Thread by @DavidKleimann

Carbon border adjustment (CBA) corner:

After the release of the @EU_Commission's #CBAM proposal, Dem Congressmen Coons & Peters tabled a US CBA bill proposal that is so flawed that if adopted could irreparably poison transatlantic cooperation on carbon leakage & CC mitigation 🧵

https://twitter.com/toddntucker/status/1417239937712332803

In contrast to @toddntucker’s more than charitable reading of the Dem proposal, I argue that the bill

1⃣would do close to nothing to combat carbon leakage
2⃣would not stand the slightest chance of surviving the WTO legal test

https://twitter.com/toddntucker/status/1417250011667181569?s=20

3⃣has only two objectives: 1st, to protect US industry from fair import competition and, 2nd, to deter the EU from adopting its CBAM proposal as it stands;
4⃣deflects attention from a politically controversial piece of US policy homework: the adoption of a US price for carbon.

What’s in the Dem proposal? It would…

1⃣… apply an import charge based on US domestic industries’ average adaptation cost to US greenhouse gas (GHG) regulation multiplied by GHG emitted in the production process of the imported products;

2⃣...exempt all importers whose home jurisdictions have at least the same level of GHG regulation in place as the US (as determined by the US admin) and do not apply a CBA – a carve out broad enough to benefit… Switzerland, Liechtenstein, and Norway.

3⃣…exempt all LDCs (LDC trade in the covered sectors close to zero)
4⃣The bill would NOT credit *any* implicit or explicit GHG regulation / taxation costs paid by importers in their home jurisdictions.

What would be the effect of the proposed bill?

1⃣double-taxes all importers who already paid explicit carbon costs @ home AND have a CBA in place (EU) or whose jurisdictions don’t have US equivalent GHG regs. The higher the carbon cost paid @ home the higher the double-taxation

2⃣It double-charges all importers from jurisdictions where GHG regulations are not found to be equivalent to the US but had adaptation cost to existing regulations @ home are > zero. The higher the regulatory adaptation cost at home, the higher the double charge tally.

3⃣ benefits importers who have paid little or zero implicit or explicit carbon costs at home

4⃣Benefits US producers relative to all importers except… Switzerland and Liechtenstein.

5⃣results in reduced imports at a given demand, but a higher share of carbon-intensive imports

Would the proposed bill be WTO compliant? Surely not.
1⃣discriminates among like imported products (Art I GATT)
2⃣applies a charge in excess of scheduled commitments (Art II GATT)
3⃣discriminates against imports vs like domestic products (Art III GATT) based on production method

4⃣The bill would also not be sheltered by the Article XX(g) GATT general exception because

🅰️ it may well be found to be to *unrelated* to the legitimate policy objective (conservation of exhaustible resources). That would be capital punishment in WTO law terms.

or...

🅱️ it doesn’t achieve the legitimate policy objective with the least trade restrictive means and hence unjustifiably discriminates among importers AND against importers vis-à-vis domestic producers

Note: the unjustifiable discrimination among domestic and foreign producers seems to weigh heavier here, but but we are already in blood-red ‘unjustifiable discrimination’ territory in both instances.

It doesn’t get much worse than this.

Effects on US relations with major trading partners?

1⃣Major irritant in EU-US relations as the bill explicitly targets CBA countries
2⃣diminishes Biden admins precious political capital across the EU;

3⃣invites retaliation from EU and non-EU governments;
4⃣ renders climate and trade cooperation with European allies in context of COP-26 and MC-12 difficult to impossible

Effects on US domestic politics:

deflects attention away from urgently needed (for climate purposes) but politically unpopular adoption of an explicit carbon price, which would also mitigate US issues w EU CBAM, since CBAM credits explicit but not implicit carbon costs.

Policy Recommendations:

1⃣bin the Coons/Peters CBA proposal
2⃣adopt a domestic price for carbon
3⃣engage sincerely w EU and other gvts in negotiations over the design of bilateral or plurilateral #CBAM based on the EU model.

The link to the 19 page Coons/Peters proposal: coons.senate.gov/imo/media/doc/…

The link to the 291 page European Commission proposal: ec.europa.eu/info/sites/def…