A carbon border tax similar to the European Union’s recently announced Carbon Border Adjustment Mechanism could be folded into the reconciliation process later this year, which would have significant domestic and international implications, though it may lack key provisions.
This is the third in a series of posts on climate proposals. While some require international coordination, others, like a clean energy standard, can be implemented domestically – though they will have international ramifications.
Carbon Border Taxation
A carbon border tax is a fee imposed on products imported from countries who have not curbed their carbon emissions as much as the country imposing the fee. This ensures imports pay the same costs as domestic producers of a like product. The adjustment does three things. First, it prevents higher emitting countries from having a trade advantage. Second, it prevents emitting industries from simply relocating to places with less onerous restrictions, a process known as carbon leakage. And third, it reduces overall emissions. In carbon border tax plans the fee is usually determined as a carbon price, as in the EU.
Carbon prices are accepted means of driving down emissions; a Congressional Research Service report noted that even a $25/metric ton cost rising 1% annually would reduce emissions enough to meet the United States’ Paris goals.
Carbon Border Taxation Regulation
The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) utilizes the European Emissions Trading System carbon price, €55 per tonne as of August, 2021. Imported products will be assessed a fee based on this cost. For ease of assessment, and because most of the world’s emissions and risk of leakage come from only a few industries, six products will be subject to the CBAM: cement, iron, steel, aluminum, fertilizers, and electricity.
The US does not have a carbon price, though 14 bills proposing carbon prices have failed in the last four years. The current US proposal for a Border Carbon Adjustment (BCA) relies instead on an estimation of the cost US manufacturers spend complying with federal and state regulations regarding carbon emissions.
Under the proposal, the Secretary of Treasury in conjunction with the Office of Management and Budget, the US Trade Representative, and the Secretaries of Commerce, Energy, Agriculture, Interior, and Transportation would assess the regulatory cost of production. An equivalent adjustment would then be assessed on products from countries not on an exemption list provided by the Secretary of the Treasury.
The fees collected by the BCA would be spent administering the program and building climate resiliency within the US.
Carbon Border Taxation Adjudication
There are several provisions in the World Trade Organization rules that may or may not be applicable to carbon border taxes, including environmental exceptions and uniformity in application to other states. The proposals are called adjustments rather than taxes partially to conform to WTO rules.
WTO rules already carve out provisions for developing and Least Developed Countries. Both the US proposal and the EU’s CBAM exempt these countries.
The flip side of a border tax, a tax credit for exporters competing in countries without emissions, would run into major issues, including more stringent WTO difficulties.
Taxation Without Representation
In terms of execution, the requirement to determine the cost of US regulations would be onerous, especially compared to a carbon price. The lack of uniformity in regulations may lead to extreme variations in how products are assessed and in turn how imports from other countries are treated.
Without a carbon price it will be more difficult to argue the US is objectively assessing carbon emissions regulations. This could open the door to action at the WTO, even if carbon adjustments are acceptable in principle. And it may also be more difficult to make the case that another country is not enforcing emissions regulations on its books.
Regardless of whether a price is included, there are likely to be significant protests from exporters. Already China, Brazil, India, and South Africa have released a joint statement condemning similar moves in April, 2021. No doubt the US will face similar criticisms.
Carbon Border Taxation Implications
There is general agreement that widespread carbon border taxes could drive down emissions, but by how much is an open question. Domestic costs of some imported products would go up, and some US producers would likewise face higher costs for imported materials. There is also the potential for producers to shift products, sending emissions conforming products to markets with carbon taxes and nonconforming products to countries without a carbon tax.
How common carbon border taxes become will determine how effective they are in reducing emissions. Carbon border taxes have long been mooted as policy that could spur other countries to regulate their carbon emissions. It appears the EU’s movement may have spurred US action, which may in turn encourage more border adjustments. The COP26 negotiations seem unlikely to result in widespread adoption of carbon border taxes, but more movement could follow.
I’ll Tax the Heat
There is movement within the US for a carbon price. Secretary Kerry has said President Biden is in favor of one and Secretary Yellen recently floated the concept of a global carbon price floor, presumably in line with the IMF’s recent call. Dozens of countries and some US states currently have or plan to have some version of carbon pricing. Notably, California already assesses a carbon border adjustment on energy produced outside of the state based on an established carbon price.
Without a carbon price, however, the US is in a difficult position. While a carbon border tax can even the playing field for producers and ultimately drive down emissions, a carbon tax without a carbon price risks haphazard and ineffective implementation. Imposing a carbon border adjustment through regulatory estimation may open the US up to bilateral complaints and potential action in the WTO beyond that faced by the EU.
Perhaps more details will arrive prior to reconciliation and a carbon price will be included, but as it stands now, 80% of a plan appears not to be much of a plan at all.