Adjusting a carbon price at the border
Economists from across the political spectrum support a carbon tax as the most efficient means to reduce greenhouse gas emissions. Not all carbon taxes are created equal, however. For a carbon tax to function properly, there are certain design questions that must be addressed. Previous R Street research has made the case for a revenue-neutral carbon tax; one that would pre-empt regulation of greenhouse gases by the Environmental Protection Agency (EPA); and that would use revenue from the emissions fee to offset cuts to more economically harmful taxes, particularly those on capital. This paper focuses on another issue related to carbon-tax design: how to deal with imports from and exports to other nations that do not have an equivalent carbon price.
Specifically, this paper examines how a carbon tax could be border adjusted to increase its effectiveness, even as it limits the economic costs. Under a border-adjusted carbon tax, imports to the United States from countries without a carbon price would be taxed as if they had been produced locally. By contrast, American exports to countries lacking a carbon price would be refunded the implicit amount of tax used to produce those products. Properly designed, a border-adjusted carbon tax removes the competitive international disadvantage that otherwise could plague a nation that decides to institute its own carbon price and reduces the risk of carbon “leakage” to nations without effective carbon policies.
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