Trade in the Age of Climate Change: The Role of a U.S. Carbon Border Adjustment Mechanism

Key takeaways:

• Carbon pricing shifts the external costs of greenhouse gas emissions back to the source of pollution.
• Carbon border adjustment mechanisms (CBAMs) generally work by looking at the carbon intensity of an imported material compared to the same material produced domestically. If producing the imported product released more carbon emissions than the production of its domestic counterpart, the entity importing the good is taxed the difference.
• The Clean Competition Act (3422/H.R.6622) from the 118th Congress and the Foreign Pollution Fee Act (S.1325), which was reintroduced in April 2025, both aim to set a price on carbon-intensive imported products.
• The shift to domestic production, which would likely be spurred by a CBAM-like policy, could create an estimated 30,000 jobs in the steel and aluminum industries annually, according to Third Way.

Greenhouse gas emissions come with a real and substantial price tag, whether from rising sea levels, increased healthcare costs in heavily industrialized communities, or crop damage. Carbon pricing shifts the external costs of greenhouse gas emissions from society back to the source of pollution. With a carbon price, often set per ton of carbon dioxide emitted, the cost of emissions partially rests on the original emitters. There are a variety of methods for pricing emissions, including carbon taxes, cap and trade, and regulations and standards.

Nations that implement carbon pricing within their borders can consider pairing that with a carbon border adjustment mechanism (CBAM), which levels the playing field by ensuring that both domestic and foreign manufacturers pay the cost of their pollution. Implementing a CBAM without a domestic carbon pricing policy would likely be considered protectionism by trading partners, and could invite retaliation.

Inversely, policy analysts emphasize that environmental degradation is an unfair trade practice. Regulations generally increase the cost of production, so countries with lower industry standards can make cheaper products, but usually with a higher overall emissions intensity. The status quo system perpetuates U.S. companies importing inexpensive and carbon-intensive materials.

The European Union and the United Kingdom, which both have domestic carbon pricing policies in place, have both recently announced CBAM initiatives to tax imported carbon-intensive products and account for the direct and indirect emissions associated with their manufacturing. These CBAM policies work by looking at the carbon intensity of an imported product compared to the same product produced domestically. If producing the imported product released more carbon emissions than the production of its domestic counterpart, the entity importing the good is taxed the difference.

The emissions intensity of a product accounts for the material inputs, off-site electricity and heat, and final product manufacturing emissions (like raw material extraction or transportation). In 2021, stainless steel produced in Indonesia emitted 4.25 times the amount of greenhouse gases of steel produced in the United States, and the steel industry in China had double the emissions intensity of the U.S. steel industry.

A man works with a steel furnace. Credit: Kateryna Babaieva on Pexels.

CBAM market-based climate policies also aim to limit carbon leakage, or the transfer of production-related emissions to another country to avoid regulation or fees. For example, if a country in Europe should decide to import all of its steel because it is carbon intensive to produce, it would no longer be held accountable for any steel-related carbon emissions. Its domestic emissions would fall, making it easier to meet carbon reduction goals, but overall emissions would likely rise, which would defeat the goals’ purpose. With a CBAM, if the country is importing carbon-intensive steel, there will be a cost associated with that, putting more responsibility on the consuming country. In this way, a CBAM ideally incentivizes trade partners to reduce their production-related emissions.

There are numerous ways to implement a CBAM-like program. Each goes by a different name—CBAM, Methane Border Adjustment Mechanism (Methane BAM), Border Pollution Mechanism, and Foreign Pollution Fee—and involves different fine print, players, and intensity.

In recent years, proposed policies in the United States have attempted to launch carbon pricing mechanisms similar to those across the pond. In the 118th Congress, the Clean Competition Act (S.3422/H.R.6622) and the Foreign Pollution Fee Act (S.3198) both aimed to set a price on carbon-intensive products, but with starkly different approaches. Neither bill made it past introduction last Congress, but the Foreign Pollution Fee Act (S.1325) was reintroduced by Sens. Bill Cassidy (R-La.) and Lindsey Graham (R-S.C.) in the 119th Congress in April 2025.

The revenue from the Clean Competition Act’s CBAM, championed by Sen. Sheldon Whitehouse (D-R.I.), would be directed towards decarbonization, while the Foreign Pollution Fee Act does not specify where the revenue would be sent. The latter focuses more on boosting domestic manufacturing and national security under the Made in America policy agenda, with emissions reductions as a secondary benefit. Furthermore, the foreign pollution fee would only tax imported goods, while the Clean Competition Act would tax both imported and domestic products relative to their carbon emissions. Although emission reductions are likely to be more significant if domestic manufacturers also have a financial incentive to reduce product emissions intensity, a domestic carbon tax is a harder sell politically.

Sens. Whitehouse and Cassidy often speak about their ideas for CBAM-like programs. In February 2025, the Silverado Policy Accelerator hosted a fireside chat with the two lawmakers to examine the impact of carbon pricing on the United States and its trade partners. Silverado presented new research about the potential environmental and economic benefits of a CBAM for the trade of aluminum and steel, which are both carbon intensive to produce. Steel and aluminum are the first products to be affected by the European Union CBAM.

The Silverado study applied two fee-setting approaches: per ton and relative difference. The per ton fee looks at the difference between imported emissions-intensive goods and goods produced domestically, then applies a dollar amount per additional metric ton of carbon emitted by the foreign manufacturer. The relative difference fee is based on the assessed value of the item and set at a rate of either 0.6% or 0.9% for every 1% more emissions intensive the import is than the domestic product.

Using wrought aluminum as an example, if the tax is $55 per metric ton of carbon dioxide equivalent (the starting fee of the Clean Competition Act), then there would be an estimated 18% decrease in imports to the United States from more carbon-intensive sources (e.g., China, South Korea, India, South Africa, Turkey, and Mexico) and a 2% increase in imports to the United States from less carbon-intensive sources (Canada and the European Union). However, a relative difference tax of 0.9% (the highest proposed rate of the Foreign Pollution Fee Act) under the same circumstances would lead to an 82% decrease in imports to the United States from more carbon-intensive sources and a 9% increase in imports to the United States from less-carbon intensive sources. No domestic carbon fee was included in this analysis, and the report assumes that domestic manufacturing would fill the product void from lost imports.

Abandoned manufacturing plant in Bethlehem, Pennsylvania. Credit: Joetography on Pexels

A CBAM program would create an economic opportunity for U.S. producers. The steel industry could see an $8.5 billion increase in domestic markets, with aluminum closely following at $6 billion in newly claimed production by 2030. Additionally, the shift to domestic production would likely create an estimated 30,000 jobs in the steel and aluminum industries annually.

Under a CBAM, the shift of manufacturing back to the United States could encourage energy efficiency in the industrial sector, since the fewer emissions the sector generates, the harder it would be for foreign companies to compete and reduce their CBAM fees. At EESI’s Clean Manufacturing in America briefing, panelist Nora Wang Esram, now the CEO at New Buildings Institute, explained how the industrial sector’s energy usage has doubled in the past 70 years, and an estimated 50% of the energy consumed in industrial applications is lost through waste heat. Certain industries are considering electrification, industrial heat pumps, and thermal heat batteries to increase efficiency. Esram noted that complexity, competition, and cost are three barriers to entry for new, more efficient technologies and retrofitted systems. A CBAM policy could not only encourage reduced carbon intensity of the industrial sector globally, but also help adapt U.S. supply chains and promote investments in clean and efficient equipment and facilities here at home.

Author: Hadley Brown