Foreign Pollution Fee Act: Design Elements, Options, and Policy Decisions

In our 2023 report, Carbon Border Adjustments: Design Elements, Options, and Policy Decisions, we provided an overview of critical design elements in carbon border adjustment policies. We compared these design elements, such as how fees are set and the product scope, across several border adjustment mechanisms (BAMs) including the European Union’s Carbon Border Adjustment Mechanism (EU CBAM); the Clean Competition Act (CCA) proposal and the Foreign Pollution Fee Act (FPFA) proposal. In April 2025, a revised version of the FPFA was reintroduced in the Senate by Bill Cassidy (R-LA) and Lindsey Graham (R-SC). This issue brief uses the design elements introduced in our original BAM report to describe the policy reflected in the updated bill.

The FPFA recognizes in its design and structure that the United States has reduced its greenhouse gas (GHG) emissions substantially over time, and that US manufacturers face costs to comply with environmental regulations that are not faced uniformly by many countries US manufacturers compete with. Though US emissions have decreased, the United States is also a significant importer of GHGs embodied in primary commodities and manufactured products from countries that have not taken comparable actions to reduce their emissions.

A primary purpose of the FPFA is to level the playing field for US manufacturers vis-à-vis manufacturers in jurisdictions with higher average carbon intensities in selected sectors and thereby reduce the importation of embodied GHGs. The FPFA seeks to accomplish this goal by imposing a fee on embodied imported GHGs for a set of product categories that are highly traded and also have high GHG intensities. The proposed fees are intended to disincentivize US importation of such products from countries with poor environmental performance, incentivize increased importation from countries with high environmental performance and greater US manufacturing overall, and address concerns about international industrial competitiveness. The primary focus on leveling the playing field for US manufacturers means that the FPFA does not include provisions to require further reductions in greenhouse gases by domestic manufacturers, in contrast to other proposals such as the CCA.

BAMs are complicated and technical policy instruments, and the FPFA is no exception. To describe the FPFA in this brief, we discuss it in terms of the seven design elements of BAMs we laid out in our earlier report. We have made every effort to be concise with respect to our descriptions of the policy approach taken in the legislation, but that has required us to abstract from a great deal of detail that exists within the legislative text. This issue brief is intended to provide a roadmap to understanding the approach taken by the FPFA but should not be considered a complete and comprehensive description and review.

BAMs are intended to ensure the competitiveness of domestic producers as they undertake potentially costly actions to reduce their GHGs. At the same time, BAMs disincentivize the importation of embodied GHGs in products that are covered by the BAM. In the design of a BAM, one expects to see the list of covered products dominated by primary commodities with relatively high GHG intensities (i.e., tons of embodied GHGs per ton of product).

Any potential increase in the price of primary products resulting from a BAM can be expected to result in an increase in the price of domestic manufactured goods using those primary products as inputs. Without further consideration in the policy design, import fees on primary products can reduce the international competitiveness of such manufactured goods. As a result, BAMs often are designed with provisions that apply import fees to these manufactured goods as well to ensure competitiveness.

The FPFA levies fees on covered primary goods/products as well as two categories of “finished goods” (manufactured products). It identifies several large categories of covered products including aluminum, cement, glass, hydrogen, fertilizer, iron and steel, lithium-ion batteries, and solar cells and panels. The FPFA then defines the covered products that are subject to the imposed fees within each large category using the four, six, eight, or ten-digit code of the Harmonized Tariff Schedule of the United States. Depending upon the category, a substantial number of products will be subject to fees.

A goal of the original FPFA was to significantly reduce GHGs embodied in imported products over a 12-year period and then to continue the reduction of imported embodied GHGs over the years to follow. This goal led the original FPFA to have a very different fee structure than the EU CBAM and the CCA, as discussed in our earlier report. The revised FPFA simplifies the fee structure to something akin to “carbon tariffs.” Country-specific ad valorem fees (called a “variable charge”) are calculated and imposed for each covered product according to the average GHG intensity of a product in the foreign country relative to the United States. The greater the GHG intensity difference, the greater the fee. An implication of this approach is that the fee level will differ depending on the product group and the country of origin of the imported goods.

The level of the fee depends on three different tiers that may apply, depending on the “pollution intensity difference” (i.e., GHG intensity). Tier 1 applies to imported products where the difference in intensity is between 10 percent and 20 percent. The ad valorem fee is between 5 percent and 25 percent, following a linear trajectory from the lower to the higher intensity difference. Tier 2 applies to imports with an intensity difference between 20 percent and 200 percent, with ad valorem fees ranging from 25 percent to 80 percent respectively, while Tier 3 applies to all imports where the intensity exceeds the US equivalent by more than 200 percent with the fees starting at 80 percent and reaching a maximum of 100 percent for imports with an intensity difference of 220 percent. The fees would also be doubled for “non-market economy countries,” such as China, leading to a maximum theoretical ad valorem fee level of 200 percent. See Figure 1 for a breakdown of the fee structure.

