In the 2021 trade agenda released early this month, the Biden administration proposed “carbon border adjustments” to reduce global carbon emissions. Ironically, one week later, John Kerry, President Biden’s climate envoy, urged the European Union (EU) to hold off its proposed carbon border adjustments. Kerry said he was “concerned” with the EU proposal and that it should be a “last resort.” These confusing messages from the Biden administration are not helping the United States restore its leadership role on the global climate stage. To effectively mitigate climate change domestically and globally, the administration needs to stop giving ambiguous signals on its policy positions and embrace a national carbon tax with a well-designed border adjustment.
A carbon tax, which puts a price on every unit of emissions, is the most economically efficient policy to achieve decarbonization. It incentivizes companies and individuals to use clean goods and services instead of carbon-intensive ones. A border adjustment is an important component of a well-designed carbon tax. It levies a tax on imported goods, and gives a rebate for exported goods. Such a mechanism levels the playing field between domestic and foreign producers and reduces the risk that companies will relocate their operations to other jurisdictions with less stringent climate policies.
Border adjustments are widely used with other types of taxes worldwide, such as the value-added tax. They ensure that domestic taxes are imposed on goods and services based on where they are consumed rather than where they are produced. Details of the EU proposal remain to be seen, but it is said to levy taxes on carbon-intensive imported goods such as steel, cement, and chemicals. So far, there doesn’t seem to be any mention of an export rebate.
Despite it being a common taxation mechanism, border adjustments are sometimes wrongly confused with protectionist import tariffs or export subsidies. A standard border adjustment is not a protectionist trade policy. Rather, it is a tax policy that equalizes the tax burden between domestic and foreign producers. Economist Alan Auerbach, the director of the Burch Center for Tax Policy and Public Finance at the University of California, Berkeley, summarizes it nicely: “Unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead, they are paired and equal adjustments that create a level tax playing field for domestic and overseas competition.”
This description makes it clear that a well-designed border adjustment must accompany a domestic national carbon price. It is perplexing that the Biden administration floated the idea of carbon border adjustments without committing to any national carbon pricing policy. Absent a national carbon price, any carbon import levy would indeed be a protectionist tariff. How would the United States justify the carbon import taxes levied on imported goods to our allies and trading partners? How would the administration pursue such a policy without violating the WTO rules or escalating tensions with our trading partners?
The Biden administration has proposed an ambitious climate goal of reaching a net-zero economy by 2050, but how is it to reach this goal in less than 30 years without an economy-wide carbon price? It would be both inefficient and ineffective to continue with the current patchwork of sector-by-sector regulations, performance mandates, and subsidies.
Interestingly, two of Biden’s Cabinet members are enthusiastic supporters of a carbon price. Kerry and Janet Yellen, the secretary of Treasury, have both publicly endorsed a carbon price. In an op-ed published with The Hill last year, Kerry stated that a carbon price is “one of the most significant ways that we can address climate change.” In Yellen’s written answers to Senate Finance Committee members’ questions for her confirmation hearing earlier this year, she wrote that “we cannot solve the climate crisis without effective carbon pricing.”
The administration has put itself in an awkward position. It makes no sense to propose carbon border adjustments without endorsing a U.S. economy-wide carbon price, while at the same time urging delay of the EU’s own carbon border adjustment. After all, the EU has had its own carbon pricing system, the EU Emissions Trading System, since 2005. Though it may be beneficial for the EU and U.S. to collaborate on carbon emissions measuring, monitoring, and reporting, the EU is not obligated to wait for any country to design or implement its climate policies.
The Biden administration’s lack of consistent messaging on climate policies can only harm the U.S.’s credibility as it is repairing relationships with allies. To successfully restore America’s climate leadership globally, Biden must commit his support for a national carbon price as part of any bipartisan legislation submitted to Congress. Then and only then will be the time to propose a carbon border adjustment for the United States.
Shuting Pomerleau is a climate policy analyst at the Niskanen Center