We see that each foreign firm receives unit revenue of equal to or greater than those under the differentiated approach tariff approach (i.e., Scenario 1). However, since each firm also receives less than under the baseline no-tax scenario, their ultimate support would be unclear.

The greatest uncertainty would come from U.S. firms’ acceptance of the arrangement. While no foreign firm gets less burdensome carbon taxes than a U.S. firm (as is the case for some firms under Scenarios 1 through 5), inefficient foreign firms are not as burdened as under the differentiated tax case of Scenario 2. Domestic firms might try to hold out for such an outcome but, as noted above, the administrative burdens of obtaining specific firm data from often uncooperative foreign companies probably precludes that approach in any event.

Standards of how to assess foreign information submissions could also be fraught with difficulties. In the antidumping analog, there are frequent arguments about whether data supplied by foreign firms is accurate. In addition, there are a myriad of small decisions that allow discretion on the part of domestic investigators to raise or lower the antidumping duty. Similar discretion in a carbon footprint investigation might easily be imagined, even when there is an attempt by foreigners to cooperate.

In summary, this discussion above makes clear that there are significant problems for any of the carbon tax proposals. They range from clear violations of WTO rules to extremely complicated administrative procedures needed to calculate foreign firms’ carbon footprint. But there are other issues that apply to all approaches.

Circumvention is probably the most daunting problem. Arbitrageurs would have incentives to buy, for example, Chinese BOF steel (in most scenarios subject the highest tax in many of the scenarios) and label it as EAF steel before sending it to the U.S. Even if there were a common carbon tax imposed on all Chinese steel, there would be similar incentives to pass the product off as coming from a country with a strict carbon emissions system like Germany. (These problems are quite familiar to those who follow antidumping duties where allegations of circumvention are very common.) Of course, there would be a possibility of a system of rules of origin that would attempt through bureaucratic means to identify the true source of a product, but this would be extremely cumbersome for products for which their origin is unclear from their physical characteristics.

Countries faced with carbon tax burdens would also have an incentive to shuffle their production around so that only the “clean” products are sent abroad while the identical product using carbon-intensive methods would be sold at home. This would satisfy the formal procedures but undercut the point of the exercise.

There is also the general problem that steel subject to these types of taxes would arrive at the border instead embodied in further processed goods such as automobiles. This is a common problem with garden-variety protection. But it does raise the possibility that if a carbon border tax scheme does come into play in the future, there will be pressure to impose similar taxes on downstream products. Such an attempt would make the administrative burdens in the examples above pale in comparison.

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