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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The Pricing Carbon Initiative is pleased to announce that Senator Sheldon Whitehouse (D-R.I.) will join us for a fireside chat on his “Clean Competition Act” and his perspectives on the future of a U.S. carbon border adjustment. A panel discussion will follow our conversation with Sen. Whitehouse. The discussants will address how carbon border adjustment mechanisms implemented by the EU and proposed U.S. approaches could impact U.S. industry and world trade.

The post The Clean Edge: Understanding the impact of border adjustments on U.S. competitiveness appeared first on Center for Climate and Energy Solutions.

A panel discussion will follow the conversation with Rep. Peters. This discussion will cover the overall state of play on the infrastructure and reconciliation bills on the Hill and the potential for carbon pricing to be part of those negotiations.

The post A Conversation with Representative Scott Peters appeared first on Center for Climate and Energy Solutions.

A panel discussion followed our conversation with Sen. Whitehouse. This panel discussion focused on carbon border adjustments. Our panelists provided an overview of, discussed the increasing interest in, and framed how the international community is responding to carbon border adjustments.

For the Fireside Chat

Speakers

Senator Sheldon Whitehouse (D-RI)
U.S. Senator, Rhode Island

Christina DeConcini
Director of Government Affairs, World Resources Institute
Chair, Pricing Carbon Initiative

Introduction from:

Nathaniel Keohane
President, C2ES

For the Panel Discussion

Pascal Lamy
Former Director-General, World Trade Organization

Catrina Rorke
Vice President of Research, Climate Leadership Council

Anna Yelverton
Energy & Environment Legislative Assistant, Office of Senator Coons (D-DE)

Moderated by:

Alden Meyer
E3G, Senior Associate

The bill (S.2085) features a pricing mechanism that starts at $54/ton for CO2 in 2023. The Whitehouse news release referred to it as a “large-scale solution [that] would reduce greenhouse gas emissions [by] 50 percent after 10 years, improve air quality in environmental justice communities, assist fossil fuel workers and communities, and speed transition to [a] green economy.“

The Save Our Future Act is also sponsored by Senators Martin Heinrich (D-NM), Kirsten Gillibrand (D-NY), Jack Reed (D-RI), Chris Murphy (D-CT), and Dianne Feinstein (D-CA).

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