The US Senate is considering a carbon tax to level the playing field

The US Senate is considering a carbon border adjustment plan that would increase taxes on carbon-intensive imports while maintaining a level tax playing field for locally produced goods.

As an alternative to a carbon tax, a bipartisan group of US senators is developing a carbon border adjustment mechanism (CBAM). While the carbon border would increase the cost of carbon-intensive imports, it may create a fair playing field for US businesses.

“The current system incentivises countries like China and India and Vietnam to not pay attention to emissions because you can produce a good cheaper by not paying,” said Bill Cassidy, Republican Senator for Louisiana.

Democratic Senator Joe Manchin, who opposed a carbon tax plan in September 2021, is a member of the bipartisan group. The carbon tax plan would have levied a $20 per ton surcharge. The $20 charge on carbon would have been gradually increased to encourage firms to save expenses.

Manchin advocates for a North American zone encompassing Canada and Mexico that would impose higher taxes on imported cement and steel. This would benefit multinational corporations with local operations in the United States, but would also create an incentive for offshore manufacturing to minimize its carbon footprint.

The Biden administration may support Manchin's idea since climate change has been a priority for the government. The conversations, however, are in their infancy, and the US midterm elections are scheduled for November.

Nonetheless, the Senate committee is motivated by the EU's ambitions for a CBAM, and the US government may be seeking favorable publicity for its climate program.

Rise of carbon borders

The European Union aspires to achieve net-zero energy by 2050 under the European Green Deal. The plan aims to cut EU greenhouse gas emissions by 55% by 2030, paving the way for carbon neutrality by 2050.

The package contains over 100 initiatives, among which is the CBAM. In May 2021, ITR projected that the EU's proposed CBAM might 'spark' a global wave of similar tax schemes. The US plan, if it proceeds, may be the most consequential.

Countries outside the EU, particularly those with carbon-intensive or emerging economies, have voiced worry about the CBAM's impact on local businesses and have shown a willingness to respond against 'discriminatory' policies.

Back in March 2021, the US administration advised that the EU CBAM should be used as a "last option," but lawmakers quickly began exploring the potential of a US carbon border. By July, the Democrats in the US Senate had produced a draft plan, but work on finalizing it has continued.

The US draft plan for 2021 will increase the cost of imported products relative to domestically produced items. This is the point at which US and EU policy would converge, but considerable gaps remain.

While the EU would tie the import tax to carbon prices through the Emissions Trading System (ETS), the US would base the fee on compliance expenses. This is partially why the US CBAM idea is seen favorably by US politicians as an alternative to a carbon price.

As a result, the US may wind up slapping very different tariffs on high-carbon imports than the EU. This presents a dilemma for impacted organizations in terms of cost estimation, as the cost might be difficult to determine. The EU CBAM may potentially increase tariffs.

Similarly to the Trump era's trade fights, the US and EU may be entering another phase of tax competitiveness. Except that this time, the stakes are environmental, which entails a steady decrease in carbon emissions.

Even so, a US CBAM will benefit more than simply the renewable energy industry. A carbon border in the United States would impose greater charges on imported oil than on domestic natural gas. The expenses may even be less than those associated with a carbon price on natural gas.

Due to the qualities of the carbon border concept, it may be more likely to garner majority support in Congress than alternatives. A carbon border system might be used to incentivize domestic enterprises, possibly through tax rebates.

However, the politics surrounding carbon boundaries are not just concerned with climate change. The US has had trade disputes with China for some years, and this is a significant factor in the CBAM proposal's considerations.

“I’ve always thought a price on carbon, a market mechanism, is where I think the world’s ought to be headed, and it also puts a penalty in place for those countries like China,” said Mark Warner, Democratic Senator for Virginia.

While the US is likely to face further trade conflicts with China and the EU over carbon borders, these concerns may spur more enterprises to accelerate their carbon reduction efforts.

By fLEXI tEAM