4 New Carbon Border Adjustment Bills in the US

Proposals for policies at the intersection of climate and trade are becoming increasingly popular around the world and in the U.S. In October 2023, the European Union (EU) began the transitional period of its Carbon Border Adjustment Mechanism (CBAM), one of the most extensive environmental trade policies so far. The CBAM will apply the carbon price its manufacturers face under EU’s Emissions Trading System to imported goods as well. CBAM is a type of carbon border adjustment (CBA) — an environmental trade policy that applies tariffs on imports such as steel and cement based on their carbon emissions.

Such policies can serve multiple purposes, such as driving down emissions, preventing carbon leakage, spurring domestic industries and onshoring manufacturing jobs, which can build support across the political spectrum. 2023 saw the introduction of four bills in the U.S. Congress related to climate and trade.

The first, introduced with bipartisan support, calls for a study of the relative emissions intensity of traded goods produced in the U.S. and in other countries. Two additional bills, one with Republican and one with Democratic sponsors, would take different approaches to implementing a carbon intensity fee on traded goods. And finally, another bipartisan bill proposes to apply a broad tax on emissions, including certain covered imported products.

Table: Environmental trade related legislations introduced in the 118^th U.S. Congress

Source – Authors’ analysis

PROVE IT – Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency

MARKET CHOICE – Modernizing America with Rebuilding to Kickstart the Economy of hte Twenty-first Centry with a Historic Infrastructure-centered Explansion

PROVE IT Act

The bipartisan Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency (PROVE IT)  Act was introduced in June 2023 by Senators Chris Coons (D-DE), Kevin Cramer (R-ND) and other co-sponsors. It would require the Department of Energy to coordinate with other federal agencies in compiling a report on the emissions intensity of carbon-intensive goods produced in the U.S. and imported from foreign countries.

Depending on the source, the U.S. is alternately hailed as a leader in low carbon emissions industry or found to be lagging behind some industrial countries.  These contradictory conclusions stem from a lack of readily available public data on the emissions intensity of industrial goods made in and imported to the U.S. This proposal would fill this gap in data by studying the following goods:

• Aluminum and aluminum goods
• Biofuels
• Cement and cement goods
• Crude oil
• Fertilizer
• Glass
• Hydrogen
• Iron and steel and their goods
• Lithium-ion batteries
• Natural gas
• Petrochemicals
• Plastics and plastic goods
• Pulp and paper
• Critical minerals
• Refined petroleum products
• Solar cells and panels
• Uranium
• Wind turbines 

Greenhouse gas emissions intensity would be calculated based on the metric tons of CO2 equivalent emissions per metric ton of product, dollar value of product or any other appropriate unit of measurement depending on the product in question. This calculation would include emissions from cradle to grave, i.e., all stages of production and consumption of the goods.

The PROVE IT Act would not levy a fee on goods — either domestically produced or imported — based on their emissions intensities. Instead, it would provide policymakers, industrial actors and consumers with valuable information on the emissions intensity of various heavily traded goods, allowing for a detailed comparison of goods produced in the U.S. to those produced overseas.

Foreign Pollution Fee Act

The Foreign Pollution Fee Act (FPFA) was introduced by Republicans Sen. Bill Cassidy (R-LA) and Lindsey Graham (R-SC) in November 2023. FPFA would apply a fee on energy and industrial imports to the U.S. The fee would only apply to imported goods and would be based on the exporting country’s average emissions intensity for the product compared to the U.S. average emissions intensity of the product. The goal would be for imports of covered goods to be:

• Less than 50% more emissions intensive than the U.S. average in the first six years (Phase 1)
• Less than 25% more emissions intensive than the U.S. average in the next six years (Phase 2)
• Less than 10% more emissions intensive than the U.S. average for subsequent years (Phase 3)

A methodology to set the fee rate is not defined and would be determined by the U.S. Secretary of Energy. The fee would increase at varying rates depending on the emissions intensity difference. Carbon intensity accounting similar to what would be done under PROVE IT would be done by National Laboratories.

Goods covered under FPFA include:

• Aluminum
• Biofuels 
• Cement
• Crude oil 
• Glass 
• Hydrogen, methanol or ammonia
• Iron and steel
• Lithium-ion batteries 
• Minerals and uranium
• Natural gas 
• Petrochemicals 
• Plastics
• Pulp and paper 
• Critical minerals 
• Refined petroleum products 
• Solar cells and panels 
• Wind turbines

The bill allows for a number of exemptions, notably a proposed establishment of “International Partnership Agreements” with the U.S., similar to the concept of Climate Clubs. International Partnership Agreement would require partner countries to use equivalent policies and carbon tariffs to decarbonize industries, waive tariffs on imported products from member countries and collaborate with the U.S. on carbon accounting. Other exemptions include imports less than 50% more carbon intensive than the U.S. average from countries with free trade agreements with the U.S.

FPFA would increase the cost of carbon-intensive imports thereby increasing the competitiveness of U.S. domestic manufacturers. The bill explicitly states that it does not create a domestic carbon price or place any new environmental or reporting requirements on domestic manufacturers.

