What is a carbon border tax?

This study note and study video looks at the concept of a carbon border tax.

What is a carbon border tax?

A carbon border tax is a tax imposed on imported goods to equalize the cost of carbon emissions between domestic and foreign producers. The tax aims to address the issue of carbon leakage, where companies move their emissions-intensive operations to countries with less stringent regulations, resulting in a net increase in emissions.

How is a carbon border tax supposed to work?

The carbon border tax works by applying a tax on the carbon content of imported goods, based on the carbon emissions associated with their production. The tax aims to ensure that foreign producers face the same carbon costs as domestic producers, creating a level playing field for businesses and reducing the incentive for companies to move their operations to countries with lower carbon costs.

How can the revenue from a carbon border tax be used?

The revenue generated from the carbon border tax can be used to support clean energy initiatives or to offset the costs of the tax for domestic producers.

In conclusion, a carbon border tax is a policy tool aimed at addressing the issue of carbon leakage by equalizing the cost of carbon emissions between domestic and foreign producers. By creating a level playing field for businesses and reducing the incentive for companies to move their operations to countries with lower carbon costs, a carbon border tax can help promote a transition to a low-carbon economy and mitigate the effects of climate change.

There have been several initiatives and proposals for carbon border taxes in different regions of the world:

1. European Union: The European Commission has proposed a carbon border adjustment mechanism (CBAM) as part of its broader climate policy, which would apply a tax on imported goods based on the carbon emissions associated with their production.
2. Canada: In 2021, the Canadian government proposed a carbon border adjustment mechanism as part of its efforts to address climate change and maintain competitiveness in the global market.
3. United States: There have been several proposals for a carbon border tax in the United States, including from members of Congress and think tanks.

These initiatives are still in the proposal or development stage and have yet to be implemented as a full-scale carbon border tax.