Photo: Kalyakan via Adobe Stock
Introduction
Collecting data on embedded emissions in imports offers a broader and more accurate picture of a country’s carbon footprint, enables informed climate policies, and—with some carrots and sticks—can promote a green transition. Embedded emissions are greenhouse gases (GHGs) emitted during the production and transport of goods in the origin country, before these products are traded. Usually, countries account and report production emissions, but there is no international standardized reporting practice for GHG emissions in traded goods.
Q1: Why is it important to collect data on GHG emissions embedded in imports?
A1: The United Nations Framework Convention on Climate Change (UNFCCC) provides that parties report GHG emissions generated by their domestic production, rather than accounting for traded emissions. GHG emissions embedded in imported goods are a relevant portion of a country’s carbon footprint, especially in nations with large consumption-driven economies like the United States. Not considering embedded emissions when formulating policies leads to an incomplete view of a country’s true environmental impact.
Tracking GHG emissions in imports data could support informed, targeted climate policies; foster international cooperation by harmonizing climate-related trade measures; and raise consumer awareness of the environmental impact of the goods they consume. Additionally, the availability of such data enhances transparency along global supply chains, which, aligned with public policy, could encourage cleaner production methods.
Currently, limited information exists regarding the amount of carbon embedded in U.S. imports. Some entities, using a non-standardized methodology, conduct their own research and publish this data. For instance, the Global Carbon Budget identifies the United States as the world’s largest net importer of carbon dioxide (CO2). A better understanding of the carbon embedded in imported goods, broken down by product type, could help foster sector-specific policies, promoting cleaner industries and potentially leading to the implementation of adjustment mechanisms or tariffs on high-emission imports.
The United States is making initial efforts to improve the collection of its carbon emissions data and compare it to emissions in other countries. A key example is the PROVE IT Act, an initiative led by Senators Chris Coons (D-DE) and Kevin Cramer (R-ND) that aims to quantify the emissions intensity of domestically produced goods, such as steel and aluminum, and compare these to the emissions intensity of goods produced in other countries. This initiative is an important step in understanding how the United States compares to other countries in terms of emissions from manufacturing, and it could support future efforts to learn how much CO2 is imported into the United States. However, further efforts are required to effectively collect data on emissions imported into the United States.
Q2: What is the U.S. Harmonized Tariff Schedule (HTS)?
A2: The Harmonized System is an international product nomenclature under which all goods can be classified based on description, use, and material. The U.S. HTS, built on the international Harmonized System (HS), provides tariff rates and statistical categories. This structure could be detailed to track embedded carbon emissions. Specifically, the statistical categories within the HTS could be used to capture and report the carbon emissions associated with imports.
Q3: How and why can the tariff schedule be broken down to facilitate trade and climate policies?
A3: The U.S. International Trade Commission (USITC), which oversees the HTS, allows interested parties, including members of Congress, private sector representatives, and NGOs, to request statistical breakouts. These breakouts enable the collection of detailed data on specific product categories, providing the basis for analyzing trade flows and monitoring trends at a sectoral level. By leveraging these breakouts, the United States could begin to collect data on the emissions of imported goods, allowing for a more nuanced approach to climate change policy.
The U.S. HTS comprises two distinct types of provisions: legal and nonlegal provisions. Legal provisions are an 8-digit code under which importers classify products and for which Customs and Border Protection (CBP) determines the applicable duty. As in the example the USITC provides, papayas are classified under subheading 0807.20.00. Nonlegal provisions—also called statistical breakouts—are a 10-digit code that further breaks down legal provisions. In the same example, if the papaya industry wishes to monitor trade flows by collecting import data of papayas with red and yellow flesh, the 8-digit legal provision can be further detailed into two 10-digit statistical breakouts: 0807.20.00.05 for papayas with red flesh and 0807.20.00.10 for papayas with yellow flesh, as illustrated below:
Both legal and statistical provisions play critical roles in how goods are classified and monitored, but they differ significantly in their legal force and their practical applications. Legal provisions have statutory backing and are legally enforceable, as they are passed into law through Congressional enactment or presidential proclamation. They also govern how duties are applied, and CBP relies on these provisions to enforce tariff schedules at the U.S. border, ensuring compliance with trade laws. Importers must classify goods according to these legal provisions when preparing customs documents, and misclassification can result in penalties.
Statistical provisions, in contrast, are unenforceable. They are primarily intended for data collection and are formulated by an interagency committee. Statistical provisions aim to collect detailed data on imports and exports, which could be used for economic analysis, trade policy formulation, and monitoring trends. Accordingly, statistical provisions can provide insights into the quantity of goods imported or their carbon emissions without directly affecting the duties applied to those goods. Although these provisions do not have direct legal consequences, they can play an important role in informing policymakers and guiding future legislative changes, including future adjustments to legal provisions based on the data collected.
If the purpose of tariff breakouts is to enhance the collection of data on embedded carbon emissions only, the creation of carbon-specific statistical breakouts in the HTS would achieve this goal. Said provisions could track the emissions embedded in high-GHG goods, such as steel, cement, and aluminum, by classifying products based on their carbon intensity, just like in the papaya example. Tariff classification descriptions could be split between low or high emission, or in tiers. The implementation of these breakouts would enable the United States to collect critical data needed to formulate sector-specific climate policies.
Q4: What are the benefits and challenges of a carbon-based tariff schedule?
