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The following is a guest post by Jennifer A. Hillman, senior fellow for trade and international political economy at the Council on Foreign Relations.
The Intergovernmental Panel on Climate Change has made it clear: the world has until 2030 to implement “rapid and far-reaching” changes to our energy and infrastructure systems to avoid catastrophic levels of warming. Much of the attention is now focused on the best way to do so, with ideas ranging from local emissions goals, to more electric vehicles, to preventing food waste, to various ways to decrease the burning of carbon, with the majority of the effort aimed at reducing carbon emissions. With so little time left to make the far-reaching changes that must be made in the United States, policymakers need to concentrate on what is politically and practically achievable.
Past U.S. initiatives have concentrated on tax credits and other support for renewable energy developments, cap-and-trade legislation that passed the House but not the Senate, regulatory actions including the Obama administration’s Clean Power Plan that was subsequently rolled back by the Trump administration, and more recently, a number of bills to impose a carbon tax (or more accurately a Green-House Gas (GHG) tax, as most of the bills include methane, nitrous oxide, hydrofluorocarbons, and sulfur hexafluoride) or other methods to place a price on GHG emissions. The pushback to all of these initiatives has centered on two claims: first, that imposing a price or restriction on GHG emissions will leave American companies, particularly in energy-intensive industries, at a competitive disadvantage to their counterparts in other countries that face no similar taxes or restrictions, and second, that imposing measures in the United States will only push energy-intensive companies offshore without forcing other countries to join the fight against climate change.
The only way to take effective and far-reaching action to combat climate change while also addressing these twin concerns is the imposition of a carbon tax with border adjustments imposing a comparable carbon tax on imports coming into the United States so that American companies are not disadvantaged, along with providing a rebate for carbon taxes paid in the United States when energy-intensive products are exported abroad. Acknowledgment that border-adjusted carbon taxes will accomplish the primary goal of reducing GHG emissions while leveling the playing field for American companies is coming from across the political spectrum. As former Clinton administration Treasury Secretary Larry Summers put it: “The case for carbon taxes has long been compelling.” And a group of prominent Republican leaders, led by former secretaries of both State and Treasury, James Baker and George Shultz, former Secretary of Treasury Hank Paulson, former chairmen of the Council of Economic Advisers Martin Feldstein and Gregory Mankiw, and business leaders have come together to put forward what they are calling the “conservative climate solution” of a carbon tax with border adjustments, with the revenues raised from the tax to be returned to the American people in the form of a monthly dividend.
When it comes to helping energy-intensive companies compete, border-adjusted carbon taxes are preferable because alternative regulatory approaches to limiting emissions would apply only in the United States to products made and sold in the United States. They would not shield American companies from low-priced imports from countries with no GHG controls, nor would they encourage other countries to adopt their own carbon controls. All of which begs the question of why, if border-adjusted carbon taxes are the best way to address climate change while creating a level playing field, they have not been adopted before now. The answer is many-fold but rests in part on the perceived difficulty—some would even say impossibility—of determining the amount of GHGs emitted in the production of a given product. Knowing that amount is vital to calculating both the amount of the carbon tax American producers would pay and the amount of any import charges or export rebates.
The good news, however, is that much has changed since carbon taxes were initially considered. First, significant data has been collected both here in the United States and around the world. U.S. companies have been required since 2007 to report GHG emissions from large sources. Industry associations and standards setting organizations both in the United States and around the world have agreed upon protocols and methodologies to allocate GHG emissions to various industrial processes. Fossil fuels have been measured and tested over long periods of time. Putting all of that altogether, scholars from Resources for the Future (RFF) have prepared extensive analyses demonstrating that GHG levels in products made both in the United States and abroad can be determined using well-established data and internationally agreed-upon standards. This new work is significant because it demonstrates that the “devil in the details” that previously plagued border-adjusted carbon tax efforts can be resolved using data and methodologies that can withstand scrutiny should there be any doubt or dispute over the numbers.
Second, the RFF work sets forth a practical and efficient approach to carbon taxes by limiting the number of U.S. taxpayers subject to the tax to those at the beginning of the carbon emissions cycle. The beauty of such a tax scheme is that it covers all emissions from the production and use of fossil fuels by applying the tax on coal, oil, and gas before they are combusted—that is at the wellhead for oil and gas or the mine mouth for coal—and then allowing the effects of the tax to flow through the economy, with everyone, particularly the most energy-intensive industries, paying the cost of the tax in the form of higher energy prices. The tax is easily administrable, in that the number of direct taxpayers would be limited to fossil fuel producers, electricity generators, and those that emit significant GHGs in the production of downstream products.
Third, by imposing an up-stream tax that can be traced through the economy much like value-added taxes are done in many parts of the world, carbon tariffs can be shown to be consistent with World Trade Organization (WTO) rules that permit charges on imports that are equivalent to domestic taxes. Such carbon tariffs on imports of energy-intensive goods reflects a recognition that an upstream GHG tax could cause energy-intensive downstream industries to shift production to countries without comparable carbon pricing, thereby resulting in “leakage” of the very GHG emissions that the tax is designed to fully capture. Such production shifting to foreign markets would also disadvantage domestic manufacturers, their employees and the communities where they operate. Moreover, because carbon tariffs would be assessed depending on the amount of GHGs emitted in the production of goods in their home market, goods imported from dirty facilities in countries that do not regulate carbon would pay a higher import duty, thereby making it easier for more energy-efficient, cleaner American companies to compete.
Fourth, because border-adjusted carbon taxes can be rebated when American goods are exported, provided the data is in place to show that the amount of the rebate does not exceed the amount of taxes effectively paid in the United States, American companies will not be at a disadvantage when seeking to export their goods to foreign markets where their competitors are not paying a higher price for energy or GHG emissions. The RFF analysis provides the factual and analytical basis to make that required showing—that the export rebates do not exceed the amount of domestic taxes effectively paid, so providing a rebate does not result in an unfair promotion of American energy-intensive exports.
It is long past time for the United States to step up to the plate in reducing its own GHG emissions while encouraging and cajoling other countries to do likewise. Because such actions must be taken quickly, the fastest and most practical way to get to a resolution that strongly encourages reductions in GHG emissions at home, while discouraging carbon leakage and leveling the playing field for American companies competing abroad, is a border-adjusted carbon tax. Now that the data and the methodologies to do so are in hand, enacting such a tax system should be on Congress’ urgent priority list.