Carbon border taxes should be based on, well, carbon taxes

We predict that this will go horribly wrong:

Cheap imported products made in polluting factories abroad may face new green import taxes

…..

The government will announce a consultation on a new system of “carbon border taxes” designed to protect UK manufacturers from being undercut by countries with lax environmental rules.

Carbon border taxes are indeed the new big thing. There’s good reason to have them too. If we are to burden domestic manufacturing with the costs of those externalities of climate change then - but no, that’s not the way the argument actually runs.

Instead, what we’re trying to do is change consumer behaviour so that consumption does not lead to those emissions which create the climate change. Therefore any form of production without the emissions works - and should be taxed the same and so on. Or, in the case of carbon taxes, non-emissive production methods should not be taxed.

Now imagine that Britain - yes, we know, ridiculous to even imagine that this could be true - adopts a very expensive manner of reducing said emissions in production processes. Bans fracking, forces up energy prices through ludicrous interventions, loads all of the grid costs onto consumers instead of charging them to renewables investors, and so on and on. Entirely nonsense that anyone would do it so badly but just imagine. Also imagine that other places do this less badly. Say, go nuclear, as France has done. Or hydro as Norway and so on.

Now, what should that carbon border tax be? From France and Norway, nothing, obviously. There’s no carbon embedded in their products. But which way would we all bet that the border adjustment will be made? Yes - it’ll be that British production costs are higher therefore the tax should be high for all non-Brits. That’s just inherent in the way this is being pitched. That the carbon border adjustment is to protect British producers. Instead of being to dissuade consumers from high emission consumption and nudge them, through prices, to low emission consumption.

The theory of carbon border adjustments is fine, logical, dandy even. Externalities exist, Pigou Tax them into prices. But when such logical theory meets politics we fear - nay predict - that it’ll end up as an orgy of simple trade protectionism. The thing being protected the inefficiency of the British domestic plans for reducing emissions.

A carbon border adjustment at the $80 per tonne CO2-e social cost of emissions? Fine and dandy. A carbon border tax to protect the vast expense of the British manner of trying to deal with climate change? No, not what should be happening at all. Sadly, we expect the second to be what does happen.