Democratic lawmakers have devised a plan to impose a border tax on imported goods that is based on the exporting countries’ greenhouse gas emissions. Although details are scarce, the New York Times ran an article Monday which provides a broad outline of the border tax explaining that it would “require companies that want to sell steel, iron, and other goods to the United States to pay a price for every ton of carbon dioxide that is emitted during their manufacturing processes. If countries can’t or won’t do that, the United States could impose its own price.”
This proposal follows a similar plan that came out of the European Union last week. As the Wall Street Journal’s editorial board explained, under that plan, “foreign firms would have to undertake detailed carbon audits to report emissions to EU regulators, and then would have to work out what proportion of the emissions attributable to goods shipped to the EU already were covered by carbon taxes elsewhere. If a company isn’t able to complete such complex and expensive calculations, its carbon tariff will be estimated on the basis of the emissions of the dirtiest 10% of European producers for the same good.”
Over at Reason Magazine, Eric Boehm has a good summary of why carbon border taxes aren’t a good idea. In short, these taxes would raise prices on imported goods, hurting low-income and middle-class consumers of those products. As my colleague Jordan McGillis explains at the American Spectator:
Democrats will try to sell this new tax as a way to save American jobs, but as has long been understood, tariffs deliver concentrated economic benefits to the powerful incumbents who lobby for them while spreading new costs across the wider population. Far from being an economically just approach, the carbon border tax would further enrich existing companies while taxing American households.
Furthermore, these taxes will expand the federal bureaucracy to a point where the whole project is likely to devolve into cronyism. As economist Dan Mitchell explains:
It’s always a bad idea to give politicians a new source of revenue. But it’s a worse idea to give them a new source of revenue that will require bureaucrats to measure the amount of carbon produced by every imported good. As I pointed out a few days ago when discussing the European Union’s version of this protectionist scheme, that’s a huge recipe for cronyism and favoritism.
And as the WSJ’s editorial page pointed out when discussing the EU’s plan for carbon border taxes, these taxes are likely to lead to retaliation from trade partners and pushback at the World Trade Organization.
To those points I would add that if this proposal exempts the poorest countries from being taxed, then the whole rationale for the policy is greatly undermined as those countries are likely to emit more carbon dioxide in the future as they develop. On the other hand, if the proposal does include carbon border taxes on the poorest countries, then people who claim to care about the world’s poor cannot support this proposal because penalizing carbon emissions from developing countries deprives them of a path out of poverty by denying them access to affordable and reliable energy. And at the political level, taxing your own citizens to try to influence environmental policy in other parts of the world feels like the type of thing that is likely to create some sort of political backlash.
One final point that needs to be made is that these proposals for carbon border taxes are problematic for carbon tax advocates writ large who frequently ignore public choice objections to their ideal proposals. Carbon border taxes are usually proposed by carbon tax advocates as an additional element to correct for problems with domestic carbon tax policies. One of the many problems with carbon taxes is that by only raising taxes on domestic emitters of carbon dioxide, policymakers simply shift that economic activity to other parts of the world where those policies don’t exist, thereby thwarting the stated goal of reducing carbon emissions. This shift is also known as carbon leakage. Proponents of carbon taxes argue that carbon border taxes are also needed to correct for the problem of carbon leakage by bringing foreign production costs in line with domestic carbon tax policies.
All of that sounds great in theory but look at what climate policy is actually producing in practice: carbon cronyism and protectionism in the form of carbon border taxes rather than your perfectly formulated carbon tax. Perhaps that’s because the only way to make climate policy palatable amongst Republicans in the real world is by formulating it in a way where politicians can sell these costly policies as attempts to punish foreign competition.
In the end, carbon border taxes are another way for politically connected companies to protect themselves from foreign competition while the government increases its revenue by claiming to save American jobs and the environment. All of that comes with a cost to the everyday consumer in the form of higher prices.