Border Carbon Adjustments: Background and Developments in the European Union

Changes from June 28, 2022 to February 21, 2023

This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with ~~red strikethrough~~ and textual matter added in the later version is indicated with blue.

Border Carbon Adjustments: Background and
~~June 28, 2022~~
~~Recent Developments~~February 21, 2023 Developments in the European Union
Jonathan L. Ramseur
A key concern among policymakers is that differing climate change mitigation policies could A key concern among policymakers is that differing climate change mitigation policies could
Specialist in Environmental Specialist in Environmental
create a competitive disadvantage for some domestic businesses—for example, by raising create a competitive disadvantage for some domestic businesses—for example, by raising
Policy Policy
production costs compared to another country. In addition, differences among countries’ climate production costs compared to another country. In addition, differences among countries’ climate

policies could create incentives to shift economic activities to countries with less stringent or less policies could create incentives to shift economic activities to countries with less stringent or less
Brandon J. Murrill
comprehensive climate policies, ultimately leading to “emissions leakage.” In general, comprehensive climate policies, ultimately leading to “emissions leakage.” In general,
Legislative Attorney Legislative Attorney
greenhouse gas (GHG) emissions leakage can occur if a domestic policy to reduce domestic greenhouse gas (GHG) emissions leakage can occur if a domestic policy to reduce domestic

emissions leads to an increase in emissions in another location, thus undermining emission emissions leads to an increase in emissions in another location, thus undermining emission
reductions resulting from the domestic climate policy. Policymakers might consider several reductions resulting from the domestic climate policy. Policymakers might consider several
Christopher A. Casey
approaches to address these potential concerns. One approach that has received interest in recent approaches to address these potential concerns. One approach that has received interest in recent
Analyst in International Analyst in International
years is a border carbon adjustment (BCA). years is a border carbon adjustment (BCA).
Trade and Finance Trade and Finance

A BCA is a potential trade-related option, such as an import fee or tariff, intended to mitigate A BCA is a potential trade-related option, such as an import fee or tariff, intended to mitigate

adverse competitiveness effects and other concerns when one or more countries establish more adverse competitiveness effects and other concerns when one or more countries establish more
ambitious policies to reduce GHG emissions than others. Although no countries have yet ambitious policies to reduce GHG emissions than others. Although no countries have yet
implemented a BCA as part of their climate change policies, the European Commission—which functions as the executive of implemented a BCA as part of their climate change policies, the European Commission—which functions as the executive of
the European Union (EU)—released a the European Union (EU)—released a legislative proposal in July 2021 for a BCA to complement its mandatory emissions reduction proposal in July 2021 for a BCA to complement its mandatory emissions reduction
program. program. ~~The~~In December 2022, the European Parliament and the Council of the EU reached Council of the EU reached a provisional agreement agreement on a proposed BCA framework, as part of a larger legislative and policy package that includes changes to the EU Emissions Trading System~~on a BCA framework in March 2022, and the European Parliament~~
~~adopted its own position on a BCA framework in June 2022~~. The European Parliament and the Council of the EU share . The European Parliament and the Council of the EU share
legislative power and legislative power and ~~must both~~both would need to approve a European Commission proposal for it to become EU law. approve a European Commission proposal for it to become EU law.
The provisional agreement on the EU BCA (known in the EU as a Carbon Border Adjustment Mechanism, or CBAM) would need formal approval by the Parliament and the Council before it can take effect. When establishing a BCA, several key questions would need to be addressed: (1) which materials or products would likely be When establishing a BCA, several key questions would need to be addressed: (1) which materials or products would likely be
subject? (2) how would the BCA fee subject? (2) how would the BCA fee ~~on imports~~ be determined? and (3) which countries’ materials or products would be be determined? and (3) which countries’ materials or products would be
subject? subject?
Establishing a BCA would likely present substantial implementation challenges. Depending on design specifics, a BCA Establishing a BCA would likely present substantial implementation challenges. Depending on design specifics, a BCA
would require calculating the economic impact of a domestic climate policy on a wide range of domestically produced goods would 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 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. to a select number of industries and apply a simplified set of default values and assumptions for categories of goods.
The potential imposition of BCAs raises a range of trade issues and other related concerns. Some analysts have expressed The potential 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 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 that BCAs could negatively affect developing countries in the short run. Further, some researchers have highlighted the
potential for unintended consequences from a BCA, including impacts to U.S. currency. potential for unintended consequences from a BCA, including impacts to U.S. currency.
The World Trade Organization (WTO) oversees and administers multilateral trade rules, and serves as a forum for trade 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 a BCA would comply with WTO rules because a WTO dispute negotiations and trade disputes. It is uncertain whether a 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 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 a Agreement on Tariffs and Trade (GATT) principles. It is also uncertain whether specific GATT exceptions might allow a
BCA that is otherwise deemed inconsistent with key GATT principles. BCA that is otherwise deemed inconsistent with key GATT principles.
Some studies have questioned whether BCAs would be effective, considering the balance between expected benefits and Some studies have questioned whether BCAs would be effective, considering the balance between expected benefits and
implementation challenges, and potential consequences that may result from them. Policymakers have alternatives to BCAs implementation challenges, and potential consequences that may result from them. Policymakers have alternatives to BCAs
that could be used to address leakage or competitiveness concerns. For example, within the framework of a cap-and-trade that could be used to address leakage or competitiveness concerns. For example, within the framework of a cap-and-trade
system, covered entities could receive emission allowances at no cost. This has occurred in the EU’s cap-and-trade system, system, covered entities could receive emission allowances at no cost. This has occurred in the EU’s cap-and-trade system,
California’s cap-and-trade program, and in the Regional Greenhouse Gas Initiative to a lesser extent. In addition, California’s cap-and-trade program, and in the Regional Greenhouse Gas Initiative to a lesser extent. In addition,
policymakers could support carbon-intensive, trade-exposed industries by funding research, development, and deployment policymakers could support carbon-intensive, trade-exposed industries by funding research, development, and deployment
efforts in particular sectors or for specific technologies. Climate policies could include funding to support transition efforts in particular sectors or for specific technologies. Climate policies could include funding to support transition
assistance for specific industries or communities with large concentrations of impacted industries. assistance for specific industries or communities with large concentrations of impacted industries.

Congressional Research Service Congressional Research Service

Border Carbon Adjustments: Background and ~~Recent Developments~~Developments in the European Union

Introduction
A border carbon adjustment (BCA) is a potential trade-related option intended to mitigate adverse A border carbon adjustment (BCA) is a potential trade-related option intended to mitigate adverse
competitiveness effects and other concerns when one or more countries establish more ambitious competitiveness effects and other concerns when one or more countries establish more ambitious
policies to reduce greenhouse gas (GHG)1 emissions than others. Other countries may also have policies to reduce greenhouse gas (GHG)1 emissions than others. Other countries may also have
an incentive to adopt more stringent climate policies to avoid the BCAs. an incentive to adopt more stringent climate policies to avoid the BCAs.
BCAs have been a subject of high-level bilateral and multilateral discussions among countries in BCAs have been a subject of high-level bilateral and multilateral discussions among countries in
recent months. The 27-member European Union (EU) is recent months. The 27-member European Union (EU) is ~~considering~~finalizing legislation on a proposed BCA framework.2 In December 2022, the European Parliament and the Council of the EU reached a provisional agreement on a BCA framework, as part of a larger agreement that included changes to the EU Emissions Trading System.3 ~~a proposed BCA framework~~
~~among its institutions.2 The European Commission, which represents the interests of the EU as a~~
~~whole and functions as the EU’s executive, introduced a BCA legislative proposal in July 2021.3~~
~~The Council of the EU (which represents the interests of the national governments of the member~~
~~states) reached agreement on the proposed BCA framework in March 2022.4 The European~~
~~Parliament adopted its own position on the BCA framework in June 2022.5~~ The European The European
Parliament and the Council of the EU share legislative power and must both approve Parliament and the Council of the EU share legislative power and must both approve ~~a European~~
~~Commission proposal~~the provisional agreement for it to become EU law. for it to become EU law.
The EU The EU ~~proposal, which is still under development and could take a year or more to enact and~~
provisional agreement, which (as of the date of this report) would still need to be formally approved and could take several years to fully implement, has raised concerns implement, has raised concerns from policymakers in a number of in a number of ~~other~~ countries, including the United States. In countries, including the United States. In
addition, in addition, in ~~August~~ 2021, Canadian government officials 2021, Canadian government officials ~~initiated~~conducted a consultation process among a consultation process among
stakeholders seeking input on BCA issues in the context of Canada’s national carbon tax stakeholders seeking input on BCA issues in the context of Canada’s national carbon tax
framework.framework.64
This report explains what BCAs are and examines some of the international challenges they This report explains what BCAs are and examines some of the international challenges they
might present if pursued in government policies. In addition, the report discusses alternatives to might present if pursued in government policies. In addition, the report discusses alternatives to
BCAs and includes selected viewpoints from a range of stakeholders. BCAs and includes selected viewpoints from a range of stakeholders.
Background and Context
Under the 2015 Paris Agreement, all Parties agreed to submit “Nationally Determined Under the 2015 Paris Agreement, all Parties agreed to submit “Nationally Determined
Contributions” (NDCs) containing nonbinding pledges to mitigate GHG emissions, among other Contributions” (NDCs) containing nonbinding pledges to mitigate GHG emissions, among other

