Carbon Import Fees: Active and Proposed Policies

By Reuben Francis

January 10, 2024

This blog post will be updated as more details emerge.

Climate and trade policies are gaining momentum across the world, partly due to an increasing awareness of the “carbon loophole” and a growing appreciation for the competitive pressures facing businesses that enjoy a “carbon advantage” over international rivals. One set of tools under consideration would impose a charge on imported goods based on their emissions intensity. These ‘‘carbon intensity import fees’’ have the potential to incentivize decarbonization efforts and ensure that imported products are aligned with national climate ambition.

Proposals for carbon import fees currently on the table vary significantly in terms of how they approach policy design options such as pricing, product coverage, and use of revenue. This piece offers a comparative analysis of these distinct policy proposals. It does not discuss approaches that remain obscure or tenuous, for example, Taiwan’s proposed CBAM, Canada’s ongoing public consultation over a CBAM, Australia’s carbon leakage study, internal consultations under way in South Korea and Japan, and a variety of proposals that have emerged from India.

Active: European Union’s Carbon Border Adjustment Mechanism (CBAM)

The EU implemented the first-ever carbon import fee in 2023, which is now in its transitional phase. Presently, importers must share information related to the carbon intensity of imported covered products. Beginning in 2026, importers will be charged a fee on the carbon emissions associated with the production of covered goods.

Covered Products: Iron, steel, aluminum, cement, fertilizers, hydrogen, electricity
Carbon Charge: EU Emissions Trading System allowances ($85/ton CO2e as of Q4 2023)
- Importers can receive credit for any carbon price paid in the country of origin
Covered Gasses: CO₂, PFCs, N₂O
Revenue Use: Split between EU member states and EU budget; spending directed to decarbonization investments in EU and least developed countries (LDCs)

Because the EU CBAM is operational, we have compiled additional details on compliance requirements. Importers will need to calculate the embedded emissions of covered goods per the procedures outlined in the transitional phase’s implementing regulation. Additionally, their emissions reports must undergo independent verification. If direct emissions data is unavailable, importers will have the option to rely on predefined default values based on the average emissions intensity associated with the exporting country for that specific product category. When reliable data from exporting countries is unavailable, the European Commission will establish the default value based on the emissions data from the poorest performing EU installation producing that product.

Proposed: United Kingdom’s CBAM

Following extensive consultations, the UK government announced that it would impose a levy on certain imported products beginning in 2027. Although the exact design and execution of the CBAM will be subject to further consideration in 2024, it appears to be similarly designed to the EU CBAM.

Covered Products: Iron, steel, aluminum, cement, fertilizer, hydrogen, ceramics, and glass
Carbon Charge: UK Emissions Trading System allowances ($62/ton CO2e as of Q4 2023)
- Importers can receive credit for any carbon price paid in the country of origin
Covered Gasses: CO₂, other gases TBD
Revenue Use: TBD

Despite the similarities, the UK CBAM diverges from its EU counterpart in several important aspects. The UK CBAM applies to a different scope of goods (adds ceramics and glass; removes electricity); does not appear to include a reporting-only transitional phase; and will include engagement with industry to “establish voluntary product standards” and to “develop a framework which measures the carbon content of goods.” It remains uncertain whether these initiatives will align with or diverge from EU carbon accounting methodologies and standards. We expect more details on the UK CBAM to emerge in 2024.

Proposed: Global Arrangement on Sustainable Steel and Aluminum (GASSA)

In October 2021, the U.S. and the EU jointly announced their intention to negotiate a Global Arrangement on Sustainable Steel and Aluminum (GASSA), intended to address both non-market excess capacity (NMEC) and the carbon intensity of steel and aluminum production. While the U.S. and the EU are the sole participants in this round of negotiations, they have indicated their interest in inviting “like-minded economies to participate in the arrangements.” Other major manufacturers, including Canada, Japan, and the UK, appear well positioned to join the agreement, which could lead to the formation of a sectoral carbon club.

Covered Products: Steel, aluminum
Carbon Charge: GASSA negotiators have explored several policy design options, including a tiered tariff structure based on carbon intensity, the EU CBAM as it is being implemented, and a secondary layer of tariffs imposed on production from NMEC sources
Covered Gasses: CO₂
Revenue Use: TBD

The parties originally agreed to a two-year timeline for the negotiations; that deadline was recently revised to March 31, 2025. Although the parties have yet to conclude a final agreement, they appear to have made notable progress in creating a framework for collecting product-specific carbon intensity data and establishing tariff rates for products linked to NMEC.

We highlight the abundant benefits available to the U.S. and the EU if the GASSA negotiations are successful in our 2023 white paper.

Proposed: Foreign Pollution Fee Act

Senators Bill Cassidy (R-LA) and Lindsey Graham (R-SC) introduced the Foreign Pollution Fee Act, the first Republican bill of its kind. The legislation would establish a standalone “foreign pollution fee,” on imports of certain energy and industrial products. It also introduces a mechanism for future expansion, allowing stakeholders to request the inclusion of additional products. It does not apply a charge to any domestic production.

