Carbon Tax on Imports Bill Introduced; Exemptions for FTA Partners

Republican Sens. Bill Cassidy of Louisiana, Lindsey Graham of South Carolina and Roger Wicker of Mississippi introduced their 92-page bill Nov. 2, proposing to add the fee to imports of aluminum, batteries, biofuels, cement, crude, glass, hydrogen, iron/steel, minerals, natural gas, petrochemicals, plastics, pulp/paper, refined petroleum products, solar cells and wind turbines.

With no Democratic co-sponsors, it's likely the bill would have to change to get 60 votes in the Senate. However, with a Republican majority in the House that has been disinclined to compromise with Democrats, prospects of passage in both chambers in the next year are slim. Sen. Sheldon Whitehouse, D-R.I., who Cassidy had hoped to get on the bill, responded to its introduction by saying, "I applaud Senator Cassidy's hard work to design and round up support for his measure in the Republican caucus and look forward to finding a middle ground that helps significantly reduce global emissions."

Sanjay Patnik, director of the Brookings Institution Center on Regulation and Markets, said he expects the bill will garner bipartisan support, even though it has no initial Democrats on board, though he thinks it will move somewhat toward Democrats' priorities. What it won't do, he predicted, is include a domestic carbon tax. "Frankly carbon price is just not feasible, you won’t get 60 votes [in the Senate] for that," he said. So, he said Democrats will have to ask themselves: "Are you going to give up on something like this completely or are you going to at least ensure that production abroad becomes cleaner?" He said the bill was well-crafted, but implementation would be highly complex.

The calculations would be done at the 6-digit Hamonized Tariff Schedule level, and would apply to tariff numbers 2207.10, 2207.20, 2504, 2523, 2612.10, 2709, 2710, 2711.11, 2711.14, 2711.21, 2712 through 2715, 2803, 2804.69, 2820.10, 2822.00, 2825.20, 2825.40, 2827.41, 2833.24, 2836.91, 2844.10, 2844.20, 2844.30, 2902.20, 2902.30, 2902.44, 2814, 2804.10, 2825.50, 2901, 2905.11, 3102.10, 3102.30, 3102.80, 3801.10, 3824.50, 3826, 3901 through 3926, 4701 through 4707, 4801 through 4813, 6810, 6811, 7001 through 7020, 7201 through 7326, 7401 through 7404, 7406, 7501 through 7504, 7601 through 7616, 8105.20, 8105.30, 8111, 8501.71 through 8501.80, 8507.60, 8502.31, and 8541.42 through 8541.43.

The fee would be paid along with customs duties in ACE. Importers may be required to post a bond large enough to ensure payment of the fees, the text says.

The bill doesn't say how large the taxes could be but says the government should set them high enough to alter trade flows, so that the aggregate imports account for no more than 50% greater emissions than domestic production, though it also would aim to privilege cleaner products within bands, so that for goods between 25% and 10% dirtier than U.S. production, the imports in that band would be only 10% dirtier than U.S. production.

It also says the fees would vary in bands -- for goods 10% to 50% dirtier than U.S. produced goods, fees would be at 5 percentage-point increments. For goods between 50.1% and 200% dirtier than U.S. production, the fees would be at 10 percentage-point increments. For products that are at least 200.1% dirtier, fees would increase at each 20 percentage-point increment.

The bill instructs Treasury, to the maximum extent possible, to assign variable charges within each tier in order to reduce import emissions "in a manner consistent with an increasing linear interpolation of the variable charge." The administration would have two years after passage to establish what those would be; they wouldn't be collected for another year.

The administration would have the authority to raise those rates if China "or other bad actors" subsidize manufacturers' costs to deflate export prices, establish state-owned enterprises' manufacturing in other countries, or attempt to circumvent the fees through transshipment.

The bill proposes the fees become more stringent over time; the benchmark would be 50% for the first six years of collections, then 25% for the next six years, then 10% dirtier than domestic production in the last six years. It also could advance more quickly if a particular product is already reaching the current benchmark. New assessments of emissions, covered products and fees would be done every three years, starting three years after the first fees were collected. If the fees didn't achieve the trade flow adjustments envisioned by the bill, that would be the first time to make a course correction. They would take effect Jan. 1 of the following year from when they were published.

The bill says that more products could be added to the list if a majority of domestic manufacturers, or a combination of manufacturers, trade groups and/or unions representing a majority of producers petitioned for the addition.

The fees would generally be countrywide per product, not based on individual factories' carbon footprints, so as to avoid bifurcation of production, where a country sends cleaner goods to the U.S. and dirtier goods to other customers. However, the bill allows for individual factory assessments if the company is not a state-owned or state-subsidized enterprise in a nonmarket economy, and if the factory allows full access to monitor emissions and technology to reduce or capture emissions. If it uses technology to mitigate emissions, at least half of the cost of that technology must be from U.S. components. If it is assessed individually, its production would not count toward the country average.

Mexico, Canada, South Korea and other countries with U.S. free trade agreements wouldn't have to pay any fees unless the product were more than 50% dirtier than U.S. production.

Patnik said during a phone interview that those countries will "be big beneficiaries of this," and companies wishing to move production from dirtier countries will find those countries, as well as the U.S., attractive.

There also would be the opportunity for low and lower-middle income countries -- such as Brazil or India -- to get special treatment on a product-by-product basis if they engaged in negotiations with the U.S. trade representative. Countries in negotiations could have four years, rather than three, before fees applied.