1 The primary greenhouse gases (GHGs) emitted by human activities—and estimated by the U.S. Environmental 1 The primary greenhouse gases (GHGs) emitted by human activities—and estimated by the U.S. Environmental
Protection Agency (EPA) in its annual inventories—include carbon dioxide (CO2), methane, nitrous oxide, sulfur Protection Agency (EPA) in its annual inventories—include carbon dioxide (CO2), methane, nitrous oxide, sulfur
hexafluoride, chlorofluorocarbons, hydrofluorocarbons, and perfluorocarbons. Other GHGs include carbonaceous and hexafluoride, chlorofluorocarbons, hydrofluorocarbons, and perfluorocarbons. Other GHGs include carbonaceous and
sulfuric aerosols, hydrochlorofluorocarbons, and elevated tropospheric ozone pollution generated by emissions of sulfuric aerosols, hydrochlorofluorocarbons, and elevated tropospheric ozone pollution generated by emissions of
nitrogen oxides and volatile organic compounds, such as solvents. nitrogen oxides and volatile organic compounds, such as solvents.
2 For more details, see CRS In Focus IF11211, 2 For more details, see CRS In Focus IF11211, The European Parliament and U.S. Interests, by Kristin Archick; see , by Kristin Archick; see
also European Parliamentary Research Service, also European Parliamentary Research Service, EU Carbon Border Adjustment Mechanism Implications for Climate
and Competitiveness, June 2022, https://www.europarl.europa.eu/thinktank/en/document/EPRS_ATA(2022)729462. , June 2022, https://www.europarl.europa.eu/thinktank/en/document/EPRS_ATA(2022)729462.
3 3 ~~For more information, see European Commission, “Carbon Border Adjustment Mechanism,” https://ec.europa.eu/~~
~~taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en.~~
~~4 Council of the European Union, “Council Agrees on the Carbon Border Adjustment Mechanism (CBAM~~ European Parliament, “Climate change: Deal on a more ambitious Emissions Trading System (ETS),” press ),” press
release, release, ~~March 15~~December 18, 2022, https://www., 2022, https://www.~~consilium.europa.eu/en/press/press-releases/2022/03/15/carbon-border-~~
~~adjustment-mechanism-cbam-council-agrees-its-negotiating-mandate/.~~
~~5 European Parliament, “CBAM: Parliament Pushes for Higher Ambition in New Carbon Leakage Instrument~~europarl.europa.eu/news/en/press-room/20221212IPR64527/climate-change-deal-on-a-more-ambitious-emissions-trading-system-ets; and Council of the European Union, “'Fit for 55’: Council and Parliament reach provisional deal on EU emissions trading system and the Social Climate Fund,” press ,” press
release, release, ~~June 22~~December 18, 2022, https://www., 2022, https://www.~~europarl.europa.eu/news/en/press-room/20220516IPR29636/climate-change-meps-~~
~~push-for-accelerated-eu-action-and-energy-independence.~~
6consilium.europa.eu/en/press/press-releases/2022/12/18/fit-for-55-council-and-parliament-reach-provisional-deal-on-eu-emissions-trading-system-and-the-social-climate-fund/. 4 Government of Canada, Department of Finance, Exploring Border Carbon Adjustments for Canada, 2021, Government of Canada, Department of Finance, Exploring Border Carbon Adjustments for Canada, 2021,
https://www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-https://www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-
border-carbon-adjustments-canada.html. border-carbon-adjustments-canada.html.
Congressional Research Service Congressional Research Service

1 1

Border Carbon Adjustments: Background and ~~Recent~~ Developments
in the European Union
actions. actions.75 Parties agreed to update or submit new NDCs by 2020 and every five years thereafter. Parties agreed to update or submit new NDCs by 2020 and every five years thereafter.86
GHG emission reduction goals in the NDCs vary across countries, according to their “common GHG emission reduction goals in the NDCs vary across countries, according to their “common
but differentiated responsibilities,” under the United Nations Framework Convention on Climate but differentiated responsibilities,” under the United Nations Framework Convention on Climate
Change (UNFCCC) and the Paris Agreement.Change (UNFCCC) and the Paris Agreement.97 The national climate change policies required to The national climate change policies required to
achieve these commitments would likely differ in terms of scope, stringency, and timing. achieve these commitments would likely differ in terms of scope, stringency, and timing.
Assuming these policies are implemented and the goals achieved,Assuming these policies are implemented and the goals achieved,108 they would likely result in a they would likely result in a
range of economic impacts across countries. range of economic impacts across countries.
For example, a 2017 study estimated the cost of emission reduction in selected countries to meet For example, a 2017 study estimated the cost of emission reduction in selected countries to meet
their individual NDCs.their individual NDCs.119 The study’s cost estimates are comparable to an estimate of the carbon The study’s cost estimates are comparable to an estimate of the carbon
price (e.g., tax or fee) that would be needed in particular countries to achieve their NDCs. price (e.g., tax or fee) that would be needed in particular countries to achieve their NDCs.
Although the study’s estimated results are outdated for several reasons (e.g., many countries have Although the study’s estimated results are outdated for several reasons (e.g., many countries have
updated their NDCs since the study’s publication), the relative cost estimates may be instructive. updated their NDCs since the study’s publication), the relative cost estimates may be instructive.
The cost estimates ranged from zero (e.g., China and India)The cost estimates ranged from zero (e.g., China and India)1210 to hundreds of dollars per metric ton to hundreds of dollars per metric ton
of carbon dioxide (e.g., the European Union, Japan). The estimate for the United States was of carbon dioxide (e.g., the European Union, Japan). The estimate for the United States was
roughly $100 per metric ton. roughly $100 per metric ton.
One One ~~key~~ concern among policymakers is that differing climate policies could cause the domestic concern among policymakers is that differing climate policies could cause the domestic
price of goods to increase more than the prices of similar goods manufactured abroad, potentially price of goods to increase more than the prices of similar goods manufactured abroad, potentially
creating a competitive disadvantage for some domestic businesses.creating a competitive disadvantage for some domestic businesses.1311 This is a particular concern This is a particular concern
for “emissions-intensive, trade-exposed” (EITE) industries, such as steel manufacture, as for “emissions-intensive, trade-exposed” (EITE) industries, such as steel manufacture, as
discussed below. A second key concern is that differences among countries’ climate policies could discussed below. A second key concern is that differences among countries’ climate policies could
create incentives to shift economic activities to countries with less stringent or less create incentives to shift economic activities to countries with less stringent or less
comprehensive climate policies, ultimately leading to “emissions leakage.” In general, GHG comprehensive climate policies, ultimately leading to “emissions leakage.” In general, GHG
emissions leakage can occur if a domestic policy to reduce domestic emissions leads to an emissions leakage can occur if a domestic policy to reduce domestic emissions leads to an
increase in emissions in another location, thus undermining emission reductions resulting from increase in emissions in another location, thus undermining emission reductions resulting from
the domestic climate policy.the domestic climate policy.1412

75 The Paris Agreement is an international treaty under the United Nations Framework Convention on Climate Change The Paris Agreement is an international treaty under the United Nations Framework Convention on Climate Change
(UNFCCC), which since 1992 has been the primary international forum among national governments to address GHG-(UNFCCC), which since 1992 has been the primary international forum among national governments to address GHG-
induced climate change. Two principles agreed to in the UNFCCC are that (1) Parties should act “on the basis of equity induced climate change. Two principles agreed to in the UNFCCC are that (1) Parties should act “on the basis of equity
and in accordance with their common but differentiated responsibilities and respective capabilities” and (2) developed and in accordance with their common but differentiated responsibilities and respective capabilities” and (2) developed
country Parties should take the lead in combating climate change. For more information about the treaties, see CRS country Parties should take the lead in combating climate change. For more information about the treaties, see CRS
Report R46204, Report R46204, The United Nations Framework Convention on Climate Change, the Kyoto Protocol, and the Paris
Agreement: A Summary, by Jane A. Leggett. , by Jane A. Leggett.
86 Each successive NDC of a Party “will represent a progression” and “reflect its highest possible ambition, reflecting its Each successive NDC of a Party “will represent a progression” and “reflect its highest possible ambition, reflecting its
common but differentiated responsibilities and respective capabilities, in light of different national circumstances.” common but differentiated responsibilities and respective capabilities, in light of different national circumstances.”
97 The UNFCCC Article 2 includes the principle of “common but differentiated responsibilities and respective The UNFCCC Article 2 includes the principle of “common but differentiated responsibilities and respective
capabilities,” sometimes with the acronym CBD-RC, which carries over in its subsidiary Paris Agreement. capabilities,” sometimes with the acronym CBD-RC, which carries over in its subsidiary Paris Agreement.
108 Based on past experience with international commitments to reduce GHG emissions (including prior U.S. targets), Based on past experience with international commitments to reduce GHG emissions (including prior U.S. targets),
the degree to which these emission targets will be met is uncertain. This issue is beyond the scope of this report. the degree to which these emission targets will be met is uncertain. This issue is beyond the scope of this report.
119 See Keigo Akimoto et al., “The Analyses on the Economic Costs for Achieving the Nationally Determined See Keigo Akimoto et al., “The Analyses on the Economic Costs for Achieving the Nationally Determined
Contributions and the Expected Global Emission Pathways,” Contributions and the Expected Global Emission Pathways,” Evolutionary and Institutional Economics Review, vol. 14 , vol. 14
(2017). (2017).
1210 The study authors stated that some countries’ estimated abatement costs were zero, because these countries could The study authors stated that some countries’ estimated abatement costs were zero, because these countries could
meet their NDCs using “business-as-usual” climate policies. meet their NDCs using “business-as-usual” climate policies.
1311 Although some industries may become less profitable, lose market share, and reduce jobs, not all businesses within a Although some industries may become less profitable, lose market share, and reduce jobs, not all businesses within a
sector may be affected similarly. For example, under an emission cap or carbon price framework, a company using sector may be affected similarly. For example, under an emission cap or carbon price framework, a company using
electricity produced with hydropower would experience less cost increase than a company using electricity produced electricity produced with hydropower would experience less cost increase than a company using electricity produced
with coal. In addition, some businesses may be more energy efficient than others or use less emitting processes. Some with coal. In addition, some businesses may be more energy efficient than others or use less emitting processes. Some
may be able to reduce their emissions in response to the new policies at lower cost than others. may be able to reduce their emissions in response to the new policies at lower cost than others.
1412 Some studies have raised questions regarding the degree to which emissions leakage would be a concern under a Some studies have raised questions regarding the degree to which emissions leakage would be a concern under a
Congressional Research Service Congressional Research Service

