Trade

President Trump doubled almost all aluminum and steel import tariffs, seeking to curb China’s growing dominance in global trade. These six charts show the tariffs’ potential economic effects.

The Court of International Trade’s ruling on Donald Trump’s tariffs is the most consequential potential setback for the president’s trade agenda to date. CFR experts weigh in.

The U.S. federal court ruling that President Trump had overstepped his authority on imposing tariffs marked a clear setback for the administration. But any global cheering has been tempered by the recognition that U.S. officials have other tools for authorizing penalties, and that an appellate court has reinstated some tariffs.

A court ruling on Wednesday could pose a major threat to President Donald Trump’s tariff agenda. CFR Trade Policy Fellow Inu Manak unpacks what could happen next.

The Association of Southeast Asian Nations is a regional organization that brings together disparate neighbors to address economic and security issues, but the group’s impact remains limited.

Governments often rely on taxes to both discourage and encourage behavior. In the climate space, carbon taxes on production—which are levied in proportion to the carbon generated—aim to motivate companies to reduce emissions and increase supply chain sustainability. Many countries have also adopted carbon taxes to encourage investment in production processes that will become more competitive as other countries ramp up their own efforts at a green transition.   But domestic carbon taxes on their own are unlikely to be enough to address polluting behaviors around the globe. Because nearly every product in the global marketplace contains embedded emissions, taxing dirty production only at home could simply encourage “carbon leakage,” whereby production is shifted to countries with lower environmental regulations. As such, there is growing demand to target emissions associated with traded goods and increase incentives for firms to decarbonize their production worldwide.    Carbon Border Adjustment Mechanisms (CBAMs) offer one potential route to address this problem by leveraging elements of both taxes and tariffs. While there are challenges to implementing a CBAM, done right, it could level the playing field for trade in goods with high emissions and significant risk of carbon leakage, such as steel and aluminum, and encourage the production of greener goods abroad.   How CBAMs Work, and What They Could Do for the United States A CBAM is a combination of a domestic carbon tax and a tariff applied to imports at a level that seeks to replicate the cost of the domestic tax. CBAMs can be structured to achieve several complementary goals. By imposing fees on imports based on their carbon content, foreign producers are encouraged to adopt cleaner technologies and manufacturing processes to maintain market competitiveness. This in turn can drive down global greenhouse gas (GHG) emissions as international supply chains are incentivized to prioritize less carbon-intensive inputs and methods of production, matching the efforts of countries with domestic carbon-price systems.   Through this process, CBAMs combat carbon leakage. For example, a European steel company that opts to locate its foundries in a part of the world with less regulation would face a tariff on its steel sold to Europe equivalent to the domestic carbon tax they were avoiding by offshoring their foundries. A tariff on dirty goods thus serves to adjust the price of a good to match the cost of producing it in the domestic market that has higher standards for decarbonization.  To date, the European Union (EU) is the only jurisdiction with a CBAM in force, but it has inspired other countries, including Canada, Japan, Singapore, South Korea, and the United Kingdom, to begin developing their own CBAMs. Importantly, the EU’s CBAM and those others under consideration are not meant to apply to all imports; rather, they target a select few carbon-intensive sectors of the economy and a handful that contribute the most to global GHG emissions. For example, energy use in industry accounts for almost 25 percent of total GHG emissions, with iron and steel alone contributing 7.2 percent to total GHG emissions. Likewise, electricity use in residential and commercial buildings account for 17.5 percent of total emissions, with cement accounting for 3 percent, and agricultural soils accounting for 4.1 percent. While other sectors contribute to overall emissions output, CBAMs can be structured to target the largest emitters, so that the tax burden falls on those who contribute most to global warming.   Finding ways to make sectors that produce the most emissions more sustainable will help countries meet both domestic and international net-zero emissions targets. Such a policy in the United States would not only  be good for the planet, but it would also help address climate vulnerabilities throughout the country, where floods, fires, and other natural disasters disrupt lives and are costly to address after the fact.  Furthermore, as countries continue to introduce incentives for industry to invest in sustainability efforts, they will seek out technologies from those places with the most innovative and low-carbon products. Thus, U.S. investments in green technologies and decarbonization efforts could make the United States even more competitive in global markets. A domestic carbon price regime with a border equalization mechanism can play an important role incentivizing such an innovative ecosystem.   