Industry News

Discussion of Carbon-Controls for Trade Gain Renewed Traction

Jul. 19, 2022


The conversations in the domestic and international arena regarding carbon border adjustments (also interchangeably referred to as border carbon adjustments “BCAs”) are heating up as the E.U. enters the final stage of negotiations on the Commission’s proposed border carbon adjustment legislation. We have previously discussed the developing issue of trade-related responses to climate change policies here and here. In addition, the Congressional Research Service has published a report explaining many of the problems and concepts.

Generally, a border carbon adjustment is a trade-tailored tool that takes the form of a fee or tariff levied against carbon-heavy imports in efforts to address the various impacts of diverse climate policies adopted across countries. Under the 2015 Paris Agreement, contracting States are committed to periodically submit what are called “Nationally Determined Contributions” (NDCs), which set out the Party’s greenhouse gas reduction goals. The climate policies that State-parties must adopt in pursuit of meeting their stated contributions are likely to differ. The anticipated divergence of climate policies gives rise to two principal concerns.

First, there is a concern that increased production and manufacturing costs in countries implementing stringent controls on carbon and emissions will create a competitive disadvantage for domestic industries. The second concern is that disparate climate policies are likely to incentivize strategic shifting of production and manufacturing to countries imposing fewer or weaker carbon and emission controls. Such shifting would frustrate the effect of any policy-related reduction as emissions would still be occurring, just elsewhere (this is referred to as “emissions leakage”).

Border carbon adjustment mechanisms have emerged as the general method by which countries may be able to offset any competitive disadvantage and/or counter emissions leakage resulting from or related to climate policies. BCAs are largely expected to take the form of a levy or fee on the tonnage of greenhouse gases associated with certain imported goods. However, as we have stated before, the devil truly is in the details when it comes to the substance and implementation of BCAs. The main questions that arise when considering the structure of a BCA boil down to the following three:

1) What countries are subject to the carbon/emission fee?

2) To what materials or products does the fee apply?

3) How would the fee be determined?

Each question raises difficult technical and policy issues, and the various extant proposals demonstrate the diversity of thought on how best to address them. However, the administrative feasibility and efficacy of any BCA will largely be determined by how concerted countries can be in the structure and implementation of such mechanisms. The more uniform the approach, the better. Thus, the E.U.’s momentum in enacting border carbon adjustments pressures the U.S. and other countries to take related, similar measures or run the risk of fighting an uphill battle.

The E.U reports that it hopes to have a final, compromised text for the BCA mechanism that can be passed into law by 2023. At this moment, there are several legislative proposals aimed at greenhouse gas emission reduction within U.S. Congress that include a BCA. In June 2022, U.S. Senator Sheldon Whitehouse (D-RI) introduced the Clean Competition Act, which promotes a carbon border adjustment mechanism that is closer to an actual adjustment than an additional tariff. Most recently, Senator Whitehouse suggested that the President could use his Executive Authority to impose carbon tariffs on imports.

For any questions on current proposals to implement border carbon adjustment mechanisms, in the U.S., E.U., or elsewhere, please contact any attorney at Barnes, Richardson & Colburn LLP.