On Thursday, two Republicans, with Louisiana Senator Bill Cassidy (R-LA.) at the forefront, unveiled a new climate tax. This legislation seeks to impose a tariff on goods imported from nations with significant greenhouse gas emissions. The primary objective is to safeguard American manufacturers from competition with countries like China and others that have less stringent environmental regulations. However, policymakers are overlooking the fact this new tariff would impose significant economic costs on the American people while producing few environmental benefits. It will also likely set the stage for the adoption of a domestic carbon tax.
Background: This New Climate Tax Originated with the PROVE IT Act
The introduction of this new bill was set up earlier this summer when Senators Christopher Coons (D-DE) and Kevin Cramer (R-ND) introduced the PROVE IT Act. That bill instructs the Department of Energy (DOE) to undertake a thorough examination, comparing the emissions intensity of specific goods manufactured in the U.S. to the emissions generated by the same goods manufactured in other countries. However, the PROVE IT Act is not just some innocuous data collection effort as it opens the door to the government imposing protectionist tariffs (like Senator Cassidy’s new bill) as well as a domestic carbon tax.
There are many flaws in the PROVE IT Act, which IER has outlined in more detail here.
The main issue is that measuring and quantifying greenhouse gas (GHG) emissions pose significant challenges as they result from a wide range of human activities. Some emissions cannot be pinpointed to a specific source, particularly in large, complex industrial facilities. This can be particularly challenging for calculating the emissions profiles for other countries as there exist strong incentives for countries to provide false or underestimated emissions data as it offers economic advantages in terms of tariffs. Additionally, climate change studies sometimes rely on imprecise approximations, which are inadequate when applied to carbon taxes and tariffs, with real financial implications for companies and industries.
For example, the PROVE IT Act aims solely to approximate an overarching “average” emissions intensity for products within a given nation. Yet, in a vast country like the U.S., emissions can significantly differ based on the production location of a product. While such an average might suffice for some modeling purposes, when taxes and tariffs come into play, individual companies either benefit from or bear the consequences of these regional discrepancies. Some of the sponsors may assert that this legislation primarily pertains to data collection for tariffs on products from other nations. However, the inherent unfairness within this nationwide average calculation will likely generate calls for the implementation of a domestic US carbon tax to address this regional variation.
The legislation mandates the Department of Energy (DOE) to compile a report filled with flawed and incomplete data, likely to be used for regulatory and taxation purposes despite its shortcomings. On top of that, calculating emissions profiles for other countries, as proposed by the legislation, faces challenges such as uncooperative nations, data limitations, and incentives to provide false data.
Finally, the PROVE IT Act also opens the door for rent-seeking and lobbying, as the DOE has broad discretion in determining the methodology. Lobbying efforts are expected to be intense, potentially leading to biases in the report’s formulation. There are concerns about the DOE’s impartiality, given the Biden administration’s policies that routinely favor some industries over others, and the legislation’s cosponsors may have unrealistic expectations about the DOE’s ability to conduct an equitable analysis of emissions across all sectors, given the government’s broader policy objectives. An example of this sort of rent-seeking can be found in the Department of Agriculture’s efforts to adjust their GHG model to help ethanol get a specific aviation fuel subsidy.
Moving Quickly from Studies to New Climate Taxes
It is clear that the goal of introducing the PROVE IT Act was to set the stage for new climate taxes and tariffs as evidenced by the introduction of Senator Cassidy’s new tariff bill. There are multiple grounds for expressing strong reservations about the potential impact of this new carbon tariff legislation as it will certainly cause significant economic harm and will likely produce few environmental benefits.
First, the economic effects of tariffs are relatively straightforward. Tariffs are just taxes on imported goods, and the costs of those taxes get passed on to consumers. Although protected domestic industries often end up making more money when tariffs are implemented, the overall effect of tariffs on the American people is a net harm as implementing taxes on imports raises the price of products and consumers just end up paying more for them.
Consequently, tariffs reallocate wealth that consumers previously saved when purchasing more affordable, non-tariffed imports to producers and the government as governments take in some revenue from tariffs. Most importantly, when tariffs are implemented, this exchange is not balanced. A portion of the consumer surplus dissipates without benefiting anyone, a phenomenon referred to by economists as “deadweight loss.” Therefore, the tariff results in a transfer from consumers to business and government and an overall reduction of wealth within the U.S.
Additionally, the history of U.S. tariff policy suggests that tariffs typically fail to achieve the stated government policy objectives. In 2017, at the Cato Institute, Scott Lincicome released a paper that summarizes the history and the effects of tariffs across multiple eras in U.S. policy. Those historical episodes showed that tariffs often fell short of accomplishing their declared government goals, which included efforts to revive safeguarded industries, preserve employment opportunities, or facilitate access to international markets.
In this case, it seems very unlikely that tariffs will be capable of engendering positive environmental outcomes as there is overwhelming evidence that the efficiencies and innovation that are generated through competition and freer trade policies help promote cleaner environments. New carbon tariffs will replace those environmental benefits with political dysfunction and corruption, creating a cycle where successful rent-seeking outcomes for the industries that benefit from these new carbon tariffs will inspire other domestic industries to pursue other forms of protectionism through government policies.
If the aim is to support American industry and improve the environment, Senator Cassidy and his fellow policymakers should explore alternative strategies rather than resorting to carbon tariffs as a form of trade protectionism. While tariffs might offer short-term benefits to specific sectors of the American industry, the long-term consequences will prove to be detrimental as the net result will be significant harm to the American economy and people. Finally, carbon tariffs are not likely to produce significant environmental benefits as shielding businesses from foreign competition in a global marketplace limits the competitive pressures that drive innovation and efficiency. These are important aspects of free trade that benefit consumers, industry, and the environment alike.