Border Adjustments in a Carbon Tax

by Shuting Pomerleau (Niskanen Center) The paper reviews the principles of border adjustment, the principal design choices policymakers would face when establishing a border adjustment for a carbon tax, and the implications of different design choices. It also provides a high-level overview of border adjustments proposed in the carbon tax bills pending in the U.S. Congress. The paper concludes with some recommendations for border adjustment design and questions for future research. READ MORE Download paper

Excerpts from paper: A border adjustment works by applying a tax on imports and a rebate on exports. In principle,
economywide border adjustments are trade-neutral. They neither encourage nor discourage imports or
exports.
► An important component of a carbon tax is a border adjustment. It helps in preventing carbon emission
leakage and preserving U.S. manufacturers’ competitiveness against foreign manufacturers.
► In designing a carbon-tax border adjustment, a wide range of issues need to be considered. This paper focuses on three important issues: first, which industries and products would be eligible for the border adjustment; second, the magnitude of the border adjustment; third, whether the origin or destination of a good needs to be considered.
► A border adjustment mechanism that would credit foreign carbon-pricing systems would be problematic on legal, administrative, and economic grounds.
► The carbon tax bills introduced in the first session of the 116th Congress include border adjustments of some kind, but adopt very different models of border adjustment READ MORE

Excerpts from Politico's Morning Energy: Or carbon border fees?: They (G-7 Group) made a fleeting non-reference in the group’s communiqué, with a commitment to prevent “carbon leakage” (producers fleeing to states with less strict carbon requirements). EU leaders wanted the group on board with its plans for a carbon border tax, but Japan and the U.S. were hesitant to sign on, Karl Mathiesen, Jakob Hanke Vela and Esther Webber report for Pros. READ MORE