Is a U.S. carbon tarrif on the horizon?

"We can provide trade advantages to American industry. We can protect or grow American jobs." |

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Could Carbon Tarrifs Be The Climate Policy Everyone Can Get Behind?
By Justin Worland
Senior Correspondent

Industrial companies and their trade groups don’t have a long track record of supporting game changing climate legislation. Last year, for example, the U.S. enacted the Inflation Reduction Act (IRA)—the most significant U.S. climate policy to date—with limited support from industry as many companies balked at the law’s tax provisions. 

More recently, however, some of the most influential trade groups–including the National Association of Manufacturers and the U.S. Chamber of Commerce—have embraced what some hope will be the next significant climate legislation: a push to measure the carbon intensity of certain products made in the U.S. That data could then underpin the creation of a fee on the import of carbon-intensive goods from other countries. Doing so would both push manufacturers in other countries to decarbonize, aiding the fight against climate change, and give U.S. manufacturers a leg up against more polluting imports from China and elsewhere.

“American heavy industry is the cleanest or among the cleanest in the world,” Sen. Chris Coons, a Democrat from Delaware, said at an event focused on such a policy earlier this month. “We can provide trade advantages to American industry. We can protect or grow American jobs.”

The development, which has bipartisan support in Congress, is the latest indicator of a new dynamic emerging from the chaos of both a broken global trade system and an increasingly urgent climate challenge. The U.S. rattled nerves in Europe with the IRA’s subsidies for domestic clean energy manufacturing—a policy that was once a no-go because of its effects on international trade. Next month, the European Union will implement its own fee on high-carbon imports, a policy once considered too politically disruptive to be feasible. And, across the globe, friends and foes alike are complaining that the emerging climate-trade focus in the U.S. and Europe may hurt them.  

How this thorny dynamic plays out is far from settled. And, as in so many things in global affairs, what happens in the U.S. will ripple across the globe—to both capitals and corporate headquarters.

At the core of the push for carbon tariffs is a convenient reality: industrial production in the U.S. is much cleaner than in the economies of geopolitical rivals, namely China and Russia. In 2020, the Climate Leadership Council, a group that advocates for conservative climate policies, released a report outlining what it called “America’s carbon advantage,” showing that on the whole U.S. manufacturing tends to be less emissions-intensive than that of its counterparts. (Even though the U.S. has lagged in climate policy, it has a relatively clean electric grid and decades of regulation targeting other pollutants have also reduced carbon emissions). 

The framing quickly caught on and today policymakers on both sides of the aisle cite the relative cleanliness of U.S. manufacturing to push for a carbon tariff policy. Such a “carbon advantage” means that tariffs would penalize manufacturers from rivals like China while also pushing them to cut their industrial footprint to gain easier access to the U.S. market. 

A new report released Thursday from the Niskanen Center, a center-right think tank, and shared exclusively with TIME before publication, tells a slightly different picture. There is no debate that the U.S. is cleaner than Russia, China, or India. But Niskanen found the E.U., U.K., and Japan to be substantially cleaner. “I think it's a fair question to ask: are we really the best?” says report author Shuting Pomerleau, deputy director of climate policy at the Niskanen Center.

Some on Capitol Hill want to answer that question before moving forward. A bill introduced in June known as the PROVE IT Act would mandate that the Department of Energy study the emissions intensity of U.S. industry. The results could then inform a future carbon tariff—though actually implementing such a policy would require additional legislation.   

There are other risks beyond how those numbers shake out. Experts debate whether a carbon tariff would survive scrutiny at the World Trade Organization. The E.U. is in better standing with WTO rules because the bloc requires industrial companies to pay a price on their carbon emissions. This allows the E.U. to avoid allegations that it's unfairly prioritizing its own companies over others. India also complicates the picture. The U.S. has sought to make India a key partner on the world stage, but the country’s industry is far more carbon intensive than in the U.S. 

These debates will inevitably take years to play out. But the signal in all the noise is a clear one: as trade and climate are increasingly linked companies stand to gain from decarbonizing.  

TIME CO2 plans to be a content and insights engine that will deliver clear, direct, action-oriented information and analysis around sustainability and climate change. You can learn more at CO2.com.

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