A bill to amend the Internal Revenue Code of 1986 to create a carbon border adjustment based on carbon intensity, and for other purposes.

This bill establishes a carbon border adjustment mechanism within the Internal Revenue Code of 1986, creating a novel framework for assessing tariffs on imported goods based on their carbon intensity. The legislation represents a significant policy innovation in climate-related trade regulation, aiming to address carbon leakage and create economic incentives for reducing greenhouse gas emissions in global supply chains. By linking trade policy with environmental objectives, the bill seeks to level the playing field between domestic producers subject to carbon regulations and foreign manufacturers operating under less stringent environmental standards. The carbon border adjustment mechanism is designed to quantify the carbon emissions associated with imported goods and impose corresponding charges, thereby incentivizing lower-carbon manufacturing practices internationally while protecting domestic industries from competitive disadvantages arising from stricter domestic climate policies.

The bill amends the Internal Revenue Code of 1986 to create a carbon border adjustment system that evaluates imported goods based on their carbon intensity. This mechanism establishes a regulatory framework for calculating and imposing carbon-related tariffs on products entering the United States. The carbon intensity measurement serves as the foundation for determining the appropriate level of taxation, though the specific calculation methodology and quantitative thresholds are not detailed in the available text. The amendment creates new tax obligations for importers of carbon-intensive goods and establishes the legal authority for the Internal Revenue Service to administer and collect these carbon-related charges. The provision fundamentally restructures aspects of international trade taxation by incorporating environmental considerations into the tariff structure.

The Internal Revenue Service, operating under the U.S. Department of Treasury, bears primary responsibility for implementing and administering the carbon border adjustment mechanism. The IRS will develop the administrative infrastructure necessary to assess carbon intensity of imported goods, calculate appropriate tariff levels, and collect the resulting charges. While the bill establishes the basic framework, critical implementation details remain unspecified, including the precise methodology for calculating carbon intensity, the reporting requirements for importers, and the compliance verification procedures. The absence of detailed implementation timelines suggests that substantial regulatory development will be required before the mechanism becomes operational. The Treasury Department will likely need to issue comprehensive regulations defining carbon intensity standards, establishing reporting protocols, and creating enforcement mechanisms to ensure compliance with the new requirements.

The carbon border adjustment will directly affect importers of carbon-intensive goods, who will face new compliance obligations and potential cost increases based on the carbon intensity of their products. International manufacturers exporting to the United States will experience pressure to reduce carbon emissions in their production processes to minimize tariff exposure. Domestic manufacturers competing with imports may benefit from a more level competitive environment if they operate under stricter domestic carbon regulations. The mechanism creates incentives throughout global supply chains to adopt lower-carbon manufacturing practices, potentially driving significant environmental benefits beyond U.S. borders. The administrative burden on importers will increase substantially as they must track, report, and verify the carbon intensity of their goods. Cost estimates and specific quantitative impacts cannot be determined from the available information due to the absence of detailed calculation methodologies and threshold specifications. The bill does not include sunset provisions, suggesting the carbon border adjustment is intended as a permanent feature of the tax code.

The bill operates within the constitutional framework of Congress's taxation and commerce clause powers, amending the Internal Revenue Code to create a new category of import-related taxation. The statutory authority derives from Congress's broad power to regulate international trade and impose taxes, with the carbon border adjustment functioning as a tariff mechanism tied to environmental characteristics of imported goods. The amendment will require extensive regulatory development by the Treasury Department and IRS to establish operational definitions, calculation methodologies, and compliance procedures. The legislation may raise questions regarding consistency with international trade obligations under World Trade Organization rules, particularly concerning non-discrimination principles and the treatment of like products. The bill does not explicitly address preemption of state or local law, though federal taxation authority generally occupies the field of import duties. Judicial review provisions are not specified, suggesting that standard Administrative Procedure Act review would apply to regulatory decisions and that Tax Court jurisdiction would cover disputes regarding carbon intensity assessments and tariff calculations.

The bill faces significant implementation challenges due to the absence of detailed methodologies for calculating carbon intensity and establishing appropriate tariff levels. The complexity of tracking carbon emissions across global supply chains presents substantial administrative and verification difficulties, potentially creating opportunities for gaming the system or unintentional non-compliance. Constitutional concerns may arise regarding the extent to which environmental objectives can justify trade restrictions, though taxation authority provides a strong legal foundation. International trade law compatibility represents a critical issue, as trading partners may challenge the mechanism as discriminatory or protectionist under WTO rules. The lack of specific quantitative thresholds and calculation methodologies leaves substantial discretion to regulatory agencies, raising concerns about predictability and fairness for affected businesses. Cost implications remain uncertain but could be substantial for both government administration and private sector compliance. Unintended consequences may include retaliatory trade measures from other nations, increased costs for consumers of imported goods, and potential supply chain disruptions as businesses adjust to the new requirements. Opposition arguments likely center on concerns about increased consumer prices, administrative complexity, potential trade conflicts, and questions about whether border adjustments effectively address climate change or simply shift production patterns without reducing global emissions.