These fees would take effect after an inital implementation period during which a set of fixed ad valorem rates would be assigned to different countries’ imports based upon a table provided in the legislation. See Section 4693 of the FPFA Bill here: https://www.congress.gov/bill/119th-congress/senate-bill/1325/text. The exact values depend on a final rule determining the relevant GHG intensities, which would be developed after the enactment of the legislation.

Defining the GHG intensity of a covered product is a foundational element of a BAM. While there are many GHG accounting protocols in existence, GHG accounting in the context of a BAM has its own requirements. BAMs are applied to traded products and not to firms or facilities, and the GHG accounting methods must align with the Harmonized Tarriff System that is the basis for customs tariffs worldwide.

We consider BAM GHG accounting in terms of the boundaries used to define the relevant emissions of GHGs. There are three broad categories of emissions that define the boundaries: 1) direct emissions from the production facility, 2) emissions from the generation of grid electricity purchased by production facilities, and 3) emissions embodied in intermediate products purchased by production facilities for use in the manufacturing of covered products.

The FPFA requires the determination of the GHG intensity for all countries of origin, which therefore includes the baseline domestic benchmark against which the GHG intensity of imported covered products will be compared.

The FPFA’s measure of GHG intensity includes direct, indirect, precursor, and transportation emissions. The legislation defines direct and indirect emissions in the legislation, generally corresponding to widely accepted definitions of Scope 1 and Scope 2 emissions. The precursor and transportation emissions are examples of Scope 3 emissions. An example of a precursor would be mined ore used in metal production.

The FPFA places the burden of calculating the pollution intensity of imported covered products on the Secretary of the Treasury. The legislation states,

“For the purposes of determining the variable charge…the Secretary shall develop consistent methods for calculating the pollution intensity of any covered product which are applied consistently across covered products and to the country of origin, and make such methods publicly available.”

The conclusion one draws from this text is the instructions to the Secretary are to treat the determination of domestic pollution intensities and those of imported goods in a similar fashion. The FPFA provides the Secretary with some flexibility in the determination of pollution intensity, stipulating which processes to follow and which data sources can be used. In addition, the treatment of recycled materials and captured CO₂ (i.e., the use of carbon capture and storage by industrial facilities Is regulated, in both cases allowing the reported GHG Intensities to be lowered through their use.

The FPFA also allows for different treatment of individual facilities in the case that a country has concluded an “International Partnership Agreement” with the United States under the FPFA. In this situation, these individual facilities are excluded from the accounting when calculating the GHG intensity of the related goods imported from that country. In principle, this strengthens the incentive for individual foreign producers to lower their GHG intensities, although it depends on the feasibility of concluding international partnership agreements (further discussed below).

As discussed in our previous report, a baseline is a product-level GHG intensity against which the GHG intensity of an imported product will be compared for the purposes of assessing border fees. When used as part of a BAM, a baseline can define an exempt level of emissions before BAM charges accrue, or to define categories of GHG intensities for the purposes of assigning BAM fees.

The FPFA specifies a benchmark based on the facility-level pollution intensity of domestic producers of a particular covered product. Differences between the pollution intensity of an imported covered product and the baseline intensity are used to assign covered products to different categories. These categories carry with them different ad valorem fees to be charged to importers to achieve the goal of leveling the playing field between US producers and producers from countries with greater GHG intensities than the United States. Unlike the CCA that specifies within the legislation a schedule used to reduce the benchmark over time to achieve decarbonization goals, the FPFA benchmark changes only when periodically recomputed by the Secretary to incorporate updated data reflecting the pollution intensities of domestic producers at that time.

The FPFA assigns to the Secretary the responsibility of developing estimates of baseline pollution intensity of covered products and the pollution intensity of covered products from any country of origin. In doing so, the Secretary will consult with a newly formed Advisory Committee. This committee will comprise members from covered industries, national labs, and scientific experts in GHG accounting. The Secretary may base estimates of pollution intensity on economic, statistical, or engineering models; pollution data from facilities and a wide range of monitoring tools; voluntarily reported data; information on technology performance; and information that may be specific to a particular covered product. The committee will support the estimations of GHG intensities with verification of data, also in cases where data is provided by foreign countries. The FPFA states that all methodologies for GHG intensity estimations should be made public, something that can aid interoperability with other (trade) policies based on carbon accounting. The methods for establishing pollution intensities for imported covered products should be the same process used to establish the pollution intensity for domestic production of the same covered product (i.e., the baseline pollution intensity). The GHG intensity should be expressed in terms of “production-weight averaged pollution intensity.” This refers to the physical quantities of products, not the value of these products.