2 2

Border Carbon Adjustments: Background and ~~Recent Developments~~Developments in the European Union

Policymakers might consider several approaches to address these potential concerns. One Policymakers might consider several approaches to address these potential concerns. One
approach that has received interest in recent years is a BCA.approach that has received interest in recent years is a BCA.1513 The sections below discuss the The sections below discuss the
concept, scope, and logistics of a BCA approach. concept, scope, and logistics of a BCA approach.
What Are Border Carbon Adjustments?
To address the potential impacts associated with different climate policies across countries, a To address the potential impacts associated with different climate policies across countries, a
BCA would impose a trade measure, such as a fee or tariff,BCA would impose a trade measure, such as a fee or tariff,1614 on certain imported materials or on certain imported materials or
products. BCA frameworks could also provide a rebate to exporters of certain materials or products. BCA frameworks could also provide a rebate to exporters of certain materials or
products based on increased costs from a domestic climate policy. Generally, a BCA would seek products based on increased costs from a domestic climate policy. Generally, a BCA would seek
to promote “equal conditions of competition” for foreign and domestic companies supplying to promote “equal conditions of competition” for foreign and domestic companies supplying
products or services within a taxing jurisdiction.products or services within a taxing jurisdiction.1715 Some observers have noted that BCAs could Some observers have noted that BCAs could
encourage other countries to adopt comparable climate policies.encourage other countries to adopt comparable climate policies.1816
Although no countries have yet implemented a BCA as part of their climate change policies, Although no countries have yet implemented a BCA as part of their climate change policies,~~19 the~~
European Commission released a proposal ~~in July 2021~~17 the EU (as discussed below) is developing a legislative framework for a BCA that would complement its for a BCA that would complement its
mandatory emissions reduction program.mandatory emissions reduction program.~~20 This proposal is under discussion and debate among~~
~~the legislative institutions of the EU.~~ In Congress, most of the recent carbon tax or emission fee In Congress, most of the recent carbon tax or emission fee
legislative proposals include a BCA.legislative proposals include a BCA.2118
When establishing a BCA, When establishing a BCA, ~~several key questions would need to be addressed~~policymakers could face consideration of several key questions, which are discussed , which are discussed
below.below.2219

unilateral approach. This issue is beyond the scope of this report. See, for example, Warwick McKibbin et al., “The unilateral approach. This issue is beyond the scope of this report. See, for example, Warwick McKibbin et al., “The
Role of Border Carbon Adjustments in a U.S. Carbon Tax,” Role of Border Carbon Adjustments in a U.S. Carbon Tax,” Climate Change Economics, vol. 9, no. 1 (2018); Adele , vol. 9, no. 1 (2018); Adele
Morris, Morris, Making Border Carbon Adjustments Work in Law and Practice, Tax Policy Center, July 26, 2018; and Joseph , Tax Policy Center, July 26, 2018; and Joseph
Aldy, “Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating Aldy, “Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating
Greenhouse Gas Emissions,” Greenhouse Gas Emissions,” National Tax Journal, vol. 70, no. 2 (2017). , vol. 70, no. 2 (2017).
1513 Policymakers, stakeholders, and researchers refer to these mechanisms by a variety of names, including Policymakers, stakeholders, and researchers refer to these mechanisms by a variety of names, including border
adjustments, , border tax adjustments, , border carbon adjustment mechanism, or , or carbon border adjustment mechanism
(the term used in the EU), among others. This report uses the term (the term used in the EU), among others. This report uses the term border carbon adjustments (BCAs). (BCAs).
1614 A A tariff is a customs duty levied on imported and exported goods and services. For more background, see CRS In is a customs duty levied on imported and exported goods and services. For more background, see CRS In
Focus IF11030, Focus IF11030, U.S. Tariff Policy: Overview, by Christopher A. Casey. , by Christopher A. Casey.
1715 Organisation for Economic Co-Operation and Development (OECD), Organisation for Economic Co-Operation and Development (OECD), OECD International VAT/GST Guidelines on
Neutrality, 2011, https://www.oecd.org/tax/consumption/guidelinesneutrality2011.pdf. , 2011, https://www.oecd.org/tax/consumption/guidelinesneutrality2011.pdf.
1816 See for example, Adele Morris, See for example, Adele Morris, Making Border Carbon Adjustments Work in Law and Practice, Tax Policy Center, , Tax Policy Center,
July 26, 2018. July 26, 2018.
1917 As a component of its climate policy, California has a mechanism to address imported electricity from surrounding As a component of its climate policy, California has a mechanism to address imported electricity from surrounding
states (California Air Resources Board cap-and-trade program, https://ww2.arb.ca.gov/our-work/programs/cap-and-states (California Air Resources Board cap-and-trade program, https://ww2.arb.ca.gov/our-work/programs/cap-and-
trade-program). Some argue this is a form of a BCA. See, for example, Aaron Cosbey et al., “Developing Guidance for trade-program). Some argue this is a form of a BCA. See, for example, Aaron Cosbey et al., “Developing Guidance for
Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Review of
Environmental Economics and Policy, vol. 13, no. 1 (2019). , vol. 13, no. 1 (2019).
~~20 European Commission, Proposal for a Regulation of the European Parliament and of the Council Establishing a~~
~~Carbon Border Adjustment Mechanism, July 14, 2021, COM/2021/564 final, https://eur-lex.europa.eu/legal-content/~~
~~EN/TXT/?uri=CELEX:52021PC0564.~~
2118 See CRS Report R45472, See CRS Report R45472, Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th
Congresses, by Jonathan L. Ramseur. , by Jonathan L. Ramseur.
2219 A number of researchers have examined these questions and other design issues associated with BCAs. See, for A number of researchers have examined these questions and other design issues associated with BCAs. See, for
example, Brian Flannery et al., example, Brian Flannery et al., Framework Proposal for a US Upstream GHG Tax with WTO-Compliant Border
Adjustments: 2020 Update, Resources for the Future, 2020; Aaron Cosbey et al., “Developing Guidance for , Resources for the Future, 2020; Aaron Cosbey et al., “Developing Guidance for
Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Review of
Environmental Economics and Policy, vol. 13, no. 1 (2019); Samuel Kortum and David Weisbach, “The Design of , vol. 13, no. 1 (2019); Samuel Kortum and David Weisbach, “The Design of
Border Adjustments for Carbon Prices,” Border Adjustments for Carbon Prices,” National Tax Journal, vol. 70, no. 2 (June 2017). , vol. 70, no. 2 (June 2017).
Congressional Research Service Congressional Research Service

3 3

Border Carbon Adjustments: Background and ~~Recent Developments~~Developments in the European Union

Which Materials or Products Would Likely Be Subject to a BCA?
Many BCA approaches would apply a fee to imported goods from industrial sectors that are Many BCA approaches would apply a fee to imported goods from industrial sectors that are
expected to experience the greatest impacts from unilateral climate policies. These industries are expected to experience the greatest impacts from unilateral climate policies. These industries are
often described as “emission-intensive, trade-exposed.” often described as “emission-intensive, trade-exposed.”
An industry’s GHG emission intensity is a function of the following: An industry’s GHG emission intensity is a function of the following:
1. direct emissions from its manufacturing process, such as carbon dioxide (CO2) 1. direct emissions from its manufacturing process, such as carbon dioxide (CO2)
from cement or steel production; and from cement or steel production; and
2. indirect emissions from the inputs (e.g., electricity, natural gas) to the 2. indirect emissions from the inputs (e.g., electricity, natural gas) to the
manufacturing processes (e.g., steel, cement, and chemical production). manufacturing processes (e.g., steel, cement, and chemical production).
“Emissions-intensive” industries would be impacted by climate policies affecting direct emissions “Emissions-intensive” industries would be impacted by climate policies affecting direct emissions
during manufacture and climate policies affecting “upstream” emissions by suppliers, such as during manufacture and climate policies affecting “upstream” emissions by suppliers, such as
electricity generators, that may pass higher costs through to electricity consumers. Emission-electricity generators, that may pass higher costs through to electricity consumers. Emission-
intensive industries are likely to experience greater cost increases than less emission intensive intensive industries are likely to experience greater cost increases than less emission intensive
industries, all else being equal.industries, all else being equal.2320
Trade-exposed industries are those that face greater international competition, compared to other Trade-exposed industries are those that face greater international competition, compared to other
domestic industries. One potential measure of a sector’s trade exposure would compare the domestic industries. One potential measure of a sector’s trade exposure would compare the
combined value of a sector’s exports and imports with the value of its domestic production and combined value of a sector’s exports and imports with the value of its domestic production and
imports. imports.
A 2009 interagency report prepared during the consideration of federal GHG reduction legislation A 2009 interagency report prepared during the consideration of federal GHG reduction legislation
identified industrial sectors that would meet specific emission-intensive, trade-exposed criteria.identified industrial sectors that would meet specific emission-intensive, trade-exposed criteria.2421
For the most part, these sectors included industries in chemical, paper, nonmetallic minerals (e.g., For the most part, these sectors included industries in chemical, paper, nonmetallic minerals (e.g.,
cement and glass), and primary metals (e.g., aluminum and steel) sectors. cement and glass), and primary metals (e.g., aluminum and steel) sectors.
~~The European Commission BCA would initially apply only to a selected number of goods: iron~~
~~and steel, cement, fertilizer, aluminum, and imported electricity.25 The European Parliament~~
~~framework would add organic chemicals, plastics, hydrogen, and ammonia to the scope of~~
~~coverage.26~~

