A recent Washington Post article describes a new piece of U.S. legislation that could eventually lead to the imposition of a carbon border tax:
In a rare example of a bipartisan climate policy, momentum is growing on Capitol Hill for a plan to tax imports from China and other countries with looser environmental standards.
Sens. Christopher A. Coons (D-Del.) and Kevin Cramer (R-N.D.) on Wednesday will introduce a bill that would lay the groundwork for America’s first carbon border tax, according to legislative text shared with The Washington Post before its broader release. The senators’ goal is to impose fees on iron, steel and other imports from countries that are not significantly reducing greenhouse gas emissions.
The title and sub-title of the Post piece are as follows:
A bipartisan plan to punish global climate laggards: Tax them
New legislation in Congress would lay the groundwork for tariffs on imports from countries with looser environmental rules
But who are the "global climate laggards"? And which countries have "looser environmental rules"? In Washington, as the Post article makes clear, the view is that these terms refer to countries such as China and India:
“Using trade to advance American manufacturing — and to disadvantage dirty or high-emissions products — is ultimately the only way we’re going to put effective pressure on China, Russia and India to dramatically reduce their emissions,” Coons said in an interview on Tuesday.
The basic idea seems to be that China, India and others are the laggards, and the U.S. should use its economic power to pressure these countries to reduce their emissions. (I'm ignoring Russia here because trade with Russia was much lower in general than with China and India, and after the Ukraine war sanctions this trade has dropped even further, so they are less important in this context).
But in China and India, many people would say that cherry-picking a few industrial products where U.S. carbon emissions are lower is not an appropriate way to look at the problem of carbon emissions. Rather, they would argue, when you look at per capita emissions, the U.S., Australia, Canada and others are the real laggards. Any actions to address global emissions through carbon taxes should take that into account.
Some in the U.S. might respond that regardless of what happened over the last couple centuries through today, now the U.S. is taking carbon emissions seriously, through measures such as the Inflation Reduction Act (IRA). However, it's worth noting that one projection that I often see cited for reduced carbon emissions through the IRA is the following: "Our preliminary estimate is that the IRA can cut US net greenhouse gas emissions down to 31% to 44% below 2005 levels in 2030—with a central estimate of 40% below 2005 levels—compared to 24% to 35% under current policy." Even assuming those projections are met -- and these sorts of projections are often wrong, so the reduction in emissions could end up being less -- the U.S. may still have one of the highest per capita carbon emissions. And it's also worth noting this from Elizabeth Kolbert of the New Yorker: "Though it’s been widely reported that, by 2030, [the Inflation Reduction Act] will reduce the U.S.’s emissions by forty per cent compared with their levels in 2005, most of this projected reduction is attributable to other developments, including the fact that many power plants have already switched from coal to lower-emitting natural gas."
Taking these very different views across countries into account, what are the trade policy implications of a U.S. carbon border tax? The article points out that WTO rules are not likely to have an impact here:
Some trade experts have raised concerns that if Congress passes a carbon border tax without its domestic counterpart, it could run afoul of World Trade Organization rules.
Joseph Majkut, director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies, said Democrats already shrugged off these concerns when passing the clean-energy tax credits in the Inflation Reduction Act.
“If concerns about the WTO were high on Congress’s list, that would have been revealed in the [Inflation Reduction Act],” he said.
While it's hard to judge these things without seeing the actual legislation, I'm pretty confident that a carbon border tax that is not tied to a corresponding domestic tax or equivalent measure is going to violate WTO rules and/or not be justified under the exceptions. Of course, as noted in the quote above, perhaps Congress doesn't care about this. (And without the Appellate Body functioning, maybe WTO rules won't have much impact anyway).
However, there are trade implications beyond the impact of WTO rules. WTO rules help to manage trade conflict; without the WTO you have to deal with trade conflict some other way. And there is likely to be trade conflict here. While some in Congress may be hoping that trading partners will simply give in to the pressure of the U.S. carbon border tax and reduce the emissions of their steel and other products, I don't think this is the likely result. Rather, my sense is that if the U.S. adopted a carbon border tax of the sort envisioned above, it would likely be met with retaliatory tariffs (or other forms of retaliation) from China, India and others.
Will the prospect of retaliatory tariffs deter members of Congress from adopting a carbon border tax? I'm not sure, but they should at least be aware that this is a likely result of this type of measure, and consider that as part of their deliberation.
Of course, if the U.S. imposed a carbon tax that applied to both domestic and imported goods, that would be a different story entirely. But it does not seem like that is under consideration.
