Carbon Fee Border Adjustments: The Camel Peeks Its Nose Under the Climate Tent
March 3, 2021
In a move that didn’t gain a lot of U.S. media attention, the European Union this summer passed a resolution that potentially provides the basis for a whole new dimension in the fight to combat climate change. The EU’s authorization of “border adjustments” in connection with its Green Deal opens the door to charging tariffs, in 2023, to countries that don’t impose carbon-pricing requirements on their manufacturers. It may fundamentally change the tenor of the United States’ climate-change efforts.
Carbon fees, which impose fees on users of energy based on the amount of carbon in them, have long been the theoretical darlings of a broad spectrum of climate activists, and economists. Adding a fee to fuels related to the amount of carbon in them — usually expressed as a per-carbon-ton factor, such that dirtier fuels such as coal have a higher price than natural gas — will increase their cost and decrease their utilization.
The primary competing climate response concept has been to use a blend of energy usage transformation — to electricity from fossil fuels — public subsidies supporting cleaner electrical production, carbon-capture strategies, and emission regulation of dirty energy producers.
The EU’s decision is a very heavy finger on the scale. The EU is collectively the largest economy in the world. Border adjustments are special tariffs on the imported products from countries that don’t have carbon fees. Critics decry the futility of having countries propose self-regulation as a model for international climate-change cooperation. Border adjustments are one aspect in which self-regulating countries may “walk softly and carry a big stick.”
The EU isn’t alone, however. Canada, the United States’ largest trading partner, has carbon fees as well. And while it has perhaps understandably not yet implemented border adjustments against its biggest trading partner, they are authorized and capable of being imposed.
The EU’s seemingly minor action lands upon a political landscape in the United States in which both parties need to have climate-change successes in the coming Congress. For the Democrats, carbon pricing is mentioned, without much specificity, in the Green New Deal proposal, as one of many strategies that should be employed.
The Republican strategies so far have wandered widely around various ideas, such as subsidizing climate capture technologies that oil companies could capitalize profit from, a trillion trees, and carbon credits that can be sold, but haven’t been focused. However, as many as seven to nine of the 21 Republican Senate seats at risk in 2022 are in purple and purplish states, and climate denial is no longer a politically viable strategy.
That’s where carbon fee comes in. It’s the single climate proposal in which there is widespread consensus. It’s an idea whose efficacy is shared by economists, environmentalists, Forbes, and The Atlantic.
However, not all carbon fee proposals are alike. Eleven proposals of various types have been floated in the most recent Congress. Most propose a tax, with the proceeds used to fund various objectives such as renewable-energy projects and economic relief for lower income families.
Only one — the Energy Innovation and Carbon Dividend Act — proposes a fee that returns all proceeds to individuals. Sponsored in the House by Reps. Francis Rooney, R-Fla., and Ted Deutch, D-Fla., it had 86 co-sponsors signed on by the end of this past session. It proposes a carbon-content based surcharge that is deposited into a trust fund — like Alaska’s oil pipeline fund — which is redistributed to citizens on a per capita basis.
The difference between a fee and a tax is important on two critical fronts. For Republicans it’s not a tax because it doesn’t send money into government coffers — a distinction that comports with anti-tax pledges that many have made. Moreover, it’s fundamentally a market-based solution.
For Democrats it ensures economic fairness, as independent modeling suggests that 65 percent of families, progressively trending to favor lower income families, will have net-positive economic experiences overall.
The monthly checks to all families will be key to having sustainable political support for increases. According to economists, the behavior modification driving the underlying policy starts to gain real traction at carbon fees of $75 a ton.
The Rooney/Deutch bill starts lower than most all competing bills, with less dramatic initial effect on the economy, but proposes significantly higher annual increases. As people become accustomed to getting monthly dividends, it will be easier to politically protect those increases. The steeper curve also means that people making long-term economic decisions, such as the purchase of cars and heating systems, will be particularly motivated to choose wisely.
For a variety of reasons, not least of which is that it’s the right thing to do but also because it’s a political necessity, Congress will be pressed to pass climate-change legislation in the upcoming session. In part because it’s the better path, in part because it’s a path that fits politically and provides “wins” for both parties, and in part because the EU’s and Canada’s border adjustment authorizations quietly but firmly point a finger as to where the world is going — carbon fee and dividend is the right first step to take.
W. Bart Lloyd is an attorney and advocate specializing in the business side of affordable housing in Boston and Rhode Island.