Experts weigh in: Sen. Cassidy’s carbon tariff bill would mean more taxes

A carbon tax is both bad policy and dumb politics.

Yet Sen. Bill Cassidy (R-LA) has just introduced legislation, the Foreign Pollution Fee Act of 2023, which will impose carbon tariffs on imports. These tariffs are taxes that will ultimately be paid by Americans. The legislation is also likely the setup for a future regime of domestic carbon taxes.  So, the legislation puts in play two different types of taxes related to carbon-based fuels (coal, oil, and natural gas), which supply 79 percent of American energy.

It used to be obvious that congressional conservatives’ self-branding as champions of prosperity requires a modicum of policy discipline. Progressive lawmakers score points with their base when they rig energy markets against abundant, affordable, reliable energy from fossil fuels, whether by means of mandates, regulations, subsidies, or taxes. Raising taxes in some form or manner is almost always on their agenda. In contrast, conservative lawmakers cannot take such actions or cozy up to the “climate crisis” narrative without demoralizing their base, which expects them to unleash prosperity, not sabotage it.

Sen. Cassidy apparently believes he has found a third way—expand government interference in trade to punish climate scofflaws, notably China, and bring jobs and investment back to the USA. He presents the case for his bill in a recent Foreign Affairs article and press release. Cassidy’s preferred terminology of “foreign pollution fee” is a synonym for carbon tariff. A carbon tariff is a tax on imports based on a good’s “carbon intensity”—a measure of its lifecycle greenhouse gas emissions. In other words, as explained, it is a carbon tax on imports.

Cassidy recently sponsored a Sense of the Senate resolution opposing domestic carbon taxes as “detrimental” to the U.S. economy. Why introduce such a resolution now? All tax bills must originate in the House, and there is no danger the GOP-led chamber will pass a domestic carbon tax in the 118^th Congress. The only apparent reason for Cassidy’s resolution is to preempt criticism for his new bill, as he seems to acknowledge.

The bill itself declares that it contains no authority for a “carbon tax, fee, pricing, or other mechanism” applicable to domestically-produced goods. That is misleading, because many domestically-produced goods are made with components or fuels sourced from countries that would be subject to the tariffs.

Besides, we have heard such assurances before, and they are worthless. The same persons who talked up the Paris Climate Treaty as “voluntary” and having “no enforcement mechanism” threatened to hit the United States with trade sanctions when President Trump proposed to withdraw from the pact.

Although Paris includes no authority for carbon tariffs, it does not prohibit coalitions of the willing, such as the European Union, from building a parallel enforcement mechanism. On October 1, the EU launched the preliminary phase of its “carbon border adjustment mechanism” (CBAM). The lesson here should be obvious. The absence of authority for domestic carbon taxes in Cassidy’s bill would not stop progressives and faux conservatives from later filling that “hole” via subsequent legislation.

The best way to avoid such a bait-and-switch is not to create the precedent of a carbon pricing scheme in the first place.

Experts at other free-market organizations have written insightful commentary on Cassidy’s proposals. Let’s have a look.

Back in June, Cassidy co-sponsored a bill, the PROVE IT Act, that would build the accounting framework for carbon tariffs. In “Three reasons to be very skeptical of carbon tariffs” (June 30), Cato Institute scholar Gabriella Beaumont-Smith warns that carbon tariffs would likely (1) impose tens of billions of dollars in “new costs on American consumers, companies, and workers,” (2) provide a vehicle for special-interest “rote protectionism,” and (3) violate the GATT Article III non-discrimination principle.

The latter point is to me the most troubling. It means the WTO could rule that America must impose carbon taxes on domestic manufacturers to ensure foreign firms receive “national treatment.” Were that to happen, those voting in Congress for a carbon tax could say, “Don’t blame us, the WTO made us do it!”

In “A carbon tariff is a carbon tax for protectionists” (Oct. 30), Cato scholar Travis Fisher notes that Cassidy’s Foreign Affairs article mentions “manufacturers” a dozen times but tellingly never once mentions consumers. Fisher poses a pointed question to Cassidy and his allies: “If advocates of a foreign pollution fee are faced with the choice of pairing it with a domestic carbon tax to satisfy WTO rules or dropping the scheme, which will they choose?” The problem, of course, is that even if the WTO decides carbon tariffs must be paired with a domestic carbon tax, it is very unlikely the sponsors of the Foreign Pollution Fee Act would work for its repeal.

In “The economic standard: Senators attempt to provide cover for incoming carbon tax” (Nov. 1), American Consumer Institute scholar Kristin Walker rebuts Cassidy’s claim that foreign pollution fees will make America more competitive vis-à-vis China. A carbon border tax “could lead to retaliatory measures and ultimately trade wars with China” and other nations. It’s far from clear our producers and workers would come out on top. We rely on China for “a tremendous amount of our consumer and commercial goods, medical supplies, pharmaceuticals, and vital raw materials,” “they control a huge share of the world’s shipping fleet and commercial shipbuilding capabilities,” and we are “heavily dependent upon China’s mineral dominance, mainly because our government officials keep us from developing them due to excessive regulation and red tape.” In short, a “trade war will not be in our best interests.”

Cassidy’s bill is not the first of its kind, of course. In “What’s the deal with carbon tariffs,” National Taxpayers Union scholar Bryan Riley examines the FAIR Transition and Competition Act (FAIR Act) introduced in the 117^th Congress by Sen. Chris Coons (D-DE) and Rep. Scott Peters (D-CA). FAIR would impose a “fee” on carbon-intensive imports. Like Cassidy’s bill, FAIR aims to prevent the “carbon leakage” that supposedly occurs when domestic manufacturers offshore their operations to less regulated jurisdictions, such as China. However, Riley notes, citing a study by the Intergovernmental Panel on Climate Change (IPCC), domestic climate policies are “unlikely” to trigger “substantial” carbon leakage “due to other costs associated with shifting manufacturing to less developed nations, including transportation costs, market conditions, and a lack of specialized suppliers.”

Walker’s piece concludes with a point that cannot be repeated too often because pro-tariff lawmakers almost never address it: “Ultimately, tariffs are not a tax on foreign producers, but on domestic consumers. Companies pass their costs onto their customers. As with all other tariffs, the ones ultimately holding the bill for a border-adjusted carbon tariff would be domestic consumers. The increase in price on various products will negatively impact the economy.”