U.S. Proposed Carbon Border Tax: Protectionism Disguised as Environmental Policy

In a recent interview with Financial Times, John Podesta, U.S. Senior Advisor to the President for International Climate Policy, indicated that the U.S. is exploring a range of options for carbon pricing on imports to combat “freeriding” by foreign producers of carbon-intensive goods​. In other words, the United States is considering implementing a carbon border tax to address carbon emissions associated with imported goods.

The ‘carbon tariff’ is no longer an innovative concept. The European Union introduced the Carbon Border Adjustment Mechanism (CBAM) last year, imposing additional tariffs targeting imported carbon-intensive products, such as steel, cement, and aluminum. However, the carbon tariff discussed by Podesta differs fundamentally from its CBAM counterpart. While both are designed to address carbon emissions associated with imported goods, because the U.S. does not have an equivalent domestic carbon market like the EU Emissions Trading System (EU ETS), many concerns have been raised regarding the fairness and underlying motives of the U.S. carbon tariffs. Especially given the severe trade friction between the United States and China, the imposition of these potential carbon tariffs may merely be a new form of trade protectionism disguised as environmental policy.

Although both are nominally carbon tariffs, there are fundamental differences between the EU’s CBAM and the carbon tariffs envisioned by the U.S. CBAM is intrinsically linked to the EU ETS. The EU ETS, established in 2005, is the world’s largest carbon market, imposing carbon taxes on high-emission industries within the EU and covering over 11,000 power stations and industrial plants across 31 countries. It sets a cap on total emissions and allows companies to buy and sell allowances as needed, creating a financial incentive to reduce emissions. However, since the ETS typically raises the costs for high-emission industries, these industries have an incentive to relocate their factories outside the EU. Similarly, because the ETS increases costs, goods imported from outside the EU have become more competitive in price. The EU established the CBAM in response to these two issues. It aims to prevent “carbon leakage” caused by factories relocating to countries without carbon taxes and to ensure that domestic industries are not disadvantaged in competition with imported goods due to the additional carbon tax. Despite criticisms and controversies on its effectiveness, the CBAM remains fundamentally focused on ensuring fair competition while pursuing ambitious climate goals​​.

On the other hand, the carbon tariff envisioned by Podesta is entirely ad hoc. The United States does not have a national carbon pricing system like the EU ETS. In his interview, Podesta emphasized the need to protect the U.S. industries by preventing the “dumping of high carbon production cost into open markets.” However, without a domestic carbon pricing system in place, the U.S. carbon border tax could be perceived as imposing harsher conditions on foreign producers while lacking equivalent measures at home. This discrepancy suggests that Podesta is essentially proposing a potential protectionist agenda that could target any country which the United States has trade frictions with, disguised as a hollow effort to reduce global emissions. While tariffs, by nature, carry protectionist intentions, the EU has only applied reciprocal policies to foreign competitors after implementing stringent environmentally focused restrictions on its own industries. In comparison, the U.S. is attempting to use environmental reasons to increase the operating costs of foreign businesses, thereby creating an unfair competitive environment for domestic industries.

China seems to be a primary target of Podesta’s carbon tariffs due to its long-standing trade tensions with the United States. Podesta is also not concealing his real intentions; in a speech in April, he openly claimed that aluminum produced in China emits 60% more emissions than that produced in the United States, directly linking the issue of “climate dumping” that he has been continuously advocating for, to China. Podesta also extended his focus to the scope 2 emissions of Chinese products, arguing that the coal-fired electricity used in the production of many products is also a part of China’s climate dumping. Subsequently, he claimed that the steel and critical metals used in the production of solar panels and electric vehicles, which the Biden administration views as essential for a cleaner future, should also be held accountable for the pollution caused by the coal-fired electricity used in their manufacturing processes, only because they are “made-in-China”.

To prevent double counting, carbon tariffs—including CBAM—typically do not consider the embodied emissions of raw materials in finished products. Given that the power sector is one of the first industries included in China’s carbon market, Podesta’s accusations are susceptible to double counting. Moreover, Podesta’s specific focus on electric vehicles and solar panels seems overly clear in its intent: after searching for various excuses such as “government subsidy,” “human rights violations,” and “overcapacity,” Podesta has now managed to provide the U.S. government with a new tool to target Chinese-made electric vehicles and other renewable energy products.

From another perspective, it is still unclear whether a carbon tariff can positively impact climate change mitigation efforts in the U.S. and globally. One major concern is that creating an unfair competitive environment might discourage domestic producers from investing in cleaner technologies. This could slow down the adoption of cleaner production methods and technologies within the U.S. Moreover, imposing carbon tariffs on Chinese products could hinder the U.S.’s access to cheaper renewable energy products, especially when the current U.S. energy structure is heavily dependent on traditional fossil fuels. China is a leading producer of solar panels and other renewable energy technologies, and tariffs could increase costs for U.S. consumers and businesses looking to transition to greener energy sources. This would slow down the U.S.’s green transition efforts and undermine its ability to meet climate goals efficiently. In the electric vehicle sector, carbon tariffs could slow down the adoption of electric vehicles in the U.S. if Chinese-made electric vehicles and components become more expensive. This would also be counterproductive to efforts to reduce greenhouse gas emissions from the transportation sector, one of the largest contributors to climate change.

The proposed U.S. carbon border tax is raising concerns regarding its protectionist nature. Unlike the EU, the U.S. lacks a comprehensive national carbon market, undermining the environmental credibility of its carbon tariff. This move appears more aimed at shielding U.S. industries from foreign competition, particularly targeting China, rather than genuinely reducing global emissions. Such an approach also risks discouraging domestic innovation in cleaner technologies, hindering access to affordable renewable energy products, and slowing down the U.S.’s green transition, ultimately harming both domestic and global climate change mitigation efforts. The world needs more genuine efforts on environmental protection, and this is also what an International Climate Policy Advisor should truly be striving for.