WASHINGTON—Many economists and others believe legislation for an economy-wide, revenue-neutral carbon tax could muster needed support as the best way to control greenhouse gas emissions. For example, advocates have proposed possibilities whereby revenues might be used to both reduce corporate income taxes and also compensate lower-income families unfairly affected. But there are other key aspects where compromise will be necessary, according to a new policy brief posted today by Resources for the Future (RFF), Carbon Taxes, Trade, and Border Tax Adjustments.
In it, author and RFF Center Fellow Brian Flannery notes that establishing and maintaining bipartisan cooperation during the political give-and-take still raises several significant challenges. One of those concerns, he says, “is the contentious issue of whether and, if so, how to address border tax adjustments to compensate for impacts on trade and emissions leakage arising from a revenue neutral carbon tax.” A major difficulty concerns crafting provisions to satisfy domestic constituencies that will also comply with WTO obligations without exacerbating tensions with major trading partners.
Flannery notes that there are some economic analyses suggesting that net macroeconomic effects of border issues may be small for important concerns such as employment, investment, and overall competitiveness—at least for large, diverse economies such as that of the United States. But, he says, “actual impacts may be large and concentrated in particular sectors, regions, or districts where they generate intense political concern. Whereas concerns are often attributed to firms, labor issues (especially those involving organized labor) may have even stronger political impact. It seems unlikely that US greenhouse gas legislation could proceed without consideration of border tax adjustments.”
Flannery concludes by underscoring the need for international bodies, especially the WTO, to provide clearer guidance, but concedes, “this appears to be a difficult task with insufficient near-term support.”
Read the full policy brief from Brian Flannery: Carbon Taxes, Trade, and Border Tax Adjustments.
* * * * * * * *Resources for the Future (RFF) is an independent, nonpartisan organization based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.