Carbon bias of tariffs: Are fossil fuels the culprits?

This paper revisits the existence of a carbon bias in trade policies, where dirtier sectors receive lower trade protection compared to cleaner sectors. Using a stylized general equilibrium model that accounts for greenhouse gas emissions, we confirm the presence of a carbon bias in 2019 but find it to be significantly smaller than previously estimated. The bias is mainly driven by low tariffs on fossil fuels, particularly crude oil. Further analysis reveals that domestic consumption taxes on fossil fuels in non-producing countries function as de facto tariffs. When these taxes are included in tariffs, the carbon bias shifts to a pro-environmental stance. Additionally, incorporating the finite nature of fossil fuel resources into the model reverses the carbon bias, as production becomes less responsive to tariff changes. These findings suggest reasonable doubts about the reality of this carbon bias and imply that addressing its existence in trade policies is not a policy priority compared to more impactful measures, such as directly taxing greenhouse gas emissions.