Taxing the Intangible: An American Carbon Border Tariff
Democratic Senator Chris Coons of Delaware was one of the Congressmen who proposed an American carbon border tax. Photo by Ralph Alswang.
As thousands evacuate California to escape annual wildfires, deadly flooding due to extreme rain threatens central China and Europe, and Canada records temperatures of 120 degrees Fahrenheit, coherent and efficient climate legislation becomes increasingly necessary. Earlier this month, the European Union took the first step: a proposal for a tax on carbon emissions, also known as a carbon border tax. This tax would act as a tariff on imports from other countries that directly corresponds to the amount, in tons, of carbon emitted by the production of those goods. Though the idea of a carbon border tax on goods imported from countries that emit high amounts of greenhouse gases, like carbon dioxide, is not a new idea, this would be the first real implementation. It comes at a dire time, as climate scientists predict that Earth’s temperature will cross the deadly threshold for dangerous global warming, an increase of 1.5 degrees Celsius, as early as 2027. As small as 1.5 degrees seems, it actually serves as a point of no return, in which once the average temperature crosses it, the effects of global climate change would be implacable and irreversible.
The EU hopes that this carbon border tax will help alleviate the consequences of domestically-produced goods’ prices increasing due to their adaptations to become more climate-conscious. This includes the recent experimentation the European steel industry is conducting, using hydrogen as a fuel source instead of the conventional fossil fuels. This is more costly than using traditional sources of energy, thus potentially increasing the cost of the steel and causing consumers to purchase from international industries that do not take into account the effects of cheaper fossil fuels on the environment. The tax would charge international companies a carbon tariff on certain goods, including steel, aluminum, fertilizers, cement, and electricity, based on the emissions released by the production of said goods. These companies would need to monitor and verify their emissions with the EU, which would set the price per ton of carbon dioxide released.
Following the pattern of the modern age, Europe has once again proved itself to be the world leader in tackling climate change. The United States, once a leader itself, has fallen behind into a pit of partisanship and climate legislation stagnation. With the new presidential administration and a switch-up in political power in Congress, however, things may be poised to change. Democrats, on the same day as the EU carbon border tax initiative, also proposed a similar tax that would help fund a new $3.5 trillion spending package (which would be used to fund a multitude of different policies like universal childcare and an expansion of public healthcare benefits). Part of the funding would come from a tariff imposed on goods with heavy carbon emissions coming from international sources. If ever passed into legislation, this tax, similarly structured to the EU’s tax, would position the United States in the forefront of leadership in the climate crisis, as well as incentivizing U.S. trading partners to cut carbon emissions to stay competitive in the largest economy in the world and encouraging American businesses to keep production domestic.
Environmental regulations, especially in the U.S., can be tricky and divisive. 20% of Americans still believe that “human activity plays not too much or no role at all in climate change.” However, climate legislation does work in reducing the overall emissions of the countries that enact them. Harvard Business Review found that global emission levels are, in fact, lower for countries with more rigid environmental regulations at home. This does have the negative consequence of companies exporting their emissions to what economists call pollution havens or places that adopt less tight regulations in order to bring in companies from abroad, so much so that “a tightening in regulation [at home] results in 43% higher emissions abroad.” The carbon border tax would help alleviate this issue, as it would nullify the incentive to move outside of the U.S. in order to pollute elsewhere and cut costs associated with reducing emissions. The tariff would take into account the number of emissions accompanying those goods and adjust the price accordingly, therefore helping to keep companies within the U.S. and providing employment to Americans.
Additionally, because the United States is the largest economy in the world, foreign companies and industries are continually motivated to maintain strong trade connections with the country and keep up competitively with other producers in the market. If the U.S. was to enact a carbon border tax, the companies with fewer emissions released would have to pay less to compensate for their pollution and allow them to keep their goods and products at a lower price to sustain an edge over the competition. A carbon border tariff in the U.S. has the potential to cause change internationally and help lower the emissions produced by other corporations around the world. It would be a large step forward for the U.S., which has completely stagnated in its environmental leadership and policies. Because of the timing between the EU initiative and the Democratic proposal across the Atlantic, there may be a possibility for the two to cooperate and work together to get both passed respectively. European officials even hoped that “the Americans would collaborate and work with the EU”, according to the Financial Times. A message of international solidarity to combat climate change would introduce a powerful message to the rest of the world that no country would fight against global warming alone.
The American carbon border tax, though, is far off. The spending package, which the tariff would help fund, has yet to be drafted. Moreover, the Biden administration's climate envoy, John Kerry, expressed concern over the carbon border tax adjustment and especially for the EU’s plan to utilize the mechanism. His anxiety may be justified, as the move is completely unprecedented and has the potential to cause sizable issues with the EU’s trading partners. The Center for European Reform found that the countries most affected by the European carbon border tariff would be Russia, Turkey, China, Britain, and Ukraine, all large partners and economies. These countries, especially Russia and China, all have the potential to be upset over this tax, as it would negatively affect their trade with European markets, which could cause rifts between the EU and other world superpowers. The EU is also ensuring that the tariff does not interfere with the World Trade Organization and would be able to withstand legal objections. This manifests in the tariff technically being known as the EU Carbon Border Adjustment Mechanism, and not a tax, though it functions like one. The United States would need to operate within the constraints of the WTO, as well, if a carbon tariff was to be implemented.
Furthermore, there is concern over whether such a tariff would negatively affect developing nations, which may lack the massive infrastructure necessary to overhaul their production of goods to be more environmentally conscious. If the U.S. was to adopt the tariff, politicians would need to address this valid apprehension towards the legislation. Companies within developing nations should not be expected to carry the full weight of the tariff when they have contributed so little to global emissions compared to other countries, and this may take the form of less taxation or a full waiver from the tariff. Currently, the EU has not proposed any exemption for certain countries based on historical emission rates.
The present-day is the best time for the U.S. to step into the forefront of the fight against climate change. Any later, and it may be too late. The U.S. has great international influence, and if a carbon border tax is implemented here, as well as in the EU, it may set the worldwide tone and set off a ripple effect around the globe. It would be an important step forward for a country that has taken many steps back in regards to climate and the future of our planet.
Zachary Masone (CC ’24) is a recent transfer to Columbia and writer for CPR, majoring in political science.