This Tariff Could Be Biden’s Best Climate Change Tool
(Bloomberg) -- President Joe Biden has plans to fight climate change with clean energy mandates, investments in electric vehicles and tough new limits on greenhouse gas emissions. But his most potent weapon against global warming may be a so-called border adjustment tariff levied on certain carbon-intensive goods imported from countries with lax climate controls. Such a tax, which is under consideration in other countries as well, is seen as a way to crack down on planet-warming pollution while protecting domestic workers. It also could ignite new trade tensions and run afoul of World Trade Organization rules.
1. What is the U.S. considering?
The Office of the U.S. Trade Representative says “carbon border adjustments” are among several “market and regulatory approaches” under consideration to address greenhouse gas emissions. Biden embraced the idea of carbon adjustment fees or quotas during his campaign for president. Border adjustments are already widely used globally, with the most common example being value added taxes charged by developed countries, including members of the European Union.
2. What products would be taxed?
There’s no specific proposal at the moment, but generally speaking, goods that are particularly carbon-intensive include cement, steel, aluminum and fertilizer.
3. How would this work?
There are all sorts of tricky details to navigate in creating this kind of border adjustment regime, including what industries and products would be taxed, how to assess the amount of carbon embedded in imported goods and, potentially, how to judge the policies of countries supplying them. The goal would be a tax regime that creates a level playing field for U.S. companies, which don’t pay an explicit carbon tax but must comply with regulations that impose a de facto price on carbon. U.S. exports to countries with less stringent climate policies could even receive rebates.
4. Why now?
Biden has made combating climate change one of his top priorities, but many of his biggest moves would have limited impact outside the U.S. He brought together the leaders of 40 nations in an April summit meant to drive deeper emissions cuts, but some countries, including China, India and Australia, have resisted calls to get tougher. A border carbon adjustment would give other nations more incentive to tighten emissions controls, lest their exports cost more inside the U.S. And the tariff is one way to stop a phenomenon known as “carbon leakage” -- where domestic climate policies spur companies to shift production overseas to nations with less stringent (and less expensive) carbon controls.
5. What other countries are considering this?
The EU is developing a carbon adjustment program that could be implemented as early as 2023. U.K. Prime Minister Boris Johnson is using his country’s chairmanship of the Group of Seven nations to press the issue. And Canadian Prime Minister Justin Trudeau has encouraged the idea in talks with Biden. Environmentalists and economists, including Nobel Prize winner William Nordhaus, have urged border carbon adjustments for years.
6. Would this survive WTO scrutiny?
In theory, the approach is trade neutral -- neither discouraging nor encouraging imports or exports. That’s key to surviving scrutiny by the WTO, which takes a dim view of protectionism. To stay within the bounds of WTO rules, a border adjustment tax would have to be triggered by a product’s sale, not its import. Environmental exemptions to WTO rules also may help. For instance, tariffs can be allowed when necessary to protect the health or life of humans, plants and animals; the existential threat of climate change could justify that reading. A separate exception applies to policies that relate to the conservation of exhaustible natural resources.
7. What’s the outlook in Washington?
A border adjustment tax could have bipartisan appeal, since some free-trade Republicans have argued that Biden’s climate policies give an advantage to China, the world’s top greenhouse gas emitter. Also, a border adjustment that prevents carbon leakage and protects domestic manufacturing is seen as an essential complement to any new U.S. carbon tax, which American businesses increasingly favor over new federal regulations. Previous efforts to develop sophisticated carbon trading regimes have faltered in Congress, however.
8. Could Biden try enacting this on his own?
Yes, by using the unilateral power given to him by a Cold War-era trade law to limit imports of products that pose a national security risk -- the same authority President Donald Trump used to impose tariffs on steel and aluminum. Biden also has latitude to slap tariffs on countries acting in “unreasonable” ways to burden U.S. commerce under a 1974 trade law. Doing so would be controversial but could perhaps be justified by arguments that carbon-intensive goods from countries with lax climate controls threaten clean-energy business inside the U.S.
The Reference Shelf
- Here’s how the world’s first potential carbon border tariff, which would be leveled by the EU, is supposed to work.
- The European Union is leveling the playing field with a carbon border adjustment mechanism. We break down the complexity.
- An article by William Nordhaus on how import levies can be a weapon against climate change.
- A 2019 paper from the American Journal on International Law examined how to design a WTO-compliant border carbon adjustment.
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