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 primer provides a comprehensive introduction to the topic. After a brief explanation of basic concepts, it reviews the EU’s proposed CBAM and U.S. congressional border adjustment provisions introduced in the 117th Congress (2021–2022). It also outlines key considerations in designing a carbon border adjustment.

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• The America’s Clean Future Fund Act (S. 685 and H.R. 2451) introduced by Sen. Dick Durbin (D-Ill.) on March 10, 2021 and by Rep. Marie Newman (D-Ill.) on April 12, 2021
• The Energy Innovation and Carbon Dividend Act of 2021 (H.R. 2307) introduced by Rep. Ted Deutch (D-Fla.) on April 1, 2021
• The Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion Act of 2021 (H.R. 3039) introduced by Reps. Brian Fitzpatrick (R-Pa.) and Salud Carbajal (D-Calif.) on May 7, 2021
• The America Wins Act (H.R. 3311) introduced by Rep. John Larson (D-Conn.) on May 18, 2021
• The Save Our Future Act (S. 2085) reintroduced by Sens. Sheldon Whitehouse (D-R.I.), Brian Schatz (D-Hawaii), Martin Heinrich (D-N.M.), Kirsten Gillibrand (D-N.Y.), Jack Reed (D-R.I.), Chris Murphy (D-Conn.), and Dianne Feinstein (D-Calif.) on June 16, 2021
• The Methane Emissions Reduction Act of 2021 (S. 645 and H.R. 4084) introduced by Sen. Sheldon Whitehouse (D-R.I.) and Rep. Ted Deutch (D-Fla.) on June 23, 2021
• The Carbon Reduction and Tax Credit Act (H.R. 8572) introduced by Rep. Sean Patrick Maloney (D-N.Y.) on July 28, 2022
• Sec. 60113 of the Inflation Reduction Act of 2022 (P.L. 117-59), enacted on August 16, 2022
• The Healthy Climate and Family Security Act of 2022 (S. 5338 and H.R. 9645) introduced by Sen. Chris Van Hollen (D-Md.) and Rep. Don Beyer (D-Va.) on December 21, 2022

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Power: Digitalization can improve the grid’s ability to integrate more variable renewable energy, create an interconnected grid with multi-directional power flow, and expand the use of demand response strategies (including smart charging of electric vehicles).

Transportation: In addition to enabling electric vehicles to provide flexible load and storage resources for the power grid, digitalization of transportation can improve fuel efficiency (e.g., through route optimization) and enable autonomous driving systems.

Buildings: Digitalization of buildings—such as through energy management systems, smart heating and cooling systems, and connected appliances and equipment—can improve the comfort of occupants while reducing energy use.

Industry: “Smart manufacturing” approaches can optimize energy and resource use, improve supply chain management, and allow for differentiation of products based on environmental attributes.

Oil & gas: Digitalization in the oil and gas sector can help with preventative maintenance, detect and reduce emission leaks, and improve the sector’s environmental footprint.

Agriculture: “Smart farming” approaches can reduce emissions-producing inputs (e.g., fertilizers) and water use, better manage livestock production and animal health, enable urban and vertical farming, and improve accounting of carbon sequestration.

Realizing the decarbonization potential of digitalization, however, will require grappling with a number of informational, usage, financial, regulatory, technical, infrastructure, security, and privacy challenges. These include lack of knowledge and capacity, high upfront capital costs, outdated regulatory models, lack of interoperable standards, the current semiconductor supply crunch, limited access to broadband, cybersecurity vulnerabilities, and concerns about compromised privacy and proprietary business information.

These challenges are not insurmountable, and a range of policies at all levels of government could help. Policies to enable climate-beneficial digitalization across the economy include:

Investing in research, development, demonstration, and deployment, including appropriations for the digitalization demonstrations authorized in the Energy Act of 2020;

Driving deployment through government procurement, including requiring agencies to procure digital solutions, document the related energy efficiencies and cost savings, and publicize the lessons learned;

Enhancing understanding of digital technologies, including by incorporating these technologies in agency outreach activities and by developing real-time measurement and verification protocols for systems-level efficiencies in buildings, industry, power, transportation, and agriculture and land use;

Developing interoperable standards and communications protocols between devices and systems; and 

Investing in digital infrastructure, such as semiconductors and broadband.

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• • Clean Energy and Sustainability Accelerator Act (H.R. 806) introduced by Rep. Debbie Dingell (D-Mich.) on February 4, 2021
  • National Climate Bank Act (S. 283) introduced by Sen. Ed Markey (D-Mass.) on February 8, 2021
  • CLEAN Future Act (H.R. 1512) introduced by Rep. Frank Pallone (D-N.J.) on March 2, 2021
  • America’s Clean Future Fund Act (S. 685 and H.R. 2451) introduced by Sen. Dick Durbin (D-Ill.) on March 10, 2021 and by Rep. Marie Newman (D-Ill.) on April 12, 2021
  • LIFT America Act (H.R. 1848) introduced by Rep. Frank Pallone (D-N.J.) on March 11, 2021
  • The U.S. Green Bank Act (S. 1208 and H.R. 2656) introduced by Sen. Chris Murphy (D-Conn.) and Rep. James Himes (D- Conn.) on April 19, 2021

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• The Energy Innovation and Carbon Dividend Act of 2019 (H.R.763) introduced by Reps. Ted Deutch (D-Fla.) and Francis Rooney (R-Fla.) on Jan. 24, 2019;
• The Healthy Climate and Family Security Act of 2019 (S.940 and H.R.1960) introduced by Sen. Chris Van Hollen (D-Md.) and Rep. Don Beyer (D-Va.) on March 28, 2019;
• The American Opportunity Carbon Fee Act of 2019 (S.1128) reintroduced by Sens. Sheldon Whitehouse (D-R.I.), Brian Schatz (D-Hawaii), Martin Heinrich (D-N.M.), and Kirsten Gillibrand (D-N.Y.) on April 10, 2019;
• The Climate Action Rebate Act of 2019 (S.2284 and H.R.4051) introduced by Sens. Chris Coons (D-Del.) and Dianne Feinstein (D-Calif.), and Rep. Jimmy Panetta (D-Calif.) on July 25, 2019;
• The Stemming Warming and Augmenting Pay Act of 2019 (H.R.4058) introduced by Reps. Francis Rooney (R-Fla.) and Dan Lipinski (D-Ill.) on July 25, 2019;
• The Raise Wages, Cut Carbon Act of 2019 (H.R.3966) introduced by Reps. Dan Lipinski (D-Ill.) and Francis Rooney (R-Fla.) on July 25, 2019;
• The America Wins Act of 2019 (H.R.4142) introduced by Rep. John Larson (D-Conn.) on August 2, 2019;
• The Modernizing America with Rebuilding to Kickstart the Economy of the Twenty-first Century with a Historic Infrastructure-Centered Expansion Act of 2019 (H.R.4520) introduced Reps. Ryan Fitzpatrick (R-Pa.) and Salud Carbajal (D-Calif.) on September 26, 2019.
• The Carbon Reduction and Tax Credit Act (H.R.5457) introduced by Rep. Sean Patrick Maloney (D-N.Y.) on December 17, 2019;
• The America’s Clean Future Act (S.4484) introduced by Sen. Dick Durbin (D-Ill.) on August 6, 2020; and
• Consumers Rebate to ban Emissions and Boost AlTernative Energy Act (H.R.8175) introduced by Rep. Jerry McNerney (D-Calif.) on September 4, 2020.

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