Carbon-Based Lawmaking

This Week's Trend In Brief:

• Less than a month into the new year, Congress is considering the PROVE It Act, which could majorly impact the industry’s ability to operate down the road by authorizing a study into the carbon emissions of U.S. manufactured products.
   

• Proponents of the legislation argue it would put high-quality data behind domestic manufacturing practices and “level the playing field for our cleaner producers,” but critics worry the legislation could set the stage for a carbon tax that could negatively impact businesses across the U.S.
   

• The legislation comes after months of discussions on how to respond to carbon border adjustment mechanisms established in the EU and announced in the UK, despite worries the measures could be used as a “trade weapon” to negatively affect customers, businesses, and other countries.
   

• Impacted firms are also concerned environmental groups, though skeptical of carbon pricing mechanisms, could use data disclosed through the legislation as a regulatory cudgel to demand companies clean up their act – regardless of how clean they may already be.
   

• Weak signals of this potential legislation began in late 2022 and accelerated last year. Now energy public affairs professionals will need to remain ahead of the curve of the debate as it unfolds to ensure policymakers’ best intentions do not become an opportunity for activists to undermine U.S. manufacturing or increase the costs of doing business.

Digging Deeper:

 
This week, Congress is considering legislation introduced in June 2023 that would lay the groundwork for climate trade policies by mandating the U.S. Department of Energy conduct a study to determine the emissions related to nearly two dozen products made in the U.S. Proponents of the legislation contend it would produce high-quality data showing “American manufacturing and production is among the cleanest in the world,” but those opposing the legislation worry it will set the stage for more significant and more consequential climate action down the line that could have far-reaching ramifications for industry and domestic production as a whole.
 
While those who support the legislation argue it would “level the playing field for our cleaner producers” in the U.S. and hold other, less regulated countries accountable, its opponents argue it would lay the groundwork for a carbon price and tariff. In its simplest form, setting a carbon price purports to allow governments and businesses to measure the external cost of greenhouse gas emissions related to domestic production. Those in favor of a carbon price and subsequent tax see it as a fundamental part of “the transition to a decarbonized economy,” but opponents of the legislation contend that “for consumers, it simply means making everything cost more via a hidden tax politicians can use to spread around for their political priorities.” 
 
The legislation comes in response to recent actions in the EU and the UK, which both recently announced or began implementing their own carbon border adjustment mechanisms (CBAM) despite objections that schemes amount to a “trade weapon.” The first phase of the EU’s CBAM entered into application several months ago and is being hailed as a “landmark tool to fight carbon leakage and one of the central pillars of the EU's ambitious” climate plan. Similarly, the UK recently announced goods imported into the UK from countries with a lower or no carbon price will have to pay a levy by 2027. According to UK finance minister Jeremey Hunt, the “levy will make sure carbon intensive products from overseas – like steel and ceramics – face a comparable carbon price to those produced in the UK, so that our decarbonisation efforts translate into reductions in global emissions.” Critics, however, worry CBAMs are a “trade weapon” that could negatively affect customers, business, other countries, and run afoul of U.N. trade and climate rules. Critics also argue CBAMs are an example of the EU setting “regulatory standards that nudge the rest of the world to keep pace” under the auspice of protecting industry from being undercut by other producers. 
 
While they have some skepticism about carbon pricing, some environmental groups see the mechanism as a regulatory cudgel in the fight for environmental justice. Some climate groups are “distrustful of market-based solutions” oppose carbon pricing, but groups like Citizens’ Climate Lobby (CCL) contend pricing schemes like California’s “cap-and-trade” program have reduced pollution and benefited residents. CCL is now advocating for Congress to pass the PROVE It Act, calling CBAMs “an effective tool that can work quickly to lower global carbon emissions.” Groups like CCL view the legislation as a way to demand transparency and address pollution through future regulatory crack downs on companies they deem unfriendly to the environment. Under recent rules unveiled in California, for example, companies must “disclose the greenhouse gas emissions they produce and how climate risk affects their business.” While the rules were intended to address climate problems, activists view the law as a way to force further decarbonization by both domestic and international companies. As California state Senator Lena Gonzalez noted, “having that data available is a very powerful lever for other jurisdictions to use.” 
 
As Congress considers following the EU and UK down their carbon pricing paths, it is more important than ever for public affairs professionals and the companies they represent to fully understand the issue and its possible ramifications. The Biden Administration has already established rules such as a calculation of the “social cost of carbon,” and the PROVE It Act could lay further groundwork towards adopting carbon pricing measures in the U.S.. While some Republicans have expressed openness to a carbon border scheme, others view it as a precursor to domestic carbon taxes. As the debate continues to unfold, it is essential to understand this shifting narrative in real-time and understand the full range of stakeholders trying to shape those perceptions.

Trends in Energy is your weekly look at key trends affecting the energy industry, brought to you by the competitive intelligence experts at Delve. As the political and regulatory landscape continues to shift, reach out to learn how our insights can help you navigate these challenges.