Across continents and political aisles border carbon adjustments (BCAs) have been gaining increasing attention and interest among policymakers. This is encouraging. Setting the global economy on a trajectory to meet any of our global emission reduction targets will require more market signals rewarding lower emitting production and disincentivizing higher emitting activities. A BCA establishes just such a signal at a point in the global economy where a lot of market activity takes place: international borders. Twenty-five percent of all global emissions are embodied in internationally traded goods.
A BCA (or similar policy by a different name) has impressively united a uniquely broad set of political interests—from environmentalists to industry to labor to economic nationalists to free traders. If designed right, BCAs will lower global emissions while driving more economic activity (investments, production, jobs, etc.) to countries and companies that are manufacturing the cleanest. Due to a combination of factors—American ingenuity, government investment, geological advantages, corporate investments, a hodgepodge of policies and some luck—the U.S. is more than 40% more carbon efficient than the global average. In other words, we make stuff while emitting less greenhouse gases than most.
If the global market rewarded our cleaner operations, America would come out ahead economically and the planet would benefit.
As interest has grown around BCAs, greater attention has appropriately turned to policy design. An important threshold question has been asked: Does a BCA need to be paired with a price on domestic emissions?
Answer: No, but it would work better if it did, and we need one eventually.
I will unpack.
First, you don’t need a domestic carbon price to do a BCA. We’ve already seen one legislative proposal in which the border carbon adjustment would be based on the implicit prices of domestic GHG laws to industry. Another approach which has gained interest with Republican lawmakers in particular is to establish a benchmark emissions intensity for a good based on the low U.S. emissions intensity, and charge a fee or tariff for imported goods against the benchmark. Such approaches will leverage the attractive U.S. consumer market to drive down global emissions and create new benefits for carbon-efficient firms. These approaches may trigger issues associated with our international trade commitments, which are discussed below. Regardless, a BCA sans a domestic carbon price can be a powerful lever to lower global emissions and benefit more efficient U.S. companies. So no, you do not need a domestic carbon price to implement a BCA, but…
it would work better if it were paired with a domestic carbon price. While there is nothing that prevents the U.S. from unilaterally implementing a BCA without a domestic price, the policy would be far more effective with a price on U.S. emissions. First, a price would all but ensure compliance with our international trade agreements and commitments to the World Trade Organization. I’ve argued that other approaches could survive WTO scrutiny as well, but a BCA backed by a domestic price will be on sturdier ground. Of course, if you don’t care about the WTO—a growing trend in some political circles—this feature is of little importance to you. That said, an appealing outcome of using trade policies, like BCAs, is to leverage the strength of the U.S. economy to compel other countries to follow our lead. And while we’re bullish on the power of trade policy to reward cleaner manufacturing globally, climate diplomacy remains an important tool as well. The ultimate goal of climate policy is to address the global climate challenge. The U.S. cannot solve this global threat on its own, and the global threat cannot be solved without meaningful U.S. leadership. Our diplomatic hand at climate negotiations is simply much stronger with a domestic policy in place that is recognized globally as effective. Which is why…
we need a domestic price eventually. The Council has demonstrated that a carbon price is the single most effective policy for addressing carbon emissions. Designed well, a carbon price can also support American households through the energy transition. Paired with a BCA, a carbon price can even improve the competitive position of domestic industries. Working with like-minded countries, like our G7 partners, to form climate clubs or other favorable trade relationships will drive down global emissions. The U.S. is exceptionally well positioned to win in a future that values emission reductions. Our businesses and workers would realize a market advantage over their higher polluting competitors. Our operating costs relative to world average would be lower. Our global market position would be stronger.
While BCAs hold much potential on their own to enhance U.S. competitiveness and lower global emissions, we should ultimately be striving for a global price on carbon, and, yes, that includes a U.S. price on carbon as well.