INTERVIEW: Shuting Pomerleau

Shuting Pomerleau is the deputy director of climate policy at the Niskanen Center, who specializes in research on carbon taxation, carbon border adjustment, and the intersection of climate change policy and trade. She recently co-wrote a piece with Kyle Pomerleau, a senior fellow at the American Enterprise Institute, in which they argued that a carbon tax could be a source of revenue to help extend the 2017 Tax Cuts and Jobs Act, which is partially set to expire in 2025. We spoke on June 25.

I read the piece you wrote with Kyle, and I thought it was really interesting. So I was wondering, do you think, with what's coming up in the next couple of years, that a carbon tax is sort of set to become a bigger part of the conversation when it comes to US taxes?

I think, just as our piece mentioned, there will be a great opportunity and potentially a political window next year to put carbon tax on the table, at least for the political discussion, if lawmakers are serious about looking for funding options to pay for the extensions of the TCJA. However, I do think that carbon taxation continues to be politically difficult in America.

So yes, I think there will be more interest in a carbon tax going forward--if not the traditional economy-wide carbon tax, I think there's emerging momentum in the carbon tariffs space, specifically. A lot of lawmakers from both the left and the right have proposed enacting standalone tariffs on imported goods based on carbon content. So in the climate and trade policy space, there is definitely increasing interest in pricing carbon or taxing carbon on the input side.

So from your point of view, is a carbon tariff getting in the right direction?

Absolutely not. I'm actually working on a piece that is going to be coming out soon that says carbon tariffs are problematic. I would like to clarify that by carbon tariffs, I mean any sort of tariff imposed on imported goods based on the carbon content without any sort of component of a domestic carbon tax, or a carbon price, whether that's cap-and-trade or a carbon tax. It's definitely not going the right direction.

Why is that?

So there are quite a few reasons why standalone carbon tariffs are not the right approach. One, if you put carbon tariffs in the general context of tariffs, I think economists generally agree tariffs are not a good idea. They increase product prices for certain protected industries, but they're protecting certain domestic industries and jobs at the expense of other non-protected industries. So it's kind of picking winners and losers. The economic effects are not what a lot of politicians claim for tariffs. And the economics of carbon tariffs are also applicable to what I just discussed about tariffs. That's one thing, the economics reason.

The second reason is international trade-wise, I think there's a lot of momentum underlying the narrative, of saying, "Oh, the U.S. is number one, the cleanest in the world, and we don't need to do much to further de-carbonize. We just need to put tariffs on imported goods, and we go from there." That premise is not correct. I had a research paper out sometime last year that looked at the product-level carbon intensity across major manufacturing industries and fossil fuel industries for the U.S. and other major economies. It shows that the U.S. is not number one, rather it kind of falls in the middle of the pack, globally. It lags behind economies like the EU, Japan and the U.K., significantly. It is much less carbon-intensive that developing countries like China, Russia, India, or the global average, but it shows that U.S. has a lot of room to improve. So the premise of carbon tariffs doesn't really hold, which weakens the case a lot.

And third is if you look at the international trade rules, like the World Trade Organization, levying tariffs on imported goods will definitely violate the non-discriminatory rules. If you claim you're doing the tariffs on imported goods for carbon content, to encourage cleaner goods, other countries might see it as a protectionist measure. And so they'll just retaliate with more tariffs on US exports. You've actually seen it happening with Trump's tariffs back in 2018. And then China and the EU retaliated, and it's just never-ending trade wars.

So that's economics and geopolitics. And lastly, I think a lot of the attention on carbon tariffs is overlooking a very important fact, which is that a majority of the global emissions are production-based emissions of large emitters for domestic consumption. If you look at countries like the U.S. and China, more than 90% of the emissions generated are for domestic consumption. Only a very small part is embedded in international trade. So the notion of, "Let's just put some current tariffs and encourage global decarbonization" is missing a large piece. With a lot of these large economies like China, India, Russia, you need to really enact meaningful and effective domestic policies to drive domestic decarbonization.

That kind of segues a little bit into what I wanted to ask next, what kind of international coordination would be necessary if other countries are already doing versions of a carbon tax, and we did that too?

I think that's an interesting question. There's a lot of discussion about a climate club. Not only the U.S., but the EU, Japan, U.K.--"if everyone puts carbon tariffs on, we'll have a cleaner world will accelerate decarbonization." But I'm very skeptical about that. I'm very skeptical about major economies, even close allies--I think they have great difficulty coming together even to reach some sort of agreement.

One example is the U.S.-EU steel and aluminum trade deal, GASSA (Global Arrangement on Sustainable Steel and Aluminum.) The deal was reached between the two sides in November 2021, the goal was to form a green climate club for trade of steel and aluminum between the EU and the U.S., and put tariffs on other more carbon-intensive steel and aluminum exports, say from China. And to lift steel and aluminum tariffs partially from the U.S. side on EU exports. To return the favor, the EU will lift retaliatory tariffs on U.S. exports like Harley-Davidson and Levi Jeans. The goal was that within two years, they'll form this club, and they'll invite more countries to join and have this green trade club.

But the deal failed completely. The deal didn't reach any conclusion by November of last year, the two year mark. That's just the EU and the U.S., and it's just for two industries, steel and aluminum.

So to answer your question, I don't think there needs to be international coordination between countries to implement some sort of carbon tax or carbon pricing policies because ultimately, they're unilateral policies. Jurisdictions can decide, if they want to do carrots they can do carrots, or if they want to do sticks, they can do sticks.

Now what I think is very critical for international coordination, looking at it from business's perspective, is the measurement of carbon emissions with product level. Because different countries have different climate policies--they might have carbon pricing, might not have carbon pricing, they might have a lot of tax credit subsidies like the U.S.

I think a border-adjusted carbon tax is a really effective way that doesn't really require countries to do coordination. But with implementation of the border adjustment part, you will really need to measure emissions associated with a certain products, in imports and exports. If different countries decide to use different methodologies and processes to measure the carbon emissions or carbon intensity, I think it will be a big headache for multinational companies. Compliance costs will be very high if they have to deal with different regulations, standards of measuring carbon emissions, reporting mechanisms. So I think, definitely in that space, it will be really beneficial for countries to at least coordinate or agree on, what was the definition of carbon emissions? How do we measure it? Are there any common methodologies and processes we could agree on and get aligned and verify reporting?

Another issue with a carbon tax that I've always been curious about--in your piece, you argue that this could be a major source of revenue that could really support all these different policies that both parties are hoping to see happen in 2025. But on the other hand, the goal is to reduce carbon usage, so doesn't that make it an unsteady source of revenue?

We actually talked about it in the piece, but we had to take it out for the word limit consideration. That's a goal for a carbon tax, that you want the emissions to eventually go down, get to a really good place. And then that means that revenue will eventually go down. That's kind of the trade off of such a policy. By that time lawmakers will have to find alternative revenue sources to help pay for the federal deficit.

I assume that it would be a while, obviously decarbonization isn't going to happen overnight.

It will take a while. And also, how much are you implementing the carbon tax? And at what rate does it go up? How many years will there be risks of repealing the policy? I think politics changes a lot. So it is definitely a real concern.

Contact the author at amparkerdc@gmail.com.