23How Would the BCA Fee on Imports Be Determined? In general, a BCA would likely levy a fee on the estimated tons of GHG emissions associated with imported goods (often described as its carbon or emissions content). The rate of the fee would likely be based on a domestic carbon price in the country of import, such as a carbon tax or emissions fee, or a calculated implicit carbon price from a regulatory program or other related policies.22 To achieve this objective, one government may levy a fee on an imported product from another country, based on estimates of the GHG emissions generated during the manufacturing process of the imported product. Estimated emissions generally would include direct emissions 20 A 2015 study estimated that the “energy-intensive industries of iron and steel, aluminum, pulp and paper, cement, A 2015 study estimated that the “energy-intensive industries of iron and steel, aluminum, pulp and paper, cement,
glass, and industrial chemicals would bear total percentage declines in domestic production, on the order of 3 to 5 glass, and industrial chemicals would bear total percentage declines in domestic production, on the order of 3 to 5
percent, in excess of the manufacturing sector average of 1.5 percent.” See Joseph Aldy and William Pizer, “The percent, in excess of the manufacturing sector average of 1.5 percent.” See Joseph Aldy and William Pizer, “The
Competitiveness Impacts of Climate Change Mitigation Policies,” The Harvard Project on Climate Agreements, 2015. Competitiveness Impacts of Climate Change Mitigation Policies,” The Harvard Project on Climate Agreements, 2015.
24 21 Interagency Report, Interagency Report, The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-
Intensive Trade-Exposed Industries, 2009, https://www.epa.gov/sites/default/files/2016-07/documents/, 2009, https://www.epa.gov/sites/default/files/2016-07/documents/
interagencyreport_competitiveness-emissionleakage.pdf. Federal agencies in the Obama Administration prepared this interagencyreport_competitiveness-emissionleakage.pdf. Federal agencies in the Obama Administration prepared this
report in response to a request from several Senators considering H.R. 2454 (111th Congress) and related legislation. report in response to a request from several Senators considering H.R. 2454 (111th Congress) and related legislation.
H.R. 2454 (“Waxman-Markey”) passed the House in 2009 and would have established a GHG emission cap-and-trade H.R. 2454 (“Waxman-Markey”) passed the House in 2009 and would have established a GHG emission cap-and-trade
program, among other provisions. The legislation included emission allowance rebates and other assistance for program, among other provisions. The legislation included emission allowance rebates and other assistance for
industries based on their energy intensity and trade intensity. industries based on their energy intensity and trade intensity.
~~25 European Commission,~~ ~~Proposal for a Regulation of the European Parliament and of the Council Establishing a~~
~~Carbon Border Adjustment Mechanism, July 14, 2021, COM/2021/564 final, https://eur-lex.europa.eu/legal-content/~~
~~EN/TXT/?uri=CELEX:52021PC0564; see also the commission website explaining the framework, https://ec.europa.eu/~~
~~taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en.~~
~~26 European Parliament, “CBAM: Parliament pushes for higher ambition in new carbon leakage instrument,” press~~
~~release, June 22, 2022, https://www.europarl.europa.eu/news/en/press-room/20220516IPR29636/climate-change-meps-~~
~~push-for-accelerated-eu-action-and-energy-independence.~~
~~Congressional Research Service~~

4

~~Border Carbon Adjustments: Background and Recent Developments~~

~~How Would the BCA Fee on Imports Be Determined?~~
~~In general, a BCA would likely levy a fee on the estimated tons of GHG emissions associated~~
~~with imported goods (often described as its carbon or emissions content). The rate of the fee~~
~~would likely be based on a domestic carbon price in the country of import, such as a carbon tax or~~
~~emissions fee, or a calculated implicit carbon price from a regulatory program or other related~~
~~policies.27 To achieve this objective, one government may levy a fee on an imported product from~~
~~another country, based on estimates of the GHG emissions generated during the manufacturing~~
~~process of the imported product. Estimated emissions would include direct emissions~~ 22 Calculating a BCA fee for imports from regulatory programs or policies may present greater challenges than a calculation based on explicit carbon prices, such as taxes or fees. Congressional Research Service 4 Border Carbon Adjustments: Background and Developments in the European Union from onsite from onsite
processes and may also include indirect emissions associated with the product’s manufacture, processes and may also include indirect emissions associated with the product’s manufacture,
such as emissions from electricity generation at offsite locations. such as emissions from electricity generation at offsite locations.
~~The European Commission BCA would apply only to direct GHG emissions generated from the~~
~~onsite production of covered materials (e.g., iron and steel). The European Commission approach~~
~~includes a plan to evaluate whether its BCA should include indirect emissions from these~~
~~materials.28 The European Parliament framework would include indirect emissions.29~~
In addition, some proposed BCA frameworks further adjust the import fee to account for the In addition, some proposed BCA frameworks further adjust the import fee to account for the
climate policies (and costs) in place in the exporting country.climate policies (and costs) in place in the exporting country.3023 The EU BCA includes this type of The EU BCA includes this type of
adjustment. adjustment.
Which Countries’ Materials or Products Would Be Subject to a
BCA?
Policymakers may consider including or excluding materials from some countries from a BCA Policymakers may consider including or excluding materials from some countries from a BCA
for a range of reasons. For example, a BCA may exclude imports from countries that have climate for a range of reasons. For example, a BCA may exclude imports from countries that have climate
policies (e.g., carbon prices) that are comparable to domestic policies. In policies (e.g., carbon prices) that are comparable to domestic policies. In ~~the EU, imports of~~
~~goods from all non-EU countries would be covered by the EU’s BCA. Certain countries that~~
~~participate or link with the EU’s emission trading system would be excluded from the EU BCA.31~~
In recent U.S. federal legislative proposals, BCAs would apply fees to imported goods from recent U.S. federal legislative proposals, BCAs would apply fees to imported goods from
countries that do not have climate policies comparable with those of the United States. Under countries that do not have climate policies comparable with those of the United States. Under
these approaches, the federal agency in charge of implementing the BCA program, such as the these approaches, the federal agency in charge of implementing the BCA program, such as the
Department of the Treasury, would generally be required to make this determination. How such Department of the Treasury, would generally be required to make this determination. How such
determinations of climate policy parity are made, and by whom, can raise challenging technical determinations of climate policy parity are made, and by whom, can raise challenging technical
and policy issues. and policy issues.
Policymakers may consider excluding goods from less developed countries or materials from Policymakers may consider excluding goods from less developed countries or materials from
countries whose trade of covered materials is below certain volume thresholds.countries whose trade of covered materials is below certain volume thresholds.~~32 The former~~

~~27 Calculating a BCA fee for imports from regulatory programs or policies may present greater challenges than a~~
~~calculation based on explicit carbon prices, such as taxes or fees.~~
~~28 European Commission, “Carbon Border Adjustment Mechanism: Questions and Answers,” https://ec.europa.eu/~~
~~commission/presscorner/detail/en/qanda_21_3661.~~
~~29 EU Parliament, “CBAM: Parliament Pushes for Higher Ambition in New Carbon Leakage Instrument,” press release,~~
~~June 22, 2022, https://www.europarl.europa.eu/news/en/press-room/20220603IPR32157/cbam-parliament-pushes-for-~~
~~higher-ambition-in-new-carbon-leakage-instrument.~~
~~30 See CRS Report R45472,~~ ~~Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th~~
~~Congresses, by Jonathan L. Ramseur.~~
~~31 European Commission, “Carbon Border Adjustment Mechanism: Questions and Answers,” July 2021,~~
~~https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661.~~
~~32 See, for example, Aaron Cosbey et al., “Developing Guidance for Implementing Border Carbon Adjustments:~~
~~Congressional Research Service~~

5

~~Border Carbon Adjustments: Background and Recent Developments~~

24 The former might encourage economic development in the exporting country. The latter might reduce the might encourage economic development in the exporting country. The latter might reduce the
administrative burden on the country with the BCA. However, such exclusions might raise administrative burden on the country with the BCA. However, such exclusions might raise
concerns in the World Trade Organization (discussed below). concerns in the World Trade Organization (discussed below).
BCA Implementation Challenges and Options
Establishing and operating a BCA would likely present implementation challenges.Establishing and operating a BCA would likely present implementation challenges.3325 Depending Depending
on design specifics, a BCA would require calculating the economic impact resulting from a on design specifics, a BCA would require calculating the economic impact resulting from a
domestic climate policy on domestically produced goods and materials as well as the analogous domestic climate policy on domestically produced goods and materials as well as the analogous
costs in other countries. A calculation involving a carbon price and its impact on materials costs in other countries. A calculation involving a carbon price and its impact on materials
directly subject to the price—often coal, natural gas, and oil—could be relatively straightforward. directly subject to the price—often coal, natural gas, and oil—could be relatively straightforward.
A calculation involving a carbon price and its impact on materials indirectly affected by a carbon A calculation involving a carbon price and its impact on materials indirectly affected by a carbon
price—such as steel or fertilizer—would be more complicated. Analogous calculations might be price—such as steel or fertilizer—would be more complicated. Analogous calculations might be
needed for imported goods produced in many countries—goods that might cross national borders needed for imported goods produced in many countries—goods that might cross national borders
multiple times before being shipped to the importing country—further increasing the complexity multiple times before being shipped to the importing country—further increasing the complexity
of the program. of the program.
To alleviate some of the measurement complexity, policymakers could limit the program to a To alleviate some of the measurement complexity, policymakers could limit the program to a
select number of industries and apply default values and assumptions to particular manufacturing select number of industries and apply default values and assumptions to particular manufacturing
23 See CRS Report R45472, Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th Congresses, by Jonathan L. Ramseur. 24 See, for example, Aaron Cosbey et al., “Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Review of Environmental Economics and Policy, vol. 13, no. 1 (2019). 25 See, for example, Marco Sakai and John Barrett, “Border Carbon Adjustments: Addressing Emissions Embodied in Trade,” Energy Policy, vol. 92 (2016); Sam Kortum and David Weisbach, “Border Adjustment for Carbon Emissions,” Resources for the Future, 2016; Carolyn Fischer et al., “Carbon Taxes and Energy-Intensive Trade-Exposed Industries,” in Implementing a U.S. Carbon Tax: Challenges and Debates, ed. Ian Parry et al. (Washington, DC: International Monetary Fund, 2015). Congressional Research Service 5 Border Carbon Adjustments: Background and Developments in the European Union processes. For example, some have proposed using average emission values for particular sectors processes. For example, some have proposed using average emission values for particular sectors
(e.g., steel) and for different countries.(e.g., steel) and for different countries.3426 However, this simplified approach could result in less However, this simplified approach could result in less
accurate import price adjustments, which could potentially affect the accuracy of GHG emission accurate import price adjustments, which could potentially affect the accuracy of GHG emission
reductions achieved by the program.reductions achieved by the program.3527
Another option would be to allow companies to provide measured, independently verified Another option would be to allow companies to provide measured, independently verified
emissions data as an alternative to default values. Emerging technologies, such as improved emissions data as an alternative to default values. Emerging technologies, such as improved
sensors and digital ledgers, may allow for increasing reliability of tracking products through sensors and digital ledgers, may allow for increasing reliability of tracking products through
supply chains. supply chains.
~~World Trade Organization Issues~~
~~The World Trade Organization (WTO) is the 164-member international organization created to~~
~~oversee and administer multilateral trade rules, serve as a forum for trade negotiations, and~~
~~resolve trade disputes. The WTO encompassed and succeeded the General Agreement on Tariffs~~
~~and Trade (GATT), which was established in 1947.36 The GATT is one of the WTO agreements~~

