Are carbon border taxes as inevitable as they seem?

What’s happening? John Kerry, who was President Obama’s Secretary of State, has been appointed a special envoy for climate by US President-elect Joe Biden. In his position as Secretary of State, Kerry played a significant role in negotiating the 2015 Paris Agreement. Kerry will become a Cabinet-level official in the new administration and will sit on the National Security Council (NSC). The appointment “marks the first time that the NSC will include an official dedicated to climate change, reflecting the president-elect’s commitment to addressing climate change as an urgent national security issue”, according to a statement from Biden’s transition team.

Why does this matter? One interesting point to consider about Kerry is that he’s been vocal on the need for a singular global price for carbon – something the Paris Agreement has so far failed to establish.

Earlier this year, Kerry supported an exchange-traded fund giving retail investors exposure to the carbon credit market. At the time, he said he hoped the product – which incorporated the cost of carbon credits on various regional exchanges – could help establish a globally accepted price for carbon.

A worldwide accepted carbon price would potentially negate the need for carbon border taxes, which many commentators see as inevitable. If governments seek to put a levy on carbon domestically – which many, including President-elect Joe Biden, are – then logic suggests there needs to be some form of border adjustment mechanisms to prevent corporates from offshoring production to geographies where the price of carbon is cheaper, a practice known as “carbon leakage”.

While plans for carbon border taxes are afoot – notably in the EU – they have also faced criticism. Some have argued these levies are unfair to emerging economies, putting these countries at a competitive disadvantage and denting the value of their exports. The EU’s proposed carbon border levy has also faced opposition from the likes of India and Russia, with both countries questioning its legality.

There does seem hope, however, that these controversial taxes could be avoided. European Commission officials have recently raised the prospect of the bloc’s carbon border levy being negated by the US’ return to the Paris Agreement.

Furthermore, the IMF, while voicing support for border adjustment mechanisms, has also raised the prospect of these being avoided if the likes of China and the US agree to a minimum price on carbon.

Lateral thought from Curation – While focus may be on US climate policy following the election of Joe Biden, it’s also worth paying attention to China. In order for any global climate action to succeed, Beijing will need to be onside.

China’s recent commitments – to carbon neutrality by 2060 and to establish a carbon trading system by 2025 – may suggest it would be willing cooperate on solidifying a global price for emissions.

It should be noted, however, that these were made a time the US was shirking any international responsibility around addressing climate change under President Donald Trump. We previously noted how China was potentially using the lack of an American environmental presence to assert influence via climate causes.

Will China change tack with the US now more focused on global climate action? Recent reports suggest it would be easy to do so, with the country’s plans for the construction of coal-powered plants at odds with its 2060 neutrality pledge.