Carbon tariff: U.S. rules of the game

In June 2022, the U.S. Senate proposed the Clean Competition Act (CCA), which would impose a carbon border adjustment on energy intensive imports. The clean bill has recently completed its second reading. If passed, the carbon tariff will be imposed starting in 2024 on products manufactured in the U.S. and US importers. Different from the EU's Carbon Border Adjustment Mechanism (CBAM), the U.S. carbon tariff is scheduled earlier and targets a very different group. The following section will look at how CCA will be implemented, as well as industries and countries it will affect.
 

Implementation of U.S. carbon tariff

The CCA will apply to energy intensive industries, including refined petroleum, petrochemicals, fertilizer, cement, steel, and aluminum (see Table 1 below), which are broader in scope in the initial phase compared to the CBAM. It is worth noting that if a taxable product exported to the U.S. uses taxable raw materials in the manufacturing process, the carbon emissions generated by the raw materials must also be included in the calculation. Additionally, information declared to the U.S. Environmental Protection Agency must include greenhouse gas emissions, product weight, electricity consumption, whether the electricity comes from the grid, and greenhouse gas emissions from non-grid electricity use, etc. According to the Act, the reporting of carbon intensity for 2024 shall not later than June 30, 2025, and the charge is payable by importer not later than September 30 of the calendar year. Least developed countries^[1], as defined by the United Nations, would be exempt from the tariff, and refunds would be issued for exports on which the carbon tariff has been collected.


Table 1. List of industries regulated by the CCA

In addition, the calculation of the carbon tariff baseline is also different between the CCA and the CBAM. In the case of the CCA, the U.S. Department of the Treasury will determine the average carbon footprint for each product category as a baseline according to the reported data. Importers would be required to pay the levy if emissions of a product exceed the industry's carbon intensity baseline. Moreover, the baseline will decline by 2.5% annually from 2025 to 2028, with the degree of decrease rising to 5% in 2029 and beyond. Notably, such calculation is on the premise that the manufacturer's carbon emissions data have been verified. In case of unverified or unclear data, the taxable portion is calculated using the ratio of the country of origin's GDP carbon intensity to that of the U.S. GDP carbon intensity.
 

Implications of U.S. carbon tariff on global trade and economy

The initial cost of the carbon tariff for locally manufactured or imported products in 2024 will be set at USD 55 per tonne. From 2025, the tariff will be adjusted annually at a rate equal to inflation plus 5%. Figure 1 illustrates the annual rate changes based on the central banks' inflation target of 2%. A conservative estimate of the carbon tariff rate is expected to exceed USD 80 per tonne by 2030, and could reach beyond USD 90 by then, taking into account the severe inflation in the U.S.


Figure 1. U.S. carbon tariff rate trend (2024-2030)

Since the U.S. is a major exporter to many countries, its carbon tariffs could make a greater impact on economies and business profitability of countries than the CBAM. Table 2 below lists the five major importers of U.S. regulated products. Since some products can be subdivided into different items (such as steel, which can be made into coils, bars, etc.) with different importers, only part of the items are listed. As can be seen, Canada and Mexico will bear the brunt of the U.S. carbon tariffs and are in more urgent need of a response mechanism than other countries. On the other hand, many countries in Asia will also be affected by the tariff, such as China, South Korea, Vietnam, Indonesia, Japan, and Taiwan, which are all major importers. However, none of them has proposed a relevant mechanism, while their carbon pricing lags behind the rest of the world. In this case, if no efforts are made to reduce the carbon intensity of their products, these countries may have to pay a large amount of carbon tariff to the U.S. in the future, which will undermine the competitiveness of their products.
 

Table 2. Major importers of five U.S. regulated products in 2021
 

Carbon tariffs underway

Following the EU’s approval of several climate bills on April 18, including to gradually phase out free emission allowance and phase in the CBAM in 2026, the U.S. is expected to establish its own version soon. The effects of the CCA should not be underestimated, especially for those Asian countries that are heavily dependent on the United States for trade and economic growth. These countries are not exempt from the tariff and are not considered developing countries^[2]  under the CCA, thus not eligible for subsidies or credits. Therefore, in addition to establishing relevant mechanisms, the most practical and effective approach is to implement carbon management plan to reduce the carbon intensity of products.