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US Republicans are looking to implement a carbon border tax—what does that mean?

Understanding the US’s proposed Foreign Pollution Fee Act, which would impose tariffs on imports from high-polluting countries

December 21, 2023

4-minute read

If there are two things US Republicans abhor, its taxes and climate policy. Bring them together into a “carbon tax”—against which Canadian Conservative leader Pierre Poilievre has directed so much ire—and it seems a recipe for disaster.

And yet, this is precisely what a group of Republican Senators recently proposed in Congress. Sort of.

On the heels of Democratic proposals for a carbon border tax, this past November Republican Senators Bill Cassidy, Lindsey Graham and Roger Wicker introduced their own “Foreign Pollution Fee Act (FPFA).” While the Senators insist it is not a carbon tax, many disagree, including the anti-tax, libertarian Cato Institute who derogatively dubbed it the “Cassidy Carbon Tax,” a tool for “climate alarmist technocrats.”

While it has a way to go to get through Congress, FPFA has bipartisan support and is the strongest indication yet the US could pursue its version of the EU’s Carbon Border Adjustment Mechanism (CBAM). Beginning in 2026, CBAM will impose tariffs (border taxes) on EU imports of iron and steel, cement, fertilizers, aluminum, electricity and hydrogen from countries which do not have their own carbon pricing system.

The Rise of Carbon Border Taxes

While COP28 garnered lots of the media attention, it can be difficult to discern the important issues at stake, from the distorting influence of the oil industry, to the final agreement itself, which the Alliance of Small Island States charged contains a “litany of loopholes.” With an agreement like this, it is unlikely the world will stay below 1.5 degrees Celsius.

One major issue raised by Global South countries at COP28 was the “crisis” in multilateralism, stemming from unilateral actions by rich countries around green subsidies, standards, and border taxes. Europe’s CBAM, in particular, came under fire for imposing burdens on Southern exporters without supporting their decarbonization efforts. Opposition was apparent from large economies, like China, Russia, Turkey and India, as well as smaller ones, like Mozambique, which exports aluminum to the EU from its emissions-heavy smelters.

The EU pushed back against these accusations, arguing CBAM does not violate global trade rules, as the costs associated with it will mirror the costs of the EU’s own carbon pricing on domestic companies. Since the start of its Emissions Trading System (ETS) in 2005, the EU has given out free allowances to high-emitting industries. The EU says it will phase these allowances out while simultaneously introducing CBAM, to avoid the threat of “carbon leakage,” where investment moves abroad to avoid carbon pricing.

The EU also claims that CBAM funds—potentially 36 billion Euros annually—can be used to support decarbonization in the South. In practice, however, the EU has made no firm commitment and recently suggested it would use the funds to pay down pandemic era debts and subsidize it electric vehicle industry.

How different is the FPFA?

The proposed FPFA, branded by supporters as “Republican climate policy,” is distinct from CBAM in important ways. First, FPFA imposes no direct burden on domestic companies. Instead, it anticipates tariffs on imports where the average carbon intensity in the source country is 10 per cent or more than the average US production intensity. Existing US carbon intensity will be taken as the baseline for FPFA, not a carbon pricing system like in the EU.

Second, while the EU has gone to pains to demonstrate CBAM adheres to global trade rules, which is likely to be tested at future World Trade Organization (WTO) disputes, Republicans have been explicit about FPFA’s geostrategic goals. China is evoked as the main target of the Act, portrayed as using lax environmental standards to bolster its competitiveness on industrial exports.

As a result, FPFA contains components that go well beyond climate change goals. FPFA covers a range of goods, 15 categories with hundreds of subcategories, including ones that generally do not involve high carbon intensity in their production, like lithium-ion batteries, solar cells and panels, and wind turbines.

Whereas the EU requires intense reporting to estimate the carbon emissions of specific companies—something critics argue is excessively burdensome—FPFA will produce country estimates in the US, determined by an Advisory Board composed of US officials and 30 corporate CEOs. These estimates will be applied based on the ownership country, not where a facility is located. This means that a Chinese-owned factory in Mexico would be assigned the carbon rate for China, not for Mexico where the factory actually is.

Countries can avoid paying the fees if they have a Free Trade Agreement (FTA) with the US and their carbon intensity differential is less than 50 per cent. Individual companies can appeal the fees if they believe their emissions are lower than their national average, but the process is extremely complicated and burdensome, including, among other things, requiring consent from US Congress.

These are only the most notable aspects of FPFA, which has been effectively dissected by Aaron Cosbey at the International Institute for Sustainable Development (IISD).

The Bumpy Road to Decarbonization

While FPFA might differ from CBAM in its more blatant violation of the ideals of “free trade,” for many trading partners their likely impacts will not be all that different. Both are essentially taxes on imports, designed to protect domestic industry from competition as they (hopefully) decarbonize. It is, perhaps, unrealistic to think that any major economy would carry out this transition without tariffs in place, regardless of the form they take.

Both are also similar in that they offer little exclusions or benefits to the poorest and more vulnerable economies that are least able to carry out a carbon transition. FPFA actually offers more than CBAM, allowing poor and upper-middle income countries the option of avoiding fees by negotiating an International Partnership Agreement (IPA) with the US. The terms of these agreements are not clear, and they could involve costly concessions, such as reduced trade barriers or investment protections that disproportionately benefit US companies.

At the same time, the idea of IPAs does represent, as Cosbey observes, “a valuable exception to the Act, particularly for poorer countries.” It builds on the position Southern politicians and advocacy groups have increasingly adopted, recognizing the need to decarbonize manufacturing in both the North and South, while calling for special and differential treatment for more vulnerable economies, and hundreds of billions of dollars in funding to facilitate decarbonization, technology transfer, and capital investment, as has recently been articulated by the Bridgetown Initiative spearheaded by Barbados Prime Minister Mia Mottley.

Without such policies in place, both CBAM and the proposed FPFA could end up, as Avinash Persaud, special envoy to Barbados’ prime minister, has argued, “developmentally negative”—an unfair tax that, from the perspective of poorer countries, leaves them further behind in the carbon transition we all need to be a part of.

Topics addressed in this article

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