Presidential candidates Joe Biden and Jay Inslee both took a shot at China and other heavy-polluting countries this week by releasing climate change plans that would tax imports of carbon-intensive goods.
But economists warn such a policy, known as a border carbon adjustment, would be unworkable unless the U.S. imposed a carbon tax on its own domestic goods. Neither Biden, the former vice president, nor Inslee, Washington’s governor, has proposed a carbon tax.
“In a world without a carbon tax, we would basically be saying we are applying this somewhat arbitrary tax to your goods even though we’re not applying it to our goods,” said Noah Kaufman, an economist at Columbia University’s Center on Global Energy Policy. “I can’t see other countries taking that well.”
Carbon pricing, the favored climate change policy of economists, is considered to be politically toxic by some in the progressive Democratic base, who prefer mandates and direct spending.
For carbon tax proponents, imposing a matching border carbon adjustment has long been viewed as essential to avoid harming the competitiveness of U.S. industries. If exporters of carbon-intensive goods like steel, aluminum, cement, glass, and some agricultural products have to pay a fee equivalent to the U.S. carbon tax, it would remove the incentive for American companies to move overseas to avoid paying the domestic fee.
“Essentially, a border carbon adjustment is a carbon tax on other countries’ goods,” Kaufman said.
A border carbon adjustment would also encourage foreign countries to adopt their own carbon price so their own governments, rather than the U.S., would get the money. China and India, along with the U.S., are the top emitters of greenhouse gases, but because they are developing countries, they have made smaller commitments to the Paris climate agreement.
Biden’s plan calls for pressuring China and other countries that are “failing to meet their climate and environmental obligations” to “bear the full cost of their carbon pollution” by imposing “carbon adjustment fees or quotas.”
Inslee, who used to be a carbon tax proponent but failed to pass it in his home state, proposed instituting a “climate duty” or border adjustment fee on carbon-intensive imports from nations “not committed to implementation of strong climate pollution reduction plans under the Paris Climate Agreement.”
Economists, however, say there are two primary problems with imposing a border carbon adjustment without a domestic tax on carbon emissions.
The first is an accounting question. If the U.S. set a carbon tax starting at $15 per ton, as a recent bipartisan House bill would do, the U.S. could simply tax imported goods equivalently. There are a range of ways to decide which products to tax, and how to determine their carbon intensity, but those that qualify would be subject to the $15 per ton tax.
But without such a point of comparison, it would be difficult to come up with a fair rate to tax imports.
“In the absence of a really clear market price, a border carbon adjustment becomes … I don’t want to say impossible, but difficult to implement because you can’t figure out what to adjust for,” said Catrina Rorke, vice president at the Climate Leadership Council, a Republican-led group that supports a carbon tax.
The second problem is fairness. While implementing a tax on carbon intensive products from overseas would be sensitive under any circumstance, other countries would be less likely to cooperate if the U.S. also doesn’t tax its own emissions.
Rorke said doing a border carbon adjustment without a U.S. carbon tax could run afoul of the World Trade Organization rules.
“It’s hard to get to where you can defend a border carbon adjustment system especially at the WTO that has a lot of rules on being fair and not prejudicial,” Rorke said.
Brian Flannery, a visiting fellow at Resources for the Future who studies border adjustments, agreed with Rorke.
“It seems curious, and likely difficult/impossible, in the absence of a very particular type of tax, to harmonize with the WTO,” Flannery said.
The campaigns for Biden and Inslee did not respond to comment about why they do not propose a carbon price to go along with a border adjustment.
But it’s still possible the candidates could support carbon pricing later on and are appealing to free trade skeptics in the Democratic Party by proposing the border adjustment first.
“We can no longer separate trade policy from our climate objectives,” Biden said in his plan. “[I] will not allow other nations, including China, to game the system by becoming destination economies for polluters, undermining our climate efforts and exploiting American workers and businesses.”
