Insights into the Foreign Pollution Fee Act
On November 2, 2023, Senators Bill Cassidy (R-LA), Lindsey Graham (R-SC), and Roger Wicker (R-MS) introduced the Foreign Pollution Fee (FPF) Act, which aims to allow the United States to “address economic, geopolitical, and national security all at once” by imposing a fee on products imported in the United States that are “dirtier” than their domestic alternatives. The bill presents no domestic fee on U.S. production and varies its charges according to the difference in pollution emitted by a foreign country’s good relative to the United States’ alternative. The introduction of the bill marks an important step in the United States’ efforts to combat climate change, as it was undertaken by three prominent lawmakers from the Republican Party, which has traditionally been skeptical of federal policies to curb climate change. It also allows for the U.S. government to establish “international partnerships” to foster clean trade. However, it also possibly violates the United States’ commitments at the World Trade Organization (WTO).
Q1: How does the Foreign Pollution Fee Act propose to curb emissions from “dirty” imports?
A1: The FPF would set up a fee on certain imported products with a “pollution intensity” over 10 percent higher than similar goods produced in the United States. Goods produced in countries with which the United States has a congressionally approved free trade agreement (FTA) that have within 50 percent of the same amount of emissions as their U.S.-made alternatives would not face the FPF; however, re-exports of goods from FTA-countries that were originally created in a non-FTA country would face the FPF fee. Products would face different tiers of fees based on their pollution levels.
Q2: What products are covered under the FPF?
A2: The products that are covered under the FPF are organized in two main categories. The first is “energy products,” such as natural gas, oil, hydrogen, minerals, solar panels, and wind turbines. The second is “industrial products,” such as aluminum, cement, glass, iron, steel, petrochemicals, and paper. Both the scope of covered products and the fee rates would be reassessed every three years. In addition, the bill gives manufacturers the opportunity to petition for additional products to be included in the list: “new products can become a covered category via petition that includes 50% of domestic manufacturers of said product.” This feature of the proposal gives significant influence to domestic manufacturers to ensure that a fee is slapped onto their “dirtier” foreign competitors, potentially adding to the protectionist nature of the legislation.
However, the FPF also includes the ability for foreign producers to have their goods’ fees waived or reduced. If there are “national security needs tied to” imports from a specific location, the fee can be erased—minerals for advanced semiconductors, for instance, could fall under that category. Tied to this feature, the fee can be diminished if the United States produces less than 5 percent of domestic demand in specific instances. The latter seems to set a high standard for products, as 5 percent of domestic demand is particularly low.
Q3: How would the FPF be implemented?
A3: The final rulemaking to clarify definitional issues, such as waiving the fee on specific goods and calculations of pollution intensity, would be completed by the Department of the Treasury in coordination with National Laboratory recommendations. Both the Department of the Treasury and the Office of the U.S. Trade Representative would be tasked with addressing circumvention, which could include adjusting fee rates. U.S. Customs and Border Patrol would collect the fee.
Q4: Would the FPF incentivize decarbonization?
A4: The FPF would rely on industry averages of emissions to calculate how “dirty” they are. These calculations support the proposal’s geostrategic aim of isolating “bad actors” such as Russia or China, as some research has found that U.S. industry is less carbon-intensive than its counterparts in these nations. However, as CSIS has previously written, this approach does not take into account important firm-specific considerations that would provide a more precise emissions calculation. The national sectoral average can result in firms paying twice—once for renewable energy and another time for carbon fees. If they face such a competitive disadvantage, companies may shy away from finding ways to decarbonize altogether.
Q5: How would the FPF serve the United States’ geostrategic interests?
A5: The act is squarely aimed at curbing sourcing from China and other countries of concern, which it states have “ignored international norms and agreements regarding environmental protection.” The FPF’s authors argue that the current global trade system has rewarded bad actors, chief among them the Chinese Communist Party (CCP), by letting them exploit loopholes in the WTO and pollute without consequence. According to the act’s fact sheet, this has enabled China to devote unfair economic gains to military expansion and economic coercion while undercutting the United States by causing the loss of millions of jobs and creating supply chains overly dependent on Chinese manufacturing. The proposal’s fees are therefore meant to reduce China’s ability to take advantage of the current trade system and restore the United States’ position as a leader in clean manufacturing and energy production. The bill also names Russia as a bad actor, arguing that its ability to take advantage of trade rules to export “dirtier” goods go against the United States’ greater foreign policy interests.
