Bipartisan Carbon Border Adjustment Mechanism

A Carbon Border Adjustment Mechanism (CBAM) allows a country to impose a price on carbon emitted during the production of goods in the country of origin as import fees, thus incentivizing greener manufacturing. This has been a perennial aspiration of environmentalists for decades that once languished in obscurity but is now rapidly becoming policy. Now, this step forward in climate policy may be legislated with bipartisan support in the US Congress, with far-reaching implications not just for the environment but the international economy.

The European Union (EU) has started the process, recently reaching a provisional agreement for a CBAM. Following a three-year transition period, Europe expects to begin the first truncheon of charges. Senator Bill Cassidy (R-LA)’s proposal for an American CBAM echoes the calls of Democratic Senators including Brian Schatz (D-HI), Sheldon Whitehouse (D-RI), and Martin Heinrich (D-NM). The question is whether sufficient bipartisan support will exist to import the CBAM to America.

American CBAM aims to balance the costs between efficient but expensive domestic manufacturing and cheaper, but highly polluting manufacturing abroad. The decrease in the cost gap is aimed at promoting investments in low-emissions technologies and manufacturing processes for environmental protection by disincentivizing offshoring and “carbon leakage” (the unreported emission of carbon). Furthermore, CBAM leverages the market power of the implementing countries to encourage trade partners abroad to transition toward sustainable manufacturing.

The CBAM is a targeted set of de-facto tariffs, not a blanket carbon tax. Currently, only high energy-consuming industrial goods such as steel, cement, and aluminum are liable to be charged.

Implementation for consumer goods is currently unlikely due to additional complexity and interactions with the EU’s valued added tax regimes, the possibility of rapidly increasing prices due to reliance on Chinese imports, and would also be unlikely in the US given the lack of a solid institutional base for CBAM.

Some critics and high-emission countries argue that the system is ushering in a new era of protectionism, calling the CBAM a tariff in disguise aimed at weakening the competitive advantage of developing countries. Others, willing to acknowledge the charge of protectionism, counter by saying the CBAM is a green extension of friendshoring.

For the US, the CBAM has a significant potential to revitalize and promote the domestic economy, especially many industrial sectors that have struggled recently. According to the Climate Leadership Council, US goods are “40% more carbon efficient than the world average,” and over three times more carbon efficient than China. Implementing CBAM legislation would further improve US competitiveness by monetizing its relative efficiency. It would also bring back a significant amount of business and may improve the decades-long huge trade deficit between Washington and Beijing.

As other low-emission countries begin to use the CBAM, any delay in implementation could put US trade at a considerable disadvantage. Joining the CBAM initiative would place the United States at the forefront of global climate leadership and set a strong example of a modern sustainable economy while countering the environmental impact of global emissions from industrial production. This shared initiative would also likely strengthen diplomatic and trade relations with the EU by streamlining trade and climate policy in the transatlantic region. As the EU is virtue signaling its stalwart support for CBAM, proposing it in the US may also make it a valuable bargaining chip in future trade talks with Brussels.

US legislators on both sides of the aisle must negotiate the details for any American CBAM. While partisan deadlock means swift legislative action from Congress to respond to all energy and climate needs is unlikely, legislators can still leverage very different priorities to arrive at a bipartisan compromise. For Republicans, who have done a drastic about-face on tariffs and protectionism in the last 10 years, and are returning from free trade to protectionism and mercantilism, the CBAM is a popular way to simultaneously protect American jobs and manufacturing while gingerly dipping the toes in the climate change waters.

For Democrats, who are historically more vocal about decarbonization, CBAM allows America to move more in line with the stalled Paris Agreement while reaching its 2030 emission reduction goals. A CBAM also aligns with Democratic legislation such as the 2021 FAIR Transition and Competition Act which promotes international cooperation on regulating carbon emissions, and the 2022 Clean Competition Act (CCA), which reflects a commitment to climate change through sustainable trade.

For both parties and foreign policy practitioners, CBAM is also a tool to counter China.

“Once people understand that [CBAM] is a geopolitical tool, and it’s a lot better than war, it’s a lot cheaper than war, in terms of addressing the militarization of China, and it helps our workers and helps our industry, then they kind of get behind it” argues Senator Bill Cassidy (R-LA). Beyond directly containing China, a CBAM will provide a lot of strategic flexibility for the US in erecting fees and de-facto tariffs that will not impact the broad contours of the international economic order.

Despite its positives, CBAM has several challenges on an international scale. First, tariffs could further exacerbate US-China relations and antagonize high-emissions economies such as India, decreasing US diplomatic leverage.

Second, insufficient regulation could incentivize countries to abuse the system and reorganize their production to export from the most efficient production lines while diverting pollution towards non-CBAM-impacted exports and domestic products such as consumer products.

Third, the US would also need to develop exceptions and robust global financial programs for green development to mitigate the adverse effects on the poorest countries and prevent diplomatic challenges arising from the “protectionism” tag attached to CBAM.

Lastly, the adjustment mechanism is incredibly complex, with many proposed versions. Unfair legislation, such as an import-only CBAM, could violate commitments to the World Trade Organization and trigger litigation.

While public support and political will exist, the devil is in the details. With many possible variations of the already complex CBAM proposed, US legislators must agree on the specifics. Some propose wholesale carbon pricing, while others argue that existing US environmental regulations already create enough costs for firms.

Democrats would likely struggle to garner support for a compromise from the most pro-environmental voters, while Republicans stand to face backlash from the anti-regulation members of the party. Even with bipartisan support for CBAM, federal regulators, the executive branch, and non-government actors will likely play a bigger role in rolling out CBAM. Still, securing bipartisan congressional support remains not only but possible but vital.