On July 19, Senator Chris Coons (D-DE) and Representative Scott Peters (D-CA) introduced companion bills in the Senate and the House of Representatives that would impose a "border carbon adjustment" ("BCA") fee on imports of carbon-intensive goods into the United States, including steel, aluminum, cement, and fossil fuels. The stated goals of S. 2378 and H.R. 4534, entitled the FAIR Transition and Competition Act (FTCA), are to "protect US jobs" and prevent "carbon leakage" that might occur where US policies to limit carbon emissions encourage the outsourcing of production to countries with less ambitious climate policies. The legislation would amend the Internal Revenue Code to create the BCA fee, which would apply to covered imports beginning on January 1, 2024. S. 2378 has been referred to the Senate Committee on Finance and H.R. 4534 to the Committee on Ways and Means in the House.
The introduction of the FTCA follows the European Commission's introduction of a proposed "Carbon Border Adjustment Mechanism" ("CBAM") on July 14. Though both measures aim to address carbon leakage, the FTCA differs from the CBAM in significant ways. Most importantly, the import fee imposed by the FTCA would not be accompanied by an equivalent domestic tax or price on carbon emissions, but rather would be based on "the cost incurred by US businesses to comply with [US] laws and regulations limiting greenhouse gas emissions." This approach reflects current political realities in the United States – namely the lack of congressional support for a domestic carbon tax, and President Biden's prioritization of regulatory approaches to combat climate change – but it is sure to generate controversy and methodological challenges if implemented.
Like the CBAM, any US carbon border adjustment will be scrutinized closely by US trading partners, both in terms of its impact on trade flows and its consistency with World Trade Organization (WTO) rules. If the FTCA is enacted, much will depend on how the Executive Branch interprets and implements the legislation, as the bill provides only the general framework for the proposed border adjustment and leaves key details to be determined through implementing regulations.
This alert provides an overview of the FTCA and the prospects for the legislation in the current Congress.
Product scope of the proposed border carbon adjustment fee
The BCA fee would apply to imports of the following products into the United States:
Iron, steel, aluminum, and cement;
- Any other product for which the Secretary of the Treasury determines that (1) there is "reliable data" for determining the quantity of greenhouse gas emissions resulting from the production of the product; and (2) it is "in the interest of the United States" to include such product within the scope of the BCA;
- Any product for which "greater than 50 percent of the composition of such product" consists of a product described above; and
- "Covered fuel," defined as "natural gas, petroleum, coal, or any other product derived from natural gas, petroleum, or coal that is used or may be used so as to emit greenhouse gases to the atmosphere[.]"
- As indicated above, the legislation would authorize the Executive Branch to expand the product scope of the BCA at its own discretion. The bills' sponsors have stated that they intend for the list of covered products to expand "as the United States improves processes for determining the carbon intensity of different types of goods."
Key factors for determining the BCA fee
The legislation seeks to impose a cost on the greenhouse gas emissions associated with imported goods "to account for the cost incurred by US businesses to comply with laws and regulations limiting greenhouse gas emissions." Accordingly, the bills would require the Treasury Department to determine (1) the costs that US companies in the covered sectors incur to comply with US environmental policies; and (2) the quantity of greenhouse gas emissions associated with the production of each covered good. The legislation provides general guidelines that Treasury must follow when making these determinations, but largely defers to Treasury regarding the details of the calculations, as described below.
"Domestic environmental costs incurred" by US businesses
Treasury must calculate the "domestic environmental costs incurred" by US firms on an annual basis for each of the covered sectors (e.g., iron, steel, aluminum, cement) and for the production of each covered fuel. Treasury's determination must be based on "the average cost incurred by companies within such sector" (or, in the case of a covered fuel, the average cost incurred to produce such fuel) to comply with any US Federal, State, regional, or local law, regulation, policy or program that is in effect at the time of the determination and is "designed to limit or reduce greenhouse gas emissions." The legislation provides an illustrative list of examples of such policies, including the Clean Air Act (42 U.S.C. 7401), emissions standards for passenger cars and light trucks, and State and local carbon taxes and cap-and-trade systems. However, the legislation provides no further guidance on how Treasury is to determine the costs of compliance with such policies.
"Production greenhouse gas emissions"
In order to calculate the BCA fee applicable to an imported product, Treasury must determine the "production greenhouse gas emissions" associated with the product, i.e., the "quantity of greenhouse gases, expressed in metric tons of CO2-e, emitted to the atmosphere resulting from the production, manufacture, or assembly of a product." The bill requires Treasury to determine the production greenhouse gas emissions using "reliable methodologies" that (1) ensure that no covered good has the BCA imposed upon it more than once; and (2) are consistent with international treaties and agreements, including FTAs. However, the legislation provides few additional guidelines and, as discussed below, does not specify whether the determination must be based on actual emissions at the facility that produced the imported good (as is the case under the EU's CBAM proposal).
