With our economic health faltering, now would be an inopportune — indeed, inexplicable — moment to ratchet prices higher still.
A carbon border tax would increase costs for U.S. consumers and harm some of America's most vital international relationships.
A ccording to the April 28 estimate from the Bureau of Economic Analysis, real gross domestic product fell in the first quarter of the year at an annualized rate of 1.4 percent. Inflation, meanwhile, has surged, with prices rising 8.5 percent in the past 12 months. For the first time in four decades, we are flirting with the most dreaded of economics portmanteaux — stagflation. With our economic health faltering, now would be an inopportune — indeed, inexplicable — moment to ratchet prices higher still. And, yet, that is precisely what a coterie of U.S. senators intends to do with a new carbon tariff.
E&E News calls the group “Joe Manchin’s bipartisan energy gang.” The sobriquet is fitting. Though the “gang” has not at this time etched the details of its plan, its broad outline is clear: This carbon tariff would foist higher prices onto the American public at a time when it is already under mounting economic duress. While pinching American prosperity, the plan would also alienate key partner countries, weakening America’s global standing.
What Is a Carbon Tariff?
A carbon tariff — sometimes called a carbon border adjustment or a carbon border tax — is a fee levied on imported goods based on an estimate of the greenhouse-gas emissions entailed by their production and, in the case of energy products, their use, factoring in both the emissions intensity of the origin country’s energy system and that country’s own emissions policies. Imports from countries with high greenhouse-gas-emitting economies and lenient emissions policies would be taxed, in theory leaving domestic alternatives or alternatives from countries with low-emitting economies and/or stringent emissions policies more price-competitive.
We do not know the scope of the gang’s current plan, but last summer, Hill Democrats pitched something along the same lines. If the 2022 approach mirrors its predecessor, imports that we can expect to be caught by the tariff would include petroleum and petroleum products, natural gas, coal, cement, iron, steel, and aluminum — products the New York Times says make up 12 percent of all U.S. imports.
Though the U.S. has been a net energy exporter in recent years, the country still imports massive resource quantities. In 2020, the U.S. imported more than 3 billion barrels of crude oil, for example. About half of U.S. crude oil imports come from Canada, a country that has its own carbon-price regime in place, and would skate past the tariff. The remaining imported oil, however, tends to come from places with high-emission intensities and lenient policies, such as Saudi Arabia, Mexico, and (until recently) Russia, meaning a significant portion of the U.S. energy supply would immediately become more expensive. With energy prices in the U.S. rising rapidly, further upward price pressure is the last thing that consumers or industry should want to see. Moreover, while the 2021 Democratic plan targeted the most emissions-intensive imports, a carbon tariff could conceivably cast a wider net, extending beyond those limited imports and pricing in emissions estimates onto goods such as cars, electronics, and industrial equipment.
A Tariff by Any Other Name Would Smell as Foul
Typically, a carbon tariff is used to offset a country’s own carbon-pricing regime on its domestic industry, in which case it can reasonably be called a carbon border adjustment. The European Union has such a policy in place, matching with its Emissions Trading System. The U.S., conversely, has no such unified policy. As the American Enterprise Institute’s Kyle Pomerleau explained in response to the 2021 proposal from Senate Democrats, without a domestic equivalent, a carbon border adjustment is a tariff, plain and simple. “Democratic lawmakers,” Pomerleau wrote, “are considering a proposal to apply the advantages of a border adjustment to current climate policy. The import tax lawmakers are considering, however, is not a border adjustment — it is a tariff.” Until and unless the U.S. enacts its own coherent emissions policy — a related but separate debate — the term “adjustment” will remain a misnomer.
Though Manchin’s gang will explore alternative nomenclature — they will doubtless experiment with “mechanism,” “fee,” “assessment,” and more — the essence of the plan is to discriminate against imports. Despite a certain segment of the Republican Party embracing the idea, few senators are comfortable championing it outright. North Dakota’s Kevin Cramer, a Republican and a vocal member of the gang, took pain to avoid it in his joint Foreign Policy op-ed with H. R. McMaster in December.
The gang will tell us the border-tax plan is a way to beat China, as Louisiana’s Bill Cassidy (another Republican senator) framed it, saying, “Once people understand that this is a geopolitical tool, and it’s a lot better than war, it’s a lot cheaper than war, in terms of addressing the militarization of China, and it helps our workers and helps our industry, then they kind of get behind it.” They will also say it is a tool to stanch global warming, as Cramer and McMaster contended, calling it “an important part of international efforts to cut emissions” and an “America First climate policy.”
