Last week, E&E News reported that Senate “chatter” on the issue was growing as a number of Senators from both parties have expressed a desire to promulgate some kind of carbon tariff bill. Also called a carbon border tax, these policies are taxes on imported goods based on their purported carbon intensity.
Senator Bill Cassidy (R-LA) has expressed a desire to put forward this type of policy using foreign competition claims as a large part of his justification. Cassidy expressed that his bill would be called the “Foreign Pollution Act”, and focused on China’s lower environmental standards allowing it to maintain lower prices than those of goods produced in the United States.
Talking about the issue on the other side of the aisle are longtime proponents of carbon taxes like Sen. Sheldon Whitehouse (D-RI) who introduced the “Clean Competition Act” last Congress, as well as Sen. Chris Coons (D-DE) who was a co-sponsor on that legislation.
A portion of the Republican Party that is focused on restrictive trade policy appears to be aligning itself on this issue with a portion of the Democratic Party that will support climate action in any form. Proponents of this policy on both sides of the aisle claim it will protect American industry and lower carbon emissions. Leaving aside that the historical evidence that tariffs help domestic industry is questionable and there is no reason why a border tax would reduce emissions rather than just increase costs, a carbon border tax is simply bad policy.
One consequence of this policy would be a negative impact on trade relations with the rest of the world. A carbon border tax will likely lead to retaliatory tariffs with our trading partners and a trade war as increasing tariffs are applied back and forth. A carbon tax like this one would impact heavy industry the most, as it would raise prices on things like steel, aluminum, and other industrial inputs. Because the costs of tariffs are ultimately passed along to consumers, starting a trade war with the world’s largest producer of aluminum (China produced nearly 60 percent of world aluminum in 2021) is a far cry from supporting the American working class. Additionally, carbon border taxes are ripe for political gamesmanship because determining the true carbon intensity of products from a variety of countries with different regulatory systems and variations in how emissions are tracked is no simple task. The sheer complexity of rating products would impose massive compliance costs throughout global supply chains, the last thing that is needed with runaway inflation and supply chains that are still recovering from the dual shocks of the pandemic and Russia’s invasion of Ukraine.
If their goal is to promote American industry, then-Senator Cassidy and other policymakers should look for options other than trade protectionism in the form of carbon border taxes. In the short run, carbon taxes may confer some advantages to some parts of American industry, but in the long run, policymakers will only harm those businesses by shielding them from the competitive pressures of foreign competition in a global market. That competition encourages innovation and efficiencies that benefit the industry itself as well as consumers. Along the way, American consumers will be harmed as they pay more for goods and services as the costs of tariffs are ultimately passed along to them.
A better approach to promoting American industry would focus on reducing burdensome regulations here in the U.S. that raise the cost of doing business and make it harder for American industry to compete with countries like India and China. In the energy sector, a good place to start would be to work on overturning most, if-not-all, of the 125 actions the Biden administration and congressional Democrats have taken that have raised energy prices by making it harder to produce oil and natural gas here in the U.S.
Ultimately, tariffs are not a tax on foreign producers, but on domestic consumers. Companies pass their costs onto their customers, and so, as with all other tariffs, the ones ultimately holding the bill for a border-adjusted carbon tariff would be domestic consumers.
For more on this issue see IER’s policy Carbon Border Adjustment Policy Brief from last year.