Congress can address competitiveness and climate change — without breaking trade rules

As Congress returns from their Fourth of July recess, one area where members can come together is in making America more competitive, particularly with a rising China, while aiming to fight climate change. As Congress considers its reconciliation package, it should include the recently-introduced Clean Competition Act (S. 4355). The bill, crafted by Sens. Sheldon Whitehouse (D-R.I.), Coons (D-Del.), Brian Schatz (D-Hawaii) and Martin Heinrich (D-N.M.), includes a tax on imported goods, often referred to as a carbon border adjustment, that are “dirtier” than their American-made counterparts, thereby advantaging American companies that are doing their part to lower the greenhouse gas (GHG) emissions in their products and production processes.

There is much to like in the Clean Competition Act. First, it offers an opportunity to level the playing field between American companies that are, on average, producing goods with 40 percent less carbon emissions than our trading partners. It does so by imposing a carbon border adjustment charge on the dirtiest producers — particularly China, India and Russia — whose producers are three or four times more carbon-intensive than the average American manufacturer. And it does so in a manner that is consistent with our trading obligations under the World Trade Organization (WTO) rules that prohibit discrimination in favor of domestic producers. This is key, because WTO consistency means that the border charges are less likely to provoke retaliation or spark a trade war. 

The WTO consistency comes from the bill’s even-handed treatment of American producers and imported products. It starts by determining the average amount of GHGs emitted by American producers when making a set list of energy-intensive goods: fossil fuels, refined petroleum products, petrochemicals, fertilizer, hydrogen, adipic acid, cement, iron, steel, glass, pulp and paper, and ethanol. American producers that are cleaner than the average would pay no charge.  Those that are dirtier would pay $55 per ton for the amount of emitted GHGs above the industry-specific average.  

Imported goods would be similarly treated; imports from transparent countries with reliable, verifiable data on GHG emissions would pay the same $55 per ton based on the amount by which the average GHG intensity in their home country exceeds the U.S. industry average. For goods from countries that do not have transparent, reliable and verifiable data on GHG emissions, importers would pay an import charge based on the amount by which the country-wide average of GHG emissions for all products exceeds the U.S. industry average for comparable energy-intensive goods. This means the dirtiest producers would pay the largest charges. In keeping with WTO and United Nations Framework Convention on Climate Change (UNFCCC) admonitions to provide “special and differential treatment” to the poorest countries, the bill exempts imports from least-developed countries.

Second, the bill makes good use of the revenues that would be raised through the assessment of border and domestic charges on dirtier producers. Seventy-five percent of the fees collected from either source would fund a grant program to help American producers invest in the new technologies necessary to reduce their carbon intensities. The other 25 percent of the revenues would be used to support developing countries in reducing emissions and adapting to climate change.

Third, the bill includes provisions to progressively increase the incentives for American producers and importers to decarbonize their production processes. It both lowers the baseline averages over time, such that more importers and domestic producers may be required to pay higher charges, and adds to the scope of imported products subject to the border charge by including finished goods containing 500 pounds or more (later lowered to 100 pounds) of any combination of the initially-covered energy-intensive goods. These provisions mean that both American and foreign producers would have strong incentives to reduce their GHG emissions without eroding the advantage that American producers currently have by being relatively cleaner than their foreign competitors.

Getting to the scale and speed that the world needs to meet our climate change goals will require using the engine of trade and aligning our trade and climate change policies. The Clean Competition Act does just that. It will create strong incentives, both here and abroad, to decarbonize while providing important funding for the adoption of clean technologies. And it does so in a manner that is consistent with our WTO obligations. Enacting the Clean Competition Act also could provide an American counterpoint to the European Union’s Carbon Border Adjustment Mechanism (CBAM), making disputes with the EU over climate policy less likely.   

Because it focuses on carbon intensity, rather than emissions prices, the Clean Competition Act is potentially more practical and provides greater incentives for de-carbonization than the EU system. Including it in the reconciliation package would signal an important American contribution to the recently announced G-7 Climate Club initiative. Congress should not miss this opportunity for a win for American manufacturers and a win for the planet.

Jennifer Hillman is a professor at Georgetown University Law Center, senior fellow at the Council on Foreign Relations, and former member of the WTO Appellate Body. Follow her on Twitter @J_A_Hillman.