Implication of Carbon Pricing & Carbon Tariff as an aid to IRA
Executive Summary
Climate change is one of the most essential challenges faced by the future generation. The consequence of the cost and risk do not straightly show in the market. As a result, firms need to internalize the cost of emissions and pricing for future environmental damage. Carbon tariff and carbon pricing is the most effective way for countries to reduce emissions. The U.S. as one of the largest polluters promised to reduce its 50% emission compared with its emission in 2005 by 2030. However, the industrial sector is still behind schedule even though the energy and transportation sector has made great progress. The Inflation Reduction Act has been taking the lead in transformation however more comprehensive progress can be made with the assistance of carbon pricing including the method of Emissions trading scheme (ETS) and carbon tariffs (also named carbon tax on foreign goods). By then cost of stopping climate change will be shared across generations, countries, and firms will reach similar production costs and limit unfair competition. Eventually, the IRA and the assist of carbon pricing and carbon tariff will move Biden Administration closer to achieve its climate provision by 2030.
Introduction
According to the New York Times, the United States has generated the most carbon dioxide into the atmosphere since the Industrial Revolution. The significant decline in emissions from energy and transportation are the two largest sources of greenhouse gases in the United States. The industry sector now become the most polluting sector of the economy. The industrial sector is targeted for the next step of climate regulation, and it is also the hardest industries to clean up, such as steel and cement manufacturing. The Inflation Reduction Act aimed to be one of the most effective plans for reducing carbon emissions by promoting technologies to assist factories in transformation. This Act influences fiscal measures aimed at controlling inflation and decides funding allocations to encourage industries to adopt new measures. According to the Hill, “It devotes $369 billion to those investments. It derives its funding by imposing a 15 percent minimum tax on large corporations and a 1 percent excise tax on corporations’ buying back their own stock; it also funds enhanced IRS enforcement applied to high-income taxpayers” (Gary, 2022). It indeed benefits manufactures on economic level on adapting to greener technologies. However, it does not contain polluters since there is not an external cost that could ties to their sources nor as a punitive measure specifically targeting producers with higher emissions.
Background on IRA and Government Investment
The Inflation Reduction Act and Bipartisan Infrastructure Law represent the most significant climate policy advances in U.S. history. Meanwhile, decarbonization and transition toward clean energy is Biden’s Administration’s major goal on climate action. In the industrial sector Biden Administration already spent $8 billion on clean hydrogen hubs and additional funding for clean hydrogen innovation. It recently announced to distribution of $254 Million to reduce emissions from the power and transport sectors, including scaling up clean energy, setting a target for zero-emission vehicles by 2030, and decarbonizing international transportation. The five sectors that contributed the most to the industrial carbon emission are chemicals and fuels; iron and steel; food and beverage; building and infrastructure materials (including cement and concrete, asphalt pavements, and glass); and forest products (Iaconangelo, 2023). Industrial Efficiency and Decarbonization Office is going to apply research, development, and (RD&D) projects to reduce energy usage and greenhouse emissions from industrial subsectors.
Rationale for Action
However, the decarbonization of the industry sector in the United States is at risk of falling behind other countries. The Inflation Reduction Act and the 2021 bipartisan infrastructure law have developed a path for industries to adapt to clean energy, as long as new or extended tax credits for generating clean electricity and for capturing and storing carbon. This could also fund the first large-scale demonstrations of low-carbon hydrogen if possible. One way for the U.S. to reach progress on decarbonization is to establish new regulations needed to reduce emissions from chemical manufacturers and refining companies. These companies also are looking for long-term storage or other stationary sources of electricity. Ammonia producers will need to be less attached to hydrogen sources and adopt new clean fuels. The US Department of Energy stated that the cost of products such as cement, plastics, and pharmaceuticals could rise as companies take steps to decarbonization (Dabbs, 2024). Using a mix of new regulations and renewable energy, Biden’s administration stated that they are confident to gradually phase out fossil fuels altogether and realize decarbonization. However, firms are unwilling to be the first mover in transformation. Inflation Reduction Act cannot lead America to reach the commitment of 50% emissions reduction by 2030. A carbon tariff and carbon price can complement the IRA by emphasizing on the impact of clean energy and encourage the corporate polluters to adapt the low carbon alternatives in industrial sector faster. Because aside from the direct regulations, carbon pricing is based on a market mechanism and even provide financial motivation for firms. California and the eleven Northeast states that construct one third of the country GDP and one fourth of country population has already put carbon pricing in action and formed Regional Greenhouse Gas Initiative (RGGI) (CCES). Firms like BP advocates the carbon pricing incentive by investing $269 million in renewable production, creating 300 local jobs in Washington D.C., and the revenue generate could strengthen the GPD for the state (BP). As a result, carbon pricing should be expanded into all states in America and slowly bring in more firms considering its positive impacts.
