Issue Brief

Carbon Taxes, Trade, and Border Tax Adjustments

Apr 20, 2016 | Brian Flannery

Summary

The need to address competitiveness in forging support for US climate legislation adds further challenges to an already complex process to avoid sparking an international backlash that could jeopardize cooperation on both trade and climate change.

Key Findings

  • Supporters believe that an economy-wide, revenue-neutral carbon tax might gain bipartisan support as an efficient way to limit greenhouse gas emissions if revenue were used in large measure to reduce the corporate income tax.
  • While trade-related effects are likely to be small, legislation must also address concerns from labor and business in specific sectors and regions where manufacturing, jobs, and emissions will shift to nations with less-stringent controls.
  • Border tax adjustments appear to be the solution for domestic concerns, and, if carefully crafted, may satisfy WTO rules.
  • However, even consideration of border adjustments may spark a backlash from developing nations that could jeopardize already fraught international cooperation on both trade and climate change.
  • Longer-term solutions appear to require the WTO to design approaches that reconcile international trade and climate regimes but, for now, adequate support seems lacking.