Matt Porterfield, vice president of policy and research at the Climate Leadership Council, wrote: "The bill provides numerous incentives for low and lower-middle income countries to join partnerships with the U.S., including calculation of emissions intensity based only on new production capacity, a longer period (5 years) to meet the emissions intensity standards, technical assistance, and the potential for U.S. aid for energy and manufacturing projects."

In a news release announcing the bill's introduction Nov. 2, Cassidy said, "The Foreign Pollution Fee begins to hold China accountable for their lack of environmental standards while expanding domestic production, increasing opportunities for the American family, and decreasing global emissions."

Graham said, "It is long past time that the polluters of the world, like China and others, pay a price for their environmental policies. This bill calls out the foreign polluters and rewards American businesses who are doing the right thing. We are leveling the playing field, and American manufacturers and business will be the biggest beneficiaries."

The bill does not change "existing duty drawback laws, rules, and applications for products imported, refined, and then exported."

The senators assert that U.S. production is 44% cleaner than the world average; research from the Niskanen Center (see 2309150058) says that the U.S. is on par with Mexico, Canada and South Korea, but the EU's industrial sector is 40% less carbon intensive than that in the U.S.; Japan is 30% less carbon intensive; and the U.K. is 60% less carbon intensive.

When accounting for domestic carbon intensity, the administration wouldn't be allowed to include U.S. factories or mines where the firm is a subsidiary of a foreign company incorporated in nonmarket economies, such as China, Vietnam and Russia.

These senators say products made in China, on average, generate three times the emissions of the same products made in the U.S. The Niskanen Center says Chinese production is twice as polluting as U.S. production, and India is three times dirtier.

The bill says that if India or Vietnam entered a partnership, by lowering trade barriers to U.S. exports and allowing pollution verification, only goods from factories built after the bill's passage would be taxed, and that they would be offered preferred market access compared with high-polluting, nonpartner countries.

It also allows partnerships with high-income countries, such as many in the EU, if they lower trade barriers to U.S. exports and if they also impose market barriers to exports from high-pollution intensity countries. The EU's Carbon Border Adjustment Mechanism does impose barriers to imports, but is based on carbon taxes in those markets, so Chinese goods could continue to enter without the border tax as long as China's price on carbon is equal to the EU's price.

The policy brief accompanying the bill said: "When the European Union’s Carbon Border Adjustment is fully implemented, there is an expanded risk China will seek to undermine U.S. manufacturers by dumping Chinese products disadvantaged in the EU into unprotected U.S. markets. The Foreign Pollution Fee protects U.S. manufacturers from this expected scenario."

Those countries would be judged on all production, but there would be no tax on goods within the 50% threshold.

However, it says that countries in NATO and other countries covered by a mutual defense agreement -- that covers Japan, Australia, New Zealand, the Phillippines, Thailand, Argentina, Bahamas, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama, Paraguay, Peru, Trinidad & Tobago, Uruguay and Venezuela -- also can be given the benefits of a low-income country partnership if the administration says it assists in geopolitical positioning or helps U.S. national security.

American Iron and Steel Institute CEO Kevin Dempsey said he appreciates the bill but doesn't like the partnership and free trade exceptions. “One aspect of the legislation that we think still needs further work is the country coverage of the new GHG [greenhouse gas] border fee. AISI is concerned that this legislation as currently drafted would exempt some countries from being subject to the border fee, even if products made in those countries have higher GHG emissions intensity than that of comparable American-made goods" Dempsey said in a statement: "We look forward to continuing to work with Senator Cassidy and his colleagues to ensure that the United States establishes a GHG border fee structure that applies to all imports of steel products with higher GHG emissions intensity than those manufactured in the U.S., regardless of the country of origin of those imports.”

The bill is explicit that a domestic carbon tax is not included in the scheme. It also says no imported goods that are within 10% of U.S. carbon intensity will be taxed.

Also, if the component is no more than 5% of weight, value and pollution, it falls under a de minimis provision.

A FAQ that Cassidy issued says that the fee is compliant with World Trade Organization rules, and therefore the U.S. is protected from retaliation. "If countries like China want to see a lower fee, they need to expand purchases from cleaner suppliers -- like the U.S. -- to clean their supply chain. This makes China more reliant on the U.S. production and retaliation difficult," the FAQ said.

Niskanen climate policy analyst Shuting Pomerleau disagrees. She said recently that a tariff on imports without a domestic carbon tax is designed to punish China rather than reduce emissions, and she predicted it would lead to "a lot of trade wars" (see 2310230055).

The Climate Leadership Council supported the senator's assertion that the law would be WTO-consistent. The bill's critics contend that this approach is "impermissibly discriminatory" because U.S. producers that are more polluting than the national average would not pay any price," Matt Porterfield, vice president-policy and research, wrote.

"One initial problem with this critique is the assumption that the WTO’s dispute settlement process will be in a position to make findings on the status of the Act, given the ongoing incapacity of the WTO's Appellate Body," Porterfield said. "But even assuming that the Appellate Body comes back online, it’s still far from clear that the Cassidy bill would be found to be 'WTO-inconsistent.' The WTO is facing serious challenges to its legitimacy and would likely want to avoid positioning itself as an obstacle to aggressive action on climate change," he wrote.