Senate Sponsor of Carbon Border Tax Says Executive Order Needed

Sen. Sheldon Whitehouse, D-R.I., recently suggested that executive action for a carbon border adjustment tax might be more achievable than passing a bill through Congress. Whitehouse, who has sponsored a CBA, was invited to speak at a virtual forum hosted by Bruegel, a European think tank that analyzes the economics of policy questions.

Whitehouse said that he and Republicans are working quietly "on trying to do a carbon border adjustment that both sides can agree to." Sen. Bill Cassidy, R-La., has said he is talking with Whitehouse's office, and is hoping to have a bill with bipartisan appeal ready to introduce sometime in 2023 or 2024 (see 2209130052).

Whitehouse and Cassidy disagree, however, about the necessity of a domestic carbon price to incentivize cleaner heavy industry.

"Whether we do a carbon price with a carbon border adjustment in it, or a carbon border adjustment with a carbon price in it, there is simply no question that is the most effective way to get on a path to safety," Whitehouse said.

That is a fundamental area of disagreement. Whitehouse didn't point to it as a reason his legislation might not come to pass, but he did say: "In the meantime, trade -- as President Trump displayed -- is an area where the executive branch has a great deal of constitutional authority and could move with much more alacrity and interest than they have to date."

"Whether we pursue executive authority or statutory or both, what matters, I think, is that everybody gets started having the conversations," he added at the Sept. 28 forum. "That sends the signals to markets ...that they had better get ready."

Mohammed Chahim, a member of the European Parliament, said that the EU's work on a carbon border adjustment mechanism, or CBAM, is not meant to be a unilateral action to protect EU industry as the cap and trade program in that bloc gets more expensive for heavy industry, such as steel.

Chahim, the legislator tasked with leading the effort to shepherd CBAM through the parliament, said, "It could be the first step towards the concept of an international carbon price." And, he said, if the U.S. and the EU could agree on principle on how to calculate carbon intensity, it would cover two-thirds of the world's economic activity. He said both the U.S. and the EU already have less carbon-intensive industry than some competitors. "We have to make sure this advantage gets a payoff at the end of the day."

Moderator David Kleimann, a Bruegel visiting fellow and trade expert, asked Chahim if the fact that the CBAM is evolving to cover trade in chemicals will cause major friction between the EU and the U.S. The initial group of goods proposed under CBAM -- steel, cement, aluminum fertilizers, energy -- were not commodities that the U.S. sells much to the EU (see 2111170007).

Chahim said the carbon footprint of the American chemical industry is quite a bit smaller compared with many exporters. "I would bet CBAM would actually improve exports coming to the EU," he said. Taxes are not expected to be collected before 2025, even if the EU is able to pass the legislation on the planned timeline.

He noted that while it's hard to harmonize the EU cap and trade program with the U.S. patchwork of regulations and some regional cap and trade regimes, it's possible to just look at carbon content to calculate if there is a cost at the border. He noted the U.S. and the EU are trying to agree on standards to do this for steel and aluminum.

"If we can agree on product standards or norms on these big heavily traded products … and this is the way we calculate the carbon content of these products, then this would be a great first step." He added: "That could be a blueprint between many other products and sectors."

But he said reaching agreement has been taking too long.

Rebecca Dell, from ClimateWorks Foundation, cautioned policy makers that they are being too optimistic about a carbon price's ability to help heavy industry with a green transition. She said that industry accounts for roughly 30% of greenhouse gas emissions, and 75% of those emissions come from steel, cement, plastic-making, aluminum and fertilizer.

She said that while the EU and the U.S. are cleaner in these areas than other regions, "those are incremental differences. The fact of the matter is, really low carbon emissions in all of these areas is pre-commercial technology."

She said the Inflation Reduction Act has good funding to try to help commercialize experimental technologies, but added, "There’s a good chance that even after we bring clean production to scale it will continue to cost more than dirty production."

She cautioned that it will be extremely difficult to track which commodities come from which plants, which is crucial to determining their carbon content, and if any carbon border tax is high enough to make a difference, exporters will "have an incentive to cheat the policy."

She said as the carbon border tax is being designed, the issue of enforcement needs to be top of mind for legislators.

"We should acknowledge we are constrained to this messy world," she said.