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An increasing number of US senators and representatives are proposing legislation to address climate change based on a greenhouse gas (GHG) tax or “pollution fee.” Such proposals would create significant economic impacts on fossil fuel producers and energy-intensive industries that rely on them, especially those proposals that call for large tax increases over time to achieve the long-term goals of the Paris Agreement. Resulting cost increases for US industries with significant GHG emissions—typically referred to as energy-intensive, trade-exposed (EITE) industries—could cause some production to shift to countries without comparable carbon pricing policies, resulting in “leakage” of GHG emissions that the domestic tax aims to reduce and competitive disadvantages for domestic manufacturers competing with foreign firms not facing the tax (both in the United States and abroad in export markets). The impacts would include loss of jobs, business, and investment. In regions where such businesses play a central economic role, the impacts would spread to the entire community and supply chains that rely on them. Such concerns have led to proposals for US GHG policy to include border adjustments (BAs) in past and current proposed legislation. Specifically, in the case of a GHG tax—by imposing a charge on GHG-intensive imported products (based on the US tax) and providing rebates for the tax on the cost of similar products exported by US firms—border tax adjustments (BTAs) are intended to alleviate losses to domestic companies from changes in international trade.

Recognizing the need to address these concerns, a decade ago, H.R. 2454 (the Waxman-Markey cap-and-trade legislation) included provisions for relief to domestic firms in EITE sectors. Eligible firms would have been entitled to free allowances or rebates based on a complex procedure that covered emissions from operations and purchased electricity. At the time, an interagency task force led by the US Environmental Protection Agency (EPA) identified 46 sectors within the North American Industry Classification System (NAICS) that were presumptively eligible for relief. The interagency report: The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-Intensive Trade-Exposed Industries (December 2, 2009) However, challenges exist in designing BAs that are compatible with US obligations under the World Trade Organization (WTO). See Addressing Competitiveness Concerns in a Carbon Tax: What Are the Options? (October 27, 2015) and references mentioned. If other nations believe that US BAs constitute illegal domestic subsidies or discrimination against imported products, they can challenge them through WTO dispute settlement procedures or by more direct retaliation against US exports. Such possibilities would place a cloud over the legitimacy of US BAs that could damage relations with other nations in a way that further complicates both climate and trade negotiations, and such claims can take years to resolve. At the time, many trade lawyers believed that BAs as proposed in the Waxman-Markey bill would not survive a WTO challenge. From a WTO perspective, the award of free allowances to offset the economic impact of the cap-and-trade regulations could be an illegal domestic subsidy aimed at alleviating competitiveness concerns. The relevant WTO rules, however, would permit the border adjustment of an indirect carbon (GHG) tax on products. Climate Change and the WTO: Cap and Trade versus Carbon Tax?, Warren H. Maruyama, Journal of World Trade 45, no. 4: 679–726 (2011). Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? Jennifer Hillman, Climate & Energy Policy, German Marshall Fund Paper Series, July 2013.

This paper builds from the recent update to our original Framework report by providing policy guidance on how proposed BTAs could be incorporated as an element of US GHG tax legislation and implemented by regulators. Framework Proposal for a US Upstream Greenhouse Gas Tax with WTO-Compliant Border Adjustments: 2020 Update, Brian P. Flannery, Jennifer Hillman, Jan W. Mares, Matthew Porterfield, October 2020. (originally published March 2018). (Below, in discussing provisions and tasks, we will refer to the GHG tax legislation as the “Legislation,” and regulatory authorities as the “Regulator”). In what follows, Section 2 summarizes the technical background regarding the upstream GHG tax, covered products and sectors, and determining export rebates and import charges for covered products. Section 3 discuses principal administrative tasks that would need to be specified in the Legislation and accomplished by the Regulator. Section 4 discusses additional administrative procedures to simplify and promote implementation, such as obligations of covered manufacturers, aggregating production across firms’ domestic facilities, procedures for appeals, and developing authorized guidelines to allocate GHG emissions of facilities to the products they create. Section 5 presents a summary and conclusions.