European Union CBAM Background As of the date of this report, the 27-member EU’s governing institutions are trying to finalize legislation on a proposed BCA framework.28 The EU’s proposed framework is called the carbon border adjustment mechanism (CBAM). The CBAM would complement the EU’s principal GHG mitigation policy mechanism: the Emissions Trading System (ETS). The ETS is a GHG emissions cap-and-trade program that started in 2005 and covers emissions from the electricity sector, selected energy-intensive industries, and aviation.29 In a cap-and-trade system, the emissions cap is partitioned into emission allowances. One emission allowance represents the authority to emit one metric ton of carbon dioxide-equivalent (mtCO2e).30 The emissions cap creates a new commodity—the emission allowance. Policymakers may decide to distribute the emission allowances to covered entities at no cost (based on, for example, previous years’ emissions), sell the allowances (e.g., through an auction), or use some combination of these strategies. The distribution of emission allowances is typically a source of significant debate during a cap-and-trade program’s development, because the allowances have monetary value. In the EU ETS, electricity generators generally purchase emission allowances through government auctions, but covered industrial facilities have received a portion of their allowances 26 See, for example, Michael A. Mehling et al., “Designing Border Carbon Adjustments for Enhanced Climate Action,” The American Society of International Law, vol. 113, no. 3 (2019); Aaron Cosbey et al., “Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,” Lessons, Cautions, and Research Needs from the Literature,” Review of Environmental Economics and Policy, vol. 13, , vol. 13,
~~no. 1 (2019).~~
~~33 See, for example, Marco Sakai and John Barrett, “Border Carbon Adjustments: Addressing Emissions Embodied in~~
~~Trade,” Energy Policy, vol. 92 (2016); Sam Kortum and David Weisbach, “Border Adjustment for Carbon Emissions,”~~
~~Resources for the Future, 2016; Carolyn Fischer et al., “Carbon Taxes and Energy-Intensive Trade-Exposed~~
~~Industries,” in Implementing a U.S. Carbon Tax: Challenges and Debates, ed. Ian Parry et al. (Washington, DC:~~
~~International Monetary Fund, 2015).~~
~~34 See, for example, Michael A. Mehling et al., “Designing Border Carbon Adjustments for Enhanced Climate Action,”~~
The American Society of International Law, vol. 113, no. 3 (2019); Aaron Cosbey et al., “Developing Guidance for
~~Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature,”~~ ~~Review of~~
~~Environmental Economics and Policy, vol. 13, no. 1 (2019).~~
~~35 Congressional Budget Office,~~ ~~Border Adjustments for Economywide Policies That Impose a Price on Greenhouse~~
~~Gas Emissions, 2013.~~
~~36 For an overview of the WTO, see CRS Report R45417, World Trade Organization: Overview and Future Direction,~~
~~coordinated by Cathleen D. Cimino-Isaacs.~~
~~Congressional Research Service~~

6

~~Border Carbon Adjustments: Background and Recent Developments~~

~~that set forth rules and disciplines for practices that affect international trade in goods and~~
~~services.37 These rules can be enforced by the WTO’s dispute settlement mechanism, which~~
~~provides a means for the resolution of trade disputes between members concerning these rules~~
~~and may decide whether a member has complied with its WTO obligations.38~~
~~It is uncertain whether a 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 key GATT principles, such as nondiscrimination obligations. It is also uncertain~~
~~whether specific GATT exceptions, such as those for national security39 and the protection of~~
~~human, animal, or plant life or health,40 may allow a BCA that is otherwise deemed inconsistent~~
~~with key GATT principles.~~
~~GATT Obligations Related to Border Adjustments~~
~~GATT explicitly allows WTO members to impose, “on the importation of any product … a charge~~
~~equivalent to an internal tax … in respect of the like domestic product or in respect of an article~~
~~from which the imported product has been manufactured or produced in whole or in part.”41~~
~~Some recent U.S. legislative proposals that would levy an emission fee or carbon tax apply the~~
~~fee or tax not on particular products but rather on emissions or the inputs that result in emissions,~~
~~namely fossil fuels.42 Under these proposals, carbon-intensive materials, such as steel, cement,~~
~~and certain chemicals, would not be directly subject to the proposed tax or fee. Some observers~~
~~contend that a tax on products based on emissions or inputs could be used to establish a BCA, but~~
~~this notion is untested.43 In addition, it is unclear whether GATT contemplates the adjustment of~~
~~an implicit tax on domestic products that would arguably result from the imposition of domestic~~
~~environmental regulations.44~~
~~A key WTO issue is whether a country’s BCA imposes a fee on imported products in excess of~~
~~like domestic products. Under the GATT’s national treatment requirement for taxation~~
~~measures,45 a country may not impose a BCA on imported products in excess of the internal tax~~
~~imposed on like domestic products.46 Depending on the design and scope of a BCA, it may be~~
~~difficult to determine if a BCA were in excess of the tax or fee on domestic products.~~

~~37 For a link to all of the WTO Agreements discussed in this report see Legal Texts: The WTO Agreements, WORLD~~
~~TRADE ORG., https://www.wto.org/english/docs_e/legal_e/final_e.htm.~~
~~38 WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), https://www.wto.org/~~
~~english/docs_e/legal_e/28-dsu.pdf.~~
~~39 GATT art. XXI.~~
~~40 Id. art. XX(b).~~
~~41 Id. art. II:2(a) (emphasis added).~~
~~42 See CRS Report R45472,~~ ~~Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th~~
~~Congresses, by Jonathan L. Ramseur.~~
~~43 See, for example, Jennifer Hillman, Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?, at 6, 9 (2013),~~
~~http://www.climateadvisers.com/wp-content/uploads/2014/01/2013-07-Changing-Climate-for-Carbon-Taxes.pdf.~~
~~44 Two proposals in the 117th Congress would arguably base a BCA on such an implicit tax. The BCA framework that~~
~~would be established under S. 2378 and H.R. 4534 would not be linked to a federal carbon tax or fee but would base a~~
~~BCA on “domestic environmental costs,” which would include existing Clean Air Act regulations, among other costs.~~
~~45 GATT art. III:2.~~
~~46 Id. In addition, Article I of the GATT sets forth the Agreement’s most-favored-nation (MFN) treatment obligation,~~
~~which generally prohibits a WTO member from discriminating against imported products of one WTO member country~~
~~as compared to products of another WTO member, including by taxing one WTO member’s products in excess of~~
~~another member’s like products. This provision might be relevant if a BCA imposes a higher tax on the products of one~~
~~Congressional Research Service~~

7

~~Border Carbon Adjustments: Background and Recent Developments~~

~~Based on a GATT panel decision in another context, it is uncertain whether a BCA based on the~~
~~amount of GHGs emitted during the manufacture or production of an imported product would~~
~~conform to WTO rules, because this BCA would be based on the method of production rather~~
~~than the product itself.47 However, some scholars have argued that a BCA could be designed to~~
~~allocate GHG emissions from the production process to particular products.48~~
~~GATT Exceptions~~
~~If a BCA is adopted and later found to violate the GATT’s requirements, a country could seek to~~
~~retain the BCA under one of the GATT’s general exceptions.49 For example, one exception~~
~~involves measures “necessary to protect human, animal or plant life or health.”50 Another~~
~~exception provisionally allows GATT-inconsistent measures “relating to the conservation of~~
~~exhaustible natural resources if such measures are made effective in conjunction with restrictions~~
~~on domestic production or consumption.”51 Certain conditions must be demonstrated to meet~~
~~these exceptions. Whether a BCA would satisfy any of these exceptions and their associated~~
~~conditions would likely be fact-dependent.52~~
~~In addition, another GATT provision contains an exception for national security.53 A country~~
~~could argue that a BCA falls within the scope of that exception because climate change is a~~
~~national security emergency. It is unclear whether a WTO panel would accept this rationale. Some~~
~~WTO members have expressed concern that overuse of the national security exception will~~
~~undermine the world trading system, because countries might enact a multitude of protectionist~~
~~measures under the guise of national security.54~~
~~Other Trade-Related Issues~~
~~The potential imposition of BCAs raises a range of trade issues and other related concerns. For~~
~~example, some analysts have expressed concern that carbon border adjustment tariffs could be (or~~
~~be interpreted as) disguised protections for domestic industry.55 That is, some have argued that~~

