Who is afraid of the EU’s carbon border adjustment plan?

A specter is haunting the policy elite in Washington. It’s the carbon border djustment mechanism, known as C-BAM, created by the European Union’s executive to complement the bloc’s emission trading scheme (ETS).

C-BAM, in a nutshell, would charge importers of steel, aluminum, iron, fertilizer, cement and electricity the equivalent of the EU’s domestic carbon price. This adjustment would, according to the plan, prevent the migration of domestic production to polluter havens abroad as the EU’s carbon price is set to rise in the years to come. This common-sense approach to climate change has generated worries not only among the governments of notoriously non-abating economies of Russia, Turkey, South Africa and the likes but also, somewhat curiously, the United States.

Critics contend the C-BAM would put U.S. manufacturers at a competitive disadvantage relative to EU producers while the U.S. is still developing its climate and trade policies. What’s more, the EU’s legislative proposal has raised fears in Washington that the scheme could be expanded to include more products soon after it takes effect in 2023. Projecting these anxieties, President Biden’s special climate envoy John Kerry fired a rhetorical warning shot across the Atlantic in March, noting that a carbon border tax would “have serious implications for economies, and for relationships and trade.” Many U.S. policymakers have suggested delaying implementation for at least two years, so the U.S. has time to shape its climate solutions. 

A leak of the EU’s draft proposal in June added to U.S. trade irritations. The document said that importers to the EU could credit carbon tax or EU-style cap-and-trade carbon costs paid in the country of origin but made no mention of the possibility of crediting (U.S.) businesses’ “implicit” carbon costs, such as adaptation to environmental regulations.

In one of the more moderate reactions to the plan’s details, U.S. Treasury Secretary Janet Yellen supported C-BAMs in general but stressed that such mechanisms should credit indirect carbon costs, too. Other American commentators were quick to conclude that the Europeans aimed to “punish the U.S.” and were trying to force her hand to adopt a carbon taxation policy. To counter the perceived threat, Sen. Chris Coons (D-Del.) and Rep.Scott Peters (D-Calif.) introduced bills that would impose an “import polluter fee.” The legislation would exempt imports from less-developed nations and from countries whose climate regulations are at least as stringent as those of the U.S. and that do not impose a border carbon tax on American products.

Such responses reflect misconceptions of a C-BAM’s anticipated operation and projected impacts on U.S. and other countries’ exports. In fact, the scheme could help the U.S. achieve its climate objectives and benefit U.S. industry at the same time. Accordingly, the proposal deserves support from the U.S., which should see it as a sincere invitation to cooperate on alignment of transatlantic carbon border adjustment policies — after the U.S. has adopted a carbon tax, that is.

Any American who is wary of the EU’s proposal should focus on three realities:

1) The C-BAM is laser-focused on actual greenhouse gases (GHG) emitted in the production process, and U.S. producers are highly carbon competitive internationally.

2) U.S. industry will gain a competitive edge from C-BAM vis-à-vis major exporters of steel, iron, aluminum and fertilizer to the EU, such as Russia, Turkey and Ukraine.

These non-abating economies emit, on average, two to four times more GHG per unit than their U.S. counterparts.

3) The EU has decided not to open the Pandora’s box of calculating the price equivalents of regulations. That process would be riddled with mind-blowing methodological difficulties and would set imprecise incentives.

In the midst of Capitol Hill’s struggle to fashion climate policies that will meet the steep challenge facing our planet, the EU’s C-BAM proposal is an opportunity rather than a threat and a cause for retaliation.

David Kleimann, Ph.D., is a senior visiting research fellow at Georgetown University’s Institute for International Economic Law (IIEL) and a senior fellow at the Partnership for Responsible Growth. 

William C. Eacho was the U.S. ambassador to Austria under the Obama administration and is the co-founder and CEO of the Partnership for Responsible Growth.