Carbon border fee gains traction, but hurdles remain

By Nick Sobczyk | 05/04/2022 06:40 AM EDT

The bipartisan Senate gang is talking up the idea of an import tax on emissions, but it’s unclear if there are 10 Republican votes for it.

Sen. Bill Cassidy (R-La.).

Sen. Bill Cassidy (R-La.) outside a meeting on climate and energy issues at the Capitol this week. Francis Chung/E&E News

Sen. Joe Manchin’s bipartisan energy gang is trying to breathe life into a carbon border adjustment, but it is still struggling with the same political problems that have dogged past efforts to slap tariffs on carbon-intensive goods.

Republicans emerged from a meeting of the group Monday pitching a vision for a carbon border adjustment that would penalize imports of high-emissions products from countries like India and China, without a domestic price on carbon in the United States (E&E Daily, May 3).

Manchin, the West Virginia Democrat who chairs the Senate Energy and Natural Resources Committee, has been trying to come up with a bipartisan energy and climate bill after he led the demise of the partisan “Build Back Better Act.”


Sen. Bill Cassidy (R-La.), a member of the group, said he is working with lawmakers on both sides of the aisle to draft a carbon border mechanism that would address rising greenhouse gas emissions in China and skirt onerous international trade rules.

“Once people understand that this is a geopolitical tool, and it’s a lot better than war, it’s a lot cheaper than war, in terms of addressing the militarization of China, and it helps our workers and helps our industry, then they kind of get behind it,” Cassidy told reporters yesterday.

But the effort is nascent, and developing a workable proposal could be a tall order. Experts have long warned that a carbon border adjustment, which would impose an import tax on products based on emissions, that does not pair with a price on carbon in the United States could run afoul of World Trade Organization rules.

And despite some GOP momentum for the policy centered on domestic manufacturing and concern about China, it’s not clear whether there are 10 Republicans who would support a carbon border adjustment in the 50-50 Senate.

“I think it’s a good sign to talk about carbon border adjustment,” said Sen. Sheldon Whitehouse (D-R.I.), a longtime advocate of the policy. “But the devil is always in the details.”

Those details are far from clear, and with midterm elections on the horizon, the current talk could set the stage for a carbon border adjustment policy down the road, rather than in the immediate future.

Still, there are some near-term imperatives that are drawing attention from advocacy groups and lawmakers across the political spectrum.

The European Union, for instance, is moving ahead with its own Carbon Border Adjustment Mechanism (CBAM), which has caught the eye of U.S. companies and lawmakers from both parties.

“To me, one of the bigger challenges is that Europe is so far out in front on the whole concept,” Sen. Kevin Cramer (R-N.D.), a member of the bipartisan gang, told reporters yesterday. “And it’s hard to tell them to slow down, but at the same time, I’d like to reconcile with them first, and then I think we all move forward better.”

For the United States, a carbon border adjustment would also fit neatly with Republican talking points about the relatively low emissions of domestic fossil fuels compared to other countries and their concerns about rising greenhouse gas emissions in India and China.

Cramer said he thinks there is “some appetite” for a carbon border adjustment among Republicans, who he said are “just starting to sort of get a sense of what we’re talking about.”

“It’s a popular talking point that they have that they’re now operationalizing and creating a policy,” said George David Banks, a former climate adviser in the Trump White House who has been trumpeting the idea for years. “But we’re at the very, very beginning stages of the policymaking exercise.”

Potential quagmire

In the past, carbon border adjustments were usually proposed as part of a larger carbon pricing scheme.

The idea is to tax carbon emissions in the United States and use an import tax and export rebates to protect U.S. manufacturers of goods like steel and aluminum.

But that paradigm has started to shift in recent years, as the political challenges of carbon pricing came into focus and as Republicans became interested in the policy after the European Union rolled out its CBAM proposal.

It culminated last year, when Sen. Chris Coons (D-Del.) and Rep. Scott Peters (D-Calif.) introduced legislation to implement a carbon border adjustment with no explicit domestic price.

