The Future of Taxing Carbon at the Border

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By Sara Schonhardt

As more world leaders consider levying border taxes on climate-damaging goods, a new study looks at ways it can be done in countries—including the United States—that haven’t established a domestic market for carbon emissions.

The findings are timely. European Union officials this summer set in motion plans for the world’s first carbon border tariff. U.S. lawmakers responded last month with their own border tax proposal.

How these efforts play out will have a significant impact on both the international trade network and the global fight against climate change.

A 12-page study published last week by Resources for the Future, a non-profit research organization based in Washington, offered a road map for how U.S. officials might craft a border tax without relying on an internal market for carbon emissions.

Resources for the Future suggested an exemption for imported emissions that are comparable to the emissions in a given sector in the United States. The United States then would apply a price on the imported emissions that are above that exemption level based on the marginal cost—the cost it takes to abate the most expensive ton of carbon.

That provides a better incentive for countries to do what the United States is doing and charges them effectively what producers in the United States are paying.

Those kinds of incentives are critical to the global campaign against climate change.

Border carbon adjustments, as they’re commonly known, slap a fee on carbon-intensive goods entering countries where domestic producers are subject to more stringent climate policies and pay a cost to meet them.

The measure is an attempt to ensure both foreign and domestic producers face the same costs and incentives to reduce emissions. Without them, businesses might move production to a country where the cost is lower, a measure known as carbon leakage since it “leaks” those emissions from one country to another without reducing them. 

Recognizing this issue, the European Union—which prices carbon through its emissions trading system—introduced a border adjustment proposal July 14 that would take full effect in 2026. The effort has attracted attention from economists and traders worldwide, but analysts have said border adjustments are critical to addressing global warming.