New Report Compares Recent International Climate and Trade Policies
With the 28th Conference of the Parties (COP28) putting a spotlight on international climate policy, a new RFF report compares three climate and trade policies and analyzes each one’s unique goals, structures, and international repercussions.
💡 What’s the story?
Today, Senator Sheldon Whitehouse (D-RI) reintroduced the Clean Competition Act (CCA). The new policy proposal follows the introduction of the Foreign Pollution Fee Act (FPFA) in November and the implementation of the European Union’s carbon border adjustment mechanism (EU CBAM) in October.
All three policies and policy proposals work to even the playing field between manufacturers in countries with high climate ambition and those who can produce goods more cheaply in less-regulated countries.
With the 28th Conference of the Parties (COP28) putting a spotlight on international climate policy, a new report from Resources for the Future (RFF) compares these policies and analyzes each one’s unique goals, structures, and international repercussions.
Author Perspective
“The idea of border adjustment mechanisms isn’t theoretical anymore: There is one in effect in the European Union and others in the United States are being introduced by policymakers on both sides of the aisle. If we want to address emissions on an international scale, border adjustment mechanisms will likely play into that overarching strategy. It’s important that we have good research to understand how and to what extent they could fit into the broader policy context.”
—Raymond J. Kopp, Senior Fellow and Director of RFF’s International Climate Policy Initiative
🔍 What are the key similarities and differences between the three border adjustment mechanisms?
The report goes into detail about several aspects of these policy options, such as fee structures, data sources, and exemptions. These aspects—and how they contribute to the success and structure of policies—are detailed further in a mid-October report. Some of the key elements are described below.
Clean Competition Act
This policy proposal, introduced today, is designed with domestic industrial competitiveness at the fore. The CCA introduces a performance standard that regulates the tons of greenhouse gas emissions per product imported from overseas. Producers with a greenhouse gas intensity above the benchmark pay a fee; producers below the benchmark do not. The benchmark declines year over year, and the fee increases.
The CCA would implement both a domestic regulatory program to reduce industrial greenhouse gas emissions and a border mechanism that would apply fees to the embodied greenhouse gas emissions of the products that the United States imports.
Foreign Pollution Fee Act
Unlike the CCA, which aims to reduce US emissions while maintaining domestic competitiveness, the FPFA, introduced by Senator Bill Cassidy (R-LA) in early November, does not include a regulatory program to further reduce domestic industrial emissions. Rather, the act seeks to reduce the greenhouse gas emissions embodied in the products the US imports.
The FPFA is unique in that it allows domestic producers to petition the government to add to the list of covered products, which already includes products such as plastics, iron, and lithium-ion batteries. The level of fees that would be placed on imported goods has yet to be determined.
EU Carbon Border Adjustment Mechanism
The EU CBAM is the only one of the three policy options analyzed in this report that has been implemented. Beginning on October 1, 2023, (but going into full effect in 2026), the EU CBAM works with the EU Emissions Trading System—a carbon market that is the cornerstone of the EU’s climate strategy—to require importers to buy and surrender “CBAM certificates” on the Emissions Trading System market that cover the greenhouse gases embodied in the imports. The cost of the certificates varies according to market forces.
The CBAM encourages trading companies to implement carbon prices, as an importing nation wouldn’t have to pay for the emissions that were already accounted for in the importer’s home country. Countries like the United States that do not have formal carbon prices do not get “discounts” on the number of certificates they must buy.
🌎 How could these policies affect emissions?
Border adjustment mechanisms can have an extensive impact on international trade. They would cover an extensive list of products—over 100, including iron and steel—and have significant indirect impacts on the consumption of many uncovered goods and products. Experts believe that they could significantly reduce emissions by minimizing the competitive risk associated with ambitious climate policies, but the extent of these reductions is unclear.
Nations may undertake a variety of actions to circumvent the fees imposed by these trade policies as well as challenges to the policies brought to the World Trade Organization. Importantly, unless exemptions or other features are made to minimize the impact on developing countries, the negative impacts of these trade policies on low- and middle-income nations could be substantial.
📚 Where can I learn more?
For more, read the report Comparing the European Union Carbon Border Adjustment Mechanism, the Clean Competition Act, and the Foreign Pollution Fee Act by RFF Fellow Milan Elkerbout, Senior Fellow Raymond J. Kopp, and Fellow Kevin Rennert.
For more information on the Foreign Pollution Fee Act, read the policy-specific issue brief released in mid-November. For more background on the policy components described in this report, read the mid-October report Carbon Border Adjustments: Design Elements, Options, and Policy Decisions.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
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