International Climate Cooperation Might Require Carbon Tariffs
This insight was the first place winner in our fall blog competition.
President Joe Biden championed a multilateral approach to climate change on the campaign trail, but he can’t escape a fundamental problem: how to incentivize other countries to act. International cooperation suffers from an inability to bind states to their commitments. There are no sanctions for states failing to meet their obligations, as evidenced by our withdrawal from the Paris Agreement. Countries can meet their on-paper goals while continuing to profit from fossil fuels, as China does by investing in coal-fired power plants overseas. An effective, efficient, and economical policy solution to this dilemma is the use of carbon tariffs.
Carbon tariffs raise the cost of imports based on each ton of carbon produced in the manufacturing of that good, also known as a good’s embodied carbon. The embodied carbon could be assessed independently through the Environmental Protection Agency, Department of Energy, and Department of the Treasury, and use existing databases of the embodied carbon of different materials and processes. The revenue generated from carbon tariffs could be given to consumers through a carbon dividend, used to subsidize renewable energy. Or it could simply go to the treasury.
In the United States, carbon tariffs could be implemented either through executive action or congressional legislation. Timothy Meyer and Todd Tucker suggest that the president could implement carbon tariffs through Section 232 of the Trade Expansion Act of 1962. This gives the president the authority to adjust tariff rates for imports that threaten national security. Jennifer Hillman, a former member of the World Trade Organization’s Appellate Body, suggests that carbon tariffs would not violate WTO rules.
This policy has several under-appreciated strengths. Like a carbon tax, it raises the private cost of carbon emissions for imports, bringing it closer to the social cost of carbon. Carbon tariffs are more likely to garner widespread public support than carbon taxes, which are considered politically unpopular relative to other policy options. Moreover, a carbon tariff is an essential complement to regulations in a world of mobile capital.
Research from David Drake of the Harvard Business School suggests that a carbon tariff would limit the ability of companies to shift production from a strongly regulated jurisdiction with strong environmental regulations to a weakly regulated jurisdiction. Though input costs may rise for domestic companies that rely on imports, tariffs would be a simpler cost to model relative to regulation.
What makes carbon tariffs essential is that they would help solve the problem at the heart of international climate cooperation by incentivizing other countries to accelerate the energy transition. Even the possibility of imposing carbon tariffs may be enough to bring countries to the negotiating table for a binding agreement by lowering the cost of decarbonization.
These tariffs could also be the precursor to what Nobel Prize-winning economist William Nordhaus calls a climate club. A climate club operates as a sort of green free trade agreement, lowering trade barriers for clean energy goods for member states and imposing carbon tariffs on non-members. Developed countries could exempt least developed countries from tariffs on key imports to mitigate the potential negative impact of tariffs on development.
Global cooperation is necessary to solving a global challenge like climate change. In isolation, even the most ambitious decarbonization plan by a large economy like the U.S., China, or the European Union would be insufficient to meet the goals of the Paris Agreement. Transformative technologies may take decades to shift the trajectory of global emissions without government support. Carbon tariffs are an effective tool for fostering meaningful cooperation on climate change, while also generating the fiscal resources necessary to manage the domestic energy transition.