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Joint Economic Committee Democrats Chairman - Senator Martin Heinrich (D-NM)

What is a carbon border adjustment mechanism (CBAM) and what are some legislative proposals to make one?

A Carbon Border Adjustment Mechanism (CBAM) is an emerging bipartisan tool that aims to cut global pollution and support American industry A CBAM is a fee applied to products upon entry or imports that accounts for the amount of greenhouse gases (GHG) emitted during their production in their country of origin. When in place, these fees can improve domestic industries’ global competitiveness against cheaper, higher-polluting imports and prevent producers from flocking to countries that lack environmental protections. A CBAM can be designed as a permissible import fee under the World Trade Organization. To be clear, it is not a carbon tax. In fact, a CBAM in the United States would make domestic steel and aluminum more cost-competitive and help producers capture an additional $8.5 billion and $6 billion of their respective markets by 2030.

Why now?

CBAM proposals in the United States are gaining bipartisan momentum, especially after the European Union passed a CBAM in October 2023, which will be gradually implemented over the next ten years. Passing a U.S. CBAM would ensure that domestic remain globally competitive as these policies are rolled out in other countries.

These approaches are also popular among Americans. While largely unknown to most people, nearly 75% of voters nationwide support a CBAM once they have heard a brief explanation. Support is strong even in states where the local economy relies on heavy manufacturing and fossil fuel industries.

What would they accomplish?

A CBAM would create economic incentives to reduce pollution for important parts of the global economy. CBAM proposals in the United States focus on the industrial sector, both because it produces a quarter of all global carbon dioxide emissions and because it covers the production of traded goods. Since U.S. goods are 40% more carbon efficient than the world average, using a CBAM to account for higher emissions in other countries would:

  • Make many domestic industries more competitive,
  • Strengthen global environmental protections,
  • Bolster industrial supply chains with our allies, and
  • Increase global demand for lower-polluting U.S. goods by enabling coordination with other countries on a club.

Additionally, enacting a CBAM will counter the economic role of higher-polluting competitors like China and Russia.

What are the recent legislative proposals to create a CBAM?

Below is a high-level description of recent CBAM proposals both in the United States and abroad. More detail is available in the table below.

The Clean Competition Act

The Clean Competition Act introduced by Senator Whitehouse in 2023 would establish a system of carbon intensity benchmarks applied to domestic industrial facilities and relevant imported products. A companion bill in the House was reintroduced simultaneously by Congresswoman DelBene. Joint Economic Committee Chairman Martin Heinrich is a cosponsor in the Senate and JEC Member Representative Beyer is a cosponsor in the House. A charge is levied on both domestic producers and imported products for carbon emissions above specified industry baselines, which are initially set at the average emissions intensity of U.S. production for each industry. Primary goods produced in a “relatively least developed country” would be excluded from the import charge unless they have a large market share of that good. U.S. facilities that export covered products would be eligible for an export rebate on charges paid, if any. The bill would allocate 75% of emissions charge revenues to Treasury for grants to domestic producers to reduce their carbon intensity and 25% to the Department of State for multilateral and bilateral assistance to developing countries to support their decarbonization.

The Foreign Pollution Fee Act

The Foreign Pollution Fee Act introduced by Senator Cassidy and cosponsored by Senator Graham in 2023 would establish a CBAM framework while excluding a domestic carbon tax. This bill leverages the cleaner emissions profile of U.S. producers relative to their foreign competitors, with the purpose of reining in China and Russia and weakening their control of global supply chains. National laboratories set the underlying calculations and the fee from the U.S. Environmental Protection Agency’s greenhouse gas data, which is phased in over three years. Generally, a fee is triggered if an imported product is more than 50% polluting than a U.S. product. The fee would increase over time to incrementally reduce the average intensity difference between U.S. production and imports of covered products. This would force foreign producers to decrease their carbon intensities if they wish to compete in the United States against cleaner American products. This CBAM framework includes many exemptions, including if the covered product meets certain national security interests, if the U.S. lacks sufficient domestic production of the product, or if the product is from a country with a Congressionally-approved free trade agreement and fulfills other requirements.

The FAIR Transition and Competition Act

The Fair, Affordable, Innovative, and Resilient (FAIR) Transition and Competition Act was introduced by Senator Coons in 2021. A House companion was introduced by Representative Peters. This bill would have established a CBAM based on a calculation of existing domestic environmental costs while not instituting charges on domestic entities. Least Developed Countries and countries with climate laws that are at least as ambitious as the United States and do not impose a CBAM on the U.S. would have been exempted. Revenues would have provided supplemental appropriations to administer the CBAM and any remaining funds would have been divided between Resilient Communities Grant programs and support for technologies to reduce or eliminate GHG emissions.

The PROVE IT Act

The Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency (PROVE IT) Act of 2023 does not establish a CBAM but would direct federal agencies to undertake research to quantify the carbon intensity of heavy industrial materials. This sort of information could be an important input to a future CBAM. Senators Coons and Cramer introduced this bipartisan bill in 2023, and it was passed out of committee (14-5) in early 2024 with 10 Democratic and 4 Republican votes.

For reference internationally, the EU CBAM just started its initial phase.

The European Union’s CBAM went into effect on October 1, 2023, and will require importers to pay a fee for the GHG emissions associated with the covered products they import. It draws the carbon price used in CBAM calculations from the EU’s domestic GHG mitigation strategy, a cap- and-trade program that started in 2005. The EU CBAM will be phased in over a number of years: an initial reporting period runs until 2026 when the CBAM fee starts in limited form, and full implementation begins in 2034. This CBAM covers imports from all non-EU countries with a few exceptions. Importers can ‘buy down’ their CBAM fee liability if a fee is paid on emissions in the country of origin. EU countries retain 25% of the CBAM revenues with the rest going into the EU budget.

How do these proposals differ in their creation of a CBAM?

In general, these proposals differ in their answers to the following questions about the structure of a CBAM:

  • Which imported items are “covered products” subject to a CBAM fee? All industrial products? Only certain inputs like steel or aluminum?
  • How large is the fee? For example, is the fee based on the average cost of complying with domestic regulations, the prevailing social cost of carbon, or something else—and does the fee increase over time?
  • How are CBAM fee revenues distributed? Do revenues finance administering the CBAM, climate resilience grants, or something else? How is the fee applied to covered products, and how is it calculated? Is the fee based on average intensities of products in a sector, facility-level data, or a mix?
  • How is the carbon or GHG intensity of a product calculated? What emissions are covered by the policy? Are embodied emissions calculated from direct emissions, indirect emissions, or all emissions required to create a covered product?
  • What baseline is used to compare the carbon intensity of an imported good to a domestic good? Is the fee applied to all embodied emissions associated with the imported goods, or just the emissions above a certain U.S. baseline?
  • What information, resources, and methods are used to determine the carbon intensity of a product when detailed data are unavailable?
  • What steps, if any, does the policy take to reduce the domestic carbon emissions of covered products?
  • Does the policy encourage coordinating with the CBAMs of other countries through a club or alliance? Are any countries that are members of clubs or alliances, based on development level or environmental standards, exempt from paying the fee?

And how do these CBAM proposals compare?

Attached PDF below contains an expanded version of this chart.