The $3.5 trillion budget proposal that the Democratic leadership in Congress is putting together will reportedly include the world’s first carbon tariffs, which are added to goods coming from countries that do not meet certain environmental regulatory standards. The only difference from Trump-era trade policy is the green packaging.
It is far from a sure thing that the carbon tariffs will be enacted; proposed budgets never get enacted in their original form, and it is still early in the process. As The New York Times reports, “Democrats released no details about their tax proposal on Wednesday. Calling it simply a ‘polluter import fee,’ the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate.”
Given how the vagueness of the proposal at this point, it is possible that it was leaked in part to gauge public reaction. That reaction should be negative.
Carbon tariffs of any kind would have practical difficulties. One is retaliation. Every time we raise our tariffs, our trading partners raise theirs in return. It happened with the Smoot-Hawley tariffs during the Great Depression, and it happened more recently with each new round of the Trump tariffs. A Biden carbon tariff would almost certainly have the same reaction.
A second problem is the timing. The economy is still recovering from a pandemic. Industries that might be hit include automobiles, which use gasoline and steel; construction, which uses steel and lumber; and smartphones and tablets, which use rare earth elements.
Automakers are already facing a supply crunch, in part because existing trade policies limit their options for semiconductor chips. Housing prices are at record highs. Everyone from students to gig workers would benefit from more affordable smartphones and tablets. Just as the highest inflation in 13 years is pushing those prices up, carbon tariffs would push them even higher.
Right now, the economy needs renewal and resilience. Consumers and businesses would benefit from a renewed commitment to free trade that fixes that last administration’s mistakes. And supply networks would be more resilient against future crises if they had fewer obstacles blocking goods from getting to where they are needed. More deficit spending and the same old trade protectionism will not help the recovery.
A third problem is cronyism. From domestic companies’ perspective, Washington is offering to raise their competitors’ costs for them. This would allow American companies to raise their prices without having to improve their products. As long as a carbon tariff proposal remains a live idea, Washington lobbyists will be making a lot of money—as will the campaign coffers of influential members of Congress. The scramble will be even more intense for as long as it is unknown which industries will be affected, as industries lobby to get themselves shielded from competition.
The list goes on. Diplomatic efforts that could be spent building counterweights to Chinese and Russian illiberalism would instead be spent fighting with allies. The World Trade Organization’s dispute resolution system, currently being rebuilt almost from scratch, would be clogged up with years of avoidable litigation, echoing the long-running Boeing-Airbus dispute between America and the European Union. Upcoming trade agreement negotiations with the European Union, the United Kingdom, and others would become more difficult.
In short, carbon tariffs have substantial costs and almost no benefit—carbon emission reductions, if any, would be too small to have a measurable effect on climate. Nor would there be a reliable way to measure those reductions, if any were to happen. Even if the policy were to work as intended, nobody would be able to tell.
There is still time for Democratic leadership to walk this one back. Rather than make terrible Trump-era trade policies even worse, Congress and President Biden should pursue an agenda of liberalization. Several ideas for one are in the trade chapter of CEI’s most recent Agenda for Congress.