The three major climate and trade developments in 2023:

1. EU implemented the world’s first Carbon Border Adjustment Mechanism

In October 2023, the European Union (EU) became the first jurisdiction to implement a carbon border adjustment mechanism (CBAM). Fundamentally, the EU CBAM aims to address the risk of “carbon leakage”: the possibility that companies shift production (and thus emissions) away from the EU—which has by far the highest prices on carbon in the world, thanks to its emission trading system—to countries outside the bloc with weaker climate policies. The EU CBAM aims to address this risk by placing a fee aligned with the EU carbon price on a narrow list of emissions-intensive goods and electricity.

During the initial phase (from October 2023 to December 2025), the EU CBAM will require only that companies report on the emissions associated with imported goods. The transitional phase is intended to facilitate a smooth rollout, gather data, and allow for continued dialogue with trading partners. Starting in January 2026, importers will have to pay a fee on covered goods based on the reporting methodologies the EU has established through implementing regulations. There are still numerous technical issues to clarify through additional regulations, along with possible additions to the scope of the policy, but the EU has officially established itself as the first mover.

2. Growing U.S. interest and congressional proposals

Partly prompted by the EU’s CBAM, there is growing interest among U.S. policymakers—both on Capitol Hill and in the Biden administration—in implementing a carbon border adjustment. A key sticking point, however, remains how and whether to do so without an explicit domestic carbon price. There are varying reasons why Democrats and Republicans are interested in a standalone carbon border adjustment mechanism, but the overlapping considerations are economic competitiveness and support for domestic manufacturing. Research indicates that U.S. manufacturers are able to produce the same goods with a lower overall carbon intensity than developing and emerging economies, giving the United States a clear “carbon advantage.”

Democrats and Republicans on Capitol Hill have pursued proposals that advance climate goals and support domestic manufacturing. Republican Senators Bill Cassidy (R-La.) and Lindsey Graham (R-S.C.) introduced the Foreign Pollution Fee Act, which would establish a fee on imported goods based on emissions performance relative to U.S. production and seek to push trading partners to enact similar measures to achieve global emissions reductions. Pointedly, however, Cassidy’s proposal would not place similar fees on domestic producers. Senator Sheldon Whitehouse (D-R.I.) and Representative Suzan DelBene (D-Wash.), however, led the reintroduction of the Clean Competition Act, a proposal which would establish performance standards with fees on a set of emissions-intensive goods, whether those were produced domestically in the United States or abroad. The potential for compromise between the two visions is the key question going forward, especially given Cassidy and other Republican senators are expected to firmly oppose a carbon border adjustment that is paired with a carbon tax placed on domestic producers.

Narrow bipartisan compromise appears limited currently to the PROVE IT Act, jointly introduced by Senators Chris Coons (D-Del.) and Kevin Cramer (R-N.D.), which is aimed solely at gathering data about the emissions intensity of goods that would likely be covered under a future carbon border adjustment. The proposal would provide analytical grounding without committing to a carbon border adjustment. Another eight Democratic and Republican senators have signed on as co-sponsors, while a companion version of the bill in the House has a bipartisan pair of champions.

Meanwhile, the Biden administration is also looking to advance carbon-based trade policies. In October 2021, the United States and the EU reached an agreement to temporarily lift tariffs on each other’s steel and aluminum exports. The United States and the EU plan to replace these tariffs with the first ever carbon-based sectoral arrangement on steel and aluminum trade by the end of 2023. Negotiations for the Global Arrangement on Sustainable Steel and Aluminum are still ongoing. While the parties have made “substantial progress,” significant differences remain, including on how to address “non-market economies.”

3. Launch of the Climate Club

The difficulty of addressing a global challenge like climate change through unilateral action or through the United Nations has led to calls to organize smaller groups of countries, known as “climate clubs” or “carbon clubs” that align on key facets of climate policy. As originally conceived by academics, climate clubs would include minimum carbon prices among members alongside common border adjustments that apply to countries outside of the club to spur greater global climate ambition and reduce the risk of carbon leakage.

Efforts by countries seeking to form climate clubs have scaled back ambition and speed in favor of a more inclusive approach. In December 2023, G7 members and 27 other countries formally launched the “Climate Club” at the United Nations climate summit in Dubai. The Climate Club will support the “advancement of ambitious policies, alignment of methodologies and standards, and improvement of access to finance and technical assistance for emerging and developing countries,” to unlock the potential of industrial decarbonization, starting with steel and cement.

This follows a push for an “open, cooperative international climate club” by the German presidency of the G7 last year. Earlier this year, under the Japanese Presidency, the G7 issued a Clean Energy Economic Action Plan, which stated the group would “pursue trade policies that drive decarbonisation and emissions reduction.” Whether the Climate Club can lead to concrete policy outcomes that enable greater alignment between countries remains to be seen, but without question, interest in such plurilateral solutions has never been higher.

Beyond 2023

Capped off with the announcement this week that the United Kingdom will launch a CBAM by 2027, 2023 has seen significant advancement in climate and trade. Additional countries, such as Australia, are very likely to announce a CBAM in 2024. The Climate Club plans to engage in substantive programmatic work in 2024 around advancing climate mitigation policies, transforming industry, and increasing international climate cooperation and partnerships. The Climate Club’s work plan represents a path towards reducing emissions from the industrial sector.

