Carbon Border Adjustments fail to stop China emissions.
Muresianu '23 [Alex; Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously, Alex worked on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science in February 2021.; "What Would a Carbon Tariff Achieve?"; 6-15-2023; published Tax Foundation; accessed 7-30-2023; https://taxfoundation.org/carbon-border-tax-carbon-tariff/; ror]
A border adjustment shifts the burden of a carbon tax from domestic production emissions to domestic consumption emissions. The border tax proposal from Sens. Cramer and Coons is not a border adjustment—it is a tariff on emissions from imports with no corresponding tax on goods produced and consumed domestically.
Table 2 omitted.
The defense of the policy on these terms is that the United States has an implicit carbon price, thanks to regulations aimed at reducing carbon emissions, and that a border tax would simply make the implicit price explicit on imported goods. Estimating the United States’ implicit carbon price is a fraught process, as different sectors and different states also face a variety of different emissions reduction policies. Even taking the implicit carbon price argument for granted, the border tax does not include an exemption for exports, so it is still not a border adjustment.
Table 3 omitted.
The border tax would make U.S.-produced goods more competitive in domestic markets relative to imports from high-carbon countries. As a result, the tax could reduce domestic consumption-based emissions on the margin. That could translate to a marginal reduction in foreign production-based emissions.
But the idea that the carbon tariff would incentivize countries like China to dramatically reduce their carbon emissions is dubious. In 2017, Chinese exports to the United States were associated with 288 megatons of CO2 emissions. Undeniably, that is a substantial amount, roughly equivalent to the total carbon emissions of Thailand in 2022. But in the context of China, it is a drop in the bucket. In 2017, China produced more than 10 billion tons of CO2, meaning that Chinese exports to the United States accounted for less than 3 percent of China’s carbon emissions.
The carbon border tariff would stop short of capturing even that 3 percent of Chinese carbon emissions. The tariff would only apply to certain carbon-intensive goods, rather than all emissions involved in the production of all imports. Administering a carbon tariff is more challenging than administering a domestic carbon tax because under a domestic carbon tax, it is possible to tax fossil fuel emissions upstream (where fossil fuels are originally produced) at a low administrative cost. Conversely, it is impossible for the United States to tax upstream carbon emissions in a foreign jurisdiction. Instead, administrators must undertake the imperfect and difficult process of estimating the emissions content of a finished good.