Q6: Does the bill respect the United States’ WTO commitments?
A6: Two articles from the WTO’s General Agreement on Tariffs and Trade are at issue here. Article I, the “General Most-Favoured-Nation Treatment” principle, states that any product emanating from or destined to any country must be given the most favorable tariff and regulatory treatment given to similar products imported from or exported to all other WTO members. Article III, the “National Treatment on Internal Taxation and Regulation” principle, requires non-discriminatory treatment between domestic and imported products. Both of these fundamental principles of international trade, according to WTO rules, must be considered when devising a carbon fee on imported products. The European Union has grappled with the same requirements in devising its carbon border adjustment mechanism (CBAM). The question of whether these prices on carbon-intensive imports violate global trade rules can never be answered definitively in the absence of an actual complaint and a subsequent WTO panel report that provides an answer, but speculation is always possible. The European Union defends the CBAM by noting that domestic manufactures of the same products are subject to its Emissions Trading System and thus are treated in an equivalent manner. Once importers have to start paying, there will most likely be complaints, and the European Union’s assertion that its CBAM complies with Article III will be tested. In contrast, the proposed FPF does not include a domestic fee, and the United States does not have one pursuant to other legislation, so it would be difficult for the United States to argue that the FPF would comply with WTO rules if it were enacted.
Q7: How does the bill deal with U.S. economic allies and partners?
A7: The FPF’s lack of fees on domestic products is sure to anger Washington’s trading allies and partners, who already see its current trade and industrial policies as fostering an uneven playing field in favor of its domestic producers. The Inflation Reduction Act, the United States’ landmark piece of climate legislation, has sparked the ire of the Washington’s closest friends through its local content requirements and significant state-led subsidies. As stated above, due to its uneven treatment of foreign suppliers, the FPF likely goes against WTO rules. However, the act does include the ability to negotiate “international partnership agreements” to permanently waive its fees. The FPF’s fee would not apply to goods from nations in such partnerships, provided such products are within 50 percent of the U.S. alternatives’ pollution intensity.
These international partnerships could be negotiated bilaterally, multilaterally, via FTAs, or as part of a larger international agreement. They can include some or all of the act’s covered products. The partnerships should require that countries be able to maintain their own policies to address pollution intensity but also have trade policies that discourage market access to high-pollution-intensity countries. With these two features, the FPF both emphasizes national sovereignty on climate action while implicitly pushing U.S. trading partners to curb their economic engagement with countries of concern, which the act names as high pollutants, and prioritize their relationship with Washington. Building on that goal, partnerships also require lowering trade barriers for U.S. exports to partner countries—without initially requiring that the United States reduce its own barriers. However, low- and lower-middle-income countries that join a partnership do obtain some advantages, as they would be judged solely “based on manufacturing built after the passage of the FPF; provided preferential treatment by U.S. development and trade agencies; and offered preferred market access to sell into the U.S. and other partner markets at the expense of high-polluting, non-partner countries.” In addition, advantageous treatment can also be given to upper-middle-income countries for national security reasons.
By isolating “bad actors,” especially China, the FPF exemplifies how promoting geostrategic interests can hinder environmental goals. Greg Bertelsen, CEO of the Climate Leadership Council, noted there could be concerns that the act sets too high a bar for China to lower its emissions and creates a situation where China is isolated from trade relationships while doing little to decarbonize its production processes. In addition, because the fee is calculated relative to U.S. products, there is little incentive for domestic manufacturers to pursue their own decarbonization goals.
Nevertheless, the FPF has several positive aspects. The first has to do with its big picture politics: three Republican lawmakers formulating legislation to tie trade policy and climate goals signals that new bipartisan efforts may come from Capitol Hill to tackle environmental issues. Second, despite the absence of fees on U.S. products, the act still paves the way for international coordination on climate and trade via its international partnerships, which include the potential for market access—a rare sight in U.S. policy today. That inclusion is particularly important because it marks an understanding that working with trading partners and allies and lowering trade barriers is an essential part of combating climate change. In parallel, the act’s international partnerships also tie comprehensive trade agreements with allies to accomplishing greater U.S. geostrategic interests, as these partnerships are meant to offer a counterweight to China’s growing economic influence. This consideration, that in-depth trade partnerships are a useful tool in the U.S. foreign policy arsenal, has been missing from Washington’s recent policies.
Thibault Denamiel is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Reinsch holds the Scholl Chair in International Business at CSIS.