The EU Unveiled A Carbon Tariff, How Should The U.S. Respond?

By Shuting Pomerleau, Niskanen Center

The European Union unveiled its highly anticipated proposal to levy a fee on carbon-intensive imports July 14 as part of the bloc’s ambitious strategy to decarbonize over the next decade. Meanwhile, Democrats in the United States are floating the idea of imposing their own “carbon tariff" or “polluter import fees" on certain products.

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The EU seems to be ahead of the game in its climate mitigation actions. How should the U.S. respond? Absent an economywide carbon price, enacting so-called carbon tariffs is not a good or effective response. U.S. lawmakers can help incentivize decarbonization in the most effective and efficient way - implementing a carbon tax that is truly border-adjusted.

The EU “carbon border adjustment mechanism" (CBAM) would impose an import tax on carbon-intensive imported goods in certain sectors, including cement, iron, steel, aluminum, fertilizer, and electricity. The import tax would mirror the costs domestic producers are subject to under the existing EU emissions trading system.

This overview, based on a draft leaked last month, explains how it will work. The newly released proposal is similar to what was leaked, with some updated details. For example, the official proposal states that a reporting system will be put in place for data collecting by 2023, but importers won’t be required to pay for emission certificates until 2026.

The proposal’s language is a little vague on what the European Commission plans to do with the existing free allowances handed out to certain EU producers. Based on the proposal, it appears that the EU is going to phase out the free allowances entirely by 2035. If an EU producer’s goods are exempted from the bloc’s emissions trading system due to the free allowances, then a foreign producer exporting the same goods to the European market would be similarly exempted.

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