Is the Foreign Pollution Fee Act a Carbon Price?

A national-level carbon price—a tax or cap-and-trade scheme placed on CO2 or other greenhouse gases—may seem distant in the U.S., especially since the Inflation Reduction Act, which included major climate policy, omitted one. However, policymakers on both sides of the aisle have been nibbling around the edges of carbon taxes.

Most recently, Senators Bill Cassidy (R-LA) and Lindsey Graham (R-SC) have proposed a fee on some emissions-intensive imports in the Foreign Pollution Fee Act of 2023 (FPFA). While The Wall Street Journal editorial board critiqued the proposal in an editorial titled “Republicans for a Carbon Tax,” and carbon tax advocates have been friendly to the bill, it is not a carbon tax—or even a carbon tariff.

What’s in the Bill?

The FPFA proposes a multi-tiered tariff that would place taxes on categories of imported goods (including a series of energy and industrial products, such as petrochemicals, iron and steel, and lithium-ion batteries) as long as imports in the specific product category are more than 10 percent more emissions-intensive than domestically produced equivalents. Categories of imported goods would face different tax rates according to a schedule based on the emissions intensity of imported goods relative to domestically produced alternatives.

The bill does not specify rates to accompany the emissions intensity schedule. Instead, it delegates responsibility for setting tariff rates to the Treasury Department, with specific targets for reductions in emissions content of the import categories over time. The tariffs would be ad valorem taxes, based on the value of a particular good (like a sales tax or a typical tariff), rather than based on its emissions content, though the rates would vary by relative emissions.

Countries with free trade agreements would be exempted from the tariffs, provided the emissions intensity of their products is no more than 50 percent greater than that of the United States. Additionally, products can be excluded from the tariff schedule if domestic production is insufficient or for national security purposes like fulfilling a Department of Defense contract. Another option would be for countries to enter into an international partnership agreement with the United States, whereby they impose tariffs on high emissions-content imports from third-party countries and remove any tariffs on U.S. exports of the covered goods.

Why the Foreign Pollution Fee Act Is Not a Carbon Tax

To understand the FPFA, one must consider the difference between production-based and consumption-based emissions. Production-based emissions are relatively straightforward, consisting of emissions generated within a jurisdiction. Consumption-based emissions are more complicated; they include foreign emissions generated from producing imported goods but exclude domestic emissions generated from producing exported goods to count emissions in the goods and services consumed in a jurisdiction.

Typically, developed countries have higher consumption-based emissions than production-based emissions, as they import goods from developing countries with high-emissions production processes. Overall, though, the gap between production-based and consumption-based emissions is not particularly large. In 2021, the U.S. was a net importer of emissions, with production-based emissions of 1.4 billion tons of carbon compared to consumption-based emissions of 1.5 billion tons of carbon (a ton of carbon is equivalent to 3.664 tons of CO2).

The distinction between production-based and consumption-based emissions has implications for designing a carbon tax. Taxing production-based emissions alone would put domestic producers at a disadvantage in domestic and foreign markets relative to foreign producers. As a result, it makes sense to border-adjust a carbon tax, excluding exporters and taxing importers. Effectively, a border adjustment shifts the tax base from domestic production to domestic consumption.

By: Alex Muresianu