Questioning the Promise of Carbon Tax Border Adjustments

Questioning the Promise of Carbon Tax Border Adjustments

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July 21, 2020

Most carbon tax proposals include a border adjustment to protect American industry from foreign competition. Yet research suggests that benefits won't extend to consumers.

Most economists agree that the best way to reduce carbon dioxide emissions that cause global warming is by implementing a carbon tax, and making it more expensive to buy products and services with a high carbon content. Yet by putting a price on carbon, countries may drive up costs for domestic businesses, putting them at a competitive disadvantage to foreign competitors from countries where no carbon price exists.

Two experts in climate law and economics look at the most commonly proposed solution to protect American businesses from the competitive impacts of a carbon tax. The solution, known as a border adjustment, would ensure that American and imported goods are subject to the same carbon price.

The tool seems simple enough, and in fact every carbon tax proposal in Congress this year features a border adjustment. Yet research suggests that the economic protections promised by border adjustments may not be as great as commonly assumed.

David Weisbach is a professor of law at the University of Chicago. Sam Kortum is an economics professor at Yale University. Their work has focused on the role of taxation in addressing climate change, and potential competitive implications of a carbon tax.

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