A new 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. This report provides a new perspective that links trade policies to carbon emissions, and how it may have unintendedly contributed to climate change. Shapiro estimates that it is equivalent to $550 to $800 billion  of global implicit subsidy to CO2 emissions.

Shapiro essentially captures the life-cycle or value-chain carbon emissions for each industry. Carbon emissions here include both direct and indirect emissions. Direct emissions come from burned fossil fuels used to produce outputs. Indirect emissions are from making intermediate goods, which are used as inputs to make final products.  The study defines an industry’s dirtiness as its “carbon emissions per dollar of output”. 

Dirty industries are upstream goods such as iron and steel, and clean industries are final goods such as cars. The analysis shows that clean industries generally face more restrictive trade policies than dirty industries. The difference amounts to an implicit subsidy of $85 to $120 per ton of CO2 emissions. This is well above the typical estimate of a social carbon cost of approximately $40 per ton of CO2 emissions proposed by the 2018 Nobel Prize winner William Nordhaus.

However, according to Shapiro, countries do not explicitly consider carbon emissions in designing trade policies, so they do not intentionally subsidize more carbon-intensive industries. Tariffs are typically intended to protect domestic manufacturers, or counteract specific measures taken by foreign governments that would put domestic producers at a disadvantage compared to importers.

One possible explanation, he argues, is that companies tend to lobby for high protection on their  outputs but low protection on their inputs (intermediate goods). Since industries can be well organized but not final consumers, countries end up with higher tariffs on downstream and relatively clean goods, but lower tariffs on upstream and dirty goods. 

This shows the importance of making a carbon border adjustment as broad as possible. A broad-based border adjustment is ideal as it ensures imported goods are taxed equally based on their carbon content. Import tax under a border adjustment would apply most to dirty goods because they have most carbon emissions, and the least to clean goods because they are relatively much cleaner. 

Applying border adjustment unevenly to imported goods would lead to unintended consequences that are equivalent to an implicit subsidy to CO2 emissions of certain industries. Shapiro explains that the difference between import tax rates applied to industries creates an implicit subsidy to CO2 emissions in traded goods. Policymakers should keep this in mind when designing a carbon tax.