Reimagining the Connection between International Trade and Climate Policy: What Are the Options?

Following the launch of the European Union’s landmark carbon tariff, a new RFF report dives into the pros, cons, and considerations for similar policies.

Date

Oct. 10, 2023

News Type

Press Release

💡What’s the story?

Following the launch of the European Union’s landmark carbon tariff, a new report from Resources for the Future (RFF) dives into the pros, cons, and considerations for similar policies. The report identifies and assesses key design elements used in existing policy proposals in the United States and elsewhere.

Often called carbon border adjustments, these policies work to level the playing field between a climate-ambitious nation’s domestic manufacturers and foreign importers who face fewer regulations. A carbon border adjustment places a fee on the greenhouse gas emissions associated with these cheaper imports, theoretically removing their competitive edge—a tricky tightrope to walk when success in the market can be determined by a hair’s difference in price.

“The European Union has changed the game and thrown open the door for countries like the United States to also develop carbon border adjustment policies. We’re at a real turning point now as industrialized nations begin to rethink trade: what they prioritize will shape the global economy for years to come.”

—Raymond Kopp, RFF Senior Fellow

📜 What policy design elements are important? 

The authors detail eight considerations for carbon border adjustments, the options available to policymakers, and some of the implications of these options.

  • Scope of imported products that are subject to fees. A workable carbon border adjustment can’t cover every product bought and sold internationally—nations would need to choose products that are most affected by competitive markets and climate policies.
  • A baseline to compare against covered products. Some options for a carbon border adjustment involve comparing imported products to a baseline, which would need to be decided on and measured.
  • Magnitude of the fees. Deciding how much to charge importers per ton of carbon emissions, and whether these fees remain flat or increase over time, is a central part of shaping an effective policy.
  • How fees are applied to the covered products. Policymakers can apply a single fee per ton of emissions that is applied equally to all covered products or set up a “benchmark” in which the importer pays fees only on the emissions above a certain level.
  • Defining greenhouse gas intensity. Policymakers will need to decide exactly which kinds of emissions will be counted: just direct production emissions, all emissions associated with the life cycle of the product, or something in-between?
  • Sound data and methodology. Carbon border adjustments level fees on individual products. Thorough data must be incorporated, and methodologies must be designed, so that fees are consistent and widely applicable, especially as some nations have robust environmental reporting standards and others do not.
  • Domestic emission-reduction strategies. While not a requirement alongside a carbon border adjustment, domestic emission-reduction strategies are relevant both to claim to “level the playing field” and to determine the import fee.
  • Clubs, alliances, and exemptions. Trading partners with carbon border adjustments could form a “club” and exempt members from paying each other’s import fees.

🌐 Are there other considerations? 

Given the variety of policy designs, there will likely be differences between nations’ carbon border adjustment policies. Nations are under no obligation to align policies with each other, which may have repercussions for international trade and global emissions. Long-established international rules set by the World Trade Organization may also complicate policy proposals.

Carbon border adjustments may also act as a way for like-minded countries to circle the wagons and strengthen trade relationships and supply chain security. However, these actions may also isolate developing nations from access to richer trade partners. 

“Carbon border adjustments are a new frontier for international climate policy. There are many opportunities in this space; accounting for climate in international trade can reduce emissions and make supply chains more resilient. But there are also lots of potential pitfalls. We need to be wary of throwing the baby out with the bathwater:  freer trade has been an engine of growth for 75 years.”  

—William Pizer, RFF Vice President for Research and Policy Engagement 

📚 Where can I learn more?

For more, read the report, Carbon Border Adjustments: Design Elements, Options, and Policy Decisions, by RFF Senior Fellow Raymond Kopp, RFF Vice President for Research and Policy Engagement William Pizer, and RFF Fellow Kevin Rennert.

For commentary, read the related article in the fall issue of Resources magazine.

Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.

Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.

For more information, please refer to our media resources page or contact Media Relations Associate Anne McDarris.

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