Democrats Find a Tax Republicans Can Support

The European Commission has done America a big favor. It has developed — and I mean developed, 291 pages total — what it calls a “carbon border adjustment mechanism,” or CBAM, designed to level the playing field between lower-emitting European manufacturers and higher-content imports. President Biden’s team has decided to go along, calling for what it prefers to label a “polluter import fee” to be levied on the carbon content of imports.

This is good news for those who blame climate change for the recent flooding in China, Europe and Iran, wildfires in California, Arizona, New Mexico and Siberia, and Western droughts and other “climate events.” It is good news also for Republicans such as Rep. John Curtis of Utah, who have been hoping that their party can advance beyond former President Trump’s “hoax” position on climate change to one that is more compatible with the views of independent and younger voters. Last month, 24 Republicans showed up at a meeting Curtis called to discuss the position they might take on climate change in the 2022 midterm elections.

Now that Democrats have opted for a polluter import fee, Republicans need not fear being attacked for raising product prices and a host of other ills that liberals have always blamed on carbon taxes. Nor need they be quite as fearful of conservative constituents, for whom the word “tax” is anathema. Indeed, they can support the move on several grounds that should be agreeable to their conservative constituents.

For one thing, a carbon border tax or polluter import fee — I leave to politicians the choice of jargon — will hit America’s adversaries, China and Russia, hardest. Both are exporters of carbon-heavy products. Both have refused to commit to reducing emissions. China, its emissions already twice those of ours, has agreed only to stabilize emissions, some day, and then reduce them per unit of its growing GDP, and lately to experiment with the data requirements of an internal carbon-credit trading system.

Chinese leader Xi Jinping has told America that we have neither the moral right nor the power to force China to do otherwise, and he charges that such border taxes are protectionist. True, in a sense: They help protect the world from what some argue are the consequences of a further heating of the globe. And they help protect American industry, which has been forced into an unequal competition with China’s $2-per-day labor and the high-carbon-content goods pouring out from its low-cost, emissions-intensive manufacturing processes that rely heavily on coal-fired electricity to give China a competitive advantage in international markets. Xi will have to decide between costly reductions in the emissions embedded in China’s imports, or border taxes that will either reduce profit margins or raise prices, reducing his products’ competitiveness in our markets as well as those of the EU.

Xi is right that we cannot force China to reduce its greenhouse gas emissions. But the EU and the U.S. combine to account for 40 percent of China’s exports. Force might not be necessary.

Russian President Vladimir Putin joined the Paris Agreement in 2019 and has instructed his government to reduce emissions, but only after taking account of the need to maintain economic growth. Putin estimates that Russia will have to pay $3 billion annually in border taxes; KPMG is guessing double that. Not a trivial sum for an underdeveloped oil-producing country with an economy only roughly the size of another but far more highly developed oil-producing economy, the state of Texas.

Republicans improve their prospects not only by showing they are doing something about climate, and something that is bad news for our major adversaries. They can also argue to conservative constituents that the proceeds from a carbon border tax, extracted from companies that are forced to pay to play in the U.S. market, reduce our budget deficits and/or taxes on work and investment required by President Biden’s infrastructure and welfare expansion plans. It is more, rather than less, likely that overseas producers of the goods subject to this tax will shrink their margins to remain competitive in the U.S. than that final prices will rise significantly. But if they do raise prices, Republicans should have in hand studies that show that the regressive features of any tax on carbon can be offset by a variety of means. Difficult, but not impossible, and a lot better than doing nothing about climate change, or favoring more regulations by an already regulation-prone government.

Besides, the effects on America will be close to nil. The proposed regulations provide a mechanism by which countries that have taken steps to reduce emissions can claim credits against any charges levied on their exports. Thanks to regulations already in place, American exports have relatively small carbon footprints. If those credits prove significant, the anticipated revenues will drop, but you can’t have it both ways — avoid any import tax by reducing domestic emissions to earn credits against that tax, and revenues from the tax being avoided. Either one is a plus.

It is a long way from an European Commission proposal to its adoption by the 27 states of the European Union. By the time that process is completed, America might well have built a similar tax into its budget. Good for the country and for Republicans angling to move from “hoax” to a position more in line with the wishes of constituents they desperately need to attract.

Irwin Stelzer is a senior fellow at the Hudson Institute, and American economic and political correspondent for The Sunday Times of London.