Their bill, S. 2378, would impose a tariff on carbon-intensive goods exposed to trade competition, including steel, aluminum, cement, iron and fossil fuel products like natural gas, petroleum and coal. It would set the tariff by calculating the cost incurred by an array of federal, state and local environmental laws to set an implicit carbon price that could be put on imports (E&E Daily, July 20, 2021).

The proposal was “a recognition that we may not be able to pass a specific carbon price that is additional to the existing regulatory burden on industrial production of some hard-to-decarbonize industries,” Coons, who is part of Manchin’s bipartisan gang, said in an interview yesterday.

But there are challenges. For one thing, adding up the regulatory burden of a patchwork of state and federal climate regulations could turn into a quagmire, said Shuting Pomerleau, research manager of climate policy at the right-leaning Niskanen Center.

Then there’s the long-standing concern that U.S. trading partners would challenge such a policy at the WTO.

“We’ll have to go through a process of review, and then they have to come to position,” Pomerleau said. “And if one trading partner starts doing that, other trading partners might follow suit and just really undermine the credibility of the U.S. policy.”

Indeed, a carbon border adjustment was part of negotiations on the “Build Back Better Act” — Democrats’ $1.7 trillion climate and social spending bill — but dropped out of talks as lawmakers struggled with the mechanics of the policy (E&E Daily, Oct. 27, 2021).

And while almost no Republicans support a domestic carbon tax, Cassidy argued that U.S. regulations already effectively amount to a price on carbon.

“We don’t have cap and trade, but the reason that our energy-intensive industry has tended to move to China is because they have to comply with regulations,” Cassidy said.

What about the WTO?

Another possibility the bipartisan gang is considering in the current round of talks, according to lawmakers involved, is to tie the import fee to carbon intensity, essentially measuring how much carbon manufactured goods produce across borders.

“If the E.U. and the United States and Japan and Korea can agree on, ‘How do you measure embodied carbon?’ then you can start talking about a common approach,” Banks said.

As for international trade concerns, Banks said, “there aren’t a whole lot of people who care about the WTO.” And Republicans in the wake of the Trump administration have moved away from some of the free-trade policies that the international business community supports.

“The folks who care most about WTO are folks who are still in the free-trade camp and who practice as trade attorneys and have made their living working on WTO compliance and related issues,” Banks said. “I think if you look at the core constituencies here — labor, the environmental community — they don’t care about the WTO.”

But Pomerleau of the Niskanen Center said setting aside WTO rules could create a bad precedent and potentially raise prices on U.S. consumers.

“If we were to just easily abandon the rules and do whatever we want, my concern is that might open up a floodgate for protectionism,” Pomerleau said. “Any country can just do whatever policy they want to implement in the name of, ‘WTO rules don’t really matter.'”

‘No one has figured that out’

Those hurdles could make it difficult for Manchin’s bipartisan gang to flesh out a carbon border adjustment policy in the relatively short time it has left before Congress potentially changes hands at the end of this year.

But there may be lingering interest. In addition to Cassidy’s early proposal, Cramer wrote an opinion piece earlier this year with former President Donald Trump’s national security adviser H.R. McMaster, calling a carbon border fee an “America First energy policy” (E&E Daily, Feb. 17).

Cramer acknowledged that it could be “difficult” to get the parties to agree on much of anything in the short term.

“I don’t want to make it sound like it’s easy, but it’s impossible if we don’t try something and start something,” Cramer said.

Still, some Democrats, desperate to get something done on climate before the midterms, are optimistic about the prospect of a carbon border adjustment.

“It would be technically challenging to calculate the exact price, but I think the possibility of harmonizing with what is already being done in the E.U., U.K. and Canada really opens up the possibility of a large market that would create incentives and rewards for our own industrial manufacturers and barriers to entry for those products coming from countries that do not have ambitious climate goals,” Coons said.

Whitehouse offered a stark assessment when asked about how, exactly, a carbon border adjustment might work without a domestic carbon price.

“It’s safe to say, I think, that no one has figured that out,” Whitehouse said.

Reporter Jeremy Dillon contributed.