POLITICO reported that “Presidential nominee Joe Biden and some Democrats in Congress want to use trade agreements to combat global warming.” According to POLITICO, Democrats and environmentalists believe that the United States can leverage its large consumer market to push other countries to cut carbon emissions through trade policies-specifically a “carbon adjustment fee” at the border. An import tariff is a trade policy, whereas border adjustment is a tax policy. Stand-alone taxes on imported goods are import tariffs, not border adjustments, no matter what the policy is called.
Trade policies and carbon emissions are certainly linked. A study by Joseph Shapiro at the University of California, Berkeley finds that global import tariffs and non-tariff barriers (NTBs) are significantly lower on dirty than on clean industries. Shapiro believes that countries do not explicitly consider carbon emissions in developing trade policies, so they end up unintentionally subsidizing more carbon-intensive industries by imposing tariffs unevenly on different goods.
Biden’s climate plan does not mention a carbon tax or carbon price, but his “Made in America” plan proposes applying “a carbon adjustment fee against countries that are failing to meet their climate and environmental obligations.” Rep. Earl Blumenauer (D-Ore.), head of the House Ways and Means subcommittee on trade, said “We can look at things like having a carbon border adjustment tariff, so that we don’t have countries importing or exporting carbon pollution.”
It’s unclear how exactly a Biden administration would cut domestic emissions and what the proposed carbon adjustment fee policy would look like. More details are needed to assess the potential impact of the policies. But it’s useful to understand what a border adjustment is and why it’s important for a carbon tax to work effectively.
A border adjustment is a tax policy that ensures consumers of a good or service pay the same tax regardless of whether the good or service is produced domestically or imported. It works by enacting a tax on imported goods and providing a rebate for exported goods. Imported goods are for domestic consumption, so they are taxed. Exported goods are for foreign consumption, so they are exempt. It’s worth noting that border adjustments and import tariffs are often confused for each other. But they are two distinct policies. Border adjustments are aimed at equalizing the tax burden on imported and domestic goods, while import tariffs are intended to distort trade flows of a country by discouraging imports.
POLITICO reported that Sen. Ron Wyden (D-Ore.) would only support a domestic carbon tax “if it includes a well-designed border adjustment.” Indeed, a border adjustment is considered as a critical component of a carbon tax. It helps prevent carbon emission leakage and preserves U.S. manufacturers’ competitiveness against foreign manufacturers. Senator Durbin introduced a carbon tax bill earlier this year that included a section on border adjustments. Under the proposal, carbon-intensive products and fossil fuels are eligible for rebates when exported and are subject to taxes when imported.
The EU is planning to implement a carbon border adjustment as part of its ambitious plan to cut GHG emissions by 50% by 2030. It’s hard to tell whether it will be an import tariff or a carbon border adjustment. As the momentum grows for implementing a border adjustment in the EU and the United States, lawmakers must recognize that border adjustment is not a trade policy, and it should not be viewed as a punitive measure against trade partners.
A well-designed border adjustment coupled with a domestic carbon tax is an effective policy to reduce carbon emission within the United States and a useful tool to protect U.S. manufacturers’ competitiveness. If there is no domestic carbon tax, stand-alone taxes on imported goods are import tariffs, not border adjustments, no matter what the policy is called. A border adjustment consists of paired adjustments-an import tax and an export rebate. U.S. policymakers need to keep this in mind when engaging in global efforts to combat climate change.