Europe sparks U.S. border carbon tax talks

Washington D.C. Correspondent
Pacman coin engulfing ships and a factory representing dirty carbon imports.
Illustration by Samson Awosan.

American lawmakers are taking a cue from their counterparts across the Atlantic and pushing policies that would tax the carbon emissions of imports.

The European Union adopted such a border tax earlier this year, and now politicians on both sides of the aisle in the United States Congress are pursuing their own versions.

Lawmakers and some experts see a border carbon tax as an opportunity to reduce global emissions from hard-to-abate sectors like iron, steel, fertilizers and cement. They also say it would give U.S. manufacturing an edge over cheaply produced Chinese goods and encourage other countries to clean up their operations. Similar arguments helped propel Europe’s action.

Climate hawk U.S. Senator Sheldon Whitehouse, a Democrat from Rhode Island, plans to reintroduce a bill in late fall or early winter that would pair a carbon fee on foreign manufacturers with one imposed on large domestic emitters.

U.S. Senator Bill Cassidy, a Republican from Louisiana, plans to introduce a separate, new bill sometime in September that would impose a “foreign pollution fee” just on imports with an eye on Chinese and Russian goods made with cheap coal-fired power that lack pollution controls.

Whitehouse and Cassidy, who have sponsored other climate-related bills together, are eager to iron out differences after they have introduced their respective plans, according to both lawmakers. Such a process could spill over into next year, sources familiar with the bill said.

Three-quarters of imports entering the U.S. are more carbon-intensive than U.S. goods, Whitehouse said at a Bipartisan Policy Center event in June discussing his plans. The border tax is “an opportunity for the domestic industry to reclaim some market share,” he added.

The EU’s border tax will cover imports of six energy-intensive products — iron, steel, cement, aluminum, hydrogen and electricity. The bloc will begin assessing emissions from making these products in October and the tax will be phased in over nine years starting in 2026 and eventually expand to cover all goods.

Canada, Japan and the United Kingdom are also eyeing their own border carbon taxes.

International trade of goods and services, representing roughly one-fourth of all global carbon emissions, is ripe for emissions cuts, according to the Washington D.C.-based Climate Leadership Council.

“The most powerful incentive we have seen throughout history is an economic incentive to do something, which in this case is reduced emissions to gain access to lucrative markets” Paul Bledsoe, a senior strategic advisor at the nonprofit Progressive Policy Institute, who recently co-authored a climate and trade proposal, told Cipher.

A border carbon tax is a tax levied on an imported good based on its “emissions intensity,” or how much carbon dioxide is released during its manufacture.

The tax is designed to encourage trade with countries that either make low-carbon goods or that impose a carbon price of their own on high-emitting goods — and penalize countries that don’t measure up.

The EU’s tax builds on the bloc’s existing internal price on carbon, which currently is about $91 (€83) per metric ton of CO2 emitted. The math gets complicated, but the tax is calculated so that the carbon price on imports mirrors the carbon price on domestic production.

Whitehouse said he supports the EU action because it is forcing the U.S. to act and could be advantageous for U.S. manufacturers.

“American manufacturers actually win” under an EU border carbon tax because “they will pay less than China, which in turn will move the supply chains to the United States of America,” Whitehouse said.

If the U.S. adopts a border carbon tax, domestic producers would have an advantage because they already produce goods that are 40% cleaner than the global average, Whitehouse said, citing a CLC report.

Unlike the EU, the U.S. does not have an existing carbon price on which to build its tax program, which could make it more complicated to impose a border tax.

One area of difference Cassidy and Whitehouse will need to reconcile as they work to combine forces is that Cassidy, like most other Republicans, opposes taxing the domestic manufacturing sector. Meanwhile Whitehouse’s bill would impose a national emissions performance standard against which domestic and foreign goods would be taxed on a per ton basis if their emissions exceed the standard.

How assistance is offered to lower income countries is another area where the two lawmakers will have to reach agreement, sources said. Cipher will explore the potential impacts of such a tax on lower income countries in a future article.

Differences aside, Whitehouse and Cassidy both would like the government to assess the emissions intensity of certain goods at home and abroad as a first step.

Both bills would cover more industries, such as petrochemicals and pulp and paper, than the current iteration of the EU tax.

Although a border carbon tax has bipartisan support, it also could have unintended consequences.

A carbon tax on importers may mean those costs get passed on to consumers, who end up paying more for cars and other goods, cautioned Max Gruenig, senior policy advisor with global climate think tank E3G.

Also, firms in countries with low environmental standards could engage in resource shuffling: exporting their cleaner products to countries with border carbon taxes while still producing and selling dirtier versions of those products in their domestic markets, noted Roman Kramarchuk, head of future energy analytics at S&P Global Commodity Insights.

Whether and when a U.S. border carbon tax is enacted will probably depend on the leadership in Congress, said Michael Mehling, deputy director for MIT’s Center for Energy and Environmental Policy Research.

“I would think there’s a good chance because it is something both sides of the political aisle can identify with,” he said.

Roman Kramarchuck is the head of future energy analytics at S&P Global Commodity Insights. An earlier version of this article said he was head of energy scenarios, policy & technology analytics.