The European Union has finally settled on a border adjustment tax on carbon. The tax, known as the carbon border adjustment mechanism, would assess the carbon emissions caused by the manufacture of various products and add a tariff that multiplies those emissions times the price of carbon in the European emissions trading system.
This tax addresses one of the main criticisms of domestic clean energy policies: that they burden domestic manufacturers with extra costs not borne by foreign competitors while creating no incentive for those countries to emit less carbon. India and China, for example, use far more coal for their energy needs than more developed economies that rely more on nuclear, natural gas and renewables. (bp Statistical Review of World Energy 2022).
While carbon taxes have long been advocated by environmentalists and the political left, a border adjustment tariff for carbon has wider support because it appeals to populism/unfair trade sentiments. In the U.S., this policy has been advocated for a long time by the Climate Leadership Council which was founded by two Reagan conservatives: James A. Baker III and the late George P. Schultz. Not exactly political lefties.
While the U.S. political system doesn’t seem to like any kind of carbon tax, we have at both the state and federal level, incentives for clean energy which constitute the beginnings of a pricing system for carbon. Once the EU implements this tax, it sets up pricing differentials, and therefore incentives, to shift the production of goods to countries that have energy systems that emit less carbon per unit of output. That would get the attention of business leaders in India and central planners in China.
Also, depending on how the rules are written, the tariff could very well be agnostic as to whether the power is generated by renewables or fossil fuels with carbon capture. Or by natural gas-fired electricity with half the carbon emissions of coal. That’s progress even if it doesn’t appeal to some progressives.