Output-Based Rebates: An Alternative to Border Carbon Adjustments for Preserving US Competitiveness
Two linked and frequently raised concerns about putting a price on carbon dioxide emissions in the United States are whether such a tax would unintentionally advantage foreign competitors and, as a result, lead to increased emissions outside American borders. The tax could make American products more expensive than those made by companies in countries not imposing comparable climate regulations, which could lead to shifts in production overseas. Because a central aim of climate policy is to reduce global emissions, the “leakage” of production overseas would run counter to this goal. To avoid this outcome, carbon tax proposals commonly include a border carbon adjustment (BCA), which would impose the carbon tax on imported energy-intensive and trade-exposed products and provide a tax refund for exports of the same products.
This commentary, part of a series of joint research on carbon tax policies by Columbia University’s Center on Global Energy Policy and Rhodium Group, highlights an alternative way to ensure that US firms remain on a level playing field with foreign competitors: output-based rebates (OBRs). While a BCA would focus on imports and exports, an OBR would instead compensate vulnerable US firms based on their production—a simpler process. Both BCAs and OBRs have their benefits and drawbacks, but nearly all carbon tax bills recently proposed in Congress included a BCA, and none included OBRs. This commentary reintroduces output-based rebates as an alternative to BCAs, analyzes US industries that could be compensated with OBRs, and estimates the costs of doing so.
A border carbon adjustment is an appealing concept: simply apply the same carbon tax to foreign firms that is applied to domestic firms. The key advantage of OBRs is avoiding the most significant administrative hurdles of BCAs, including the complexities of determining the carbon content of foreign goods and providing foreign firms credit for climate regulations in their home countries.
The proposed (but not passed) American Clean Energy and Security Act of 2009, commonly called the Waxman-Markey climate bill, included compensation for energy-intensive and trade-exposed (EITE) US firms with OBRs. This commentary uses the Waxman-Markey proposal as a guidepost to analyze the potential scope and costs of OBRs today. The results show:
- While 46 industries would have been eligible for OBRs under Waxman-Markey, using the same thresholds for EITE industries, just 14 industries would be eligible today. The single biggest driver of this change is the fall in energy prices that has lowered the energy intensity of these US industries.
- Waxman-Markey would have granted OBRs to industries with annual carbon dioxide emissions of 731 million metric tons in 2006; those same industries emitted 496 million metric tons in 2018. Using the Waxman-Markey thresholds, the 14 industries that would still be eligible today emitted 174 million metric tons of CO2 in 2018.
- The annual cost of OBRs could range from 3 to 10 percent of the revenue from a carbon tax (roughly $4 to $13 billion per year for a $25 per ton carbon tax), depending on which industries are covered by the program.
Policy makers designing OBRs would need to carefully balance trade-offs associated with industry eligibility and the structure and level of compensation. They should also be wary
of unintended consequences like providing additional support for polluting facilities near disadvantaged communities.