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Carbon Taxes, Trade, and American
Competitiveness
Key Findings
• Carbon leakage occurs when a climate policy in one jurisdiction leads to
emissions-producing activity simply shifting to a different jurisdiction.
• Leakage raises both environmental concerns—as it undermines emissions
reduction efforts—and economic concerns.
•
In the aggregate, leakage is relatively small, but it could have an outsized
impact on specific emissions-intensive, trade-exposed (EITE) industries.
• Using a border adjustment to make a carbon tax based on consumption,
rather than production, can help address this problem.
• However, measuring the carbon content of imported goods is challenging.
This underscores the need to pair carbon taxes with strong domestic tax
reforms.
• Pro-growth policies like expensing for R&D investment and permanence for
100 percent bonus depreciation would at least mitigate a carbon tax’s impact
on manufacturing and other critical industries.
FISCAL
FACT
No. 803
Nov. 2022
Alex Muresianu Policy Analyst
Sean Bray
EU Policy Analyst
TAX FOUNDATION | 2
Introduction
Economists tend to favor carbon taxes as an ideal policy solution to address climate change.1 By
making the market reflect the social costs of carbon emissions, such a tax would incentivize emissions
reduction and innovation, without creating a specific bias for or against different technologies.
But how carbon taxes interact with a globalized economy is more complicated. For one, it is possible
that a carbon tax enacted only in America could merely move polluting activity abroad rather than
drive down the overal