Europe Just Launched the World’s First Carbon Tariff. Will the United States Follow Suit?

by Kristoffer Tigue (Inside Climate News) In the U.S., where climate policy has been highly politicized, the concept of a carbon tariff has recently emerged with rare bipartisan support. -- Companies that want to do business in the European Union will soon have to pay extra if the carbon footprints of their products are too high.

The EU on Sunday officially began phase one of its carbon tariff. The first-of-its-kind tax scheme could help reduce the climate-warming emissions of industries that are notoriously hard to decarbonize, including cement and steel manufacturing.

Under the EU’s new policy, foreign companies must now report all the greenhouse gas emissions associated with certain imported goods: cement, steel, iron, aluminum, fertilizers, hydrogen fuel and electricity. Starting in 2026, any of those imports that don’t meet the bloc’s emissions standards will face an additional fee when crossing the border. Other goods will be considered for the tax in the coming years, the European Commission said.

The way a carbon tariff works is relatively simple. A company in China, for example, might sell relatively cheap cement, but with a high carbon footprint because the product is made in factories that run on electricity from coal-fired power plants. That puts EU cement makers, which are required to have lower emissions, at a cost disadvantage.

The EU company has had to invest extra money to switch to cleaner energy sources, buy carbon offsets and install more energy efficient equipment—meaning that, for now at least, it must sell its cement at a higher price. A carbon tariff essentially reduces the price differences between the domestic products and the more carbon-intensive foreign imports, incentivizing companies sending goods to the EU to reduce their emissions to avoid the additional fee.

In the United States, where climate policy has been highly politicized, the concept of a carbon tariff has recently emerged as a rare opportunity for bipartisan support.

While Republicans have generally opposed any new domestic taxes, some have now jumped on board with the idea of taxing the carbon emissions of foreign imports, seeing it as a way to give the U.S. a leg up on rivals like China.

Earlier this year, U.S. Sen. Bill Cassidy, a Republican from Louisiana, introduced a bill in Congress proposing a carbon tariff. Called the “Foreign Pollution Fee,” Cassidy said the legislation “would curtail China‘s ability to undercut U.S. manufacturers by penalizing China for not meeting the same reasonable environmental standards to which domestic manufacturers are held” and “level the playing field for American workers, making it less likely that jobs migrate to China.”

Democrats proposed a similar bill last year, called the “Clean Competition Act,” championed by U.S. Sen. Sheldon Whitehouse of Rhode Island. The Whitehouse bill, however, would also charge domestic companies a fee if their emissions exceeded the average for their industry, E&E News reported.

Still, there are signs that the idea is gaining support. In August, a group of bipartisan lawmakers introduced the “PROVE IT Act,” which would require the Department of Energy to study the carbon intensity of U.S. industries with the intention of informing a future carbon tariff. READ MORE

Excerpt from Politico Pro E&E Daily: Groups like the American Petroleum Institute and U.S. Chamber of Commerce are supporting the bill, arguing it will make the U.S. more competitive overseas. At the same time dozens of conservative advocates have lambasted the effort as a springboard for a domestic carbon tax.

The battle over the bill could expose political rifts that may complicate the bill’s chances on Capitol Hill. They also reveal the influential forces on either side of the measure, which could set the tone for the upcoming debate on the bill inside the Senate Committee on Environment and Public Works. READ MORE

Excerpt from Transport Energy Strategies: Steel, a basic product which standard production carbon footprint is reasonably easy to calculate, manufacturing using either iron ore or scrap and coal in blast furnaces or iron ore and scrap and hydrogen in direct reduction processes, has been included in the scope of the CBAM. It still represents on average more than half of the weight of a car, routinely accounts for one-third of the cost of materials used in light-duty vehicle manufacturing (around 1,000 Euros on average) and is more than 5% of the total cost of production, significant enough in a highly competitive sector, especially in the lower segments (small cars), where a few hundred Euros can make the difference between commercial success and failure in showrooms.

But CBAM, if not applied to all imports, like a full car for instance, may prove insufficient. Coming back to steel in car manufacturing, the overall effect of CBAM is to increase the production cost, whether the steel is imported and suffers CBAM because of a poor sustainability when produced, or sourced in the EU, thus necessarily sustainably produced, at a premium (same story if import is deemed sustainably produced).

Note by the way the double whammy, increased local demand for EU-sourced sustainable steel is inflationary in nature, as it will inevitably drive the cost of CO2 up in ETS. Every sector has diminishing over time CO2 emission caps and productivity gains in terms of CO2 efficiency are hard to achieve nowadays and can become very costly to achieve (manufacturing steel by direct reduction of iron is much more expensive than blast furnace operation).

At the end of the day, the result for the EU car maker is an increase in the cost of manufacturing, and steel is only one of the materials which must improve its carbon footprint in the production step, aluminum, plastics, and batteries (the largest cost element in an electric vehicle) will be treated accordingly. EU cars will then become less competitive compared to imports of vehicles, from China for instance, already well helped, according to the findings of a recent enquiry launched by the European Commission services. (According to one academic study, a Chinese C-segment vehicle would have received 6,000 to 7,000 Euros of state support, 25 % of its average total price tag in a European showroom.) READ MORE