China rivalry helps drive US carbon pricing debate

Welcome back. Economists have long viewed international carbon pricing as one of the most important policy tools — arguably the most important — in the fight against climate change. The EU has been the key mover so far, with a long-standing industrial carbon trading scheme and an incoming levy on carbon-intensive imports.

Now, momentum is growing around a similar move by the US, as was clear from the conversation that FT climate correspondent Attracta Mooney and I had in London with John Podesta, the White House senior adviser on international climate policy. Such a step could be a major development for the global energy transition — even if it’s the US economic rivalry with China that gets it over the line.

Carbon pricing

US looks beyond its borders in new approach to carbon pricing

Joe Biden’s weak performance at Thursday’s debate with Donald Trump has added weight to predictions that his administration is now entering its final months.

But our conversation with John Podesta underscored the growing political support in the US around carbon pricing, especially on imported goods. The momentum could conceivably grow even under a second Trump administration, thanks to the bipartisan concern about Chinese industrial competition.

So far, the Biden White House appears to have made a conscious decision not to prioritise a national carbon pricing system, as has now been rolled out in various forms in most other high-income economies and in China. That concept has long been seen as politically toxic in the US, the world’s biggest oil and gas producer. Biden’s clean energy strategy has put much more emphasis on carrots than on sticks, notably through the lavish incentives proffered under the Inflation Reduction Act.

But Podesta made clear that carbon pricing in international trade is now a focus for the administration. “The global trading system doesn’t properly take account of embodied carbon in tradable goods,” said Podesta, who announced a new “task force” to tackle this issue in April. “So we’re undertaking a review of that, trying to deepen the data that we are going to need to implement a policy framework for that.”

What has caused this shift? There are two obvious factors to consider.

The first has come from Europe, in the form of the EU’s Carbon Border Adjustment Mechanism. From 2026, EU imports of a wide range of goods — from aluminium to fertilisers — will be subject to a levy linked to the carbon emissions from their production (“embodied carbon”). That is, unless their producers have already paid a domestic carbon price at least equal to that paid by their European competitors under the EU’s emissions trading scheme (ETS) for power providers and heavy industry.

This creates a clear incentive for other countries to introduce serious carbon pricing schemes of their own. That way, instead of letting Brussels collect carbon-linked levies under its CBAM, they can raise that money themselves.

This is the logic of the “Climate Club” model proposed by the Nobel-winning economist William Nordhaus. Judging by the growing global momentum around carbon pricing, Nordhaus may have been on to something.

China is reportedly considering expanding the scope of its ETS to new industries including cement and steel, and has been allowing the carbon permit price to rise, albeit to levels well below the EU price. Turkey and Brazil are both in the process of introducing an ETS. The UK will impose a CBAM in 2026. There are now 75 carbon pricing systems in force around the world, covering 24 per cent of global emissions, according to a recent World Bank report.

Podesta demurred when I asked if the EU’s CBAM had helped to drive the US movement on this front:

“I would characterise it as a common analysis, and they’re just further along in implementing the policy. So I don’t think we’re reacting to the CBAM, as much as we’re reacting to the same problem, which is, we’re not going to just give up our industrial base to people who are dumping carbon.”

The second clear driver of US interest in this field is China — specifically, the enthusiasm of politicians from both main parties for measures to tackle supposedly unfair Chinese industrial competition. That’s why, as Podesta put it, carbon-related trade policy is “maybe one of the few places where there’s bipartisan conversation”.

Last November, Republican senators Bill Cassidy and Lindsey Graham proposed legislation to introduce a “foreign pollution fee”, targeting carbon-intensive goods from other countries. Explaining the rationale for the bill, Cassidy’s stated priorities have included “isolating China” and exploiting a “clear competitive advantage”, in the form of US industry’s lower carbon emissions.

The Cassidy-Graham bill would not introduce domestic carbon pricing — unlike a bill introduced to Congress in December by Democratic senator Sheldon Whitehouse and congresswoman Suzan DelBene.

Podesta noted that the Biden administration had introduced a national fee for methane emissions, and that California and several north-eastern states had already introduced state-level emissions-trading schemes along similar lines to the EU’s. But he refused to be drawn on the prospect of federal carbon pricing, placing far more emphasis on the need for action on international trade.

In the absence of domestic carbon pricing, US exports to the EU will be hit by new levies under Brussels’ CBAM — a shift that will add a new level of tension to transatlantic trade relations. But if the US ends up introducing a CBAM-type policy of its own on imports, this would bring a dramatic shift in the economic incentives for industrial producers all over the world.

Smart read

What’s behind Donald Trump’s newfound enthusiasm for the cryptocurrency sector? Jemima Kelly explains.