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23 June 2022

First US shot at border carbon tax flawed but fixable

There is no guarantee that a private bill put forward by Democrat leaders will get into the lawbooks, but something we have been talking about for the past few years is just how the USA, without even having a Carbon Cap and Trade system, could introduce its own border adjustment mechanism.

And Senator Sheldon Whitehouse has just got together with a few colleagues and proposed the Clean Competition Act, aimed specifically at just that. But we have to be careful here – China and India both are significantly more carbon intensive than the US economy, so this is specifically aimed at making imports of fossil fuels, refined petroleum, petrochemicals, fertilizer, hydrogen, adipic acid for making nylon, cement, Iron and steel, aluminum, glass, pulp, paper and ethanol more expensive for those countries.

In the emerging European border adjustment mechanism, if a particular supplier has kept strict records of its emissions, and they are less than those achieved in the EU, then there is nothing to pay. Where there is a higher carbon component, then the equivalent payment to the EU carbon tax needs to be paid. But this US regulation simply decides which countries are worse emitters than the US and which industries and then charges all companies the same amount, regardless of any kinks in their supply chain.

Now that is a mere detail and if this gets closer to becoming law in the US, we’re sure people with knowledge of the border adjustment mechanism in Europe will be consulted, and the two pieces of legislation could be aligned, but at present they are not. Also the EU has not gone after only fossil fuels and the big industrial polluters. In fact there is mention in the bill of adding everything which includes “at least 500 pounds of covered energy intensive primary goods,” in 2026 – so that would be all cars made in China, Mexico and from places like Japan, Korea and Indonesia. By 2028, that threshold would lower to 100 pounds.

It claims that importers would only pay a levy based on the fraction of emissions which exceeds the comparable US carbon intensity baseline.  For that there needs to be published information on that baseline and in most industries this does not exist.

On the surface this looks like an unserious piece of legislation which wants to punish China specifically, and not count its exports of electronics, phones, and computers – quite yet. As such it looks to us like it might come into opposition from the World Trade Organization (WTO) since it does not reward less polluting individual companies.

The legislation relies on average carbon intensity of foreign competitors. The US would love it if then other countries such as Japan and South Korea applied the same rules – pushing China out of more export markets.

The sponsors of the bill said “American manufacturers doing the right things on climate are often at a disadvantage compared to pollution-friendly foreign competitors.” But where would that put the Green Steel makers in Europe, would they be able to import directly into the US, or would some other piece of legislation – tariffs for instance – prevent that.

Previous US president Donald Trump introduced tariffs on aluminum and steel products imported from Europe in 2017, and then the new president Joe Biden failed to entirely lift these sanctions when he came to power. In November 2021, after retaliatory tariffs were introduced on US whisky among other things, and after it launched WTO legal proceedings against the US talks started. A deal is supposed to be finalized in two years, but meanwhile there are unnecessary and illegal tariffs.

So this simply looks like 3 US senators finding a route around Chinese and Indian imports as they have found a way around European imports.

Senator Whitehouse said, “Our Clean Competition Act will give American companies a step up in the global marketplace while lowering carbon emissions at home and abroad and steering the planet toward climate safety.  I’m hopeful this proposal has a path forward in Congress, as experts from across the political spectrum have expressed support for a border adjustment mechanism like ours.”

Such a carbon border adjustment mechanism will not encourage anyone to engage climate ambition and this just seems a “Smash and grab” on Chinese revenues – but only in its current form.

If the bill was adjusted so that it genuinely did create a series of mechanisms which reward decarbonization efforts and help fund future R&D and renewables deployment then it might catch fire – but as it sits it is a cynical and rude snub to China and we don’t think it has a hope in hell of being adopted into US law or getting past the WTO.

From 2025 through 2028, the applicable US carbon intensity baselines would be reduced by 2.5% points each year from the initial average. The Bill does suggest that US companies already report GHG emissions under the EPA’s Greenhouse Gas Reporting Program and that these numbers would have to be reported to the US Treasury, as well as their annual electricity consumption and annual production of any covered primary goods by weight.  The Treasury would then calculate the average carbon intensity (for just scope one and two emissions) for each activity.

Starting in 2029, the baselines would decrease by 5% a year.  The levy would begin at $55 a ton of CO2 and increase at 5% above inflation per year.  Covered imports from least developed countries would be exempt from any charges.

Seventy-five percent of revenues raised each year would fund a competitive grant program for each of the covered industries to invest in new technologies for carbon reduction – allocated by who? – presumably the oil companies would want all their cash to go to carbon capture. The State Department will spend the other 25% of the take meeting the US commitment to help developing nations chase zero carbon. We wondered where that money was coming from?