In my view, carbon taxes are the best way to address climate change, and the best approach to carbon taxes is to apply them in a non-discriminatory manner to products from all countries. How exactly do you make them non-discriminatory? Ideally, you would do this on a multilateral basis, with a coordinated effort by as many countries as possible. That way, through the various domestic measures adopted by each country, the taxes would be applied in a roughly equal way. But if multilateralism isn't achievable, and a country wants to go ahead anyway, it could adopt domestic taxes that are applied in a non-discriminatory manner to both domestic goods and imports. That will be a challenge, but in theory it could be done.
One variation of this domestic approach concerns me, though. Sometimes I hear the issue presented as follows: We should adopt a domestic carbon tax of some sort first, without any attempt at coordination, and then subsequently, possibly through a separate mechanism, impose border adjustments/tariffs on imports from countries who will not adopt the same or a similar policy. It worries me because in practice, due to a lack of expertise or a bad faith implementation of the measure, these adjustments/tariffs might exceed the domestic taxes, and therefore actually be discriminatory; or they might be applied in a non-discriminatory but arbitrary way. And it worries me because this approach has a unilateral feel to it, and could lead to trade wars and be less effective than trying to coordinate with others. I understand the difficulties with this kind of coordination, but I think we should at least give it a try first before we turn to going it alone. And if we are going it alone, we should be careful about how we approach things, in order to avoid the abuses of unilateralism.
That's why I'm skeptical of this suggestion from Tim Meyer and Todd Tucker that the now infamous Section 232 could be used as the basis for imposing carbon tariffs and pushing other countries to follow U.S. policies. Here is their explanation for how Section 232 could work in this context:
For a carbon tariff, though, a U.S. president has a far easier path forward. A Cold War-era law, known as Section 232 of the Trade Expansion Act of 1962, gives the president the authority to “adjust the imports” of any product that “threatens to impair the national security” of the United States. While the phrase “national security” makes most people think of defense and foreign affairs, Congress made clear that it wanted the president to take a much broader view. In assessing threats, Congress directed the president to “recognize the close relation of the economic welfare of the Nation to our national security” and to consider “the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports,” as well as any other factors the president deems relevant. The president can then act on his or her assessment without further authorization by Congress.
Put simply, Section 232 links national security to economic security and, in doing so, gives the president carte blanche to regulate imports that he or she decides affect some aspect of the nation’s economic well-being. Section 232 also gives the president his or her choice of policy instrument—the president can impose tariffs, fees or quotas. Congress even gave advance consent to international agreements that adjust imports. Taking Congress up on its broad invitation, President Trump has used Section 232 to impose tariffs on steel and aluminum imports, and he has threatened to impose tariffs on auto imports as well. Past presidents have used these powers to “adjust the imports” of oil and for other purposes.
Section 232 thus provides a U.S. president with all the authority he or she needs to impose a carbon tariff.
This is not as far-fetched as it sounds. Over the past three years, both the courts and Congress have considered the scope of presidential authority under Section 232. Given the breadth of the definition of national security, courts have been unable to find limits in the substantive grant of authority. In June 2018, the American Institute of International Steel and two of its members filed a suit in the U.S. Court of International Trade, charging that Section 232 violates the nondelegation doctrine, a constitutional rule that prohibits Congress from wholesale transferring its constitutional authorities to the executive branch. In this case, the plaintiffs argued that Congress had impermissibly transferred its exclusive constitutional authority to impose taxes and regulate foreign commerce. (In full disclosure, one of us—Meyer—represented the plaintiffs in that case.) But, relying on a 1976 Supreme Court decision, the lower courts turned the challenge away and in June of this year the Supreme Court declined to hear the case, effectively blessing presidential discretion to regulate imports based on an expansive conception of security.
Section 232 has virtually no administrative guardrails, so substantive challenges to the president’s exercise of discretion under Section 232 are almost impossible. The Supreme Court long ago held that the president is not an “agency” and that his or her decision-making processes are thus not subject to the Administrative Procedure Act. Nor does Section 232 itself provide any explicit basis for review of presidential decisions. To be sure, the statute does require an investigation by the Commerce Department, which must first determine that imports threaten to impair the national security before the president can act. That investigation and the president’s decision-making process must also adhere to certain timelines, the violation of which does provide a basis for challenging Section 232 measures. But the time limits are hardly burdensome and the Commerce Department is not an independent agency. It works for the president, and its deliberations might properly be influenced by the administration’s policy goals.