It is controversial to examine the emission performance standards by promoting emissions reduction on imported goods based on their carbon footprint. There are two methods for carbon pricing one is a carbon tax, the government charges a fixed amount of tax based on the carbon emitted per ton. Another way is called the Emissions trading scheme (ETS), the government may issue emission allowances according to a certain company’s emission level. Firms can obtain the allowance on emission per ton through the government or trade with other firms. This is based on market regulation instead of government control. The downside is that the total emission of Carbon is unknown. Carbon pricing has been implemented in a quarter of states in America, but it is not on the federal level plan. Currently 40 national and 25 sub-national jurisdictions put a price on carbon worldwide (Dervis, 2022). Besides, a fee could be charged based on the Carbon emission globally because then Carbon tariffs as a complementary factor lie in their interconnected impact on economic and environmental policy. It will force countries like China and Russia to clean up their business under similar regulations (Davenport, 2023). As a result, congress would need to approve such a tax not only because it could punish its geopolitical rival, but also protect domestic industries from unfair competition and encourage global adoption of cleaner technologies.
Options& Analysis
Carbon Tariff: Limiting Industrial Carbon Emissions on the World Stage
According to Biden’s plan to focus on limiting industrial carbon emissions, his team suggested a legislative strategy that focuses on economic stimulus that both targets clean energy investment and sector-specific decarbonization standards (Martin, 2020). The European Union imposed a similar carbon border tax earlier this year has implications for global trade, as it could affect the competitiveness of products imported into the EU. If China and Russia do not comply with carbon pricing mechanisms or invest in cleaner technologies could potentially reduce demand for their goods in the EU, impacting their economies. Trade policy offers a more practical way to push countries to take action on climate change instead of negotiations.
According to Springmann, a Ph.D. fellow in the German Institute of Economic Research stated that wealthier, industrialized nations have historically been the largest contributors to greenhouse gas emissions but now they cut greenhouse gas emissions, while developing or poorer countries have been more hesitant to accept legally binding emissions reduction targets. Some factors contribute to this resistance including developmental priorities on economic growth and poverty relaxation, comparative differences in the developing stage, and lack of capacity and financial resources on transition to cleaner energy sources. As a result, with an absence of carbon pricing mechanisms in industrial countries, they can manufacture goods with high carbon emissions at a lower cost. Advocates of carbon tariffs believe that by imposing taxes on these goods at the border can help offset such pricing disparity and would also control the emissions of their production indirectly (Springmann, 2022).
Chao, Judy. “U.S. Carbon Tariff Rate Trend (2024–2030).” InfoLink Consulting Group, 26 Apr. 2023, www.infolink-group.com/energy-article/carbon-boarder-tax-how-the-us-plays-the-game. Accessed 23 Feb. 2024.
According to Infolink Consulting, the prediction on the U.S. carbon tariff rate trend from 2024 to 2030 illustrates that since U.S. economics can gradually profit from carbon tariffs is a major exporter to many countries. Asia countries with unclear carbon pricing regulations will be behind the world in reducing the carbon intensity of their product. As a result, they will lose the competitiveness of their product and pay a large carbon tariff to the U.S (Chao, 2023). The mutual goal of achieving zero commission is foreseeable, by choosing compromise over conflict U.S. and the EU can combine their economic influences to promote low-carbon industrial practices worldwide. Eventually, high emitters like China, Russia, and India could follow the trend without damaging U.S. domestic advantages. According to a study on carbon tariffs and trade flow between China and U.S. heavy industrial sectors in China will face more penalized by carbon tariffs. For every dollar of carbon tariffs imposed, China’s exports will fall tremendously than the U.S. For example, the decline in Chinese mining exports will be around 11 times more than the U.S. mining industry. If U.S. chooses to replace China's import goods with Canadian, Mexico, or Japanese goods, then producing the same amount of carbon emissions in the United States would be 88.8 percent less than in China, this approach will result in a 0.65 percent reduction in world carbon emissions (Zhao).
