How will the Foreign Pollution Fee Act impact carbon-intensive imports to the US?

Focused on reducing the importation of greenhouse gases to the United States (US), the Foreign Pollution Fee Act is one of several US carbon legislations currently being tabled.

The Foreign Pollution Fee Act (FPFA) could dramatically impact high-carbon domestic imports in the US.

Find out more about the FPFA's suggested carbon tariffs, how the policy compares to other US and EU carbon border adjustment mechanisms and how US importers of carbon-intensive products may be affected by this carbon legislation.

What is the Foreign Pollution Fee Act?

As carbon pricing schemes become commonplace worldwide, traders and manufacturers may have to pay an increasingly high price for their carbon emissions. If high-emission activities continue as usual, producers and importers could be putting their business models at risk.

In the US, one of the main carbon legislations currently under discussion is the Foreign Pollution Fee Act (the FPFA). Introduced in November 2023 by Senator Bill Cassidy, the FPFA is a carbon border adjustment legislation that seeks to apply tariffs to products imported into the US which are more carbon-intensive than goods produced domestically.

.png)

How does the Foreign Pollution Fee Act plan to curb emissions from carbon-intensive imports?

The FPFA's aim is to significantly reduce greenhouse gas emissions embodied in products imported into the US. Fees are charged for covered primary goods and products — as well as two categories of ‘finished goods’ (manufactured products).

Products covered by the FPFA include:

• Natural gas
• Refined petroleum products, crude oil and petrochemicals
• Solar cells, solar panels and wind turbines
• Biofuels
• Plastics
• Glass
• Cement
• Lithium-ion batteries
• Aluminum, iron and steel
• Hydrogen, methanol and ammonia
• Pulp and paper products
• Critical minerals such as graphite, uranium, silicon, manganese, cobalt, lithium, nickel, and copper

Fees will be set by the Secretary of the Treasury and based on how much more greenhouse gas (GHG) intensive non-US products are compared to domestic goods.

The bill proposes an ‘ad valorem charge’ on goods, meaning that the fee is applied to the dollar value of imported goods, rather than the specific emissions content (embodied emissions) of the specific imported good.

• The total tariff for a product under the Foreign Pollution Fee Act is calculated by multiplying the total amount of the product (in dollars) by a variable percentage number.

That variable percentage number is a tariff rate set for each tier of covered product. It's set in proportion to that tier of product's relative emissions — the difference between its US and non-US GHG intensity (or the GHG differential).

• For example, assume you import $400 of steel into the US, and the tariff rate is set at 5%. You would have to pay a carbon import fee of $20.

Unlike the EU Carbon Border Adjustment Mechanism (CBAM), the FPFA does not credit carbon prices paid in the country of export. This means US-based importers already paying for carbon pricing in the products’ country of origin would be double charged on those emissions.

Within the first six years, the Foreign Pollution Fee Act’s goal is to:

• Reduce products with a greater than 50% GHG differential to less than 50%;
• Reduce goods with between a 50% and 25% GHG differential to less than 25%;
• Reduce products with less than 25% GHG differential to less than 10%.

Timeline of the Foreign Pollution Fee Act

The FPFA would be implemented 36 months after enactment, with the earliest possible year being 2027 if passed into law in 2024.

However, the upcoming elections in November could make further action in 2024 unlikely, while enactment in 2025 onwards depends on the outcomes of both the presidential and congressional elections.

Does the Foreign Pollution Fee Act incentivize decarbonization?

Positioned as “an American plan to address the nexus between energy, economic development, supply chains, national security, and the environment”, the FPFA makes it more difficult for carbon-intensive imports to compete with domestic products. However, it does not provide incentives for US-based manufacturers to reduce their products’ carbon intensity.

While addressing emissions from imports does provide an opportunity for the US economy to decarbonize, imports of heavy products make up a small proportion of US consumption — for example, despite being the world’s largest steel importer, the US imports less than a quarter of its steel and steel imports reduced by 2% in 2022 compared to the previous year.

To scale up decarbonization more rapidly nationwide, the US would need a policy that covers domestic goods as well as imports.

US-based producers can lobby the US Secretary of Energy to add new products to the list of products covered by the FPFA. Trade organizations and labor unions can also lobby the Secretary, as can other individuals involved in manufacturing.

What is the Clean Competition Act?

The Clean Competition Act (CCA) is a proposed US carbon border adjustment legislation that establishes a domestic regulatory program to reduce industrial emissions from US producers and sets fees on imports from high-polluting sectors.

The CCA would introduce a so-called domestic industrial performance standard based on the GHG intensity of each national industry. Producers whose goods are above that benchmark would have to pay a fee. Over time, the standard’s benchmark is set to decline, while the fee increases year on year. Revenues will be used to incentivize domestic low-carbon technology innovation and activities to further reduce industrial emissions.

Which products would the Clean Competition Act cover?

From 2025, the CCA would apply to energy intensive industries, for example fossil fuels, petrochemicals, fertilizer, hydrogen, cement, iron and steel, aluminum, glass, pulp and paper. In 2027, it would be expanded to include imported finished goods that meet certain weight or value thresholds.

How does the Clean Competition Act differ from the Foreign Pollution Fee Act?

• Domestic reporting: GHG intensity reporting requirements on domestic manufacturers are required by the CCA, while the Foreign Pollution Fee Act does not impose these.
• Calculation responsibility: The CCA assigns responsibility for calculating imported covered primary commodities’ GHG intensity to ‘the Secretary’ (the Head of the Department of Energy). The Foreign Pollution Fee Act assigns responsibility of developing estimates of baseline pollution intensity of covered products — as well as the pollution intensity of covered products from any country of origin — to ‘the Board’ (the National Laboratory Advisory Board on Global Pollution Challenge).

Are there any other similar US legislations to the Foreign Pollution Fee Act?

Another US-based legislation which addresses domestic carbon emissions is the MARKET CHOICE Act ( M odernizing A merica with R ebuilding to K ickstart the E conomy of the T wenty-first C entury with a H istoric I nfrastructure- C entered E xpansion Act).

A bipartisan carbon pricing bill, the MARKET CHOICE Act would assign a systematically rising fee on carbon pollution. The tax would mostly be paid by fossil fuel producers at the points of taxation for coal mines, refineries and processing facilities. Similar to the Foreign Pollution Fee Act, the MARKET CHOICE Act also includes a stipulation that covered products may be added or removed by the Administrator (the head of the United States Environmental Protection Agency).

How does the Foreign Pollution Fee Act relate to the EU CBAM regulation?

The EU's Carbon Border Adjustment Mechanism (CBAM) is a carbon regulation which will cover imports of non-EU goods into the European Union. It complements the existing EU Emissions Trading System (ETS), which covers around 45% of the EU’s GHG emissions.

In contrast with the EU’s CBAM, the Foreign Pollution Fee Act’s ‘ad valorem’ charges do not correspond to products’ embodied GHG emissions — as the United States does not have a country-wide carbon price to reference, unlike the EU — but instead link to a US and non-US GHG intensity differential.