Clean Competition Act

In December 2023, the Clean Competition (CCA) Act was reintroduced by Sen. Sheldon Whitehouse (D-RI), Brian Schatz (D-HI) and Martin Heinrich (D-NM) with an identical companion bill in the House by Rep. Suzan DelBene (D-WA), Don Beyer (D-VA), Kathy Castor (D-FL) and Ami Bera (D-CA). This bill would apply a carbon intensity charge on both domestically produced and imported energy-intensive goods if their emissions intensity exceeded a certain benchmark. The fee would be determined by the U.S. Secretary of Treasury as:

(carbon intensity of product – carbon intensity benchmark) x (weight of goods) x (carbon price)

The carbon price would start at $55/metric ton CO2 and increase at 5% per year above the rate of inflation. The starting point for the benchmark under CCA would be the U.S. industry average for that good and would decline at 2.5% every year for the first three years and 5% every year in subsequent years. The bill includes reporting requirements that would provide similar data on the carbon intensity of products as would be produced under the PROVE IT Act.

Energy-intensive goods covered under CCA would include:

• Fossil fuels
• Refined petroleum products
• Petrochemicals
• Fertilizer
• Hydrogen
• Adipic acid
• Cement
• Iron and steel
• Aluminum
• Glass
• Pulp and paper
• Ethanol

The bill includes an exemption for “Carbon Clubs” or Climate Clubs which would waive the fees for goods from countries implementing similar policies with an explicit cost on greenhouse gas emissions.  Least developed countries would be exempt from the fee.

Revenues generated would be directed as competitive grants towards supporting decarbonization in the targeted domestic industries. A portion of the revenues would also be reserved for multilateral assistance for climate and clean energy programs overseas.

By applying the emission reduction incentives equally on domestic manufacturers and imports and providing funds for decarbonization, the CCA could drive deep industrial decarbonization in the U.S. while also incentivizing it overseas.

MARKET CHOICE Act

Another bipartisan bill, the Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion (MARKET CHOICE) Act, was also introduced in December 2023 by Reps. Brian Fitzpatrick (R-PA) and Salud Carbajal (D-CA). This bill would replace federal motor vehicle and aviation fuel taxes with a broader tax on greenhouse gas emissions. And, similar to a CBA, the bill would also include a border tax adjustment that assesses an equivalent tax on the emissions of covered imported goods and rebates the tax for exported goods.   

The tax would largely be paid by fossil fuel producers at the points of taxation at the coal mine, refinery and processing facility. Owners and operators of certain industrial facilities would also pay the tax on those emissions. Importers of covered industrial products, fossil fuels and other manufactured products with high GHG intensity would be subject to the carbon border adjustment equivalent to the domestic carbon tax.

The tax rate would initially be set at $35 per metric ton of CO2 equivalent emissions for 2025 and would increase annually by 5% above inflation, as measured by the Consumer Price Index.

The bill establishes a schedule for cumulative CO2 emission reductions, aiming for a 20% reduction in annual U.S. CO2 emissions from the 2022 level by 2035. If cumulative CO2 emissions of the previous year surpass the amount specified for that year, the carbon tax would increase by $4 per metric ton during the next year.

The bill would levy a tax on the greenhouse gas emissions resulting from the following industrial processes:

• Iron and steel production and metallurgical coke production
• Underground coal mining
• Coal preparation and processing plants
• Refineries
• Cement production
• Petrochemical production
• Lime production
• Ammonia production
• Aluminum production
• Soda ash production
• Ferroalloy production
• Phosphoric acid production
• Glass production
• Zinc production
• Lead production
• Magnesium production and processing
• Nitric acid production
• Adipic acid production
• Semiconductor manufacture
• Electrical transmission and distribution

The bill would also tax non-fossil fuel based GHG emissions associated with the usage of the following products:

• Fuel ethanol
• Industrial carbonates
• CO2 urea
• Soda ash
• Nitrous Oxide
• Ozone depleting substances
• Biodiesel
• Solid biomass fuels

The MARKET CHOICE Act includes several exemptions. For example, refunds would be issued to producers who capture and sequester GHG emissions and for fossil fuels used as non-combustion inputs into products. Captured emissions that are used for enhanced oil recovery will also be exempted as well as least developed countries.

The bill would dedicate most of the revenue for investment in infrastructure, replenishing the Highway Trust Fund which currently is funded by the federal gas tax. Additional funds would be allocated to climate resilience and research and development of climate mitigation technologies.

The MARKET CHOICE Act proposes a carbon tax on all emissions — not just those above a benchmark. If passed, this act would go further than any of the other previously discussed bills in preventing carbon leakage and reducing emissions from all energy intensive sectors of the U.S. economy.

Why These Bills Are Important

Proposals related to environmental trade policies have picked up momentum in the 118^th Congress, with a degree of bipartisan interest in such measures. The bipartisan PROVE IT Act would be a meaningful step toward instituting greater transparency of industrial emissions in the U.S. compared to other countries. By laying the groundwork for robust carbon accounting, the PROVE IT Act would provide a strong foundation for the design of future environmental trade policies.

While proposals to fully price GHG emissions in the U.S. have dropped out of the forefront of federal climate policy discussions, the reintroduction of the bipartisan MARKET CHOICE Act provides a useful reminder of the importance of carbon pricing for achieving meaningful emissions reductions and meeting U.S. climate goals.

The differing approaches of the FPFA, the MARKET CHOICE Act and the CCA to implementing a carbon border adjustment illustrate the diversity of opinions on these issues among Members of Congress. Both the FPFA and the CCA build on the view that U.S. manufacturing is cleaner than that of many of our trading partners and in effect challenges others to catch up to the U.S.  However, the CCA also recognizes that setting a goal for U.S. industries and applying its carbon intensity charge equally to U.S. and foreign goods will lead to deeper global emissions reductions. Both Democrats and Republicans introducing CBA bills indicates that there is appetite in Congress for environmental trade policies. Whether the sponsors of these bills can converge and negotiate a bipartisan CBA bill remains to be seen.