Table of Contents

Environmental Tariff

By Investopedia Staff

Updated November 27, 2020

Reviewed by

Ebony Howard

Fact checked by Marcus Reeves

What Is an Environmental Tariff?

An environmental tariff, also known as an eco-tariff, is a tax on products imported from countries with inadequate environmental pollution controls. They are mechanisms to prevent nations from ignoring environmental controls to increase exports.

Direct environmental tariffs are uncommon because they tend to run afoul of international trade commitments and treaties, though other trade measures with similar environmental intent have become more common.

Key Takeaways

An environmental tariff is a punitive or countervailing tariff imposed on goods from a country with lower environmental laws and standards.
Environmental tariffs have never been widely adopted or accepted due to their impact on development in emerging economies and conflict with international trade agreements.
One example is the carbon border adjustment mechanism, an EU tariff on imported goods from countries with less stringent policies on carbon reduction.
Instead, other approaches have been implemented that treat environmentally-friendly goods and services more favorably in trade.

Understanding Environmental Tariffs

An environmental tariff is designed to deter countries with more relaxed environmental policies by making trading with them more expensive. Proponents of environmental tariffs believe that these tariffs lead to a harmonious blend of efforts from nations to establish environmental standards and that the taxes encourage non-compliant countries to improve their processes.

An early proposal for an environmental tariff was introduced into the U.S. Senate in 1991, which would have imposed countervailing tariffs on goods from countries that did not enforce effective pollution controls in a manner that would constitute an unfair subsidy to their exports. However, this bill was never passed into law. Moreover, for a variety of reasons, environmental tariffs that impose this kind of trade barrier have proven politically undesirable.

For one, developing or less-developed countries (LDCs) raised concerns that developed nations may impose unreasonable standards to which developing and underdeveloped nations cannot adhere. The opposing argument maintains that part of the stated intent of early attempts at environmental tariffs was specifically to prevent an international race-to-the-bottom among emerging market economies. These standards could also just be pretexts for protectionist trade barriers against them that might threaten the viability of their nations' economies.

The consensus on the imposition of environmental tariffs was thus seen as counterproductive to the goals of international development and globalization. Because of this, environmental tariffs never gained acceptance under the General Agreement on Tariffs and Trade (GATT) or the World Trade Organization (WTO).

Many free trade agreements, such as the USMCA, discourage tariffs that limit international trade.

Alternatives to Environmental Tariffs

Instead of imposing punitive environmental tariffs, the more accepted approach has been to lower tariffs with respect to so-called "environmental goods." This approach was formally adopted under the Doha round of WTO negotiations in 2001, where ministers agreed in principle to reduce or remove tariff and non-tariff barriers on environmental goods and services.

Environmental goods include pollution-control devices, such as catalytic converters and smokestack scrubbers, or renewable energy goods, like wind turbines. By lowering trade barriers for these and similar goods, the goals of promoting healthy environmental policies and fostering economic development are believed to be made more compatible.

However, some critics argue that this is counterproductive. Since increased global trade encourages industrialization, mechanization of agriculture, and long-distance transportation of goods, lowering trade barriers for environmental goods is considered inherently contradictory to promoting a healthy environment.

In addition to increased international trade in environmental goods, there has been an increase in environmentally preferable products (EPPs) designed with smaller carbon footprints or otherwise lower environmental impact than their alternatives. Carbon footprint refers to the emission of carbon dioxide and other compounds into the environment due in part to petroleum and fossil fuel use.

Example of Environmental Tariff

One major example of an environmental tariff is the carbon border adjustment mechanism, a border adjustment tax on high-carbon products like cement and electricity. The tax is intended to raise the costs of products imported into the EU from countries with less robust climate policies.

How Does Free Trade Affect the Environment?

Free trade tends to encourage industrial specialization between different regions, due to the law of comparative advantage. Some economists say that this is bad for the environment, since specialization increases environmental hazards such as pollution, soil depletion, and resource exhaustion. Conversely, some scholars argue that free trade is beneficial for the environment, since it allows different countries to use resources more efficiently.

How Do Environmental Regulations Affect Trade?

Environmental regulations are often considered to be non-tariff barriers, in that they tend to increase the transactional costs of international trade. Examples might include requirements for food products to be raised with sustainable agricultural techniques, or a prohibition on certain highly-polluting manufacturing processes. Since these requirements make it more expensive for foreign companies to trade on the domestic market, they may be considered barriers to trade.

How Can Taxation Be Used for Environmental Policy?

There are several ways taxes can be used to promote environmentally-friendly behaviors. One way is to tax industries and products that are highly carbon-intensive, such as steel and cement. This reduces demand for those products, thereby incentivizing manufacturers to produce less of them. A more sophisticated approach is to implement a broad carbon tax, or tradable carbon credits, allowing the market to determine what goods can be produced.

Article Sources

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Federal Reserve Bank of Dallas. ”GATT and the New Protectionism,” Page 1.
H. Jeffrey Leonard. ”Pollution and the Struggle for the World Product,” Page 69. Cambridge University Press, 2006.
World Trade Organization. ”Negotiations on Trade and the Environment.”
U.S. Congress. ”S.984 - International Pollution Deterrence Act of 1991.”
World Trade Organization. "Eliminating Trade Barriers on Environmental Goods and Services."
U.S. General Services Administration. ”Environmentally Preferable Products.”
U.S. Environmental Protection Agency. ”Climate Change Terms.”