A Solution to the Competitiveness Risks of Climate Policy: Countervailing Duty Law

Over the past year, governments across the world have called for more ambitious goals to combat climate change. Many countries, including Japan, have pledged net-zero emissions goals by mid-century, with China aiming to do so by 2060. In April, the Biden administration pledged to cut US emissions in half by 2030 as part of a broader set of aims that includes an emissions-free power sector by 2035 and net-zero emissions economy-wide by 2050. At the same time, some national governments have raised concerns about the potential for ambitious emissions mitigation policies to impose adverse competitiveness pressures on energy-intensive domestic industries that could in turn result in emissions leakage. Leakage happens when emissions reductions in a regulated region are undermined by increased emissions in other regions due to the relocation of industrial activity to unregulated areas. While economic evidence is mixed about the competitiveness risks of climate change policy, the issue is politically salient.

To address such risks, policymakers have turned their attention to border carbon adjustments—a surcharge on imports from countries that implement relatively less stringent climate policies. Some recent examples: political leaders in the United Kingdom have discussed a tariff on the carbon content of imports, the European Union proposed a carbon border adjustment mechanism in July, and the Office of the US Trade Representative noted its consideration of carbon border adjustments in the US government’s 2021 trade agenda.

In a new issue brief, I describe the policy principles that could guide an effort to implement US trade law in mitigating competitiveness risks and reducing leakage, and I elaborate on how US countervailing duty law could effectively satisfy these principles. Three policy principles can guide the design and application of trade policy that is associated with ambitious US domestic climate policy: First, enable broader political support for domestic climate policy. Trade-related measures can help level the playing field and prevent carbon leakage; however, a prevalent perception is that regulations disadvantage American business and workers relative to foreign competitors. To counteract that perception, US climate policy can be designed to avoid the relocation of economic activity to other countries and retain environmental benefits. With these reassurances, business, labor, and the general public may be more willing to support an ambitious domestic emissions mitigation program....