~~WTO member as compared to another.~~
~~47 This reasoning stems from a 1991 GATT panel decision that considered whether the United States could treat~~
~~imported Mexican tuna differently than United States tuna because the Mexican tuna’s production method resulted in~~
~~the incidental killing of dolphins. The Panel determined that the regulation was directed at the method of production of~~
~~the tuna rather than the tuna itself. The Panel determined that distinguishing between tuna based on the production~~
~~method was impermissible under Article III because it was not a regulation of a product. See GATT Panel Report,~~
United States – Restrictions on Imports of Tuna, GATT Doc. DS21/R, GATT BISD 39S/155, para. 5.15 (Sept. 3, 1991)
~~(unadopted).~~
~~48 See, for example, Hillman, supra note 31, at 6, 9.~~
~~49 These are found in GATT Article XX, ¶¶ (a) through (j).~~
~~50 GATT art. XX(b).~~
~~51 Id. art. XX(g).~~
~~52 See Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products,~~
~~WT/DS58/AB/R, paras. 158-59 (Oct. 12, 1998).~~
~~53 GATT art. XXI.~~
~~54 See, for example, WTO Council for Trade in Goods,~~ ~~National Security Cited in Two Trade Concerns at Goods~~
~~Council Meeting, June 30, 2017, https://www.wto.org/english/news_e/news17_e/good_10jul17_e.htm.~~
~~55 Peter Holmes et al., “Border Carbon Adjustments and the Potential for Protectionism,” Climate Policy, vol. 11, no. 2~~
~~(2011); Gary Clyde Hufbauer, “Divergent Climate Change Policies Among Countries Could Spark a Trade War. The~~
~~WTO Should Step In,” Peterson Institution for International Economics, 2021, https://www.piie.com/blogs/trade-and-~~
~~investment-policy-watch/divergent-climate-change-policies-among-countries-could.~~
~~Congressional Research Service~~

8

~~Border Carbon Adjustments: Background and Recent Developments~~

~~countries could use subtle adjustments to the complex calculations often involved in the proposed~~
~~BCAs to privilege domestic industries.56~~
~~Similarly, experts have suggested that BCAs could negatively affect developing countries in the~~
~~short run.57 A survey conducted by the United Nations Conference on Trade and Development~~
~~(UNCTAD) notes that the EU’s proposed carbon border adjustment mechanism, for example,~~
~~“could impact the development of poorer countries and reduce their opportunities for export-led~~
~~development.” However, the study also noted that the impact would be highly variable, and~~
~~certain developing countries could gain advantages. For example, a 2020 study argued that~~
~~because the steel industries of India and Turkey are relatively carbon efficient, they would likely~~
~~“take crude steel share from China, Russia, and the Ukraine” if the EU implemented a carbon~~
~~border adjustment tariff.58~~
~~Further, some researchers have highlighted the potential for unintended consequences from a~~
~~BCA. For example, some studies have found that a border adjustment may lead to lower net~~
~~exports than the carbon price alone, due to the adjustment’s terms-of-trade effect on U.S.~~
~~currency.59 Some of the concerns may be lessened to some degree if a larger number of nations~~
~~establish comparable emission reduction policies.~~
~~Alternatives to BCAs~~
~~Some studies have questioned whether BCAs would be justified, considering the expected~~
~~benefits, implementation challenges, and potential consequences that may result. For example, a~~
~~2017 study concluded that “our review of the economics of unilateral carbon taxes, however, does~~
~~not find strong justifications for [BCAs].”60 A 2015 study concluded that “attempting to ‘protect’~~
~~energy-intensive U.S. manufacturing firms from international competitive pressures through~~
~~various policies may have only a limited impact on these firms.… [G]iven the magnitude of the~~
~~competitiveness impacts on climate policy in our simulation, the potential economic and~~
~~diplomatic costs of such policies may outweigh the benefits and justify no action.”61~~
~~Policymakers have alternatives to BCAs, which could be used to address leakage or~~
~~competitiveness concerns. For example, within the framework of a cap-and-trade system, one~~
~~alternative is to provide emission allowances to covered entities at no cost. This has occurred in~~
~~the EU-ETS, California’s cap-and-trade program, and in the Regional Greenhouse Gas Initiative~~
~~(RGGI) to a lesser extent.62 Policymakers could support carbon-intensive, trade-exposed~~
~~industries by funding research, development, and deployment efforts in particular sectors or for~~

~~56 Ibid.~~
~~57 For example, Elena Ianchovichina and Harun Onder, “Carbon Border Taxes: What Are Their Implications for~~
~~Developing Countries?” Brookings Institution, October 5, 2021, https://www.brookings.edu/blog/future-development/~~
~~2021/10/05/carbon-border-taxes-what-are-their-implications-for-developing-countries/.~~
~~58 Ben Aylor et al., “How an EU Carbon Border Tax Could Jolt World Trade,” Boston Consulting Group, 2020,~~
~~https://www.bcg.com/publications/2020/how-an-eu-carbon-border-tax-could-jolt-world-trade.~~
~~59 See, for example, Warwick McKibbin et al., “The Role of Border Carbon Adjustments in a U.S. Carbon Tax,”~~
Climate Change Economics, vol. 9, no. 1 (2018).
~~60 Samuel Kortum and David Weisbach, “The Design of Border Adjustments for Carbon Prices,” National Tax Journal,~~
~~vol. 70, no. 2 (June 2017).~~
~~61 Joseph Aldy and William Pizer, “The Competitiveness Impacts of Climate Change Mitigation Policies,” The Harvard~~
~~Project on Climate Agreements, 2015.~~
~~62 The Regional Greenhouse Gas Initiative is a regional cap-and-trade system on CO2 emissions from electric power~~
~~plants in 11 U.S. states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New~~
~~York, Rhode Island, Vermont, and Virginia.~~
~~Congressional Research Service~~

9

~~Border Carbon Adjustments: Background and Recent Developments~~

~~specific technologies. In addition, climate policies could include funding to support transition~~
~~assistance for specific industries or communities with large concentrations of impacted industries.~~
~~Selected Viewpoints from Government Leaders and~~
~~Officials~~
~~Government leaders and officials from around the world have expressed a range of varying~~
~~viewpoints regarding BCAs and their possible implementation. This section provides selected~~
~~examples of these viewpoints. The examples below do not represent an exhaustive list.~~
~~ The U.S. 2021 NDC states, “The United States will work to ensure that our firms~~
~~and workers are not put at an unfair competitive disadvantage and cooperate with~~
~~allies and partners that are committed to fighting climate change. As appropriate,~~
~~and consistent with domestic approaches to reduce United States greenhouse gas~~
~~emissions, this includes consideration of carbon border adjustments in relation to~~
~~carbon-intensive goods.”63~~
~~ The Government of Canada stated that “whether BCAs are necessary to mitigate~~
~~carbon leakage risks ultimately depends on the level of ambition and~~
~~effectiveness of other countries’ GHG emission curbing actions….This is why~~
~~the Government wants to engage with key trading partners and other like-minded~~
~~countries who are taking climate action to better understand their perspectives~~
~~and plans for BCAs or alternative measures and ensure there is as much~~
~~coherence and coordination as possible among different policies and~~
~~approaches.”64~~
~~ Officials from the BASIC country group—Brazil, South Africa, India and~~
~~China—issued a Joint Statement in April 2021, expressing “grave concern~~
~~regarding the proposal for introducing trade barriers, such as unilateral carbon~~
~~border adjustment, that are discriminatory and against the principles of Equity~~
~~and CBDR-RC [the UNFCCC principle of Common but Differentiated~~
~~Responsibilities and Respective Capabilities].”65~~
~~ Artyom Bulatov, deputy head of the European Co-operation Department at~~
~~Russia’s Foreign Ministry, reportedly stated that “it appears that some of our~~
~~partners cannot resist the temptation to instrumentalise the climate agenda for the~~
~~benefit of their economies…. We took note of the plans to use the CBAM as an~~
~~additional source of income for the EU budget.... And frankly speaking it goes~~
~~fully in line with protectionism in the trade sphere.”66~~

~~63 The United States of America Nationally Determined Contribution, Reducing Greenhouse Gases in the United~~
~~States: A 2030 Emissions Target, Submitted April 2021, https://www4.unfccc.int/sites/NDCStaging/Pages/All.aspx.~~
~~64 Government of Canada, Exploring Border Carbon Adjustments for Canada, August 2021, https://www.canada.ca/en/~~
~~department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-border-carbon-adjustments-~~
~~canada.html.~~
~~65 Joint Statement issued at the conclusion of the 30th BASIC Ministerial Meeting on Climate Change hosted by India~~
~~on April 8, 2021, https://www.environment.gov.za/mediarelease/basic_ministerialmeeting_climatechange_india.~~
~~66 Nastassia Astrasheuskaya and Mehreen Khan, “Russian Businesses Start Counting Cost of EU Carbon Border Tax,”~~
Financial Times, May 17, 2021.
~~Congressional Research Service~~