Congressional efforts to reform Section 232 have gotten little more traction. A number of bills have been introduced, but none has made it out of committee. Congress has had good reason to revisit the scope of the president’s authority, since the Trump administration’s use of Section 232 has led to job losses in the United States and has disrupted relationships with staunch U.S. allies like Canada and the EU. But, absent veto-proof majorities in both houses of Congress, amending Section 232 would require the president’s consent—and it is hard to see why an incoming administration would give up the kind of authority that Section 232 confers. Any reform of Section 232 under a future Biden administration would therefore likely have to grandfather in that administration’s policies, as some of the proposed reforms would have done for the Trump steel and aluminum tariffs. A future reform-minded administration might even insist on a “sunrise” clause, which would delay any amendment’s effectiveness until after the next presidential election.
Section 232 is therefore likely here to stay, at least for the medium term, and carbon tariffs would be a much more defensible use of the broad 232 authorities than Trump’s erratic approach. The Defense Department has already concluded that climate change poses a threat to national security, even as conventionally understood. And significant research suggests that decarbonizing the economy need not slow economic growth and is even likely to support greater economic productivity. Moreover, Section 232’s ex ante grant of authority to conclude international agreements allows the president to work with U.S. allies on carbon tariffs, rather than antagonizing them through unilateral action. Indeed, having on hand a Commerce Department report that recommends security-motivated restrictions on carbon-intensive imports (even if the president does not ultimately impose the restrictions) can motivate allies and competitors alike to come to the table.
Tim has been in the trenches of the Section 232 fight, so I mostly defer to him on what the courts would allow here (although I would note that a conservative Supreme Court may take a different view of the importance of fighting climate change than Tim and Todd do). I'm going to focus instead on the policy/politics side of their suggestion.
At the outset, it's worth stating the obvious: Politically, it won't be easy to do any of this. Putting aside the border adjustments/tariffs, the domestic carbon tax itself will be a struggle. My view has always been that a revenue-neutral carbon tax would be achievable, but there have been objections on both sides (many on the left want to increase revenue, and many on the right don't care about carbon emissions).
But let's assume that someone finds a way to move the domestic carbon tax forward. What are the specific difficulties with the border adjustments/tariffs? To me, there are two aspects to the challenge a Biden administration would face here: International and domestic. Let's start with the international side of the issue. As Tim and Todd put it, the international aspect arises for the following reasons:
... The problem is this: If a country pushes its industries to make costly adjustments to reduce carbon emissions and the rest of the world doesn’t follow suit, its manufacturers may head offshore. After all, if Vietnam or Indonesia allow firms to pollute freely, it quickly becomes an attractive business proposition to relocate there and sell cheap products back to U.S. or European consumers.
How to resolve the tension between saving the environment and saving jobs? One possibility is a tax on carbon-intensive imports from countries that do not have stringent climate regulations. ...
A core assumption that Tim and Todd seem to make is that some or all countries won't go along with any U.S. initiative here, which could lead to "carbon leakage," so we have to use economic leverage to pressure them into doing what we want. It seems to me that, with their Section 232 proposal, they want to get the economic leverage all ready at the outset, so we can use this pressure to push everyone else along. They try to present it otherwise when they say this: "Section 232’s ex ante grant of authority to conclude international agreements allows the president to work with U.S. allies on carbon tariffs, rather than antagonizing them through unilateral action." But then their next sentence says: "having on hand a Commerce Department report that recommends security-motivated restrictions on carbon-intensive imports (even if the president does not ultimately impose the restrictions) can motivate allies and competitors alike to come to the table." I'm not sure what "motivate allies and competitors alike to come to the table" means other than unilateral antagonism.
More importantly, I'm not sure their basic assumption is necessarily true. They seem to think that other countries would not be amenable to joint action, and thus we have to start off with some motivating threat like Section 232 tariffs in order to get anything done. But I'm not sure why they think that. We should at least try to make the case to other countries that they should join the effort. If we come to the table, and others don't show up, or are not willing to engage, then we can think about going it alone. But we are not there yet. We ourselves haven't even sat down at the table at this point.
In addition, while those in the United States who push for these coercive policies may think they are just doing what needs to be done to save the planet, keep in mind that things may look very different from the perspective of other countries. They may see it as, after years of not caring about climate change, suddenly the United States cares, and as a result now everyone else must care too, and must care to exactly the same degree and in exactly the same way. And these other countries may also note that the long history of carbon emissions is ignored in all of this, and that the United States is not taking into account its historical contribution to carbon emissions.
For these reasons, other countries might not be eager to cooperate when the United States starts the process by giving itself economic leverage in the form of an official authorization to impose tariffs, fees, or quotas. A Section 232 action here is just as likely to discourage coordinated action as it is to encourage it, especially with the most important developing countries (India, China, GCC countries, etc.).
Thus, approaching the situation in this way could undermine the cause of reducing carbon emissions, and could lead us down a path towards trade conflict over the issue because the result of imposing carbon tariffs in this way might be retaliatory tariffs.
