Politicians across the world are increasingly embracing “climate tariffs,” mixing trade policy with combating global warming.
European leaders and Democrats running for president in the United States have floated the once unpopular prospect of taxing imports of carbon-intensive goods, and analysts say China could follow suit.
“This has been seen as a rude, brutalist way to regulate greenhouse gases,” said Kevin Book, managing director for research at Clearview Energy. “It’s messy. This is the ugliest of all outcomes. It is the least desirable way to put a price on carbon. But we could see a transition from a trade war to a carbon trade war.”
Book says the 2016 Paris climate agreement has increased the possibility of carbon import tariffs, a policy better known among economists as a “border carbon adjustment.”
The U.S., which doesn’t have a federal policy to curb carbon emissions, is among the countries that are failing to keep pace with the targets it set for reducing emissions under the agreement. President Trump has rejected the agreement and intends to pull the U.S. from it, making it the only country to do so.
Book says countries that are aggressively imposing policies to reduce emissions, such as those in the European Union, could seek to level the playing field with import tariffs to make their products more competitive with those produced in countries that don’t tax or otherwise put a price on carbon.
“You can’t have a regulated economy doing more, and a less regulated economy doing less without some sort of trade equalization,” Book said. “Tariffs are very likely to happen if differential compliance with the Paris agreement continues, which seems likely.”
Ursula von der Leyen, the newly elected president of the European Commission, has proposed imposing a “carbon border tax” as part of her agenda to expand Europe’s existing emissions trading system.
Book and other climate policy experts noted that French President Emmanuel Macron has threatened to make his support for trade agreements conditional upon other countries’ compliance with the Paris agreement, which could be a prelude to carbon tariffs.
A number of Democratic presidential candidates have endorsed border carbon adjustments, which have recently been a regular feature of carbon tax proposals in Congress, viewed as essential to avoid harming the competitiveness of U.S. industries.
Forcing non-U.S. exporters of carbon-intensive goods like steel, aluminum, and cement, to pay a fee equivalent to the U.S. carbon tax would remove the incentive for American companies to move overseas to avoid paying the domestic tax.
“Some politicians say it would be politically infeasible to do a serious climate policy without a border tariff,” said Joseph Shapiro, a professor at University of California, Berkeley, who studies environmental trade policy. “The reason for that is energy intensive industries are concerned about how different policies would affect their competitiveness. One goal of a border adjustment would be to assuage those concerns.”
Democratic presidential candidates promising aggressive U.S. climate policies cite another goal of a border carbon adjustment: to incentivize other countries to increase their emissions cuts.
Joe Biden’s climate change 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.”
Cory Booker, a senator from New Jersey, similarly says as part of his climate plan that “countries without domestic policies capable of meeting their climate goals will be charged a border adjustment fee on goods based on their carbon intensities.”
Book, along with other experts, says given the hurdles to passing climate legislation in Congress, the more likely outcome is that the EU or China impose carbon tariffs on the U.S.
“The idea has been the U.S. doing this against China,” said an international climate expert, who asked to not be named given the speculative nature of the topic. “It’s more likely for China and the EU to be doing it on the U.S.”
Despite having less ambitious goals, both the EU and China are on track to meet their obligations under the Paris agreement, notes Nat Keohane, senior vice president of the Environmental Defense Fund.
“They are both on their way to meeting their Paris targets, although there are a lot of folks who would say that is a sign they can do more,” Keohane said.
The U.S., by contrast, is on pace to cut emissions 12% to 19% below 2005 levels by 2025, well below its Paris agreement goal of reducing emissions 26% to 28% in that time frame, according to a report released in July by the Rhodium Group.
Book says the EU or China acting first against the U.S. could be the trigger that finally pushes Republicans to pass a domestic carbon tax.
If the U.S. were to price its own emissions, countries imposing carbon tariffs on the U.S. would likely drop the tariffs.
“Congress would pass a carbon tax not for climate, but for commerce,” Book said. “Both parties like to sell stuff overseas. If we end up on the losing side of a carbon trade war with major markets keeping U.S. goods out, the people in power in Washington will be called upon to have a solution.”
Book and other experts dismissed the feasibility of another fringe possibility: the U.S. imposing carbon tariffs on other countries without first enacting a plan to curb climate change.
Josiah Neeley, energy policy director of R Street, has suggested Democrats could turn to carbon tariffs as a way to compensate for Republicans in Congress blocking climate action. But he concedes it’s unlikely and would violate fairness rules of the World Trade Organization.
“The question is, could you do just the border adjustment and not anything else?” Neeley said. “Even if you just did that, it would be a significant emissions chunk because a lot of emissions are produced outside the U.S. and consumed in the U.S. It’s a clever idea. It might be a little too clever.”
