Interest in climate and trade policy is growing as the EU prepares to implement its CBAM and multiple U.S. senators explore their own ideas for carbon intensity import fee legislation. In the U.S., there have been questions about whether these concepts are protectionist. And some have wondered whether drawing a line between tariffs and carbon import fees is a distinction without a difference. However, well-designed carbon import fees are fundamentally different from tariffs in at least three key ways.
Let’s explore.
Key Difference #1: Economic Protection v. Environmental Protection Objectives
A tariff is a trade tool whose main objective is to increase the price of foreign products relative to products made in the U.S. Tariffs by design protect domestic goods and services. The objective of a tariff, in most cases, is to economically support a domestic industry or industries.
By contrast, the objective of a carbon intensity import fee is to establish a market-driven environmental performance standard. Nearly a quarter of global carbon emissions are linked to goods traded internationally. In the U.S., we imported 1,258 gigatons of carbon dioxide in 2019. In fact, we’ve imported more emissions than we export since 1995. You cannot solve the challenge of lowering global emissions without addressing trade.
Is it true that a carbon intensity import fee might also benefit domestic industries? Absolutely. U.S. manufacturers are 40% more carbon efficient than the world average, meaning on balance they stand to win out economically under any system that rewards environmental stewardship. Does that make carbon intensity import fees inherently protectionist? No. The domestic industry advantages are one of many complementary outcomes, but they aren’t the central purpose. Carbon intensity import fees promote a more level playing field for companies around the world—not just in the U.S.—to compete to lower emissions.
Key Difference #2: Carbon Import Fees are Avoidable
In most cases, there is little exporters and importers can do to avoid a conventional tariff. A tariff is set, typically based on some percentage of the value of a product, and if that product crosses into the U.S., the tariff is applied. The only options are to accept the tariff or lose access to the U.S. market.
A carbon intensity import fee gives an exporter a third option: lower their emissions. Because the fee is applied based on the amount of carbon emissions it took to produce the product, lowering emissions lowers or eliminates the fee. An exporter to the U.S. may decide not to lower their emissions, in which case they would pay a higher fee. However, they may also decide to invest in lower emitting processes and technologies to avoid the fee. This makes avoidability a key distinguishing feature of carbon import fees.
Key Difference #3: International Cooperation
Traditionally, tariffs are viewed as obstacles to greater international economic integration. In contrast, U.S. policymakers developing carbon intensity import fees are focused on encouraging consistent, predictable market signals and greater international cooperation. For example, Senator Cassidy’s office anticipates his fee proposal will include “a pathway to expand the policy to international partners.” Senator Coons has stated that “future legislation will be a win for the climate, a win for American workers and manufacturers, and a win for global cooperation.” And Senator Cramer has stressed the global security benefits of “some sort of [climate] alliance with our trading partners.”
This cooperative objective is not limited to U.S. policymakers. Our closest partners, including the G7 countries, are all exploring avenues for joining together on these types of policies. The G7 Clean Energy Economy Action Plan released in May “recognize(s) that trade and trade policies are important tools to tackle climate change and can be drivers of sustainable growth,” and commits its members to “pursue trade policies that drive decarbonisation and emissions reduction, by spurring markets to account for embedded emissions in traded goods.”
International cooperation will only enhance the emission reducing benefits of these policies. And once again, U.S. industries and workers will find greater international demand for their lower emission goods.
Environmental Objectives, Climate Progress, American Competitiveness
Done right, the implementation of a market-driven environmental performance standard offers enormous upsides for the climate and the world. To help guide policy development, the Council recently established a set of principles for well-designed carbon intensity import fees in the U.S.
Import fees should be underpinned by fair and consistent rules that are in line with international best practices. This type of policy will facilitate the scaling up and deployment of clean technologies, increase transparency and cooperation with other trade partners, and incentivize massive global emissions reductions. And because the U.S. economy has a considerable carbon efficiency advantage, American manufacturers and workers also stand to win.