Politicians Grapple With Coming Carbon Border Adjustment Tariffs in EU

A Democratic and a Republican senator agreed at an international conference that a U.S. carbon border adjustment tax will be useful, both for making sure domestic industry is competitive and to convince China to tackle greenhouse gas emissions.

Sen. Sheldon Whitehouse, D-R.I., is the leader on carbon border adjustments in the Senate, and in the past introduced a bill that would impose a domestic carbon tax first, for dirtier-than-average producers in about a dozen industries, and expand it to a border adjustment two years later (see 2206080009). He and Sen. Lindsey Graham, R-S.C., spoke alongside the Indonesian finance minister on the geopolitics of carbon border adjustments at the Munich Security Conference on Feb. 17.

Before the topic turned directly to carbon border tax legislation, the moderator asked both men to address the EU's reaction to the Inflation Reduction Act.

"They believe we’ve created an unfair playing field for electric vehicles," Graham said. "The Europeans believe we’ve created a law to kind of close them out of that space -- and maybe they’re right."

But Graham said he's less interested in thinking about whether the IRA's battery content requirements should be revised, and more in how the electrical grid will be built out to handle an electrified transportation sector.

Whitehouse said he heard complaints from other countries' politicians about the competitive disadvantage the IRA would cause when he was at the UN Climate Change conference in November. "I was pretty thoroughly unsympathetic," he said. " And I was like, ‘Fine, you do the same. Let’s compete to see who can support a rapid energy transition.'"

He said that, by the same token, when the EU implements its carbon border adjustment mechanism (CBAM), "If the United States comes whining and complaining about the carbon border adjustment tariffs, I think the EU would be very fair and properly responsive to say, ‘Hey, you match us.’"

Whitehouse noted that Sen. Bill Cassidy, R-La., is working on introducing a carbon border adjustment bill (see 2209130052), and Whitehouse said he has his own approach.

"We’ll continue to negotiate," he said.

Graham added that he thinks CBAMs are fair, and said that if the U.S., the EU, the UK and Canada all implement one, it will make China take climate change more seriously.

Indonesian Finance Minister Sri Mulyani Indrawati said the EU CBAM will make it harder for developing countries to develop, even though many of them are committed to fighting climate change. "It definitely is going to punish them," she said.

Whitehouse said his bill has exemptions for less developed countries. However, if that exemption applies to least developed countries, Indonesia would not be covered.

Whitehouse said he believes that the EU's CBAM will be good for U.S. exporters because of their lower carbon intensity. So far, the CBAM does not consider that metric, however, just the cost of carbon for foreign producers. Only California and a few other states have an official price on carbon.

Cassidy does not support a domestic price on carbon as part of his approach to a carbon border tax.

Whitehouse said that a carbon tax would give firms certainty. "Then the private sector can respond," he said. He said he tells EU politicians they should not consider any delays to their CBAMs, or waivers to it. He says: "Do not get squishy on the CBAM."

The problem for Republicans with a domestic carbon tax is that it will increase costs for consumers.

On climate change, Graham said, 70% of Americans believe it's real and harmful, and he's one of them.

But, he said, if you then ask voters if they would pay more for heating their homes, electricity, or vehicle fuel, they say: "No, thank you."

So Graham said it's not as much about convincing folks that climate change is real, but to talk about it in a way that seems like a win-win, rather than a sacrifice.

He said some Republicans feel Democrats have "turned this thing into a religion, not a problem to be solved. There is a way to get there that actually makes us safer and more prosperous. I will not be able to sell my party on anything other than that model."