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What Would a Carbon Tariff Achieve?

By: Alex Muresianu

Climate change is a global issue and solving it requires global action. However, most policymaking authority lies with national governments. One challenge facing domestic policymakers is carbon leakage, which occurs when a jurisdiction imposes an emissions reduction policy, but companies move operations to another, less regulated jurisdiction. The result is economic pain for the regulated jurisdiction with no net reduction in global emissions.

Leakage is a real concern, although it only explains a small share of emissions reduction in regulated countries. Sens. Kevin Cramer (R-ND) and Christopher Coons (D-DE) have recently introduced a bill laying the groundwork for a possible solution to the problem: a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on the carbon content of imports. But it falls short of the optimal approach in several ways.   

The bill, known as the “Prove It Act,” would commission a Department of Energy study on the emissions contents of certain imported goods, particularly iron, steel, and other energy- or carbon-intensive products. The results of the study could form the basis for a carbon border fee or polluter import fee, which would tax high-emission imports.

Proponents claim that the policy would constitute a “carbon border adjustment,” but that is a misconception. A border adjustment is a component of a tax on domestic consumption, which taxes imports and exempts exports. In the context of carbon emissions, a border adjustment would exempt emissions associated with exports and tax emissions associated with imports.

Table 1: Carbon Price with Border Adjustment
  Produced Domestically  Produced Abroad
Consumed Domestically  Taxed Taxed
Consumed Abroad Not Taxed Not Taxed

Source: Alex Muresianu and Sean Bray, “Carbon Taxes in the Global Market: Changes on the Way?,” Tax Foundation, Jun. 27, 2022,

A border adjustment shifts the burden of a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. from domestic production emissions to domestic consumption emissions. The border tax proposal from Sens. Cramer and Coons is not a border adjustment—it is a tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. on emissions from imports with no corresponding tax on goods produced and consumed domestically.

Table 2: A Carbon Tariff with No Domestic Carbon Price
  Produced Domestically  Produced Abroad
Consumed Domestically  Not Taxed Taxed
Consumed Abroad Not Taxed Not Taxed

Source: Alex Muresianu and Sean Bray, “Carbon Taxes in the Global Market: Changes on the Way?,” Tax Foundation, Jun. 27, 2022,

The defense of the policy on these terms is that the United States has an implicit carbon price, thanks to regulations aimed at reducing carbon emissions, and that a border tax would simply make the implicit price explicit on imported goods. Estimating the United States’ implicit carbon price is a fraught process, as different sectors and different states also face a variety of different emissions reduction policies. Even taking the implicit carbon price argument for granted, the border tax does not include an exemption for exports, so it is still not a border adjustment.

Table 3: Implicit Carbon Price with Tariff and No Border Adjustment
  Produced Domestically  Produced Abroad
Consumed Domestically  Taxed (implicitly through regulations) Taxed
Consumed Abroad Taxed (implicitly through regulations) Not Taxed

Source: Alex Muresianu and Sean Bray, “Carbon Taxes in the Global Market: Changes on the Way?,” Tax Foundation, Jun. 27, 2022,

The border tax would make U.S.-produced goods more competitive in domestic markets relative to imports from high-carbon countries. As a result, the tax could reduce domestic consumption-based emissions on the margin. That could translate to a marginal reduction in foreign production-based emissions.

But the idea that the carbon tariff would incentivize countries like China to dramatically reduce their carbon emissions is dubious. In 2017, Chinese exports to the United States were associated with 288 megatons of CO2 emissions. Undeniably, that is a substantial amount, roughly equivalent to the total carbon emissions of Thailand in 2022. But in the context of China, it is a drop in the bucket. In 2017, China produced more than 10 billion tons of CO2, meaning that Chinese exports to the United States accounted for less than 3 percent of China’s carbon emissions.

The carbon border tariff would stop short of capturing even that 3 percent of Chinese carbon emissions. The tariff would only apply to certain carbon-intensive goods, rather than all emissions involved in the production of all imports. Administering a carbon tariff is more challenging than administering a domestic carbon tax because under a domestic carbon tax, it is possible to tax fossil fuel emissions upstream (where fossil fuels are originally produced) at a low administrative cost. Conversely, it is impossible for the United States to tax upstream carbon emissions in a foreign jurisdiction. Instead, administrators must undertake the imperfect and difficult process of estimating the emissions content of a finished good.

A carbon tariff is not nothing in terms of addressing either international carbon emissions or American competitiveness with more polluting economies. And a study to assess the emissions content of imports would be useful for policymakers looking to design a more comprehensive carbon tax that featured a border adjustment. But the policy at hand falls well short of that ideal.