Fortunately, I think there is an alternative. Instead of starting this alone, by setting a domestic policy and trying to force everyone to adopt the same policy through economic coercion (via Section 232 or something similar), the United States should instead try to coordinate with others at the outset. We shouldn't be thinking about it as "we will decide the policy and everyone else must follow." Instead, we should be thinking from the start about how we might bring others on board. We need to get the table out and invite everyone to sit down.
Now, all of this will obviously be quite a challenge. But it probably gives us a better chance of coordinating multilateral action on this issue. That's my impression from watching other attempts at coordinating multilateral action over the years, although I acknowledge that it would be hard to demonstrate this empirically, and we are all going on instinct here. Some people seem to have an instinct that the United States should make decisions on its own and then use its power to push others to follow along, but I'm skeptical of the effectiveness of that approach.
As noted, though, coordinated multilateral action is difficult, so in the end you may have to do something on an exclusively domestic basis. If you end up going that route, I would suggest doing things in as neutral and objective a way as possible. Try very hard to ensure that the carbon taxes you impose on foreign goods are equivalent to the taxes you impose on domestic goods. Basically, you want to have a non-discriminatory carbon tax that applies somewhat equally to domestic and foreign goods.
Could Section 232 be used effectively in this way? I'm skeptical. For one thing, as Tim and Todd note, "substantive challenges to the president’s exercise of discretion under Section 232 are almost impossible." That means it would be hard to go to the courts if the executive branch did the wrong thing here. Checks and balances do slow things down, but they are a good thing, and they are important even if whoever is in power is pursuing your favored policy. Tim and Todd seem to see the absence of constraints as an argument for using Section 232 in this context, but I would say it's an argument against using it here.
In addition, in thinking about the right approach, you probably want to consider the biases and expertise of the actors involved. Section 232 relies mainly on the Commerce Department and the President, with input from the Defense Department. As Tim and Todd point out, "the Commerce Department is not an independent agency. It works for the president, and its deliberations might properly be influenced by the administration’s policy goals." When you have a president who emphasizes "Buy America," you can imagine what direction this might go. In addition, lobbying would almost certainly play a bigger role than we would like, as it often does.
With regard to expertise, the Bureau of Industry and Security is the responsible department within Commerce, and my sense is they are not that big and do not have the kind of environmental/tax background needed here. In theory, you could bring in environmental and tax experts as well, but you would have to break a lot of new ground to do it. As a result, I'm not sure how well it would go if you put Commerce in charge of all this. Section 232 has never been used this way, and the process doesn't seem equipped to do the job required here. Section 232 is designed to protect a domestic industry from foreign competition. Can it really be used for a completely different purpose? It's not set up to impose non-discriminatory taxes, and it would be a challenge for Commerce to manage all this in a reasonable way. The resulting tariff could end up being arbitrary and not well-calibrated to the policy goal.
Instead of delegating this aspect of the carbon tax issue to an agency not set up to handle it, it may be better to address the import side of carbon taxes as part of the underlying tax measure, relying on the same experts who were involved in designing the domestic tax. If the same people thinking about the domestic tax can think about how to apply it in a non-discriminatory way to foreign goods, there may be a better chance of success. There are no guarantees, of course, and there are plenty of reasons why they might fail as well. But relying on Section 232 for this seems almost certain to be disappointing.
And finally, can you use Section 232 in this way and not have it be used in a wide range of other ways as well? Seems doubtful. If you're pushing the boundaries of Section 232 with carbon tariffs, there will be pressure for other actions as well.
Beyond the use of Section 232 here, keep in mind how difficult this all will be, both politically and technically. Referring to "carbon-intensive imports from countries that do not have stringent climate regulations" probably oversimplifies things, because it's unlikely to be an all or nothing (regulations or no regulations) in many cases, but rather a range of taxes/regulations across countries that have to be compared somehow. And think about the following example. There are two steel companies in a country that lacks a domestic carbon mitigation scheme. One uses a cheap but dirty coal-fired blast furnace and the other uses a cleaner but costly electric (arc) mini-mill. Do their imports face the same carbon tariff? If not, that’s going to require a complex calculation. But if so, the cheaper/dirtier option would be at an advantage, which would defeat the environmental purpose of the tariff. These are hard questions, and you should address them with all the key actors participating. Ideally, you would want Congress involved in this, but can legislation be passed? That probably depends on the makeup of the Senate after the upcoming election. If legislation cannot be passed, can regulations be developed under existing legislation? Will the regulations be challenged in court? It's all going to be a mess regardless, but you really need to get the right people working on this. I can see how Section 232 might seem like a neat solution to one aspect of the problem, but on balance I think it may cause an equal or greater amount of domestic controversy, and may also completely undermine international efforts to address this problem. If the challenge of climate change is truly global, then using a unilateral policy like this one to tackle it seems counterproductive.
