The idea of a carbon border tax is gaining ground in the United States and the European Union.

[Frans Timmermans, European Commissioner of European Green Deal]

"A carbon border tax, to level the playing field for European products if other countries do not go as far as us, or refuse to go in the right direction."

It sounds like a win in the fight against climate change – the idea of imposing additional costs on imports that come from countries with inadequate climate rules.

But such policies could also level the playing field between countries where it’s costly for companies to operate,

and countries where it’s cheap

helping rich countries to retain jobs and investment.

What is it?

The idea is to impose additional costs on high-carbon imports, such as steel and aluminum,

that come from countries with less strict climate policies.

At the same time, suppliers at home could get a carbon-related rebate to help boost their exports.

President Joe Biden and his counterparts in Europe are mulling the idea.

The Biden administration listed carbon border adjustments as part of its 2021 trade agenda

to help cut greenhouse gas emissions in global trade and combat China’s unfair trade practices.

Over in Europe, the European Parliament approved moving forward with a plan and aims to have a pilot program by 2023.

The carbon border tax would reinforce climate action – but also, avoid carbon leakage.

Carbon leakage happens when companies relocate outside the EU or U.S., for example, to avoid the cost of stringent climate policies.

Western countries don’t want to see companies packing up for places like China or India because of their less stringent environmental rules,

which make the goods produced there cheaper.

A carbon border tax would make those products more expensive,

reducing the incentive to manufacture and move jobs overseas.

But working out which countries are subject to the tax and pricing can be complicated

and requires some way of weighing up differing carbon regimes.

But if the U.S. and EU are determined to move ahead, the carbon border tax is likely to catch on.