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Understanding Border Carbon Adjustments

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Description
This training reviews the basics of border carbon adjustments, how they're viewed constitutionally and in terms of trade legality, and the practical aspects of border carbon adjustment implementation along with its constraints.
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What are the basics?

The Energy Innovation and Carbon Dividend Act has a provision built in to protect trade competitiveness: a ‘Carbon Border Fee Adjustment’ imposed on covered fuels and emissions-intensive trade-exposed’ (EITE) goods that cross our border in either direction. These goods include products like steel, aluminum, cement, glass, and some agricultural products.

Goods that fall under this EITE classification and are imported from a country that does not have a carbon price equivalent to ours will have to pay a surcharge to make up the difference. Conversely, an American-made EITE product exported to such a country will get a refund for the carbon fee associated with its carbon footprint.

This border adjustment prevents the carbon fee from putting American businesses at a competitive disadvantage in global markets.  It will also remove the incentive for them to relocate overseas to avoid the carbon fee. In addition, it will encourage foreign countries to adopt their own carbon fee so they would get the money instead of us.

For more information, check out the slides and recording for the training under the "Watch" tab above.

How does this interact with the WTO?

The carbon border fee adjustment is also specifically designed to comply with international trade law

The Border Carbon Adjustment is an important provision of the Energy Innovation and Carbon Dividend Act. To protect U.S. manufacturers and jobs, carbon-emitting fuels and carbon-intensive goods from countries that do not have a carbon emissions mitigation program analogous to ours will pay a border carbon adjustment. 

Conversely, producers of fuels and carbon-intensive goods exported from the United States to countries that do not have a carbon emissions program will receive a rebate for the carbon fees that were levied under the act. 

Questions concerning the mechanisms of the Border Carbon Adjustment, how it would affect our trade with China, and whether it would be approved by the World Trade Organization (WTO) have been asked in a significant number of lobby meetings in recent years, so it’s particularly important for CCL members interacting with members of Congress to have a good understanding of this provision and how it works.

This border adjustment prevents a US carbon fee from putting American businesses at a competitive disadvantage in global markets.  It will also remove the incentive for them to relocate overseas to avoid the carbon fee. In addition, it will encourage foreign countries to adopt their own carbon fee so they would get the money instead of us.

In fact, the act specifically recommends that the Secretary of State negotiate with other nations to form treaties, agreements, or partnerships to reduce greenhouse gas emissions. Such agreements would naturally include harmonizing emissions mitigation programs among a group of countries so that border carbon adjustments would not be necessary. 

What are carbon-intensive goods?

Besides a large range of fuels that emit CO2 or other greenhouse gases when burned, the carbon border adjustment also affects carbon-intensive goods, which require large amounts of energy to produce. These goods include products like steel, aluminum, cement, glass, and some agricultural products. steel, aluminum, cement, glass, pulp, paper, chemicals, or industrial ceramics.

While energy is used to produce most products, the amount is generally low as a percentage of total production cost (often even under two percent for most industries). For industries that are considered carbon-intensive, only a handful use more than five percent of its production costs attributed to energy usage (only 8 in a subset of Table 2 in this 2009 Interagency report) Additionally, as written, only goods with high trade exposure internationally (generally considered to be at least 15 percent of the total production traded) would be considered eligible for an adjustment.  Thus, the amount of products that the US exports or imports that would be affected by a border adjustment is not actually that large. In the case of US exports, fewer than ten percent of US industry groups may be affected, totaling about 12 percent of US manufacturing output. 

Would a Border Carbon Adjustment be permitted under international trade agreements for which the US is a signatory? 

The U.S. along with most countries is a member of the WTO and is a signatory to the General Agreement on Tariffs and Trade (GATT). GATT is a legal agreement among trading countries to minimize barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving important trade regulations. The agreement also provides a system to arbitrate commercial disputes among nations.

It is generally agreed that a border carbon adjustment would not violate provisions of the GATT (see several linked resources). Plus, the carbon border adjustment in H.R.763 is designed to comply with international trade law.

The most important provision is Article 1, the “Most Favored Nation” article, which states that countries cannot discriminate between countries, meaning that a country must charge the same tariff to any country for a specific product. Another important provision of the GATT is Article III, paragraph 2, which states that imported goods should not be subject, directly or indirectly, to taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to similar domestic products. Since the border adjustment rates would be identical to the carbon fees assessed domestically at that time, a border carbon adjustment would be in compliance with this provision.

Length
Press play to start the video (42m 59s)
Video Outline
To skip ahead to a specific section go to the time indicated in parenthesis.

Intro & Agenda
(from beginning)

Context of International Trade
(2:13)

History of Trade Treaties
(5:59)

Interpreting Tariffs & Resolving Disputes
(9:50)

Adjustment Design For Fossil Fuels & Carbon Intensive Goods
(20:48)

Global Diplomacy Considerations
(30:30)

Final Thoughts & Takeaways
(39:20)
 

Instructor(s)
Dr. Ross Astoria
Downloads

Download PowerPoint or Google Slides presentation.

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Introduction to Border Carbon AdjustmentsIntroduction to Border Carbon AdjustmentsPowerpoint Presentation16440 KB
Audio length
Press play to start the audio (42m 59s)
Audio embed code
Audio Outline
To skip ahead to a specific section go to the time indicated in parenthesis.

Intro & Agenda
(from beginning)

Context of International Trade
(2:13)

History of Trade Treaties
(5:59)

Interpreting Tariffs & Resolving Disputes
(9:50)

Adjustment Design For Fossil Fuels & Carbon Intensive Goods
(20:48)

Global Diplomacy Considerations
(30:30)

Final Thoughts & Takeaways
(39:20)
​​​

Instructor(s)
Dr. Ross Astoria
Discussion Topic
To Print
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Category
Training
Topics
Climate Policy
Format
Audio / Video, Presentation
File Type
Google Slides, PowerPoint (.pptx)