Senators Bill Cassidy (R-LA) and Lindsey Graham (R-SC) have introduced the Foreign Pollution Fee bill (S.3198), which would impose a fee on certain carbon-intense imports. A FAQ document for the bill explains how this would work:
The legislation imposes a fee on products imported into the U.S. that are dirtier than their American-produced counterparts. There is no domestic fee for American production. The fee increases as the difference in pollution between a foreign country and the U.S. grows.
Here's a quick and dirty look at how some key WTO rules would apply here. I'm not fleshing everything out, so feel free to add nuance (or objections) in the comments.
In terms of which WTO obligations the fees imposed under this bill would violate, if I understand it correctly, the bill involves a fee collected at the border, without a domestic equivalent. That would put it under GATT Article II (to be read with the Uruguay Round Understanding on the Interpretation of Article II:1(b)), and mostly likely classified as an "other duty or charge" (as opposed to an "ordinary customs duty"). Unless this fee was recorded in the U.S. Schedule, which it was not, imposing it would violate Article II:1(b) and II:1(a).
I assume the bill's authors would concede the Article II violation, and that their main WTO argument is that the fee falls within the Article XX(g) exception. A set of "policy details" provided for the bill states that: "The rate of the Foreign Pollution Fee is set to correlate to the environmental performance of U.S. production and U.S. imports to qualify for the WTO’s environmental policy exception." The FAQ document elaborates on this argument as follows:
Is World Trade Organization (WTO) considered in the policy design?
The FPF equalizes the environmental performance of our imports with our production. This fits into acceptable WTO practices for environmental policies. Previous WTO case law is also incorporated by providing the ability for countries to prove U.S. calculations of foreign countries’ pollution-intensities wrong.
The problem with this argument is that as part of the Article XX(g) analysis, you have to look at whether measures "relating to the conservation of exhaustible natural resources" are "made effective in conjunction with restrictions on domestic production or consumption." There doesn't seem to be a domestic restriction component here, as the bill involves "no fee on any U.S. producer", but I'm interested in hearing whether there is something they have in mind in this regard. The FAQ document states that "[t]he FPF equalizes the environmental performance of our imports with our production," but I'm not sure how that brings them within the XX(g) requirement, and I think they will have to add something to the bill -- or do it elsewhere -- that constitutes "restrictions on domestic production or consumption" if they want to satisfy XX(g). I feel like their argument may be that the "equalizing" aspect of the bill means they are acting consistently with the spirit of XX(g), but that probably will not be sufficient. Also, I don't think there is full equalization between imports and domestic products here, because if imports were less carbon intensive than the corresponding domestic products, the bill would not impose a fee on the domestic products to equalize things. As things stand now, the equalization is only going in one direction: Imports are penalized when they are dirtier, but domestic products are not penalized when they are dirtier.
And, of course, there is still the matter of the Article XX chapeau and its requirement to avoid "arbitrary or unjustifiable discrimination between countries where the same conditions prevail" and "disguised restrictions on international trade." Here, there is still the problem of equalization only going in one direction, and, in addition, assessing carbon intensity on a country-basis rather than a company-basis, as the bill seems to do, could lead to problems in terms of arbitrary discrimination.
There are also some Article I MFN/Article XXIV issues related to the treatment of FTA partners in the bill.
Finally, the FAQ document offers an assessment of international politics as it relates to WTO compliance:
What is the outlook for retaliation?
Because the FPF is WTO compliant, the U.S. is protected from retaliation. If countries like China want to see a lower fee, they need to expand purchases from cleaner suppliers—like the U.S.—to clean their supply chain. This makes China more reliant on the U.S. production and retaliation difficult.
On the politics of all this, the bill's authors are trying to portray the situation as one of unfairness between low-CO2 producing U.S. manufacturing and high-CO2 producing countries such as China ("The Foreign Pollution Fee utilizes the U.S. advantage in manufacturing and energy production with less greenhouse gas emissions than our adversaries"), but that ignores the overall CO2 emissions in the U.S. economy. China and India in particular often have strong objections to proposals under which high carbon emission places such as the U.S. or EU would impose financial penalties on countries (like them) that have lower per-capita CO2 emissions. As a result, I think it's very likely China and India (and maybe others too) would retaliate against fees being imposed on their imports on this basis. They will probably bring a WTO complaint, but given the state of WTO dispute settlement, I'm not sure they would wait for the result before retaliating.
