05.10.2021

The ‘elephant in the room’ on Biden climate agenda

By Josh Siegel

There’s a looming problem with President Joe Biden’s climate agenda.

The administration is considering taxing imports of carbon-intensive goods, fulfilling a Biden campaign promise to punish China and other countries that are “failing to meet their climate and environmental obligations.”

But economists warn such a policy, known as a border carbon adjustment, would be unworkable unless the United States imposed a carbon tax or a similar pricing scheme on its own domestic goods.

Right now, Biden is not planning a carbon tax as part of his new goal to cut U.S. emissions in half by 2030 and has instead proposed for Congress to pass a clean electricity standard mandating utilities use more zero-carbon electricity.

At an event on Thursday hosted by the Niskanen Center, moderator Joseph Majkut, the group’s director of climate policy, referred to the infeasibility of the U.S. proceeding on a border adjustment without a domestic carbon tax as “the elephant in the room” threatening the Biden administration’s climate agenda.

“If the U.S. didn’t have a national carbon price, it just doesn’t make sense to have a border carbon adjustment,” Shuting Pomerleau, a Niskanen climate policy analyst, told the Washington Examiner in a subsequent interview. “You are not putting a price on carbon emissions domestically, so how do you justify a tax on imported goods?”

At least some officials in the Biden administration are aware of this potential hypocrisy.

Noah Kaufman, a senior economist in the White House Council of Economic Advisers, previously told the Washington Examiner before joining the administration that the U.S. could not tax other countries’ carbon-intensive products if it didn’t first penalize its own.

“In a world without a carbon tax, we would basically be saying we are applying this somewhat arbitrary tax to your goods even though we’re not applying it to our goods,” said Kaufman, who was then an economist at Columbia University’s Center on Global Energy Policy. “I can’t see other countries taking that well.”

For carbon tax proponents, imposing a matching border carbon adjustment has long been viewed as essential to avoid harming the competitiveness of U.S. industries. If exporters of carbon-intensive goods such as steel, aluminum, cement, glass, and some agricultural products have to pay a fee equivalent to the U.S. carbon tax, it would remove the incentive for American companies to move overseas to avoid paying the domestic fee.

Economists, however, say there are two primary problems with imposing a border carbon adjustment without a domestic tax on carbon emissions.

The first is an accounting question. If the U.S. set a carbon tax starting at $50 per ton, for example, the U.S. could simply tax imported goods equivalently. There is a range of ways to decide which products to tax and how to determine their carbon intensity, but those that qualify would be subject to the $50-per-ton tax.

But without such a point of comparison, it would be difficult to come up with a fair rate to tax imports.

The second problem is fairness. Other countries would be less likely to cooperate if the U.S. also doesn’t tax its own emissions.

Pomerleau said doing a border carbon adjustment without a U.S. carbon tax could run afoul of the “most favored nation” clause of the World Trade Organization, which prohibits a WTO country from discriminating against others.

“It would be perceived as protectionist by trading partners,” Pomerleau said.

If the U.S. can’t pass a carbon tax, it risks being left beyond by allies and competitors.

The European Union and Canada have already implemented domestic carbon pricing systems, and both could impose border carbon adjustments imposing a tax on the exports of countries like the U.S. that don’t put a price on pollution.

The EU, which has had an emissions trading scheme since 2005, has proposed a border carbon adjustment as part of its European Green Deal, committing the bloc to reaching carbon neutrality in 2050 and cutting its emissions by at least 55% compared to 1990 by 2030.

Aaron Cosbey, a senior adviser at the European Roundtable on Climate Change and Sustainable Transition, said at the Niskanen event that the European Commission is expected to offer a specific proposal on taxing imported carbon-intensive goods this summer.

Canadian Prime Minister Justin Trudeau’s liberal government is also examining the merits of carbon tariffs after announcing a “world-leading price on pollution” in December, which he said would reach $170 per ton in 2030.

“The major risk for the U.S. if the EU and Canada go ahead and implement a border carbon adjustment would be the weakening of U.S. global leadership on climate,” Pomerleau said.

U.S. climate envoy John Kerry has tried to keep alive the prospect of a carbon tax, even if it’s not the immediate path pursued by the administration.

In the meantime, Kerry has warned the EU to take some time before imposing a tax on imports of carbon-intensive goods, saying such a policy should be used only as a “last resort.”

“It does have serious implications for economies, and for relationships, and trade,” Kerry told the Financial Times in March.

Kerry seemed to be signaling for the EU to give the administration some time to impose policies that can help achieve its aggressive climate target so the U.S. would be in good standing and not subject to the tax.

But Pomerleau and Cosbey said the EU and Canada are unlikely to see the Biden administration’s current policy proposals, a mix of subsidies and mandates for cleaner energy, as credible without the U.S. passing a carbon price that could be easily compared to other regimes.

“Without a carbon price, it makes it very difficult for the EU and Canada to coordinate with the U.S.,” Cosbey said. “How do you recognize ambition if there is no carbon price?”

This article appeared on the Washington Examiner website at https://www.washingtonexaminer.com/policy/energy/the-elephant-in-the-room-on-biden-climate-agenda

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