Can We Stop Carbon at the Border? 
Talk of carbon tariffs is getting serious. But so are complaints that they would be unfair, risky, and marginally effective.
June 24, 2021

Politicians and activists like to talk about our “addiction” to fossil fuels, but carbon emissions resemble narcotics in another important way: Squeeze emissions out of production in one country, and they quickly pop up elsewhere, where rules are looser or carbon penalties are lower. Call it carbon whack-a-mole; policy wonks use the term “carbon leakage.”

One way to plug these leaks is to slap taxes on imports based on the amount of carbon emitted in making them. Imports already account for hundreds of millions of tons of emission a year. It’s not surprising that politicians in the U.S., U.K., and Western Europe are getting serious about carbon tariffs. They fear that carbon leakage will become a flood as industries pack up and leave, fleeing new climate regulations and penalties.

Are those worries justified? Perhaps. But look at these taxes from another angle, and they can seem impractical, destabilizing, and deeply unjust.

Let’s consider the pros and cons.

 

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Carbon border taxes use rules, not politics, to stop carbon leakage. That’s a good thing.

1. Without carbon-based tariffs, emitters can easily outrun regulators. And indeed some have. An in-depth briefing over at Clean Energy Wire explains in plain language why carbon leakage is a legitimate worry, and how the import taxes proposed by the E.U. could strip away profits from those who dodge climate regulations. (Reuters also has a helpful explainer.)

2. The taxes will protect nascent green industries against competition from dirtier competitors. Governments in the advanced economies are planning major public stimulus programs to expand the number of firms and workers in cleaner, greener businesses. But those efforts may fail if competitors in less-regulated regions can undercut their prices, at the expense of the environment. What’s more, income from the carbon duties can help pay for the stimulus.

3. Rules-based trade agreements have worked before. Supporters of carbon-based tariffs can point to previous global trade agreements—such as the post-war GATT treaty, the creation of the WTO in 1995, and many free-trade agreements since—as reason for optimism that the world’s major economies can agree on a set of rules for carbon border taxes that level the playing field.

 

Carbon leakage, in the form of emissions embodied in imports, already amounts to hundreds of millions of tons of CO2 a year. There’s every reason to expect the leakage to grow—perhaps dramatically—as governments tighten regulation and raise prices on emissions.   ©Our World In Data

 

• • •

Carbon tariffs are unjust and marginally effective

1. The complexity of global supply chains could create bizarre problems for carbon tariff schemes. As Anthropocene has covered, car parts made in the U.S. often go to Mexico for assembly and then come back to America as cars. In effect, the U.S. could end up taxing itself.

2. Financiers, gaming the system, will create new kinds of economic instability. Carbon border levies could be designed in myriad ways, as Clean Energy Wire’s briefing explained. All of them are mind-bendingly complex. Byzantine regulatory systems historically have advantaged those who can afford clever consultants and political lobbyists to exploit loopholes and grey areas. Consider the messes that the Superfund law and competing international tax regimes became, and the huge inequities and perverse incentives that they created.

3. These taxes are one more way for rich nations to punish poor ones. “Unilateral carbon border adjustments merely represent the latest form of economic imperialism,” writes economist Arvind Ravijumar in a sharp commentary for Technology Review. He blasts rich countries for hypocritically taxing imports from low-income nations while simultaneously funding fossil-fuel extraction in those same regions.

 

 

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What to keep an eye on

 

1. The IMF’s proposal to set an international floor on the price of carbon. The International Monetary Fund’s new director is pushing national leaders not only to pass laws that put a price on carbon but also to set a minimum price that applies worldwide. As The Guardian explains, a price floor would affect discussions about carbon border taxes, emissions trading schemes, and corporate tax rates.

2. Talk of setting up a “global carbon incentive.” Writing recently in Project Syndicate, the economist Raghuram Rajan argues for the global equivalent of a swear jar. Nations like the U.S. that emit more carbon per capita than the world average would put money into the jar, and carbon-frugal countries like Uganda could then draw out amounts proportional to their population and emissions levels. Every country would then be motivated to spout less harmful pollution, by whatever means are most politically acceptable there. If the incentive system works, border taxes could be unnecessary.

3. The package of new environmental rules the EU will propose on July 14. Bloomberg reports that the European Union’s new proposed rule will slap import tariffs on emissions embedded in steel, cement, aluminum, fertilizer, and electricity coming in from countries that have fewer constraints on CO2 emissions.

Discover more:  Taking Off in Two Directions at Once

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