down a slippery slope for the “worker-centric” trade policy advocated by the Biden administration. It’s a shame that the workers end up paying the bill after their shift is over and heading to the store.
Carbon border adjustments are already at the heart of the climate policy debate in Europe. Europe has a price on carbon through its long-standing cap-and-trade system, so carbon border adjustment there is at least largely transparent. Some proponents believe that carbon border adjustments are also appropriate for the United States. Many of these same people are not very supportive of a national carbon price.
Carbon pricing will surely benefit the legions of lawyers, forensic accountants and economists who will be needed to design the system and help companies navigate it. Protectionists will approve of the carbon border adjustment, which will be too confusing or costly for many importers. In today’s world of disrupted supply chains, a new trade barrier is unlikely to improve the situation.
What is the alternative, given the political need for climate action? Carbon prices are unpopular. More than two decades of climate diplomacy have resulted in few concrete plans or binding commitments. Fortunately, there are a few options.
Mitigation of emissions is not the only strategy of climate policy. Adaptation and enhancement can play a role alongside mitigation. Digging the pandemic recession hole won’t be any easier with a new, untested trade barrier. It is sure to trigger retaliation, just as the infamous Smoot-Hawley tariffs did in 1930. Retaliation is not the lever needed to achieve an international climate agreement after decades of frustration. The United States learned this the hard way in 2018 and 2019, despite assurances to the contrary. Policy makers would do well to bear this recent history in mind and resist the lure of a shiny new object that promises to solve all the problems.
Timothy Fitzgerald is an associate professor at Texas Tech University’s Rawls College of Business and author of a chapter on trade and climate policy in Hoover Institution Press’ recent “Adapt and Be Adept.”