10

~~Border Carbon Adjustments: Background and Recent Developments~~

~~ Indian Trade Minister Piyush Goyal reportedly stated it would be “very unfair~~
~~today to bring trade policy and trade barriers and use trade as a means to foist~~
~~[new restrictions] upon the developing world or the less developed countries.”67~~no. 1 (2019). 27 Congressional Budget Office, Border Adjustments for Economywide Policies That Impose a Price on Greenhouse Gas Emissions, 2013. 28 For more details, see CRS Report RS21372, The European Union: Questions and Answers, by Kristin Archick; see also European Parliamentary Research Service, EU Carbon Border Adjustment Mechanism Implications for Climate and Competitiveness, June 2022, https://www.europarl.europa.eu/thinktank/en/document/EPRS_ATA(2022)729462. 29 For more information, see the European Commission EU ETS website, https://ec.europa.eu/clima/policies/ets_en. 30 This term of measure (CO2e) is used because GHGs vary by global warming potential (GWP). GWP is an index developed by the Intergovernmental Panel on Climate Change (IPCC) that allows comparisons of the heat-trapping ability of different gases over a period of time, typically 100 years. Consistent with international GHG reporting requirements, EPA’s most recent GHG inventory (2018) uses the GWP values presented in the IPCC’s 2007 Fourth Assessment Report. For example, based on these GWP values, a ton of methane is 25 times more potent than a ton of CO2 when averaged over a 100-year time frame. The IPCC has since updated the 100-year GWP estimates, with some increasing and some decreasing. For example, the IPCC 2013 Fifth Assessment Report reported the 100-year GWP for methane as ranging from 28 to 36. EPA compares the 100-year GWP values in Table 1-3 of its 2018 GHG Inventory. Congressional Research Service 6 Border Carbon Adjustments: Background and Developments in the European Union for free since 2005.31 The rationale for this approach is generally the same as the rationale for a BCA: to address concerns of competitiveness with international firms that do not face comparable GHG mitigation and avoid emissions leakage. The European Commission, which represents the interests of the EU as a whole and functions as the EU’s executive, introduced a CBAM proposal in July 2021.32 The Council of the EU (which represents the interests of the national governments of the member states) reached agreement on its approach for the proposed BCA framework in March 2022.33 The European Parliament adopted its own position on the BCA framework in June 2022.34 In December 2022, the European Parliament and the Council of the EU reached a provisional agreement on a BCA framework, as part of a larger legislative and policy package (known as “Fit for 55”) that includes changes to the EU Emissions Trading System.35 The European Parliament and the Council of the EU share legislative power and must both formally approve the provisional agreement for it to become EU law.36 The EU provisional agreement has raised concerns from policymakers and stakeholders in a number of countries, including the United States. The CBAM proposal is part of a larger reform package that would amend other components of the EU ETS. In particular, the reforms would reduce the ETS emissions cap and gradually eliminate the allocation of free allowances. The CBAM would be phased in as free emission allocation is phased out. Following a reporting period that would start in October 2023, the CBAM would start in 2026 in a limited form and reach full implementation in 2034, as free allowances are reduced to zero. During the phase-in period, the CBAM would apply only to the percentage of emissions that does not benefit from free allowances, thus reducing the CBAM price on covered imported products. Products Covered The precise list of imported products subject to the provisional CBAM is uncertain. EU policymakers have debated which products to include in the CBAM. The European Commission’s July 2021 proposed CBAM applied to a selected number of goods: iron and steel, cement, fertilizer, aluminum, and imported electricity. In June 2022, the European Parliament proposed to add organic chemicals, plastics, hydrogen, and ammonia to the scope of coverage. 31 For more background the free allocation, see the European Commission, “Allocation to Industrial Installations,” https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/free-allocation/allocation-industrial-installations_en#allocation-based-on-benchmarks. 32 For more information, see European Commission, “Carbon Border Adjustment Mechanism,” https://ec.europa.eu/taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en. 33 Council of the European Union, “Council Agrees on the Carbon Border Adjustment Mechanism (CBAM),” press release, March 15, 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/03/15/carbon-border-adjustment-mechanism-cbam-council-agrees-its-negotiating-mandate/. 34 European Parliament, “CBAM: Parliament Pushes for Higher Ambition in New Carbon Leakage Instrument,” press release, June 22, 2022, https://www.europarl.europa.eu/news/en/press-room/20220516IPR29636/climate-change-meps-push-for-accelerated-eu-action-and-energy-independence. 35 European Parliament, “Climate change: Deal on a more ambitious Emissions Trading System (ETS),” press release, December 18, 2022, https://www.europarl.europa.eu/news/en/press-room/20221212IPR64527/climate-change-deal-on-a-more-ambitious-emissions-trading-system-ets; and Council of the European Union, “'Fit for 55’: Council and Parliament reach provisional deal on EU emissions trading system and the Social Climate Fund,” press release, December 18, 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/12/18/fit-for-55-council-and-parliament-reach-provisional-deal-on-eu-emissions-trading-system-and-the-social-climate-fund/. 36 For more information on the legislative process in the EU, see European Parliament, “Ordinary Legislative Procedure,” https://www.europarl.europa.eu/olp/en/interinstitutional-negotiations. Congressional Research Service 7 link to page 12 Border Carbon Adjustments: Background and Developments in the European Union According to documentation explaining the European Commission’s initial 2021 CBAM proposal, the CBAM would cover imports of goods from all non-EU countries. Countries that participate with the EU ETS or have their own emissions trading systems linked with the ETS (e.g., Switzerland) would be excluded from the CBAM.37 In addition, the Commission’s CBAM proposal included an adjustment mechanism to account for the climate policies (and costs) in place in the exporting country.38 Based on the available information from the December 2022 provisional agreement, the CBAM would initially apply to imports of cement, aluminum, fertilizers, electricity, hydrogen, iron and steel, as well as some precursors and a limited number of downstream products (e.g., screws and bolts).39 The European Commission is to consider whether to include organic chemicals and polymers in the future.40 CBAM Carbon Price Starting in 2026, the EU CBAM would indirectly attach a carbon price to the GHG emissions associated (“embedded”) with the initial list of imported products identified in the December 2022 provisional agreement (described above). The carbon price would be linked to the weekly average auction price for the EU ETS emission allowance. The CBAM would attach the price to imported goods through a certificate process. One certificate would equate with one metric ton of CO2 emissions. Companies importing covered products into the EU would need to purchase certificates through national authorities. Once a year, importers would need to surrender an amount of certificates that matches the emissions associated with their imported covered products. CBAM certificates are not tradeable or bankable, but companies may sell a limited quantity of unused certificates back to a national authority. Figure 1 illustrates the EU ETS allowance prices over time. As the figure indicates, allowance prices have increased in recent years. The average price in 2002 was $85 per metric ton of CO2e emissions. This value is considerably higher than 2022 emission allowance prices in U.S. state and regional GHG emissions reduction programs. As a point of comparison, the average emission allowance price in 2022 from the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program in 11 U.S. states, was $13.5 per metric ton.41 The 2022 average allowance price in California’s cap-and-trade program was $28.5 per metric ton.42 37 European Commission, “Carbon Border Adjustment Mechanism: Questions and Answers,” July 2021, https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661. 38 See CRS Report R45472, Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th Congresses, by Jonathan L. Ramseur. 39 European Parliament, “Deal reached on new carbon leakage instrument to raise global climate ambition,” press release, December 13, 2022, https://www.europarl.europa.eu/news/en/press-room/20221212IPR64509/deal-reached-on-new-carbon-leakage-instrument-to-raise-global-climate-ambition. 40 Ibid. 41 This is the average settlement price from the past four RGGI allowance auctions. Eleven U.S. states participate in the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program that covers CO2 emissions from electric power. The RGGI states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Virginia, and Vermont. Through executive branch action, Pennsylvania is seeking to join RGGI. Some policymakers in Pennsylvania’s legislative bodies have voiced strong opposition to joining RGGI and the governor’s actions to join the program without enacting new legislation. In addition, the governor of Virginia has proposed removing his state from RGGI. For more information, including emission allowance price data, see https://www.rggi.org; see also, CRS Report R41836, The Regional Greenhouse Gas Initiative: Background, Impacts, and Selected Issues, by Jonathan L. Ramseur. 42 California implements a GHG emissions cap-and-trade program that covers electric power, selected industries, and Congressional Research Service 8 Border Carbon Adjustments: Background and Developments in the European Union Figure 1. European Union Emissions Trading System Emission Allowance Prices 2006 – 2022 Source: Created by the Congressional Research Service with data from International Carbon Action Partnership (ICAP), Allowance Price Explorer, https://icapcarbonaction.com/en/documentation-allowance-price-explorer. ICAP sourced its data from the European Energy Exchange Group, https://www.eex.com/en/market-data/eex-group-datasource. Direct or Indirect Emissions The European Commission’s initial legislative proposal for CBAM (in July 2021) applied only to direct GHG emissions generated from the onsite production of covered materials (e.g., iron and steel). The European Commission approach included a plan to evaluate whether its BCA should include indirect emissions from these materials.43 The European Parliament’s CBAM proposal (from June 2022) included indirect emissions.44 According to available documentation, the December 2022 provisional CBAM agreement would cover “indirect emissions under certain conditions” and the Commission is to “assess the methodology for indirect emissions” during the transition period (i.e., 2026-2034).45 World Trade Organization Issues The World Trade Organization (WTO) is the 164-member international organization created to oversee and administer multilateral trade rules, serve as a forum for trade negotiations, and fossil fuel distributors. For more information, see the California Air Resources Board website at https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program. The average allowance price is based on the auction settlement prices, available at https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program/program-data/cap-and-trade-program-data-dashboard. 43 European Commission, “Carbon Border Adjustment Mechanism: Questions and Answers,” https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661. 44 EU Parliament, “CBAM: Parliament Pushes for Higher Ambition in New Carbon Leakage Instrument,” press release, June 22, 2022, https://www.europarl.europa.eu/news/en/press-room/20220603IPR32157/cbam-parliament-pushes-for-higher-ambition-in-new-carbon-leakage-instrument. 