A4: The process of creating a statistical breakout requires stakeholders to submit a detailed description of the product or group of products for which the breakout is requested. For carbon emission data, this could include specifying products based on their average CO2 emissions per unit of production. However, there is currently no official threshold for defining a low- or high-emission product, making it challenging to implement such breakouts without further research and standardization. Initiatives like the PROVE IT Act can help establish such benchmarks by quantifying the carbon intensity of key products. The United States could also opt to adopt foreign standards, such as the EU default values related to the union’s carbon border adjustment mechanism (CBAM).
In conclusion, collecting accurate data on embedded emissions offers significant advantages by informing trade and climate policies. It provides a clearer understanding of the carbon footprint associated with imports, enabling targeted measures such as carbon tariffs or the promotion of cleaner industries. While the challenge lies in determining how to quantify emissions that classify a product as low or high emission, initiatives like the PROVE IT Act can help establish benchmarks to guide this process. The use of statistical breakouts within the U.S. HTS could effectively facilitate data collection without violating international trade rules, as they would not impose direct legal obligations on importers.
Q5: What are the enforcement implications of carbon-based tariff breakouts?
A5: One of the main challenges of incorporating carbon emission data into the HTS is the inspection of such measures. CBP typically prefers product descriptions to be clear, accurate, and verifiable. Carbon emissions, however, are tied to the production processes of goods, making them difficult to observe or verify at the point of import.
Nevertheless, CBP has experience enforcing regulations based on nonvisible characteristics, such as its investigations into forced labor in supply chains. To prevent imports of goods made using forced labor, CBP enforces Section 307 of the Tariff Act of 1930, the Uyghur Forced Labor Prevention Act (UFLPA), and the Countering America’s Adversaries Through Sanctions Act (CAATSA). This is done through the issuance of Withhold Release Orders (WROs) and findings, as well as rigorous investigations of supply chains. CBP encourages domestic importers and businesses to conduct comprehensive supply chain due diligence extending beyond direct suppliers, and it relies on audits, investigations, and third-party verifications to assess compliance. NGOs around the world, partner government agencies, and consumers play a vital role in providing critical information to support forced labor investigations.
By using these resources and encouraging transparency, CBP works to ensure that products made with forced labor do not enter the U.S. market. Similarly, if legal provisions are adopted and enforced, carbon emissions could be verified through production certificates and third-party audits.
Q6: Could tariff schedule breakouts support the implementation of carbon tariffs?
A6: While statistical breakouts are ideal for gathering information without imposing immediate legal obligations on importers, carbon-based legal provisions are required if the ultimate purpose would be to apply tariffs on imported high-emission goods. However, monitoring trade flows by means of statistical provisions first can be a step prior to an eventual imposition of carbon tariffs.
The EU CBAM began with a gradual approach, collecting data on carbon emissions associated with imports before transitioning to the application of carbon measures. The United States could adopt a similar model, with statistical breakouts laying the ground for climate-related trade policies, which may or may not include the application of carbon tariffs.
With the upcoming administration and the ascension of tariffs, carbon tariffs may seem an attractive idea, although there are legal limitations due to international obligations under which the United States cannot increase tariffs. Still, if the U.S. government decides to apply carbon tariffs, the advantage of building them into the tariff schedule is the automatic nature of U.S. HTS. For the EU CBAM, Brussels has developed a completely separate system to analyze customized data reported by importers for each imported product. This model is very costly and requires specialists dedicated to this type of analysis. On the other hand, a carbon-based tariff schedule with emissions built in makes data collection much simpler. Even though the resulting data would not be as accurate as in the CBAM, and some capacity building and training would still be necessary, this approach would allow for efficient data collection without overly burdensome oversight of each transaction.
Q7: What are the international trade implications of this approach? Is it WTO compliant?
A7: World Trade Organization (WTO) compliance depends on whether the U.S. HTS breakout would be for purposes of imposing tariffs or not. While the mere detailing for data collection is unlikely to face challenges under WTO rules, the application of carbon tariffs would likely be challenged. The General Agreement on Tariffs and Trade (GATT) provides two basic principles to ensure fairness in international trade: the most-favored-nation (MFN) and national treatment principles. The MFN principle means that a country must treat all of its trading partners equally—if it offers a trade benefit such as lower tariffs to one country, it must offer the same benefit to all WTO members. The national treatment principle ensures that once a product enters a country, it must be treated the same as local products. In other words, the United States cannot favor a particular origin country over other places of origin, nor favor domestic producers over foreign producers.
As long as these two principles are observed, WTO members have broad discretion to design their tariff schedules, and the inclusion of carbon-related descriptions in tariff schedules would not violate WTO principles. In cases like Spain—Unroasted Coffee and Japan—SPF Dimension Lumber, panelists held that members can differentiate products in their tariff schedules as long as that differentiation does not unfairly discriminate among origin countries.
Considering the next administration’s interest in tariffs, carbon tariffs might seem an appealing idea. However, if the United States decides to apply carbon tariffs without a similar burden on domestic producers, the application of discriminatory tariffs (and not the tariff schedule itself) could violate WTO rules. Any tariff in excess of the rates negotiated under the WTO could qualify as a national treatment violation, especially if the United States is not enforcing carbon taxes on its own domestic producers. This would mean that foreign producers are subject to a higher burden than domestic producers, effectively giving U.S. companies more favorable treatment than foreign producers.
Carbon-based statistical breakout measures could enhance U.S. climate policy and are generally WTO compliant. However, carbon tariffs present a substantial risk of violating WTO rules and sparking international trade disputes due to trade discrimination.
Ana Luiza Sanches is a research intern with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Alan Reinsch is senior adviser with the Economics Program and Scholl Chair in International Business at CSIS.