The Biden Administration floated the idea of “carbon border adjustments” on Monday to mitigate greenhouse gas emissions in international trade. In the presidential campaign, President Biden proposed enacting “a carbon adjustment fee” on imported goods from countries “failing to meet their climate and environmental obligations.” But what are they proposing exactly? Standard border adjustments, or rather, protectionist import tariffs?
Standard border adjustment is a mechanism that is implemented along a domestic federal tax to ensure domestic and foreign producers are on a level playing field. A border adjustment works by levying a tax on imported goods and providing a rebate on exported goods. It’s used in value-added taxes widely around the world. Consumption of goods and services within the borders of a jurisdiction is taxed regardless of where the goods and services are produced. The key to a standard border adjustment is that it needs to be accompanied by a domestic national tax. Otherwise, it would be stand-alone import tariffs or export subsidies.
According to the 2021 Trade Policy Agenda published by the Office of the United States Trade Representative, the Biden Administration will consider “carbon border adjustments” that are “as appropriate, and consistent with domestic approaches to reduce U.S. greenhouse gas emissions.” No further details about the proposal were provided in the document.
It is perplexing that the Biden Administration proposed “carbon border adjustments” without mentioning any policy proposals that would put a national carbon price on greenhouse gas emissions. The United States is currently relying on a patchwork of federal and state regulations, subsidies, and performance mandates to reduce carbon emissions. If the proposed “carbon border adjustments” would need to be “appropriate and consistent” with the domestic U.S. approaches, how would the Administration define, measure, and quantify the U.S. approach?
Let’s assume that the proposal is implemented without a national carbon price. For any given good produced in the United States, how would the federal government translate all the regulations and mandates applicable to the carbon emissions associated with the good into an equivalent carbon price? What about regional differences in the regulations and mandates? Even if there is a way to crunch the numbers to assign a national benchmark price to any given product, it would seem a daunting task to justify and explain it to the United States’ trading partners.
Additionally, levying carbon import taxes without a domestic carbon price may violate WTO’s non-discriminatory rules and risk escalating trade tensions with trade partners. It is not clear on what grounds the United States can justify implementing “carbon border adjustments” when there is not a uniform national carbon price in the country.
A good and overdue climate policy is a federal carbon tax with a well-designed border adjustment. Until there is a national domestic carbon price, any proposal that tries to levy a tax on imported goods’ carbon content would be protectionist import tariffs in disguise.