How to boost US clean manufacturing with a low-carbon product standard

The intersection of climate and trade policies is increasingly at the center of U.S. and international debate. The European Union is moving forward with the Carbon Border Adjustment Mechanism (CBAM), which would apply a carbon fee on imported goods equivalent to the allowance price in the E.U. Emissions Trading System (ETS). At the same time, some policymakers in the U.S. are looking to leverage the degree to which certain U.S. industries, which operate under significant environmental regulations, are typically less carbon-intensive than competing industries in countries like China.

Given the strong bipartisan distrust of China, this factor plays a large role in discussions of possible carbon-oriented trade legislation in the U.S. In addition, some in the U.S. hope that strong climate-trade legislation would allow American companies to enter a “climate club” with the E.U. and avoid the CBAM. These factors have led to talk of possible bipartisan agreement on Capitol Hill on the use of trade policy to protect clean U.S. industries facing competition from more carbon-intensive industries overseas.

What has been less prominent in these discussions is how to use this type of trade-oriented climate policy to not only protect U.S. products from competition from carbon-intensive imports but to accelerate decarbonization of U.S. industry and manufacturing, which include some of the hardest-to-abate sectors. A low-carbon product standard applied to goods sold in the U.S. could speed industrial decarbonization for both goods made domestically and for imports. Implementing this approach would require many of the same elements under consideration with the CBAM and on Capitol Hill.

Let’s walk through the basics of how these various policies would work.

The EU’s ETS requires local manufacturing facilities (among others) to turn in credits to cover their carbon emissions. While credits can be bought and sold and some are auctioned, industrial facilities have received a significant portion of the credits they require for free because of concerns about competition and carbon leakage in trade-exposed sectors like steel and cement.

Over the next decade, the E.U. is replacing free allocations with the CBAM. This will require importers to effectively pay the same price for the emissions associated with imported goods as they would if the goods had been produced in facilities covered by the ETS. The E.U. also plans to implement a de facto climate club, with imports from countries with comparable carbon pricing systems exempt from CBAM.

Interest in similar sector-based border adjustment mechanisms has increased in the U.S., driven in part by the sense that U.S. manufacturers in some sectors like steel production are less carbon-intensive than overseas competitors. Much of the discussion in the U.S. focuses on proposals that would apply carbon tariffs to imported goods that are more carbon-intensive than their U.S. counterparts, but without any corresponding fee on carbon-intensive products produced domestically. Such a policy would boost U.S. industry by making carbon-intensive imports more costly. However, a policy that does not apply emission reduction incentives or requirements on domestic manufacturers will do little to drive the deep industrial decarbonization in the U.S. that is critical to meeting climate goals. In addition, while some of the interest in these policies centers on allowing U.S. manufacturers to be exempted from the EU CBAM, it seems unlikely that an import-only fee would satisfy the E.U. that the U.S. has in place a comparable carbon pricing system.

An exception to this “imports only” approach is the Clean Competition Act (CCA) introduced in the last Congress by Sen. Sheldon Whitehouse (D-R.I.). Under CCA, both domestically produced and imported goods would face a carbon intensity charge if their emissions intensity exceeded a certain benchmark. The charge would start at $55 per ton of carbon emissions and increase by 5 percent plus inflation each year, while the intensity benchmark would drop 2.5 percent per year for the first few years and 5 percent per year thereafter until it reached zero. This fee would provide a very strong incentive for both domestic and international manufacturers to reduce their emissions intensity and has a promising potential to be considered part of an international climate-club pact.

The CCA would come close to implementing a low-carbon product standard (LCPS), which World Resources Institute explored for the cement and steel industries. As described in this research, an LCPS would create a credit trading system similar to an emissions trading system, where products whose emissions intensity was lower than the benchmark would earn tradeable credits and products with a higher emissions intensity would have to surrender credits. The system could also be implemented with a fee-bate approach, where rebates would be paid to those who earned credits and a fee would be paid by those who owed them.

While both a CCA and LCPS would assess a product’s emissions intensity against a benchmark, an LCPS would create an additional layer of incentive for companies to make investments in significantly lowering their emissions, particularly in the early years of the program. Rather than just avoiding a fee by beating the benchmark under the CCA, with a LCPS companies would earn money based on how far below the benchmark they were. This approach would provide strong financial incentives for both existing facilities and new entrants to invest in innovative technologies and processes that not just meet but significantly beat the benchmarks. As the benchmark approaches zero under CCA, more goods would fall on the fee side of the equation, so the difference between the two approaches would diminish over time.

As policymakers look for ways to ensure that low-carbon U.S. manufacturers aren’t outcompeted by high-carbon imports, the U.S. should not simply rest on its current relatively clean manufacturing practices. A low-carbon product standard would ensure that manufacturers of both domestically produced and imported goods have strong incentives to decarbonize as soon as possible while also bolstering the competitiveness of clean U.S. manufacturers.

Kevin Kennedy is a senior fellow for the U.S. Climate Program at World Resources Institute.

Ankita Gangotra is an associate for industrial innovation for the U.S. Climate Program at World Resources Institute. Follow her on Twitter: @AnGangotra