Leveling up our climate ambitions 

Will the EU’s Carbon Border Tax Serve as a Test for America’s Approach to Carbon Pricing?

The Inflation Reduction Act’s tax incentives are expected to promote significant adoption of clean energy in the US, but changes to permitting and a global carbon border adjustment mechanism are necessary for effective climate action.

Congratulations are due to the EcoRight, a conservative environmental group that has successfully achieved much of its agenda through the substantial tax credits included in the Inflation Reduction Act. These tax credits, if presented as a separate bill, may have gained Republican support due to the appeal of reduced taxation.

As EcoRight advocates for a carbon tax, their ultimate goal is to address climate change worldwide. While the deployment of clean energy in the US is celebrated, it should be noted that foreign companies cannot benefit from American tax credits. Without a corresponding global shift, climate change cannot be solved, as carbon pollution anywhere affects the entire world.

One solution proposed by conservatives is an “untax,” where income taxes are reduced while a carbon tax is implemented on polluters. By taxing carbon at the source, such as coal mines and pipelines, the number of firms involved is relatively small, and the IRS can handle the job effectively. The resulting revenue from the carbon tax can be given back to citizens to address the regressive nature of this type of tax.

Conservatives also suggest that this carbon tax should be revenue-neutral, without increasing the size of government. With a domestic carbon tax in place, the US could impose a similar carbon tax on imports, following World Trade Organization precedents.

The EU’s plan to impose a carbon tax on imports of certain goods could serve as a test for this approach. American companies selling these products to the EU would have to pay a European carbon tax, which the US could collect instead, allowing them to avoid EU tariffs.

Overall, a carbon tax on imports and domestically would enable America’s clean energy revolution to spread worldwide, while a “untax” approach could encourage a shift to renewable energy sources.