Economists generally agree that a well-designed carbon tax is an effective and promising way to reduce greenhouse gas (GHG) emissions that cause climate change. U.S. policymakers and advocates have offered a number of carbon tax bills and proposals over the last few years. An important component of a carbon tax is a border adjustment. A border adjustment works by applying a tax to imports, and a rebate on exports. It ensures that consumers of a good or service pay the same tax, regardless of whether the good or service is imported or produced locally. A border adjustment mechanism in a carbon tax helps in preventing carbon leakage, and preserves U.S. manufacturers’ competitiveness against foreign manufacturers.
There is a consensus among experts that border adjustments should be part of a carbon tax. Still, there is little agreement on how such a border adjustment should be designed. The carbon tax bills introduced in the first session of the 116th Congress include border adjustments of some kind, but adopt very different models of border adjustment.