Will the International Interest in Carbon Import Fees Lead to a Carbon Club?

By Holly Rooper
August 18, 2023

Carbon import fees—a price imposed on imported goods based on their carbon intensity, largely targeting energy-intensive and trade-exposed products—are gaining traction as an important element in addressing global climate goals. At least 9 countries—including the European Union (EU) and the United States—have started formal policy processes toward imposing such fees or have expressed interest in these trade-oriented policy approaches.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is furthest along in the implementation process, going into effect this October. The U.S. and EU are presently negotiating the Global Arrangement for Sustainable Steel and Aluminum (GASSA), which will coordinate efforts to restrict trade of the most carbon-intensive products. In the U.S., a bipartisan group of Senators are reportedly developing at least two pieces of legislation to introduce carbon import fees this Congress.

In addition to the EU, other key trading partners have also expressed public interest in carbon import fees, including Australia, Canada, the U.K., Taiwan, Japan, South Korea, and India. These countries represent nearly 60% of the global consumer market and nearly 40% of global carbon emissions. Carbon import fees have the potential to reshape global trade and serve as an important instrument in achieving global climate goals. The opportunity for cooperation between climate-ambitious countries is only growing.

Carbon import fees are gaining traction because they appeal to broad economic, political, and security interests. Implementation of a carbon border fee can help climate-ambitious countries meet their decarbonization goals by reducing carbon-intensive imports and supporting more carbon-efficient domestic production. Reorienting trade routes to favor lower-carbon goods or closely align with more carbon-efficient trading partners can reduce the geopolitical influence of high-emitting countries like Russia and China.

Thus far, little technical detail on policy design has been released beyond the EU’s CBAM proposal. However, a handful of countries have launched carbon import fee consultations or indicated interest in these pathways. Outlined below is a status report of countries that have publicly expressed interest in a carbon import fee.

  • EU CBAM will begin its transitional phase in October 2023. The transitional phase will require importers of certain energy-intensive products to collect and disclose emissions intensity data. Border charges will begin on January 1, 2026, requiring EU importers to purchase certificates for imported goods based on prices set by the EU’s emissions trading system.
  • Taiwan adopted the Climate Change Response Act in January 2023, which will implement a carbon border fee alongside its domestic cap and trade system. The Environmental Protection Administration will release further details in early 2024, with fees expected to start in late 2024.
  • GASSA negotiations are ongoing between the U.S. and the EU. The two governments are working toward an agreement that will restrict trade in the most carbon-intensive steel and aluminum products and address global nonmarket excess capacity in these industries.
  • The Canadian government closed its public consultation on a CBAM-like instrument in 2021 and is deliberating its next steps. The Department of Finance consulted various stakeholders, including provinces, importers, and exporters, in targeted conversations on the economic, environmental, and international impacts of a carbon border fee.
  • The U.K. closed a public consultation on “addressing carbon leakage risk to support decarbonisation” in June of this year. The government published its exploratory consultation considering a range of policy measures, including a carbon border fee and mandatory product standards.
  • Japan’s Ministry of Economy, Trade, and Industry (METI) expressed interest in a carbon border fee (along with a carbon market) in 2021. METI set up a working group that released a report detailing a sustainable approach to value chains. The report discussed expanding the carbon market and a possible border fee. The government has not yet released any further steps.
  • On August 15th, Australia’s energy minister announced it is investigating a carbon border fee on imports of energy-intensive and trade-exposed sectors, including steel, aluminum, and cement. The investigation is intended to determine if a carbon border fee will reduce the economic burden on domestic industries due to the strengthening of Australia’s safeguard mechanism and will be released in 2024.
  • India is beginning to explore carbon import fees largely in response to the EU CBAM. Government ministers have spoken to the press about internal deliberations over a fee on imports, including luxury products with high carbon content.
  • South Korea is reportedly conducting internal deliberations among government ministers and stakeholders for its own CBAM to support its domestic emission trading system (K-ETS).

Countries are presently exploring an array of approaches to carbon import fees, and it is increasingly likely that they will each implement approaches that best serve the needs of domestic politics, employment patterns, and industry. Coordinating across these measures will ensure that lower-carbon goods and vital supply chains continue to flow smoothly. The 2023 G7 Clean Energy Economy Action Plan suggests that collaboration even across disparate proposals will be possible; G7 leaders simultaneously committed to “pursue trade policies that drive decarbonisation and emissions reduction,” and acknowledged that, “our climate policies may take different approaches.” This fits firmly with the G7’s multi-year effort to advance an inclusive climate club to facilitate global decarbonization, particularly in energy-intensive sectors.

Carbon import fees will be a powerful tool for facilitating global decarbonization and addressing the 25% of global carbon emissions associated with internationally traded goods. As more countries come to the table with diverse approaches to lowering trade in the most carbon-intensive goods, opportunities for collaboration and partnership abound. Ultimately, coordinated efforts across individual carbon import fees or more formal integration into an inclusive climate club, as suggested by the G7, will increase the decarbonization impact of these policies and increase trade flows and economic opportunities between like-minded countries.

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