Recently, new legislations have been proposed and implemented in the USA and the EU to regulate the impact of climate change through border adjustment mechanisms (BAMs). These mechanisms aim to balance the competitiveness of domestic industries and combat carbon leakage by penalizing imports that do not meet domestic carbon emission standards.
In the USA, proposed legislation includes the Foreign Pollution Fee Act (FPFA) and the Clean Competition Act (CCA), while in the EU, the Carbon Border Adjustment Mechanism (CBAM) has already been implemented.
The FPFA, supported by the Republican Party and planned to be implemented 36 months after adoption, does not include a regulatory program but relies on an ad valorem tax on primary goods and two categories of manufactured goods. It provides an extensive list of covered products and allows domestic producers to request the addition of new products to this list. It includes Scope 1, 2, and 3 emissions, and the calculation basis is the pollution intensity at domestic production facilities.
On the other hand, the CCA, promoted by the Democratic Party for implementation in June 2026, is designed to work in tandem with domestic regulatory programs and sets taxes of $55/tCO2e imposed on finished goods. The CCA is based on an average of the greenhouse gas (GHG) intensity for the national industry, also encompassing the three types of emissions.
Another bipartisan legislative act under discussion in the USA is the ‘Market Choice’, which is set to be implemented in 2025 and is designed to work alongside a domestic carbon tax. With an extensive list of covered products, Market Choice proposes taxes of $35 per tCO2e on both covered domestic goods and imports. It would be the most extensive carbon emission regulation in the US economy, with emission details to be determined by the EPA and DOE.
In comparison, the EU’s CBAM, implemented in October 2023, is designed to work in cooperation with the EU ETS (European Union Emission Trading System). It targets six categories of goods with high GHG emission intensities and imposes taxes on primary goods. It includes onsite emissions and certain Scope 3 emissions, and for some materials, emissions from the electric sector are considered. The CBAM’s calculation basis reflects the EU ETS prices.
Analyzing these legislative initiatives, it is clear that the approaches of the USA and EU share similarities, such as the extension of the list of covered products and the inclusion of Scope 1, 2, and 3 emissions types. However, there are significant differences in implementation and how taxes and tariffs are calculated. While the USA opts for setting a specific tax per ton of CO2e, the EU links the CBAM mechanism to the existing prices in the EU ETS, providing a direct link to the European carbon market.
These legislative moves show an increased commitment by governments to address global environmental issues through economic and fiscal mechanisms. The effectiveness of these proposed and existing acts will depend on how they are integrated into global economies and the reactions of international trade partners.
For companies, these border adjustment mechanisms represent both a challenge and an opportunity. On one hand, firms will need to align their production with stricter emission standards and invest in clean technologies to remain competitive. On the other hand, they could benefit from a leveled playing field where imported products are subject to the same environmental taxes as domestic products.
In conclusion, the border adjustment mechanisms of the USA and EU represent a legislative response to the need to combat climate change and promote a green economy. However, their success will be determined by their ability to stimulate innovation, minimize trade impact, and be globally equitable. International cooperation will also be essential to ensure that efforts to reduce emissions do not transform into trade barriers but instead serve as incentives for effective and inclusive global climate action.