Policy: US Carbon Border Tax or Trade Protectionism?

Copyright © 2021 Energy Intelligence Group

• US policymakers targeting aggressive emissions reductions are rolling out new tax policies that would levy duties on imports from countries without strong climate policies. • The idea is to prevent “carbon leakage” -- the potential that emissions controls at home will incentivize production and manufacturing in countries where regulations are lax. • But in unifying climate policies and trade policies, there is a risk that policymakers focus on proposals that skew toward trade protection rather than emissions reduction. The Issue This week, US Democrats debuted their own carbon border tax, following the EU’s proposal last week (EC Jul.16'21). Policymakers in Canada and the UK are also considering their own adjustment mechanisms, amid a growing recognition that governments need to deploy more tools if they’re going to stay on track with the goal of limiting global warming to 1.5°C or 2°C over preindustrial levels. Washington’s First Attempt Legislation tabled by Democratic lawmakers Monday would levy a tax on imports of energy and manufactured goods such as aluminum, cement, iron and steel when those imports are more carbon intensive than those produced in the US. Under the rule, oil, gas and coal importers would have to pay a fee based on the upstream emissions of their fuel, multiplied by the cost of environmental regulations imposed on that same fuel in the US. Importers of manufactured goods would follow a similar process. Proposed by US Sen. Chris Coons, a Biden ally, and Rep. Scott Peters, the “Fair Transition and Competition Act” is the most comprehensive carbon border tax legislation on the table in the US. It comes shortly after Democrats working on a $3.5 trillion spending package said they had agreed in principle to including one in their deal, expected to move forward without Republican votes. The Coons legislation could be used to inform what goes into the eventual package, but there are no guarantees it will serve as a template. In March, the Office of the US Trade Representative said the administration would consider a carbon border adjustment. More recently, Biden climate envoy John Kerry has said the US is reviewing the idea, despite having warned European leadership that a carbon border tax should be a “last resort” in an interview with the Financial Times, saying one could have “serious implications for economies, and for relationships and trade.” Coordination or Competition? For those focused on addressing the problem of carbon leakage, the new US legislation has a worrying focus on trade competitiveness. “It says a lot that there’s ‘competition’ in the name of this act,” notes Aaron Cosbey, with the International Institute for Sustainable Development. A fact sheet from Coons and Peters notes that in addition to helping to meet climate goals, their bill would “protect US jobs” and “reduce reliance on foreign energy sources.” Carbon border taxes are, of course, meant to insulate domestic producers from seeing their markets erode as customers turn to cheaper but more greenhouse gas-intensive imports. But they aren’t supposed to serve as another means of protecting domestic industry. That kind of language, however, could be the thing that holds appeal for US Republicans, says George David Banks, a former official in the Donald Trump White House who now advises Republicans on energy and climate policy. “I think Republicans would come at it from more geopolitical and commercial perspective, as in: ‘If we're going to have a trade and climate agenda why would we do it?’ And the answer is China, China, China.” The EU’s Carbon Border Adjustment Mechanism proposal allows for a reduction in the fee an importer pays if the manufacturer was subject to a carbon price at home, a European Commission spokesperson says. The US legislation does not appear to do that in countries which also impose their own border adjustments. Cosbey says that could risk a Canadian producer subject to a carbon tax at home being hit twice when selling into the US market. Carbon Price Conundrum

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