They are two fundamentally different policies.

Two linked and frequently raised concerns about putting a price on carbon dioxide emissions in the United States are whether such a tax would unintentionally advantage foreign competitors and, as a result, lead to increased emissions outside American borders. The tax could make American products more expensive than those made by companies in countries not imposing comparable climate regulations, which could lead to shifts in production overseas. Because a central aim of climate policy is to reduce global emissions, the “leakage” of production overseas would run counter to this goal. To avoid this outcome, carbon tax proposals commonly include a border carbon adjustment (BCA), which would impose the carbon tax on imported energy-intensive and trade-exposed products and provide a tax refund for exports of the same products.

This commentary, part of a series of joint research on carbon tax policies by Columbia University’s Center on Global Energy Policy and Rhodium Group, highlights an alternative way to ensure that US firms remain on a level playing field with foreign competitors: output-based rebates (OBRs). While a BCA would focus on imports and exports, an OBR would instead compensate vulnerable US firms based on their production—a simpler process. Both BCAs and OBRs have their benefits and drawbacks, but nearly all carbon tax bills recently proposed in Congress included a BCA, and none included OBRs. This commentary reintroduces outputbased rebates as an alternative to BCAs, analyzes US industries that could be compensated with OBRs, and estimates the costs of doing so.