What the gang will avoid is the evidence that tariffs spread economic harm widely, while concentrating gains on a few select winners. The Trump-cum-Biden steel and aluminum tariffs, promulgated on alleged national-security grounds, have yielded unfortunate, but predictable, outcomes to that end. According to March 2022 research by the American Action Forum, since 2018 these tariffs have added a cost burden to U.S. consumers of more than $2 billion. The Cato Institute’s Scott Lincicome has described the tariffs as costly, ineffective, and unfair. “As a result of these tariffs, favored U.S. steel companies can extract extra profits from downstream manufacturers by continuing to restrict output and charging obscenely high prices,” he wrote in February 2021. For U.S. households, the bottom line is that, as with a steel tariff, a carbon tariff stretches budgets ever closer to the breaking point. For U.S. firms that are not on the winning side, it is that business costs tick upwards further still.
As to how a carbon tariff would work in the absence of a unified domestic emissions policy, “It’s safe to say, I think,” Rhode Island senator Sheldon Whitehouse told E&E News in a moment of uncharacteristic insight, “that no one has figured that out.” Because the U.S. has no comprehensive price on carbon emissions, any border tax will be a clumsy approximation of the myriad emissions regulations that U.S. companies face. And as University of Chicago Law Professor David Weisbach told the New York Times in 2021, “I’ve never seen a border adjustment that adjusts for regulatory costs. That’s going to be hard to do.”
Foreign Policy Implications
Looking beyond the domestic economic consequences, such a U.S. carbon tariff would almost surely run afoul of World Trade Organization norms and trigger retaliatory measures from other countries. According to Policy Guidance for US GHG Tax Legislation and Regulation, a collaboration between Resources for the Future scholars Brian Flannery and Jan Mares and World Trade Organization experts Jennifer Hillman and Matthew Porterfield, “If other nations believe that US [carbon border adjustments] constitute illegal domestic subsidies or discrimination against imported products, they can challenge them through WTO dispute settlement procedures or by more direct retaliation against US exports.” In contrast to the European Union border adjustment, a U.S. policy as devised by the Manchin gang would most definitely be viewed in such a way.
Some proponents are willing to throw consensus anti-protectionist positions out the window, trading partners be damned, but that is a curious ploy for a country seeking to rebuild economic and strategic relationships as a bulwark against China in the Indo-Pacific. Carbon tariffs would strike at countries such as India, Indonesia, and Vietnam, which are crucial to forging a coalition against Chinese regional hegemony. Kneecapping these developing countries’ exporters to the advantage of U.S. insiders would be counterproductive to important goals in foreign affairs.
There is an unmistakably punitive element to some of the carbon tariff backers’ rhetoric. “Well, we are trying to move the world to a cleaner environment,” South Carolina Senator Lindsey Graham told Politico in February, “and China, India and other countries are not doing as much, and they need to pay a price.” While that attitude may give a boost to some politicians’ popularity, in the long run it risks giving China a plausible claim (by Beijing standards anyway) to the role of standard-bearer for developing countries against a cynical, hypocritical United States. To that point, University of Texas professor Arvind P. Ravikumar sees a carbon border tax as a new form of colonial-style economics, coercing developing countries into adherence with ever-shifting Western norms. As Ravikumar wrote in 2020 for the MIT Technology Review, “That China, India, and other developing countries rely on fossil fuels to power their economies is not an accident. These growth models are a consequence of post–World War global dominance by the West in economic, political, and financial spheres. Until very recently, international organizations like the World Bank Group provided financing to expand fossil-fuel infrastructure, including coal-fired power plants, in developing countries.”
According to the most recent data from the World Bank, India’s greenhouse-gas emissions amount to 1.8 tonnes annually per capita; Indonesia’s to 2.2 tonnes; Vietnam’s to 2.7 tonnes. For the U.S., the figure is 15.2 tonnes. And Senator Graham thinks it is we who should be making these countries “pay a price?”
At root, a carbon border adjustment fee, absent a genuine domestic carbon policy, is a tariff. Delaware senator Chris Coons, who as recently as 2019 lamented the harmful effects of tariffs on U.S. businesses, now approves of the very same framework, describing the bipartisan energy gang’s plan as creating “incentives and rewards for our own industrial manufacturers and barriers to entry” against products from places such as India.
The benefits of a carbon tariff would redound to a narrow subset of domestic interests while the rest of us are forced to pay higher prices in an already inflationary environment. To weaken the case further, suggestions that such a policy would help our position relative to China ignore the fact that a carbon tariff will not only strike at Beijing, but will also harm the economies of pivotal Indo-Pacific counterweights.