Covered Products: Aluminum, biofuels, cement, crude oil, glass, hydrogen, methanol, ammonia, iron, steel, lithium-ion batteries, critical minerals, natural gas, plastics, petrochemicals, pulp and paper, refined petroleum products, solar cells and panels, wind turbines
Carbon Charge: tiered ad valorem tariffs that increase based on the emissions intensity of imports relative to U.S.-produced products
- Countries have the option to adjust their determined emissions-intensity values if they can provide detailed and verifiable data
Covered Gasses: CO₂, CH₄, N₂O, HFCs, PFCs, SF₆
Revenue Use: Not specified

The proposal offers considerable focus to catalyzing international collaboration. It aims to mobilize trading partners by exempting fees for countries that engage in “international partnerships” with the United States, provided that their emissions intensity does not exceed 50% of the U.S. average and they adopt both a similar framework of emissions-intensity-based import fees and a “compatible” approach to emissions monitoring, reporting, and verification. Specific special treatment is extended to low and lower-middle income countries that enter into partnership with the United States. Non-market economies, including China and Russia, would not be eligible for partnership agreements.

Proposed: Clean Competition Act

Senator Sheldon Whitehouse (D-RI) and Representative Suzan DelBene (D-WA-1) led the introduction of the Clean Competition Act, which would impose a “carbon intensity charge” on imports and domestic production of energy-intensive products.

Covered Products: Fossil fuels, refined petroleum products, petrochemicals, fertilizer, hydrogen, adipic acid, cement, iron and steel, aluminum, glass, pulp and paper, and ethanol
Carbon Charge: $55/ton CO2e in 2025, rising annually by five percent plus inflation
- Charge applied to emissions above a benchmark of U.S. performance
  - Default is based on economy-wide emissions intensities
  - If data is available from a “transparent market economy,” the charge can be based on sectoral performance
- Importers can receive credit for any carbon price paid in the country of origin
- LDCs are exempted if they are not a “significant” producer of a covered good
Covered Gasses: CO₂, CH₄, N₂O, HFCs, PFCs, SF₆
Revenue Use: Decarbonization grants; 75% to domestic industry, 25% to the State Department to support developing countries

Proposed: MARKET CHOICE Act

The Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion (MARKET CHOICE) Act, introduced by Representatives Brian Fitzpatrick (R-PA-1) and Salud Carbajal (D-CA-24), would establish a carbon price on domestic greenhouse gas emissions and a border carbon adjustment (BCA) on imports of covered goods. Least developed countries, and countries determined to be “responsible for less than 0.5 percent of total global greenhouse gas emissions and less than 5 percent of global production in the eligible industrial sector” would be exempt from the BCA.

Covered Products: Fossil fuels, iron and steel, coal, cement, petrochemicals, ammonia, aluminum, lime, soda ash, ferroalloy, phosphoric acid, glass, zinc, lead, magnesium, nitric acid, adipic acid, semiconductors, electrical transmission and distribution, ethanol, industrial carbonates, biofuels, and fertilizers
Carbon Charge: $35/ton CO2e in 2025, rising annually by five percent plus inflation
- LDCs and countries with small emissions and manufacturing footprints are exempt from the BCA
Covered Gasses: CO₂, CH₄, N₂O, HFCs, PFCs, SF₆
Revenue Use: Infrastructure investments and state grants for low-income households

Proposed: Energy Innovation and Carbon Dividend Act

The Energy Innovation and Carbon Dividend Act of 2023, championed by Representative Salud Carbajal (D-CA-24), is one of four legislative proposals introduced in the 118^th Congress that have incorporated a carbon import fee. Originally introduced in 2018 with bipartisan support, the bill proposes a carbon price on fossil fuels at the point of extraction, with the collected fees subsequently distributed to citizens in the form of monthly dividends.

The legislation includes a BCA component, which would impose a fee on imports of covered fossil fuels and carbon-intensive products and refund carbon fees on exports from the United States.

Covered Products: Fossil fuels, iron, steel, aluminum, cement, glass, pulp, paper, chemicals, industrial ceramics
Carbon Charge: $15/ton CO2e in 2023, rising annually by $10/ton
- The BCA fee may be adjusted based on the exporting country’s mitigation and carbon pricing efforts
Covered Gasses: CO₂, CH₄, N₂O
Revenue Use: UN’s Green Climate Fund

Honorable Mention: PROVE IT Act

Though not a proposal to impose a carbon import fee, this additional legislative proposal is often cited in climate and trade discussions. Senators Chris Coons (D-DE) and Kevin Cramer (R-ND) introduced the bipartisan Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency (PROVE IT) Act, which would require the Department of Energy (DOE) to calculate and report verifiable, high-quality, product-level emissions intensity data across energy-intensive industries from the U.S. and trade partners and competitors. It would be the first U.S. government effort to comprehensively assess the relative carbon efficiency of dozens of goods across the world’s major economies.

Purely a data bill, the PROVE IT Act does not establish a carbon price or carbon import fees. Nevertheless, it lays the foundation for the rest of the climate and trade conversation by providing the essential data to better understand America’s carbon advantage, address data gaps, support informed policymaking, foster collaboration on climate and trade issues across international borders, and give U.S. officials and industry the best case to defend their environmental performance as carbon import fees proliferate internationally.

The proposed legislation tasks the DOE with utilizing the best available information to estimate the average carbon intensity of various products based on their country of origin. The DOE will update the data every five years, working in collaboration with the EPA, the U.S. Trade Representative, and the Commerce and State departments.

Industry may voluntarily participate by sharing data or proposing measurement methodologies. Additionally, international partners are encouraged to actively engage in information and data sharing, contributing to the accuracy of the study while fostering global cooperation on emissions measurement.

Covered Products: Aluminum, cement, iron, steel, plastics, biofuels, crude oil, fertilizer, glass, hydrogen, lithium-ion batteries, natural gas, petrochemicals, pulp and paper, critical minerals, petroleum, solar cells and panels, uranium, wind turbines
Carbon Charge: N/A
Covered Gasses: CO₂, CH₄, N₂O, HFCs, PFCs, SF₆
Revenue Use: N/A

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