45 European Parliament, “Deal reached on new carbon leakage instrument to raise global climate ambition,” press release, December 13, 2022, https://www.europarl.europa.eu/news/en/press-room/20221212IPR64509/deal-reached-on-new-carbon-leakage-instrument-to-raise-global-climate-ambition. Congressional Research Service 9 Border Carbon Adjustments: Background and Developments in the European Union resolve trade disputes. The WTO encompassed and succeeded the General Agreement on Tariffs and Trade (GATT), which was established in 1947.46 The GATT is one of the WTO agreements that set forth rules and disciplines for practices that affect international trade in goods and services.47 These rules can be enforced by the WTO’s dispute settlement mechanism, which provides a means for the resolution of trade disputes between members concerning these rules and may decide whether a member has complied with its WTO obligations.48 It is uncertain whether a 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 key GATT principles, such as nondiscrimination obligations. It is also uncertain whether specific GATT exceptions, such as those for national security49 and the protection of human, animal, or plant life or health,50 may allow a BCA that is otherwise deemed inconsistent with key GATT principles. GATT Obligations Related to Border Adjustments GATT explicitly allows WTO members to impose, “on the importation of any product … a charge equivalent to an internal tax … in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part.”51 Some recent U.S. legislative proposals that would levy an emission fee or carbon tax apply the fee or tax not on particular products but rather on emissions or the inputs that result in emissions, namely fossil fuels.52 Under these proposals, carbon-intensive materials, such as steel, cement, and certain chemicals, would not be directly subject to the proposed tax or fee. Some observers contend that a tax on products based on emissions or inputs could be used to establish a BCA, but this notion is untested.53 In addition, it is unclear whether GATT contemplates the adjustment of an implicit tax on domestic products that would arguably result from the imposition of domestic environmental regulations.54 A key WTO issue is whether a country’s BCA imposes a fee on imported products in excess of like domestic products. Under the GATT’s national treatment requirement for taxation measures,55 a country may not impose a BCA on imported products in excess of the internal tax 46 For an overview of the WTO, see CRS Report R45417, World Trade Organization: Overview and Future Direction, coordinated by Cathleen D. Cimino-Isaacs. 47 For a link to all of the WTO Agreements discussed in this report see Legal Texts: The WTO Agreements, WORLD TRADE ORG., https://www.wto.org/english/docs_e/legal_e/final_e.htm. 48 WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), https://www.wto.org/english/docs_e/legal_e/28-dsu.pdf. 49 GATT art. XXI. 50 Id. art. XX(b). 51 Id. art. II:2(a) (emphasis added). 52 See CRS Report R45472, Market-Based Greenhouse Gas Emission Reduction Legislation: 108th Through 117th Congresses, by Jonathan L. Ramseur. 53 See, for example, Jennifer Hillman, Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?, at 6, 9 (2013), http://www.climateadvisers.com/wp-content/uploads/2014/01/2013-07-Changing-Climate-for-Carbon-Taxes.pdf. 54 Two proposals in the 117th Congress would arguably base a BCA on such an implicit tax. The BCA framework that would be established under S. 2378 and H.R. 4534 would not be linked to a federal carbon tax or fee but would base a BCA on “domestic environmental costs,” which would include existing Clean Air Act regulations, among other costs. 55 GATT art. III:2. Congressional Research Service 10 Border Carbon Adjustments: Background and Developments in the European Union imposed on like domestic products.56 Depending on the design and scope of a BCA, it may be difficult to determine if a BCA were in excess of the tax or fee on domestic products. Based on a GATT panel decision in another context, it is uncertain whether a BCA based on the amount of GHGs emitted during the manufacture or production of an imported product would conform to WTO rules, because this BCA would be based on the method of production rather than the product itself.57 However, some scholars have argued that a BCA could be designed to allocate GHG emissions from the production process to particular products.58 GATT Exceptions If a BCA is adopted and later found to violate the GATT’s requirements, a country could seek to retain the BCA under one of the GATT’s general exceptions.59 For example, one exception involves measures “necessary to protect human, animal or plant life or health.”60 Another exception provisionally allows GATT-inconsistent measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”61 Certain conditions must be demonstrated to meet these exceptions. Whether a BCA would satisfy any of these exceptions and their associated conditions would likely be fact-dependent.62 In addition, another GATT provision contains an exception for national security.63 A country could argue that a BCA falls within the scope of that exception because climate change is a national security emergency. It is unclear whether a WTO panel would accept this rationale. Some WTO members have expressed concern that overuse of the national security exception will undermine the world trading system, because countries might enact a multitude of protectionist measures under the guise of national security.64 56 Id. In addition, Article I of the GATT sets forth the Agreement’s most-favored-nation (MFN) treatment obligation, which generally prohibits a WTO member from discriminating against imported products of one WTO member country as compared to products of another WTO member, including by taxing one WTO member’s products in excess of another member’s like products. This provision might be relevant if a BCA imposes a higher tax on the products of one WTO member as compared to another. 57 This reasoning stems from a 1991 GATT panel decision that considered whether the United States could treat imported Mexican tuna differently than United States tuna because the Mexican tuna’s production method resulted in the incidental killing of dolphins. The Panel determined that the regulation was directed at the method of production of the tuna rather than the tuna itself. The Panel determined that distinguishing between tuna based on the production method was impermissible under Article III because it was not a regulation of a product. See GATT Panel Report, United States—Restrictions on Imports of Tuna, GATT Doc. DS21/R, GATT BISD 39S/155, para. 5.15 (September 3, 1991) (unadopted). 58 See, for example, Hillman, supra note 31, at 6, 9. 59 These are found in GATT Article XX, ¶¶ (a) through (j). 60 GATT art. XX(b). 61 Id. art. XX(g). 62 See Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, paras. 158-59 (October 12, 1998). 63 GATT art. XXI. 64 See, for example, WTO Council for Trade in Goods, National Security Cited in Two Trade Concerns at Goods Council Meeting, June 30, 2017, https://www.wto.org/english/news_e/news17_e/good_10jul17_e.htm. Congressional Research Service 11 Border Carbon Adjustments: Background and Developments in the European Union Other Trade-Related Issues The potential imposition of BCAs raises a range of trade issues and other related concerns. For example, some analysts have expressed concern that carbon border adjustment tariffs could be (or be interpreted as) disguised protections for domestic industry.65 That is, some have argued that countries could use subtle adjustments to the complex calculations often involved in the proposed BCAs to privilege domestic industries.66 Similarly, experts have suggested that BCAs could negatively affect developing countries in the short run.67 A survey conducted by the United Nations Conference on Trade and Development (UNCTAD) notes that the EU’s proposed carbon border adjustment mechanism, for example, “could impact the development of poorer countries and reduce their opportunities for export-led development.” However, the study also noted that the impact would be highly variable, and certain developing countries could gain advantages. For example, a 2020 study argued that because the steel industries of India and Turkey are relatively carbon efficient, they would likely “take crude steel share from China, Russia, and the Ukraine” if the EU implemented a carbon border adjustment tariff.68 Further, some researchers have highlighted the potential for unintended consequences from a BCA. For example, some studies have found that a border adjustment may lead to lower net exports than the carbon price alone, due to the adjustment’s terms-of-trade effect on U.S. currency.69 Some of the concerns may be lessened to some degree if a larger number of nations establish comparable emission reduction policies. Alternatives to BCAs Some studies have questioned whether BCAs would be justified, considering the expected benefits, implementation challenges, and potential consequences that may result. For example, a 2017 study concluded that “our review of the economics of unilateral carbon taxes, however, does not find strong justifications for [BCAs].”70 A 2015 study concluded that “attempting to ‘protect’ energy-intensive U.S. manufacturing firms from international competitive pressures through various policies may have only a limited impact on these firms.… [G]iven the magnitude of the competitiveness impacts on climate policy in our simulation, the potential economic and diplomatic costs of such policies may outweigh the benefits and justify no action.”71 65 Peter Holmes et al., “Border Carbon Adjustments and the Potential for Protectionism,” Climate Policy, vol. 11, no. 2 (2011); Gary Clyde Hufbauer, “Divergent Climate Change Policies Among Countries Could Spark a Trade War. The WTO Should Step In,” Peterson Institution for International Economics, 2021, https://www.piie.com/blogs/trade-and-investment-policy-watch/divergent-climate-change-policies-among-countries-could. 66 Ibid. 67 For example, Elena Ianchovichina and Harun Onder, “Carbon Border Taxes: What Are Their Implications for Developing Countries?” Brookings Institution, October 5, 2021, https://www.brookings.edu/blog/future-development/2021/10/05/carbon-border-taxes-what-are-their-implications-for-developing-countries/. 68 Ben Aylor et al., “How an EU Carbon Border Tax Could Jolt World Trade,” Boston Consulting Group, 2020, https://www.bcg.com/publications/2020/how-an-eu-carbon-border-tax-could-jolt-world-trade. 69 See, for example, Warwick McKibbin et al., “The Role of Border Carbon Adjustments in a U.S. Carbon Tax,” Climate Change Economics, vol. 9, no. 1 (2018). 70 Samuel Kortum and David Weisbach, “The Design of Border Adjustments for Carbon Prices,” National Tax Journal, vol. 70, no. 2 (June 2017). 71 Joseph Aldy and William Pizer, “The Competitiveness Impacts of Climate Change Mitigation Policies,” The Harvard Project on Climate Agreements, 2015. Congressional Research Service 12 Border Carbon Adjustments: Background and Developments in the European Union Policymakers have alternatives to BCAs, which could be used to address leakage or competitiveness concerns. For example, within the framework of a cap-and-trade system, one alternative is to provide emission allowances to covered entities at no cost. This has occurred in the EU-ETS, California’s cap-and-trade program, and in the Regional Greenhouse Gas Initiative (RGGI) to a lesser extent.72 Policymakers could support carbon-intensive, trade-exposed industries by funding research, development, and deployment efforts in particular sectors or for specific technologies. In addition, climate policies could include funding to support transition assistance for specific industries or communities with large concentrations of impacted industries.

Author Information

Jonathan L. Ramseur Jonathan L. Ramseur
Christopher A. Casey Christopher A. Casey
Specialist in Environmental Policy Specialist in Environmental Policy
Analyst in International Trade and Finance Analyst in International Trade and Finance

Brandon J. Murrill Brandon J. Murrill

Legislative Attorney Legislative Attorney

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material. copy or otherwise use copyrighted material.

~~67 Mark Linscott, “Carbon Border Adjustment Mechanisms: Will Innovative Climate Policy Launch a Trade War?”~~
New Atlantacist, June 2021, https://www.atlanticcouncil.org.
72 The Regional Greenhouse Gas Initiative is a regional cap-and-trade system on CO2 emissions from electric power plants in 11 U.S. states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia. Congressional Research Service Congressional Research Service
R47167 R47167 · VERSION ~~1 · NEW~~
113 · UPDATED 13