Legislation is designed to level the playing field for U.S. producers.

On November 2, 2023, Senators Lindsay Graham and Bill Cassidy introduced S.3198, the Foreign Pollution Fee Act (FPF), legislation designed to impose fees on pollution-heavy imports. The proposed legislation would create a system of fees on imports produced with methods found to generate more pollution than current methods in the United States. The intent of the FPF is to diminish the competitive advantages accruing to foreign producers not required to abide by the same environmental regulations as U.S. manufacturers. Depending on the product and its country of origin, the impact could be significant.

As proposed, the FPF would affect both raw materials and some finished products. The current language would include solar panels, wind turbines, cement, petroleum and petroleum products, aluminum, glass, iron and steel; additional products might also be affected.1 Products affected by the FPF are sorted by their classification based on the Harmonized Tariff Schedule of the United States.

Fee levels would vary depending on the industry and country of origin; countries in which the particular industry has a higher “carbon intensity” would be subject to a higher fee. Pollution data is to be collected and provided by the U.S. government through a new Laboratory Advisory Board on Global Pollution Challenges. Particular foreign producers would have the ability to petition for individual treatment, while domestic producers can also petition to have additional items added to the list of covered products.

The proposed bill currently contains a limited exception for free trade agreements. Countries engaged in free trade agreements with the U.S. would be exempted from the fee, unless the relevant industry pollutes over 50% more than the same U.S. industry. Exceptions would also be available for products deemed required for national security purposes, or that are not produced in the U.S. in sufficient quantities. Notably, these exceptions are largely not available to non-market economy countries—including China.

Although the FPF is arguably focused on climate policy, it is also consistent with a broader trend of policy measures reflecting escalating concerns regarding trade with China, as demonstrated recently in the Department of Commerce’s rulemaking further restricting trade in semiconductors and other advanced computing equipment with China.2 The FPF is intended to level the playing field between U.S. producers abiding by stricter environmental policies, and foreign producers who take advantage of countries with significantly less environmental requirements.

Support for this bill and others like it has grown. In June 2022, Senator Sheldon Whitehouse introduced the Clean Competition Act (S.4355), which would have created a similar carbon fee for imports. And in June 2023, Senators Christopher Coons and Kevin Cramer introduced the Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency Act of 2023 (PROVE IT) Act of 2023 (S.1863) to study the emissions intensity of certain products. However, support for the FPF is not universal; some domestic interests and commentators have voiced concerns that the bill and similar proposals would only increase costs of production for domestic producers, with higher prices being passed to consumers as a result.3

The European Union has enacted a similar fee system, known as the Carbon Border Adjustment Mechanism (CBAM). However, the authors of the FPF claim that, unlike the CBAM, the FPF will not allow creative supply chain tactics to avoid the bill. Neither the FPF or CBAM have been subject to review under the World Trade Organization (WTO), and the authors of the FPF claim that the FPF is compliant with the rule of the WTO.4 However, a challenge may well be possible should the bill become law.