Calculation of the BCA fee on imported goods
The legislation would require Treasury to calculate the BCA fee on imported goods using the following general methodologies:
For covered products other than covered fuels, the BCA fee must be equal to the product of (A) "the domestic environmental cost incurred" for the sector in which the product was produced; multiplied by (B) the "production greenhouse gas emissions of the product[.]" A simplified example of how this calculation might work in practice is as follows:
(A) Domestic environmental costs incurred. Treasury determines that, on average, the cost that US cement producers incur to comply with US laws limiting greenhouse gas emissions amounts to $5 per ton of cement produced.
(B) Production greenhouse gas emissions. Treasury determines that the greenhouse gas emissions associated with the production of one ton of cement are 0.5 MT of CO2-e.
(C) BCA fee. The BCA fee applicable to imported cement would be $2.50 per ton ($5.00 x 0.5).
The legislation does not specify whether Treasury must calculate production greenhouse gas emissions on a facility-specific basis (i.e., based on an importer's documentation of actual emissions at the facilities that produced the imported good), or based on broader data such as industry averages within the country of origin. The legislation requires Treasury to establish a process by which the importer of a covered good "may petition the Secretary to revise the Secretary's determination of the production greenhouse gas emissions of that importer's covered good," but does not elaborate.
In the event that there is no "reliable data" concerning the production greenhouse gas emissions of an imported product, the legislation directs Treasury to calculate the BCA fee using "benchmark emissions" for the sector that produced the product. Treasury will calculate the benchmark emissions by determining "the production greenhouse gas emissions for the top 1 percent of the emitting production sites within each sector in the United States during the prior calendar year." The proposed CBAM would take a similar approach where actual emissions at the facility that produced the good cannot be verified. In this situation, the CBAM would use "default values" based on the average emissions intensity of the industry in the exporting country or the 10 percent worst-performing EU facilities.
In the case of a covered fuel, the BCA fee will be equal to the product of: (1) the domestic environmental costs incurred in the production of such fuel, multiplied by (2) the "upstream greenhouse gas emissions" of such fuel, i.e., "the quantity of greenhouse gases, expressed in metric tons of CO2-e, emitted to the atmosphere resulting from the extraction, processing, transportation, financing, or other preparation of a covered fuel for use[.]" Like the bill's provisions concerning production greenhouse gas emissions, the provisions concerning upstream greenhouse gas emissions do not specify whether determinations must be made on a facility-specific basis.
The legislation would exempt imports from the BCA fee if they originate from a country that the OECD considers to be a Least Developed Country. It also would exempt imports from any country that does not impose a border carbon adjustment on US goods and enforces laws and regulations "that are at least as ambitious as [United States] Federal laws and regulations" designed to limit or reduce greenhouse gas emissions.
The FTCA's approach to country exemptions may prove controversial. The legislation contemplates full exemptions for countries with emissions regulations that are "at least as ambitious" as the United States, but provides no partial exemption or offset for countries with less ambitious regulations than the United States. Thus, a country with emissions regulations that are almost as ambitious as those of the United States could be treated the same as a country with no emissions regulations at all, for purposes of the FTCA.
The FTCA also appears to reflect concerns that US exports will not be exempted from the EU's proposed CBAM, even if the United States implements the core components of President Biden's climate agenda. The CBAM would allow importers to claim a reduction in the number of required "CBAM certificates" (and thus, import fees) to account for a carbon price paid in the country of origin, and would provide country-wide exemptions for nations with an emissions trading system linked to the EU's. However, the CBAM provides no such offsets or exemptions to account for non-price policies in the country of origin that limit carbon emissions, such as regulations and subsidies. The Biden administration has taken issue with that approach, urging that the CBAM and similar measures should take into account "the degree to which a country's climate policies reduce emissions (and hence carbon content), rather than focus only on explicit carbon pricing." The FTCA might be intended to pressure the EU to revisit its current approach, as the legislation ensures that EU goods would be subject to the US carbon border fee for as long as US exports are subject to the CBAM.
The sponsors of the FTCA are seeking to include the legislation in a forthcoming budget resolution, which Senate Democrats intend to pass on a party-line vote using reconciliation procedures. Democrats on the Senate Budget Committee reached agreement on the broad outlines of the resolution last week and are currently developing the legislative text. A summary of their agreement indicates that the resolution will include new climate regulations proposed by President Biden – most notably a Clean Electricity Standard aimed at achieving 100% carbon-free power by 2035 – as well as a "polluter import fee," which Senators have confirmed is a reference to border carbon adjustments. The summary does not mention a domestic carbon tax to accompany the import fee, indicating that the proposed border carbon adjustment might be similar, if not identical, to the FTCA.
Proponents of the budget resolution strategy acknowledge that they have not yet secured the necessary votes for its passage, and that the details of the reconciliation package remain unsettled. It remains to be seen whether any Democratic Senators will object to the inclusion of the FTCA or a similar measure in the reconciliation package.
The Biden administration has not publicly taken a position on the FTCA, but the legislation reportedly was developed in consultation with USTR and the Treasury Department, and President Biden has expressed support for border carbon adjustments on several occasions. Though the FTCA would likely generate frictions with US trading partners, Democratic Senators have argued in recent days that such measures will be necessary to protect US industry from "unfair" competition, particularly with China, if Congress approves the new climate initiatives envisioned in the budget resolution. Thus, the enactment of the FTCA or a similar measure this year cannot be ruled out.
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