R48247 — Border Carbon Adjustments: Policy Considerations, Legislation, and Developments in the European Union

Policymakers may consider a wide array of options to reduce greenhouse gas (GHG) emissions, including emissions caps, fees, or performance standards. Although these approaches would likely limit or reduce U.S. GHG emissions, some policymakers have raised concerns about the potential effects of unilateral climate policy in the United States. A central concern is that certain domestic climate policies could cause the domestic prices of goods to increase more than the prices of similar goods manufactured abroad, potentially creating a competitive disadvantage for some domestic businesses. In addition, some argue that domestic climate policies could potentially shift economic activity to countries with less stringent or less comprehensive climate policies. One option to address these concerns is with a border carbon adjustment (BCA). A BCA is a fee or a tariff on selected imported materials, often based on the GHG emissions associated with an imported material’s production or its end use. BCAs increasingly have been a subject of high-level bilateral and multilateral discussions among countries. After several years of debating a proposed framework, the 27-member European Union (EU) finalized legislation on a BCA system known as the carbon border adjustment mechanism (CBAM) in May 2023. The first phase of the CBAM—which requires reporting but does not impose a fee—went into effect on October 1, 2023. During the second phase—scheduled to start in 2026—the EU is scheduled to impose a fee on selected imports. When establishing a BCA, policymakers face several key questions, including (1) which materials or products to include in a BCA, (2) which countries to include in a BCA, and (3) how to determine a BCA fee on imported materials. A BCA presents substantial implementation challenges. Depending on design specifics, a BCA may require calculating the economic impact of a domestic climate policy on a wide range of domestically produced goods as well as the analogous costs in other countries. To alleviate some of these challenges, policymakers could limit the program to a select number of industries and apply a simplified set of default values and assumptions for categories of goods. Alternatively, a BCA could allow companies to provide measured, independently verified emissions data as an alternative to default values. Some studies have questioned whether BCAs would be effective, considering the balance between expected benefits and implementation challenges, and consequences that may result from them. For example, imposition of BCAs raises a range of trade issues and other related concerns. Some analysts have expressed concern that BCAs could be (or be interpreted as) disguised protections for domestic industry. Some experts have suggested that BCAs could negatively affect developing countries in the short run. Further, some researchers have highlighted the potential for unintended consequences from a BCA. The World Trade Organization (WTO) oversees and administers multilateral trade rules and serves as a forum for trade negotiations and trade disputes. It is uncertain whether any BCA would comply with WTO rules because a WTO dispute settlement panel has never considered the issue. In particular, it is uncertain whether a BCA would be consistent with General Agreement on Tariffs and Trade (GATT) principles. It is also uncertain whether specific GATT exceptions might allow for a BCA that would otherwise be deemed inconsistent with key GATT principles. Members of Congress have introduced legislation that included market-based approaches (e.g., carbon taxes or fees, or cap-and-trade programs) with BCA provisions since 2007. These proposals have varied considerably in their scope, stringency (e.g., emissions reductions requirements or tax level), and compliance options. Members in the 118th Congress have introduced several proposals that include BCA provisions. As with market-based approaches from prior years, these proposals vary in their design, scope, and stringency. One key difference among the bills is whether and how they would implement a domestic price on GHG emissions (e.g., tax or fee). For example, some proposals would impose a domestic tax on GHG emissions from selected sources. Other proposals would impose a domestic emissions charge at certain facilities, based on a facility’s GHG emissions intensity. One proposal would not impose a domestic fee. Another would base its BCA on the domestic methane emissions charge established in the law commonly referred to as the Inflation Reduction Act of 2022 (P.L. 117-169).

Curated by CRS — every bill listed in this report's relatedMaterials. Edge type cited_in_report, gold confidence.

• HR 8962 — Methane Border Adjustment Mechanism Act · 118th Cong
• HR 6665 — MARKET CHOICE Act · 118th Cong
• HR 6622 — Clean Competition Act · 118th Cong
• HR 5744 — Energy Innovation and Carbon Dividend Act of 2023 · 118th Cong
• S 5107 — America's Clean Future Fund Act · 118th Cong
• S 3422 — Clean Competition Act · 118th Cong
• S 3198 — Foreign Pollution Fee Act of 2023 · 118th Cong
• S 1863 — PROVE IT Act of 2024 · 118th Cong