After the cold fall winds swirling around Hurricane Sandy pushed an enormous storm surge toward the New York and New Jersey coastlines several years ago, the ensuing damage left an indelible imprint on the public imagination. Restaurants with ocean views were battered by wild waves, homes were rent asunder, and historic lighthouses were pummeled into piles of rubble. New York City was paralyzed for days, and some 40,000 people were left homeless.
The dramatic destruction garnered 24-hour media coverage, but the damage to international trade slipped more quietly under the radar. No TV cameras captured the storm waters as they swelled over the quays surrounding the Port of New York and New Jersey or as they surged through operations centers, knocking computers, power transformers, and cargo control systems off-line. Scant attention was paid to the goods containers strewn like toys around the marine terminals or to the gantry cranes left inoperable by saltwater damage. For a week, container ships laden with cargo floated aimlessly in the calmed harbor while responders scrambled to repair the damage.
Despite their interconnectedness, these issues are mostly considered in silos. The 2015 Paris climate change agreement devotes not one clause to trade. And the sectors underpinning it—aviation and shipping, whose emissions are growing by 3-5 percent annually—are not covered either. Similarly, the 2001 Doha Ministerial Declaration—which set the parameters for the stalled Doha round of trade negotiations—does not mention climate change. As a result, sizable chunks of the global economy have fallen between the environmental protection cracks.
Perhaps more important, the rapid growth of international trade also makes striking an effective global climate agreement more difficult.
China’s emergence as a trading superpower has given rise to fears of so-called “carbon leakage,” which occurs when costs related to complying with climate policies drive businesses to transfer production overseas in pursuit of laxer rules. If the European Union or United States makes polluters pay for their greenhouse gas emissions, the fear is that the polluters would simply offshore production to China or another emerging economy, yielding no net environmental benefit. But if developed countries don’t act, emerging economies never will.
Although studies find little evidence of leakage in practice, its specter has long loomed large. In the United States, it was ostensibly a fear of leakage, among other things, that led the Senate to unanimously rule out ratifying any climate agreement that left economies such as India and China unbound by carbon targets in the run-up to negotiating the Kyoto Protocol in 1997. More recently, President Donald Trump invoked similar concerns when repudiating the Paris agreement, which he has pledged to leave. He argued that the deal “disadvantages the United States to the exclusive benefit of other countries,” citing “lower wages, shuttered factories, and vastly diminished economic production.” Within the EU, the danger of leakage has also been a major concern. Under the EU’s flagship climate policy—its emissions trading scheme—energy-intensive industries receive free carbon credits so that they are protected from competition from abroad.
A carbon tariff has received considerable attention on both sides of the Atlantic as a means of addressing carbon leakage and breaking the deadlock of international climate action. Such a scheme would involve applying a tariff to imports from countries that have not already accounted for their carbon emissions. However, past efforts to set up a border adjustment have been resisted.
In 2010, then-French President Nicolas Sarkozy proposed a border adjustment for the EU, but Karel De Gucht, who was the European commissioner for trade, objected on the grounds that it could lead to retaliation. In 2017, the current occupant of the Élysée Palace, President Emmanuel Macron, proposed a similar carbon tax at Europe’s borders, but there were again concerns that it would ignite a trade war with the United States and China. In the United States, meanwhile, politicians across the aisle have considered border adjustments as a way of winning allies for climate action among energy-intensive industries that fear carbon leakage. It was for this reason, for example, that a border adjustment provision was included in the 2009 American Clean Energy and Security Act, which did not pass.
But past failures have not stopped efforts to revive the idea of a border tax. In July, Ursula von der Leyen, who is now the president-elect of the European Commission, promised in a speech to the European Parliament to introduce “a carbon border tax to avoid carbon leakage.” A year earlier, in the United States, then-Rep. Carlos Curbelo, a Florida Republican, introduced a federal carbon tax bill in Congress that proposed a “tax equivalent to the domestic carbon tax” for importers. This year, Sen. Mitt Romney was also said to be “looking at” a carbon tax and border adjustment. Furthermore, two leaders for the Democratic presidential nomination, former Vice President Joe Biden and Sen. Elizabeth Warren, have proposed fees on carbon-intensive imports as a means of protecting American workers and advancing climate action around the world.