Border Adjustment Is a Tax Policy (Niskanen Center)

Trade policies and carbon emissions are certainly linked. A study by Joseph Shapiro at the University of California, Berkeley finds that global import tariffs and non-tariff barriers (NTBs) are significantly lower on dirty than on clean industries. Shapiro believes that countries do not explicitly consider carbon emissions in developing trade policies, so they end up unintentionally subsidizing more carbon-intensive industries by imposing tariffs unevenly on different goods.

A border adjustment is a tax policy that ensures consumers of a good or service pay the same tax regardless of whether the good or service is produced domestically or imported. It works by enacting a tax on imported goods and providing a rebate for exported goods. Imported goods are for domestic consumption, so they are taxed. Exported goods are for foreign consumption, so they are exempt. It’s worth noting that border adjustments and import tariffs are often confused for each other. But they are two distinct policies. Border adjustments are aimed at equalizing the tax burden on imported and domestic goods, while import tariffs are intended to distort trade flows of a country by discouraging imports. 

The EU is planning to implement a carbon border adjustment as part of its ambitious plan to cut GHG emissions by 50% by 2030. It’s hard to tell whether it will be an import tariff or a carbon border adjustment. As the momentum grows for implementing a border adjustment in the EU and the United States, lawmakers must recognize that border adjustment is not a trade policy, and it should not be viewed as a punitive measure against trade partners. 

A well-designed border adjustment coupled with a domestic carbon tax is an effective policy to reduce carbon emission within the United States and a useful tool to protect U.S. manufacturers’ competitiveness. If there is no domestic carbon tax, stand-alone taxes on imported goods are import tariffs, not border adjustments, no matter what the policy is called. A border adjustment consists of paired adjustments-an import tax and an export rebate. 

Read the commentary further on the Niskanen Center Website.