Climate Change Carbon Tariffs: The Future of Climate Policy

Climate and energy policy has long been a highly partisan issue in the United States, with Republican and Democratic administrations adopting wildly divergent policy frameworks. Over the past few years, though, one climate policy idea has emerged that appears to hold at least some bipartisan appeal: carbon tariffs. The basic idea behind a carbon tariff, more formally known as a Border Carbon Adjustment (BCA), is to levy a tariff or fee on foreign imports that is based in whole or in part on the amount of carbon dioxide emitted to produce and/or transport them. 

The main goal of a BCA is to address a potential flaw in policies that aim to promote decarbonization by putting a price on carbon dioxide or other greenhouse gases, thereby making cleaner alternatives cheaper in relative terms. The risk of such policies is that they compel firms or industries that are subject to them to raise the price of their goods and services, making them less competitive relative to firms or sectors in other jurisdictions that are not subject to carbon pricing—a risk known as carbon leakage. BCAs promise to prevent carbon leakage by equalizing the price of goods and services sold by domestic producers and foreign exporters.  

But the real appeal of BCAs stem from their ability in principle to simultaneously internalize several interrelated environmental, economic, and national security externalities. In environmental terms, the cost of imported goods typically does not reflect their associated climate impact, including the fact that imported goods usually feature higher carbon footprints than domestically produced ones, in part due to emissions associated with transport. In economic terms, subsidized or underpriced imports can undermine domestic industries and contribute to economic dislocation and job loss. In national security terms, finally, critical supply chains can become excessively concentrated in foreign countries that may become geopolitical competitors or adversaries. In theory, BCAs can mitigate each of these externalities by raising the cost of imported goods by an amount commensurate with or equal to that of the environmental, economic, and national security consequences they create. 

Not coincidentally, each of these externalities is of special political concern when it comes to China, and this fact is also central to the bipartisan appeal of BCAs. Thanks to its dependence on coal-fired power generation, China’s exports are unusually carbon intensive, meaning that they contribute more to climate change than exports produced by most other countries on a per-unit-value basis. Due in part to the fact that coal is relatively cheap, as well as economies of scale in production and government policy support, Chinese exports are typically among the least expensive in any given product category, which the U.S. government alleges amounts to dumping and unfair trade that harms American workers and economic security. China’s dominance in many manufacturing supply chains has also led to fears that technologies essential to national security could be disrupted in the event of conflict with the United States. 

BCAs can, in principle, address each of these concerns by raising the price of Chinese and other imports into the United States, and this multi-purpose appeal is, in fact, the justification for the proposed Foreign Pollution Fee Act introduced by Republican Senator Bill Cassidy of Louisiana. The Clean Competition Act introduced by Democratic Senator Sheldon Whitehouse of Rhode Island, likewise, would create a BCA, as would the bipartisan MARKETCHOICE Act. While none of this legislation has yet proceeded to a full vote, such similar legislation—with similarly designed proposals—introduced by members of Congress on both sides of the aisle suggests considerable bipartisan support for at least the basic idea of a U.S. BCA. 

Despite the appeal of BCAs, they also entail complex policy design considerations. To effectively internalize the climate externality, BCAs must be proportionate to the actual climate damage associated with the embedded emissions in imports, but it is very difficult to calculate and verify these in practice. Most proposals envision using estimates and averages rather than precise measures, though some rely on importers to report embedded emissions. Similar challenges exist in quantifying economic and national security externalities. Because the magnitude of such externalities is likely to differ, it may also be difficult to capture them in a single border adjustment. Moreover, some legal experts caution that BCAs may run afoul of international trade rules, and unless BCAs are adopted by other major trading jurisdictions, any country adopting a BCA may degrade its own firms’ export competitiveness while reducing consumer surplus by raising the price of imported goods. BCAs may also impose severe economic harm on less developed countries. 

Even so, the experience of the European Union (EU), the first jurisdiction to enact a BCA, suggests that carbon tariffs can be a highly effective climate and energy policy tool. The EU’s Carbon Border Adjustment Mechanism (CBAM), which entered into force in late 2023, equalizes the carbon price imposed on domestic production with that of imports. It has already generated significant investment in reducing the carbon intensity of exports in countries like China and South Africa, and has led other jurisdictions, from Taiwan to India to Canada, to consider developing similar BCA frameworks.  

This success, though tentative, suggests that the next president should work with Congress to more fully explore a U.S. version of CBAM as a signature climate and energy policy initiative. Unlike the EU CBAM, the US version could more explicitly address economic and national security as well as environmental externalities. If properly calibrated, a U.S. CBAM could also effectively set a domestic carbon price that helps drive innovation and investment in US clean technology as an alternative to government subsidies. The fact that so many U.S. allies are also exploring BCAs presents an opportunity to make them a centerpiece of transatlantic, hemispheric, and Indo-Pacific dialogue and cooperation.  

In this context, one final attraction of BCAs bears emphasis: their promise to raise revenue, including for climate finance. Governments across the developed world face growing fiscal pressures stemming from COVID-era deficit spending, rising defense expenditures, trade frictions, and other macroeconomic headwinds along with the costs associated with decarbonization. At the same time, at the recently concluded UN Climate Change Conference (COP29), these same developed nations committed to providing at least $300 billion per year by 2035 to help other countries decarbonize and adapt to climate change. BCAs offer one means to help finance decarbonization both in developed economies and across the globe. Committing a certain percentage of BCA revenue to multilateral climate finance would be a powerful sign of goodwill to the developing world, much of which views climate change as a top strategic concern. 

There may be little that both parties can agree on when it comes to climate and energy policy, but carbon tariffs quickly rise to the top of an otherwise short list.

Scott M. Moore is the Director of China Programs and Strategic Initiatives at Penn Global, and Practice Professor of Political Science at the University of Pennsylvania.