No Consensus on Carbon Tariffs or Taxes in Congress
Recently on Trading Thoughts, we kicked off our series on “Trade & Climate” with a look at how the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) could reshape international trade and climate policy. In our second installment of the series, we will explore legislative proposals coming from this side of the Atlantic.
The proposal with perhaps the easiest hill to climb is the PROVE IT Act (S.1863). Rather than establishing a CBAM, the bill from Sens. Chris Coons (D-DE) and Kevin Cramer (R-ND) would direct the Department of Energy to study and compare the emissions intensity of some industrial products in the U.S. and specific foreign countries. The intent of the bill is to garner verifiable data to prove that U.S. production is cleaner than that of many trading partners across the globe. The Senate Environment and Public Works Committee recently passed the bill by a significant majority (14-5). On the flip side, Reps. Scott Peters (D-CA-50) and John Curtis (R-UT-03) have announced they are working on a House companion but that has yet to come to fruition.
For those wanting a proposal with more teeth, there is the Clean Competition Act (S.3422, H.R.6622) led by Sen. Sheldon Whitehouse (D-RI) and Rep. Suzan DelBene (D-WA-01). This bill would tax both the domestic and imported emissions of high-polluting products and inputs, including fossil fuels, cement, steel, aluminum, and paper, and would expand to finished goods like cars in 2027. This bill is the most similar to the system the EU has in place with its Emissions Trading System and CBAM but would face significant opposition by many in Congress over its inclusion of a carbon tax.
However, there is a small minority of Republicans who view carbon tariffs not necessarily as a climate solution, but as a piece of their China competition strategy. The idea behind this approach is that a carbon tariff would protect cleaner U.S. manufacturing from moving to high carbon-emitting countries such as China. Even former President Donald Trump’s U.S. Trade Representative Robert Lighthizer said he would support a CBAM but not a domestic carbon tax.
Sen. Bill Cassidy (R-LA) is spearheading the Republican approach in Congress with his Foreign Pollution Fee Act (S.3198), which would impose a “foreign pollution fee” on imports such as steel, aluminum, critical minerals, batteries, and solar panels. The bill includes carve outs for free trade agreement (FTA) partners, to meet national security needs, and for products where there is insufficient domestic production. Cassidy’s bill explicitly opposes the imposition of a domestic carbon tax—and the senator is even leading a resolution on economic harms of taxing domestic carbon emissions (S.Con.Res.23).
But Cassidy’s bill remains rather unpopular in the Republican caucus, where most members see any CBAM proposal, including the PROVE IT Act, as a backdoor to imposing a domestic carbon tax. Even one of his bill’s original cosponsors, Sen. Roger Wicker (R-MS), jumped ship shortly after introduction, leaving Sen. Lindsey Graham (R-SC) as the lone cosponsor aboard. Conversely, Cassidy’s anti-carbon tax resolution has garnered 16 Republican cosponsors.
The House adopted its own resolution opposing a carbon tax (H.Con.Res.86) in a slate of recent “Energy Week” bills. House Ways and Means Committee Chairman Jason Smith (R-MO) gave floor remarks describing such a tax as “anti-American family,” anti-American worker,” and “pro-China.”
Cramer, one of the PROVE IT Act sponsors, even added an anti-carbon tax provision to the PROVE IT Act ahead of the EPW markup in an attempt to assuage concerns among Republicans. However, the five Republican no votes on the bill, which simply commissions an emissions study, demonstrates the tough battle ahead for those in Congress seeking to pass any form of a CBAM.
The takeaway? The likelihood of a CBAM from Congress in the near term is slim to none. While there is interest on both sides of the aisle, the two parties disagree over how to address the carbon intensity of imports, whether a tariff should be accompanied by a domestic carbon tax, and even whether to refer to the measure as a tariff. At the same time, the U.S. is trying to navigate the EU’s CBAM and conclude negotiations to permanently remove the Trump-era Section 232 tariffs on steel and aluminum by addressing carbon intensity and nonmarket excess capacity.
Issues at the heart of trade and climate are just scratching the surface, and Lot Sixteen will be following all of it closely. In our next post, we will explore prospects for a U.S. - EU deal on green steel and aluminum and the impact of the upcoming election on these negotiations.
