Governments in the U.S., Europe and other developed nations are embarking on a climate-change experiment: using tariffs on trade to cut carbon emissions. The idea has the potential to rewrite the rules of global commerce.
Policy makers on both sides of the Atlantic are looking at targeting steel, chemicals and cement. The tariffs would give a competitive advantage to manufacturers in countries where emissions are relatively low.
It’s an idea that is gaining acceptance among U.S. businesses, particularly in those industries, as well as among politicians who see an opportunity to appeal to domestic manufacturers and their workers. Over the weekend, the Biden administration announced the first-ever trade agreement to incorporate such a concept. The pact with the European Union would jointly curb imports of steel that generate high levels of carbon emissions.
Carbon tariffs, also called border adjustments, are intended to plug a hole in domestic policies that discourage emissions. A country that imposes a carbon tax or some other regulation on a steel mill, for example, can raise that company’s costs and prices, making them less competitive domestically.
Such a move could also encourage buyers to import less expensive steel, potentially produced with higher carbon emissions, or encourage manufacturers to shift production to countries with less regulation—undoing the environmental benefits of the taxes and putting domestic companies at a disadvantage. Environmental economists call that leakage.
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The Climate Leadership Council, a business-backed group lobbying for economywide carbon pricing and border adjustments, said that products manufactured in the U.S. in major sectors such as metals, chemicals, electronics and vehicles generate 40% less carbon dioxide in their production than the global average.
It estimates that one of the largest beneficiaries of U.S. carbon tariffs would be the politically powerful steel industry. American steelmakers are more likely to use a more-efficient production method that recycles scrap metal, while many Asian producers rely on a different method that converts new iron into steel. The result: 50% to 100% more carbon dioxide is emitted in the production of imported steel than U.S.-made steel.
A carbon tariff of $43 a ton could reduce steel imports into the U.S. by half and completely eliminate purchases from the least carbon-efficient countries, including China and Brazil, the Climate Leadership Council said.
Supporters say a carbon tariff has the potential to rewrite the politics of climate regulations, softening resistance from conservatives skeptical of the need and worried about the cost.