Existing Carbon Tariffs Subsidize Polluting Industries
According to new international environmental economic research, most countries’ existing trade policies implicitly subsidize carbon pollution. That’s because many polluting industries, like oil production, face lower tariffs and fewer non-tariff barriers to trade (NTB) than industries selling finished products to consumers. In other words, carbon tariffs tend to be assessed on upstream industries only indirectly and later in the process (at the point of trade), and less so at the point of extraction and refining. As a result, existing trade policies tax dirty polluting industries at a substantially lower rate than clean industries.
The favorable treatment in trade policy creates a global subsidy to carbon emissions in internationally traded goods and contributes to climate change. This subsidy is large – an estimated $550-800 billion annually, an amount of the same magnitude as some of the world's largest actual and proposed climate change policies. The subsidies amount to $85-120/ton, about the same amount many economists identify as an optimum price for carbon emissions. Trade policy is, in essence, giving the exact opposite price signal than what is needed to reduce carbon pollution. New research on these policies also suggests that if countries applied similar trade policies to clean and dirty goods, global CO2 emission would decrease with little impact on global real income.
Carbon Border Adjustment Mechanisms Correct Existing Carbon Subsidies
Carbon border adjustment mechanisms (C-BAMs) are a form of trade policy that aims to correct these subsidies and prevent carbon-intensive economic activity from moving to areas with less stringent policies. Border adjustments apply fees on imported goods based on greenhouse gas emissions during production. A jurisdiction importing goods would impose carbon tariffs on carbon-intensive products, thereby offsetting current carbon subsidies given to dirty industries. C-BAMs are part of the European Green New Deal and will place tariffs on carbon-intensive goods imported by the EU, taking effect in 2026 on seven high-emission sectors.
These border adjustments are an important climate policy mechanism to prevent the risk of carbon leakage, as C-BAMs prevent the industry from shifting emissions to regions outside the reach of the EU’s stricter standards. Their goal is to ensure climate objectives are not undermined by production relocation, as the environmental effect of carbon emissions on the atmosphere are the same regardless of where they are emitted. This is an equitable policy; the cost to the planet of emitting greenhouse gasses is universal and thus the cost of emissions should have some consistency across the globe.
C-BAMs also equalize the price of carbon between domestic products and imports. As a result, this policy encourages greening production processes across the world, so countries can avoid the border adjustment tax. Border adjustments can also be in the form of rebates or exemptions depending on the domestic policies for producers that export their goods. Such policies are already in place in California for certain imports of electricity. The United States, Canada and Japan are looking into C-BAMs, as well.
The European Union Creates the First C-BAM
On April 25, 2023, the EU finalized the language for the world’s first carbon tax; the initial transition phase is scheduled to begin in October 2023. In the European Green New Deal, European importers will buy carbon certificates that correspond to carbon prices that would have been paid if the goods had been produced under the European Union’s carbon pricing rules. Products can also receive price deductions if the carbon price has already been paid in an outside country. In the EU, these adjustments will be phased in gradually first with iron, steel, cement, fertilizer, aluminum, and electricity generation.
Our Guest: Joseph Shapiro
Joseph Shapiro is an associate professor at UC Berkeley in Agricultural and Resource Economics and the Department of Economics. Shapiro holds a Ph.D. in economics from MIT, a Master's degree from Oxford and London School of Economics, and a BA from Stanford. He is also a Research Associate at the Energy Institute of Haas, Associate Editor of the Journal of Political Political Economy, Co-Editor of the Journal of Public Economics, and a Research Associate at the National Bureau of Economic Research. Shapiro's research agenda explores the following three questions: How do globalization and the environment interact? What have been the effectiveness, efficiency, and equity impacts of environmental and energy policies over the last half-century, particularly for water, air, and climate pollution? How important are the investments that people make to protect themselves against air pollution and climate change? Shapiro has also received an Alfred P. Sloan Research Fellowship, Kiel Institute Excellence in Global Affairs Award, and Marshall Scholarship.
Sources
For a transcript, please visit the episode's page on our website at: https://climatebreak.org/how-international-trade-policy-can-boost-climate-action-with-joseph-shapiro/