In the United States, bipartisan interest in a border carbon adjustment needs to be translated into action. Combined with growing international interest—especially among trading partners—in a CBAM, pressure for action will only increase in time. As conversations continue into the new year, it’s important to note that a carbon border adjustment on its own would be seen as protectionist and likely violate World Trade Organization (WTO) trade rules. While a border carbon adjustment paired with some type of domestic carbon price (e.g., a performance standard or fee placed on a narrow list of emissions-intensive goods) would be seen as an environmental policy addressing carbon leakage concerns and would likely comply with WTO trade rules. The combined pairing will reduce emissions domestically and abroad while also enhancing U.S. competitiveness globally.

At C2ES we will continue working with Congress, companies, and other stakeholders to help build bipartisan support for a well-designed border adjustment that ensures greater domestic ambition alongside international partnerships that can drive global emission reductions.

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Carbon pricing offers a cost-effective way to reduce greenhouse gas emissions. Fourteen states are already pricing carbon, and a number of states are considering similar action. This factsheet summarizes and compares two federal carbon pricing proposals that have been introduced so far in the 118th Congress (2023–2024), highlighting similarities and differences. Two of these proposals would establish a carbon tax (or “carbon fee”). They are:

• The Energy Innovation and Carbon Dividend Act of 2021 (H.R. 5744) introduced by Rep. Salud Carbajal (D-Calif.) on September 27, 2023
• The Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion Act of 2023 (MARKET CHOICE Act, H.R. 6665) introduced by Reps. Brian Fitzpatrick (R-Pa.) and Salud Carbajal (D-Calif.) on December 7, 2023

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This factsheet compares border adjustment-related proposals introduced in the 118th Congress (2023–2024). It also outlines key policy considerations in designing a carbon border adjustment.

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This report first examines whether the logic of the regime, and the Paris Agreement in particular, is effective. The Paris Agreement is having a positive impact: if nationally determined contributions (NDCs) are fully implemented, projected global temperature rise would be around 1 degree C less than it would have been had the agreement not been adopted. Yet the pace of action is not enough to achieve the goals of the Paris Agreement—the world is on track to overshoot 1.5 degrees C, and even staying within 2 degrees C of warming is far from certain. Clearly, incremental improvements in climate ambition and implementation are not enough. A transformational shift is essential.

The report then examines how the regime’s “norm-setting” function can be strengthened to make it fit for an evolving purpose, remain functionally relevant, and deliver on the goals of the Paris Agreement. More specifically, recommendations are made in the following areas:

• enhancing ambition and fairness by increasing peer pressure that encourages and inspires ambition in light of different national circumstances and fair shares
• accelerating implementation and strengthening accountability across sectors and within nations with improved systems and processes to understand and follow up on the progress made
• strengthening cooperative action on adaptation and loss & damage (L&D) in the context of urgent needs and overshoot pathways
• expanding coverage to prepare for the future demands that will require agreement on a range of issues that are currently not addressed by the regime well or at all
• streamlining and fine-tuning processes to enhance responsiveness to an evolving purpose.

Finally, this report reviews the regime’s catalytic role in the wider landscape of climate action. The wider landscape includes relevant international organizations and agreements, international cooperative initiatives (ICIs), multilateral development banks (MDBs), international financial institutions (IFIs), and voluntary commitments by non-Party stakeholders (NPS). There is considerable potential in leveraging the actors in this landscape to narrow remaining ambition and implementation gaps in relation to mitigation, adaptation, and means of implementation, as well as fulfilling governance functions in ways that complement and reinforce the United Nations Framework Convention on Climate Change (UNFCCC) process.

At the same time, there remain core challenges related to transparency, accountability, and the thematic and geographical balance of the wider landscape. To ensure that this wider landscape effectively contributes to and strengthens the catalytic role of the climate regime, this report highlights key findings and makes the following broad recommendations:

• Parties should harness existing agenda items under the UN climate regime, or establish a targeted mechanism or process, to foster substantive exchanges with other international organizations and treaties, including IFIs, and to recognize, consider, and promote alignment of their goals and actions with the objectives of the Paris Agreement.
• Parties should enhance the role of, and engagement with, all types of ICIs, in the context of an upgraded Global Climate Action Portal, including by strengthening their transparency and accountability as well as their thematic and geographical balance.

Parties, the UNFCCC Secretariat, the High-Level Climate Champions/Marrakech Partnership, the UN Secretary-General, and/or the Conference of Parties (COP) Presidencies could advance and implement these recommendations variously, including through leveraging the GST process.

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It lays out the certainty of impact, feasibility, and barriers of each key signal, as well as existing initiatives working toward its implementation, relevant sustainable development goals, and options for outcomes of the GST at COP28. The report also underscores the importance of linking the GST outcomes to active progress in 2024 and updated nationally determined contributions in 2025.

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This event will look at what has changed on the resilience landscape since COP-27, including the impact that the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) are having on private sector resilience efforts, especially those related to the energy grid. The event will also explore key initial findings from a convenings by C2ES to better understand businesses’ actions on resilience, especially as it relates to energy grid hardening and expansion and other infrastructure development.

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