In general, the calculation of pollution intensities of imported and domestic covered products poses a significant technical challenge in the imposition of a BAM. The FPFA puts the responsibility for calculating these pollution intensities upon the executive branch of government while imposing further traceability requirements on covered entities (i.e., importers) to supply data to support the calculations. The exact requirements for covered entities will depend on a final rule issued by the Secretary after the legislation enters into force. In contrast, the CCA imposes GHG intensity reporting requirements on domestic manufacturers to support its assessment of domestic carbon intensities. Domestic manufacturers must report information to the Secretary of the Treasury and the Administrator of the US Environmental Protection Agency on eligible facility emissions, product production, and other relevant information needed for the Secretary of Energy to calculate the GHG intensity at the level of the eligible facility.

The only BAM in effect now is the EU CBAM. It was designed to work in concert with the ETS, a workhorse for the decarbonization of the EU in general, including the EU’s industrial sector. The CCA is also a BAM designed to work in concert with a new domestic regulatory program intended to reduce GHG emissions from the industrial sector using a “performance standard.”

A key distinction of the FPFA from the above two approaches is that the FPFA does not include a new regulatory program to reduce industrial emissions. This is in line with the FPFA’s objective to only charge a fee on the importation of embodied GHGs within certain US trade flows rather than focus on reductions in emissions from domestic sources. In fact, the FPFA states that it should not “be construed to authorize the creation of any carbon tax, fee, pricing, or other mechanism that imposes additional costs to any covered product… which is produced…domestically [in the United States].”

In the July 2022 issue brief, Industrial Decarbonization and Competitiveness: Building a Performance Alliance, we distinguished between a policy club and a performance club, where the most rudimentary club is a collection of countries where transactions and trade in primary commodities are not subject to environmentally based fees or tariffs.

The FPFA provides an extensive section on international agreements and partnership that could be characterized as clubs. Under the FPFA, the US trade representative, under the direction of the president, is authorized to engage with countries to encourage the establishment and expansion of international partnerships. Such partnerships cannot be concluded with non-market economies, thus likely excluding China. Partnerships would facilitate the creation of compatible methods to promote pollution reduction through trade mechanisms by focusing on the pollution intensity differences between countries (such as a performance club). A partnership agreement should also cover collaboration between the parties on market distortions such as “excess capacity” caused by non-market economies, reflecting further geoeconomic objectives of the FPFA.

Each partner country would continue to develop its own sovereign methods for pollution reduction. Importantly, the international agreement would reduce the fee being applied. However, the FPFA does not stipulate by how much the fee would be reduced. Nothing in the FPFA text precludes a reduction of the fee to zero, but the exact outcome would depend on the negotiations between the United States and the foreign country (or countries). Agreeing on a partnership is a precondition for separate treatment of individual facilities in determining the level of the fees being applied.

Under the FPFA, international agreements are intended to provide interoperability by developing compatible pollution monitoring, creating reporting and verification methods among partners that allow for similar methods to be used to calculate pollution intensity of covered products, and increasing transparency to the calculations or partner countries. International agreements may not be forged with non-market economies. International agreements concluded with low income and lower middle-income countries would result in no fees being applied to imports from that country for the first five years of the agreement, pending further extension based on the pollution intensity of new capacity. The partnership agreements with these countries could also include provisions on financing and technical assistance through, for example, USAID or the US International Development Finance Corporation. This presupposes the continued operation of these bodies. Authority to develop international agreements does not include the authority to negotiate agreements that would establish carbon taxes, fees, pricing, or other mechanisms on domestic producers of the United States.

The goal of the FPFA is to introduce carbon tariffs that protect US manufacturers from competition with producers in countries with higher GHG intensities. This reduces the United States’ “consumption” of GHGs embodied in imported goods and provides a new lens through which to view the alignment of international trade with climate objectives. Like other border adjustment mechanisms, the FPFA seeks to improve international competitiveness of domestic industries to the extent that domestic producers have lower GHG intensities.

The FPFA focuses on the importation of embodied GHGs into the United States. The outcome of reducing such consumption is to reduce the carbon footprint of imported goods into the US. With lower US demand for more carbon-Intensive goods, the size of the global market for high GHG intensity products could be affected, and with it, their global production and associated emissions. The exact outcome on global emissions also depends on what happens to high GHG Intensity goods that are no longer sold in the same quantities in the US and the GHG intensities of the producers that replace them, whether domestic or foreign. The development and expansion of international agreements and partnerships with like-minded nations is designed to further reduce trade in high GHG intensity products.

The approach of the FPFA is in many ways novel, and at present it is unknown how effective the FPFA will be in achieving the goal of reducing global industrial emissions. RFF and our research partners have conducted additional analysis to help inform our understanding of the effects of the proposal. This analysis can be found in RFF’s report on the 2025 FPFA. The introduction of the FPFA represents another important milestone in the development and consideration by the US Congress of border adjustment mechanisms and can be expected to play an influential role in the continuing congressional debate about such policies and the role of trade measures to reduce emissions. The FPFA’s exclusive focus is on charging imported embodied emissions from certain countries. However, it could lead to further discussions among domestic and international stakeholders looking to the United States to take domestic regulatory action to reduce GHG emissions from its own industrial sector.