Last Friday, Politico reported that Democratic and Republican lawmakers are working on a bipartisan plan to levy punitive fees on carbon-intensive imported goods. Sen. Kevin Cramer (R-N.D.) proposed an “America First energy policy” to impose taxes on products from countries with less stringent environmental standards. According to Politico, Sen. Lindsey Graham (R-S.C.) spoke with Sen. Cramer about the plan, and they want to discuss it with Sen. Chris Coons (D-Del). Sen. Coons and Rep. Scott Peters (D-Calif.) introduced a bill on “border carbon adjustment (BCA) on polluting imports” in July last year.
While it is encouraging to see lawmakers across the aisle working together to tackle climate issues, imposing protectionist green tariffs absent a domestic carbon price is problematic. A border-adjusted carbon tax is a sensible path forward to maintain U.S. manufacturers’ competitiveness against foreign producers.
The main goal of border adjustments under a domestic carbon tax is to level the playing field between domestic and foreign producers. By imposing taxes on imported goods and giving rebates to exported goods, border adjustments would ensure a carbon tax is levied on the consumption instead of the production of carbon-intensive goods. Import taxes would equalize the tax burden between domestic and foreign producers and export rebates would allow U.S. exporters to stay competitive in foreign markets. If another country with a domestic carbon price would like to level the playing field between its domestic producers and foreign producers, it would border-adjust U.S. exports entering the country’s market and collect import taxes on them.
Levying a tax or fee on imported goods as a stand-alone policy, however, is not standard border adjustment. Rather, it is equivalent to enacting tariffs (a protectionist policy). The lack of two key components from the bipartisan idea makes it de facto tariffs, not border adjustments. First, the proposal does not include implementing a carbon tax in the United States. Second, it does not include giving rebates to U.S. exporters.
Leveraging import tariffs to address climate change would be perceived as protectionism by the U.S.’s trading partners because we do not have a domestic carbon price. It would also violate WTO’s non-discriminatory rules. Additionally, tariffs would create winners and losers across the U.S. economy and hurt domestic consumers.
If addressing climate change and maintaining U.S. producers’ competitiveness are high priorities, lawmakers should think twice before enacting protectionist climate tariffs. A border-adjusted carbon tax is a good policy for addressing climate change in trade that shouldn’t be overlooked.