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Congress can address competitiveness and climate change — without breaking trade rules

As Congress returns from their Fourth of July recess, one area where members can come together is in making America more competitive, particularly with a rising China, while aiming to fight climate change. As Congress considers its reconciliation package, it should include the recently-introduced Clean Competition Act (S. 4355). The bill, crafted by Sens. Sheldon…

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Members of Congress can work together to improve the United States’ competitiveness, especially in the face of a rising China, while also attempting to combat climate change, as Congress returns from its July 4 recess. The recently-introduced Clean Competition Act should be included in Congress’ reconciliation package (S. 4355). Whitehouse (D-R.I.), Coons (D-Del.), Schatz (D-Hawaii) and Heinrich (D-NM). The bill includes a carbon border adjustment tax on imported goods that are “dirtier” than their American-made counterparts, which benefits American companies that are doing their part to reduce greenhouse gas (GHG) emissions in their products and production processes.

The Clean Competition Act has many positive aspects. There will be a level playing field for American companies that produce goods with 40 percent fewer carbon emissions than our trading partners. For example, China, India, and Russia, which produce three or four times as much carbon as the average American manufacturer, are subject to a carbon border adjustment charge. Because we’re bound by WTO rules prohibiting favoritism for domestic producers, this policy is in keeping with our international trading responsibilities as well. Consistency with WTO rules means that the tariffs are less likely to spark an international trade war.

The bill’s fairness to both domestic producers and imported goods makes it WTO compliant. Start by finding out how much GHGs are produced on average in the United States from the following energy-intensive products: fossil fuels, refined petroleum products (RPP), petrochemistry (PC), fertilizer(fertilizer/hydrogen/adipic acid) and ethanol (cement/iron/steel/glass/paper/pulp/paper). Producers in the United States that are cleaner than the national average would be exempt from the fee. Those who emit more GHGs than the industry-specific average would pay $55 per ton.

Exports from countries with reliable and verifiable GHG emission data would pay the same $55 per ton based on the amount by which their home country’s average GHG intensity exceeds the US industry average. Similarly, imported goods would be treated similarly. In countries where data on GHG emissions is not publicly available, reliable, and verifiable, importers would be required to pay an import fee based on the amount by which the country’s overall average GHG emissions for all products exceeds the U.S. industry average for comparably energy-intensive goods. As a result, the most polluting businesses would be required to pay the highest fines. Exempting products from developing countries in accordance with international trade agreements and UNFCCC guidelines calls for a “special and differential treatment” for the world’s poorest nations.

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It also contains provisions to gradually increase the incentives for American producers and importers to reduce their carbon emissions. For example, it lowers the baseline averages over time, which means that more importers and domestic producers may be required to pay higher charges, and it expands the scope of products subject to the border charge by including finished goods containing 500 pounds or more (later lowered to 100 pounds). Therefore, both domestic and international producers will have strong incentives to reduce their GHG emissions without diminishing the current advantage that US producers enjoy due to their relative cleanliness when compared to other countries’ domestic producers.

Using the power of trade to meet our climate change goals will necessitate aligning our trade and climate change policies in order to achieve our goals. That is exactly what the Clean Competition Act does. Decarbonization will be made more appealing both domestically and internationally, and significant funding for the adoption of green technologies will be made available. Our obligations under the World Trade Organization are upheld by this measure. The Clean Competition Act could also serve as an American counterpoint to the European Union’s Carbon Border Adjustment Mechanism (CBAM), reducing the likelihood of disputes with the EU on climate policy.

The Clean Competition Act may be more practical and provide greater incentives for decarbonization than the EU system because it focuses on carbon intensity rather than emissions prices. Reconciliation package inclusion would signal an important American contribution to the recently announced G7 Climate Club initiative. This is a great opportunity for both American manufacturers and the planet to benefit from this legislation.

Georgetown University Law Center Professor Jennifer Hillman is a senior fellow at the Council on Foreign Relations, and a former member of the WTO Appellate Board. To keep up with what she’s up to, you can follow her on Twitter at @J A Hillman.

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