Senator Sheldon Whitehouse (D-RI) introduced legislation yesterday proposing a narrow-based border-adjusted carbon tax. The legislation is cosponsored by Senators Chris Coons (D-DE), Brian Schatz (D-HI), and Martin Heinrich (D-NM). The bill, titled “Clean Competition Act”, aimed to incentivize decarbonization at home and abroad. As the reconciliation negotiations came to a stall, lawmakers proposed new ideas to address climate change. One of the ideas gaining bipartisan interest is a carbon border adjustment. The ongoing bipartisan energy talks led by Senator Joe Manchin (D-WV) also include carbon border adjustments on the agenda. Across the Atlantic, the European Union is expected to implement a carbon border adjustment to ensure European manufacturers are on a level playing field with foreign producers. 

Here are the key components of the Clean Competition Act:

Domestic Carbon Price

The legislation proposes a narrow-based domestic carbon tax different from an economy-wide carbon tax levied upstream at the extraction points of fossil fuels. The proposed domestic carbon tax would be collected at facilities that produce primary goods that fall under certain carbon-intensive industries. Manufacturers of these covered primary goods would then pass the taxes onto their customers who are producers of intermediary or finished goods. 

Covered goods 

Goods under a selective list of North American Industry Classification System (NAICS) industries that currently participate in EPA’s Greenhouse Gas Reporting Program would be subject to the domestic carbon tax. Some examples of the covered industries are fossil fuels, aluminum, iron & steel, pulp & paper.

Carbon tax rate

A carbon tax of $55/ton starting from 2024 and accelerating at a 5 percent real growth rate would be levied on domestic carbon-intensive manufacturing industries at the facility level. 

Calculation of tax liability

Initially, covered facilities would not be required to pay for every ton they emit. Rather, they would only need to pay for the portion of their emissions that exceed the industry-specific average carbon intensity benchmark. The benchmark will decline by 2.5 percentage points annually in the first four years, then drop by five percentage points annually. Covered facilities must report data of their total emissions, electricity consumption, and production volume to the Treasury. The Treasury would then calculate an industry-specific average carbon intensity benchmark, carbon emissions per output unit, for each covered industry. 

Import Taxes

Import taxes are designed to mirror the domestic carbon tax. Beginning in 2024, covered imported carbon-intensive goods would be subject to the same carbon tax as domestic producers of these primary goods. Note that imports from the least developed countries would be exempt from the import taxes. 

Covered goods

Starting from 2026, covered imported goods would expand to any finished good “containing at least 500 pounds of covered energy intensive primary goods”. Starting from 2028,  they would expand to any finished good containing at least 100 pounds of covered energy intensive primary goods. 

Calculation of import tax liability

If foreign country A’s industry-specific average carbon intensity is lower than the comparable U.S. carbon intensity benchmark, then imports from country A would not be subject to import taxes. If country A’s industry-specific average carbon intensity is higher than the comparable U.S. benchmark, then producers in country A would need to pay for the emissions that exceed the U.S. benchmark. 

If a foreign country’s emissions data are not available or cannot be validated, that country’s economy-wide average carbon intensity would be used for the import tax liability calculation. 

For an eligible imported finished product, the countries of origin would be determined for the primary goods it contains. The tax levied on the imported finished product would be the sum of the tax liability of each primary good based on the above calculation methodology. 

Export Rebates

Domestic producers of covered primary goods would get rebates when exporting such goods. Although domestic producers of finished goods are in effect subject to the domestic carbon tax when they purchase covered primary goods from upstream manufacturers, there is no mention of domestic finished goods producers being eligible for export rebates in the legislation. Therefore, domestic producers of finished goods might have incentives to move their production overseas to avoid the increased emissions costs. 

Revenue Uses

Three-quarters of the revenue raised by the border-adjusted carbon tax would go to a domestic competitive program aimed at helping carbon-intensive domestic industries decarbonize. The rest of the revenue would go to helping developing countries decarbonize. 

Different from the carbon border adjustment legislation introduced by Senator Chris Coons (D-DE) and Representative Scott Peters (D-CA) last July and other recent carbon border adjustment proposals floated by other U.S. lawmakers, the Whitehouse carbon border adjustment legislation would implement carbon border adjustments not as a stand-alone policy, but with a domestic carbon price. This would make the Whitehouse legislation much more likely to be compliant with the WTO rules.  

The legislation would expand the covered goods under the border adjustments to finished goods, which has a much more ambitious scope than other existing carbon border adjustment proposals, including the pending EU carbon border adjustment proposal

The key to implementing this bill is carbon emissions measuring, reporting, and validation, especially regarding the emissions embedded in imported primary and finished goods. 

It remains to be seen whether the legislation will gain sufficient political support to become law. Although it is not an economy-wide border-adjusted carbon tax, it is a somewhat pared-down version of that. It could be a good first step towards reducing emissions in the U.S. and in our traded goods if implemented.  

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