Back to basics. The research literature shows that the most effective policy to reduce emissions of greenhouse gases (GHGs) is an economy-wide, revenue-neutral, upstream carbon tax. Economy-wide means that all carbon consumption is taxed and done so at the same rate – no demonizing coal, lambasting petroleum, or other uneven policies. Revenue-neutral means that the proceeds of the carbon tax are used to reduce or eliminate other taxes on capital and labor that would be a detriment to growth. A carbon tax is not a way to grow a larger government. It is a way to reduce the corporation income tax, payroll tax, and so forth. Finally, upstream means that carbon is taxed at the first point it enters the economy – at the wellhead or mine and so forth.

Producers subject to the tax would be forced to pass the tax along in their prices. That is, of course, the point. GHG-intensive products would become less attractive, forcing their manufacturers to reduce the GHG content through efficiencies, substitution, and innovation. The carbon is the price signal the guides production, innovation, employment, and consumption in a cleaner direction. Eakinomics has zero doubts that a well-designed carbon tax would simultaneously support vigorous economic growth and reduced GHG emissions.

There are two additional important footnotes to “well-designed.” First, the carbon tax is sufficient as a mitigation strategy and everything else should go away, including the vast, burdensome regulatory morass under the Clean Air Act, Clean Water Act, Endangered Species Act, and dozens of other pieces of legislation. Keeping those regulations wouldn’t help with emissions and will burden growth.

As she reviews, there have already been proposals in the United States to tax imports based on their carbon content. But there is a big difference. The EU already has in place carbon pricing in member countries. The CBAM is an expansion of Europe’s existing system. The United States does not have a domestic carbon price. Indeed, instead of making carbon-intensive products relatively more expensive, the Biden strategy (as passed in the Inflation Reduction Act) is to throw taxpayer money at cleaner activities in an uncoordinated, willy-nilly, inefficent fashion.

That’s not a climate strategy. It’s giving taxpayer subsidies to your friends, aka crony capitalism. And adding a carbon tariff to the mix doesn’t make it a CBAM – it’s just protectionist industrial policy. So, it isn’t a strategy for the coexistence of progress on climate and rising standards of living. Even worse, Smith points out that it is likely to be illegal under our agreements with the World Trade Organization (WTO).

“Uncertainty about the permissibility of CBAMs should give U.S. policymakers considering such a policy pause, because neglecting WTO rules could leave the United States open to retaliation by its trading partners. In recent years, U.S. trade policy and legislation, most recently with the Inflation Reduction Act, has disregarded WTO rules. The Biden Administration is currently engaged in yet another trade dispute with allies over its neglect of WTO rules in implementing the IRA. While debate among scholars remains, there do seem to be three principles to follow to have a “reduced risk of violating WTO law” when considering a CBAM: (1) the carbon tax must apply to domestic goods and imports; (2) imports from all WTO members must be treated the same; and (3) rebates for exports cannot exceed the carbon tax.”