Business Law and Politics

Carbon border tariff takes aim at worst pollution perpetrators

University of Miami business and law specialists tout the potential of a carbon border tax to level the global playing field and cut carbon emissions scientists link to extreme weather catastrophes.
Single wind turbine, a coal burning power plant with pollution and electricity pylons in the background.

In the same week in mid-July, both the United States and the European Union introduced legislation for a carbon border tax, a trade-based tool that aims to cut world pollution by penalizing the worst perpetrators of emissions—and stave off climate-related devastation.

Caroline Bradley, a professor at the University of Miami School of Law and specialist in international law and finance, and David Kelly, academic director of the Miami Herbert Business School’s Master of Science Sustainable Business program, recognize that the proposals are complex and politically challenging to advance, but tout them as a powerful incentive to cut pollution at a time of critical reckoning. 

“Climate change is something that affects us all and can only be addressed effectively by action that is global other than in individual countries,” said Bradley, whose course on climate finance examines threats to the worldwide financial system. “These changes in weather have huge impacts on businesses, and it’s obvious that increasingly this is becoming an issue that financial systems have to worry about.” 

The proposals represent a much-needed shift in attention and behavior, Bradley said.  “This is particularly interesting in the U.S. because the EU has been much more determined and their efforts more visible to force financial actors to pay attention to these issues,” she said. “A carbon border tax is not just about peer pressure and saying it’s the right thing to do, it’s making it costly to not go along. So, it’s a more aggressive form of encouraging because the stakes are so high.” 

Environmental controls and business innovation have helped reduce carbon emissions in both the EU and the U.S. in recent years, Kelly pointed out. In contrast, China, India, Vietnam, and other nations—void of controls—have increased emissions that offset reductions here and in Europe. 

A carbon border tax aims specifically to reduce carbon leakage, where for reasons of costs of complying with climate change regulations, businesses in certain industry sectors and sub-sectors transfer production to other countries with less stringent emission controls. 

Kelly explained that businesses have been motivated to act on their own. Reducing fuel costs by shifting to alternative energy sources and addressing the concerns of increasing environmentally and socially conscious investors and consumers have proved to be business-savvy decisions—yet more pervasive action is required. 

“A carbon tax ensures that the emissions reductions occur and so succeed beyond what these voluntary efforts can achieve,” Kelly said, “and has the definite advantage in that it reduces always in the cheapest possible way, better than anything else—wind subsidies, fuel economy regulations, whatever your incentive of choice.” 

As many as a dozen variations on a carbon tax are under legislative consideration and, while his research leads him to favor a cap-and-trade option, Kelly proposes that any of the tax systems provide critical progress. 

Many proposals allow for part of the carbon tax to be rebated to households as a dividend. Carbon regulations impact fuel and energy costs, and they tend to impact low-income populations more severely—a major criticism. Yet a carbon tax plus dividend resolves this “regressivity” impact, Kelly explained. 

He offered the scenario of someone who, unable to work remotely, must drive a long distance to get to work. They will pay more when the gas tax goes up, yet the tax will generate revenues that would be returned to them in the form of dividends. 

“That dividend will matter more to the low-income population, or it could be restricted to be paid solely to them. And with it you still have the incentive for people to drive less, so they pay less,” he said. 

‘‘That helps solve the regressivity problem and gives people a stake in it—seeing that check come every month for your carbon dividends creates good will,” he noted. 

The European Commission’s proposal for a carbon border tax to be phased in beginning in 2026 must ultimately be decided by the 27 nations of the union.

According to media reports, the U.S. proposal is to be included along with a range of climate change initiatives as part of the $3.5 trillion budget package proposed by the Biden administration. Proponents suggest that it would generate $16 billion in tax revenues that could then be invested in research and development for alternative energy.

Kelly cautioned that any carbon border tax should be small and uniform to avoid the perception of protectionism that would devolve into a trade war with China or other nations, as has happened in recent years. 

The World Trade Organization, whose job it is to prevent trade wars, could play a vital role, he suggested. 

“If the tax is uniformly applied to all countries and they approve it and say it’s not protectionist, then it’s a harder case for the country to make the claim that it is,” he explained. “But you can’t just submit legislation and expect the WTO to say: ‘Okay, this is green, so it’s fine.’ ” 

Bradley noted that because of cost and competitiveness issues, U.S.-based businesses might be resistant to the idea of increasing environmental regulation to deal with climate change and be tempted to pursue production elsewhere.

“These types of carbon border taxes foreclose the opportunity to go somewhere cheaper in regulatory terms to compete, but also mean that other competitors of yours coming from less regulated jurisdictions don’t have a price advantage,’’ she said. 

“So, the leveling of the playing field that this is supposed to achieve has to be beneficial to domestic producers,” Bradley added. “Still, it depends on the details and the extent that there are sectors that are subject to stringent regulations in the U.S. that aren’t covered by the border tax.” 

For two weeks in early November, the G20 industrialized nations convene for the Glasgow Climate Change Conference, the United Nations summit that many suggest is one of the last chances to put the world back on track to meet 2015 Paris Agreement metric of reducing world emissions by half by 2030.