Consequence of Carbon Tariff
Opponents of imposing carbon tariffs on the industrial sector often raise concerns about the potential for retaliation from trading partners like China and Russia and its subsequent impact on trade relations. However, the republican supporters of carbon tariffs explain that the tax could be a punishment for emitters even at the cost of creating turbulence in geopolitics. American industrial production is in a carbon advantage that is much cleaner than the economies of geopolitical rivals China and Russia. The US could collaborate with the Allies to create a global club of countries to impose a carbon tax at its borders. This would push other countries, especially those big emitters to decarbonize. Besides, the downside is domestic firms with high industrial emissions will also be charged the same tariff, but Congress may consult with the 1970 Clean Air Act to draft new regulations. But this is a complex trade mechanism that challenges the path toward zero emission. Some people argue that the carbon tariffs are meaningless if countries like China and Russia do not limit their emissions. Domestic climate measures only win support when Biden’s Administration can successfully encourage other countries to step up first (Davenport, 2023).
Market Response on Carbon Tariff and Carbon Pricing
On the market level, charging a carbon tariff is not the key because of the reliance on importing components, China will continue to pollute the environment as long as they are not being punished. Besides, the new regulation could negatively impact the steel and cement industry if there is a decrease in job opportunities. The downstream industries like concrete and construction are interrelated with cement manufacture and could also be negatively impacted. However, there are leading firm representatives who support the carbon tariffs he stated that the decarbonization in the industrial sector is achievable as long as the regulation does not affect the supply of construction materials (Davenport, 2023).
On the side of carbon pricing, there are transition risks in the green economy but with the lead from JPMorgan, and Morgan Stanley, executives from the three companies, and more than two dozen other global businesses, investors, and nonprofits signed the report. They claimed that “climate change poses a significant risk to the financial system and regulators must “act urgently and decisively” (Roston, 2020). Because with missing carbon pricing brings uncertainty to investors on their financial plans. Some firms even established interior carbon pricing by including the predetermined price of carbon emissions in its current and future budgets (Dervis, 2022).
Recommendation
Carbon pricing helps those who are responsible for carbon production and who damaged the environment to take control. They decide whether to reduce emissions where and how, whether to stop polluting activities, reducing emissions, or continuing to pollute and eventually paying for it. With the minimum social cost, it is the most flexible way that environmental objectives can be achieved. The federal government can gradually help corporations adapt to carbon pricing by following the steps of Washington and California. With an imposed carbon tax, the government will charge a fixed tax on every ton the firm emits. Even if the price fluctuates the government will send a projection on the carbon emitted at a certain price as supervision. The approach will stimulate clean technology and market innovation, and gradually lead to economic growth (World Bank).
United States can be the first to lead the imposition of carbon tariffs because the EU and the U.S. pursue different underlying goals even though both address carbon emissions. The EU’s strategy focuses on ensuring fairness by imposing tariffs that equalize the costs between domestic and foreign traders under the same policy on the global stage. This approach seeks to prevent carbon leakage. On the other hand, the U.S. approach is utilizing tariffs as a punitive measure specifically targeting producers with higher emissions. This indicates the aim for emission reductions within specific industries rather than to address broader fairness concerns in global trade. The United States could benefit from the carbon tariffs as long as it does not raise geopolitical concerns. The green steel club Biden proposed already established a foundation for charging tariffs on imported goods (Kaufman, 2023). Even though aggressive carbon tariffs will only bind climate issues to geopolitical conflicts while accelerating the trade wars of the 20th century. As the geopolitical environment trade and climate are increasingly linked together, United States needs to act as an innovator to promote changes in carbon tax and lead the greening in the industrial sector globally.
Reference
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Chao, Judy. “U.S. Carbon Tariff Rate Trend (2024–2030).” InfoLink Consulting Group, 26 Apr. 2023, www.infolink-group.com/energy-article/carbon-boarder-tax-how-the-us-plays-the-game. Accessed 23 Feb. 2024.
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Gary Yohe, Ph.D. “No, the IRA Is Not a Carbon Tax — but It Would Be Cheaper If It Were.” The Hill, 24 Aug. 2022, the hill.com/opinion/energy-environment/3614555-no-the-ira-is-not-a-carbon-tax-but-it-would-be-cheaper-if-it-were/. Accessed 23 Feb. 2024.
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