The urge to complicate and climatize trade policy

As part of its emerging plan to act to address climate change, the Biden administration is considering a novel and unproven trade barrier called a carbon border adjustment. Rather than imposing a tariff based on the value of a product, a carbon border adjustment would be levied based on the amount of carbon emissions used to produce it.   

Around the world policymakers sense growing urgency in the broader population to take visible action to avoid the worst costs of climate change. Yet, without a template for international coordination, action at the national level may not achieve ambitious climate goals. Bold climate action may also leave the nation exposed to economic risks. That combination is not appealing to any policymaker.  

Border carbon adjustments purport to avoid some of the domestic costs. At essence, the idea is to mirror a domestic emissions fee or standard, levying imported products based on the embodied emissions that have escaped domestic mitigation efforts. The putative goal is to avoid “leakage,” or a rebound in emissions beyond the borders of a first-mover.  

Consider how leakage might occur if an emissions policy raised costs for a domestic producer of, say, steel. The domestic producer would try to pass the higher costs along to the consumer. However, the consumer would consider substituting imported steel for the now higher-priced domestic variety. And where would that steel come from? More than likely, from an exporter not subject to the same emissions restrictions. While the emissions for a ton of domestic steel are avoided, they are replaced by emissions from an imported ton of steel.

It is even conceivable that the import creates more emissions than the avoided domestic production. Not only does the domestic producer lose its market, but the environmental objective is undermined as well. 

This is meant to level the playing field for the domestic and foreign producers, so that they have to pay the same costs for emissions. The idea that trade policy can be used to shunt costs off onto foreigners often proves more complicated than it seems at first blush. This was a central claim of advocates for the Trump tariffs, though the evidence suggests that the world is more complicated. As it turns out, the consumer often winds up paying a greater share of the cost in the form of higher prices — and may buy less as a result. 

On the policy blackboard, this climate policy sounds straightforward and logical. Adopting the carbon border adjustment will require some replumbing of the international trade machinery.

Any changes will be controversial. International trade policy is not for the weak-kneed. Even close allies are known to fiercely contest trade issues. Changing the basis for tariffs from product value to the embodied emissions is a major shift that will surely present unanticipated challenges. The arguments about how to measure and assess emissions will be interminable. This will create an entire new arena for trade friction. 

A real risk is that these new tariffs devolve into a new form of protectionism. This would be a short slide down a slippery slope for the “worker-centric” trade policy advocated by the Biden administration. It’s too bad that the workers will end up picking up the bill after their shift ends and they head to the store.  

Carbon border adjustments are already a central part of the climate policy debate in Europe. Europe has a carbon price thanks to its long-running cap and trade scheme, so the carbon border adjustment there is at least largely transparent. Some advocates think carbon border adjustments are also appropriate for the United States. Many of those same people are not very keen on a national carbon price.

Carbon tariffs will surely benefit the legions of lawyers and forensic accountants and economists who will be needed to design the scheme and help firms navigate it. Protectionists will endorse the carbon border adjustment, which will be too confusing or expensive for many importers to navigate. In today’s world of disrupted supply chains, a novel trade barrier is unlikely to improve the situation. 

What is the alternative, given the political necessity to take some climate action? Carbon prices are unpopular. More than two decades of climate diplomacy have delivered little in the way of concrete plans or binding commitments. Fortunately, there are some options. 

Emissions mitigation is not the only strategy for climate policy. Adaptation and amelioration can play a role right alongside mitigation. Digging out of the pandemic recession hole will not be any easier with new trade barrier that hasn’t been tested. It will be sure to trigger retaliation, just as the infamous Smoot-Hawley tariffs did in 1930. Retaliation is not the leverage that is needed to realize an international climate accord after decades of frustration. The United States learned this the hard way in 2018 and 2019, despite assurances to the contrary. Policymakers would do well to keep this recent history in mind and resist the allure of a shiny new object that promises to solve all problems. 

Timothy Fitzgerald is an associate professor in the Rawls College of Business at Texas Tech University, and author of a chapter on trade and climate policy in the recently-released “Adapt and Be Adept” from the Hoover Institution Press.