The Current Status of Carbon Taxes in the United States  In the United States, several proposals to integrate carbon pricing into trade have been introduced in Congress, each offering a distinct approach. However, most of the proposals do not entail actual border adjustments as they are not applied in conjunction with a domestic carbon regime. The leading bill for consideration is the Foreign Pollution Fee Act, which would charge a country- and product-specific fee on certain imported products based on the average pollution intensity of the product at the country level (rather than at the level of individual companies or facilities).   An important, complementary piece of bipartisan legislation is the PROVE IT Act, which would direct the Department of Energy to collect data on average emissions intensity in select products in the United States and in other countries. Products covered include steel, aluminum, cement, fertilizers, petrochemicals and plastics, pulp and paper, glass, biofuels, refined petroleum, crude oil, hydrogen, lithium-ion batteries, solar cells, wind turbines, and refined critical minerals. This would help inform the future development of a border carbon adjustment or refinement of a carbon tariff, while also providing valuable information on emissions in the United States and abroad.   Therefore, while something resembling the EU’s CBAM is not currently on the table in the United States, some of the measures being considered could lay the groundwork for it. The table below summarizes the major bills under consideration and compares them to what is included in the EU CBAM.   Alongside the proposed bills at the federal level, various states have begun implementing their own CBAM adjacent programs. For example, California and Washington have implemented cap-and-trade systems that establish a limit on GHG emissions by reducing the number of available allowances each year, allowing companies to trade those allowances to meet their emissions targets. Other states—namely, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont—have joined the Regional Greenhouse Gas Initiative (RGGI), a collaborative effort aimed at capping and reducing emissions in the power sector by requiring emissions-producing facilities to purchase allowances for their emissions. Proceeds are then reinvested in energy efficiency and clean energy programs.   That said, if the sum of those efforts eventually leads to the consideration of a CBAM, there are several key issues for consideration that U.S. policymakers should keep in mind.   How CBAMs Measure Embedded Emissions  Though tariffs are often applied on products based on their physical characteristics (such as the alcohol content of a beverage or whether milk is powdered), governments can further distinguish imports based on their composition. In fact, governments often use trade regulation to control access to the market based on underlying factors, such as the percentage of certain inputs, environmental criteria, or labor standards. For example, the Singapore-Australia Green Economy Agreement reduced tariffs on aluminum produced with low carbon emissions, sustainably sourced cobalt for use in lithium-ion batteries, and sustainable bamboo flooring materials.  While agreements like the one mentioned above help to facilitate trade in green goods, CBAMs are meant to encourage green production and level the playing field between domestic and foreign producers with different emissions standards. However, if governments want to apply a CBAM they will need to specify the type of emissions they want to control and have a way to calculate how much of any given emission is embedded in a product to determine whether it is “dirty” or not. Efforts to do so could be aided by private sector initiatives such as those at the E-Liability Institute, a nonprofit that has developed an e-ledgers accounting method for establishing verifiable, comparable calculations for the incurred net emissions of any product.  The European Union’s CBAM targets carbon-intensive goods that are at the most significant risk of carbon leakage, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The GHG emissions subject to EU regulations are carbon dioxide, and, where relevant, nitrous oxide and perfluorocarbons. Under the EU rules, the emissions subject to the CBAM fall into three different categories:  Direct emissions that are generated during the production processes, which includes emissions from the heating and cooling of a product during production, regardless of whether those steps take place in the primary facility or elsewhere. These are often referred to as Scope 1 emissions under the GHG Protocol’s taxonomy.  Indirect emissions linked to the generation of electricity consumed during the production of a good, or Scope 2 emissions.  Direct and indirect emissions of certain relevant precursors, which capture additional upstream (Scope 3) emissions. For example, intermediate products used to produce cement, such as calcined clay and blending materials like fly ash and slag, which reduce clinker content, have their own upstream footprints. The GHG embedded in those precursors are added to cement’s Scope 1 and Scope 2 emissions to arrive at its overall emissions.   Measuring and reporting emissions also presents an administrative challenge. To address this issue, the EU provides for the calculation of emissions based on default values, which are used as a proxy for emissions calculations when exact emissions data may not be available (calculating both direct and indirect emissions accurately requires detailed data across multiple levels of the supply chain). The EU calculates default values by taking the average emissions intensity from the production of specific goods across several foreign countries and updating the calculation after receiving feedback from industry. The EU has allowed importers to rely on default values in the initial stage of CBAM implementation to support its administrative feasibility, though it is possible that when fully implemented, default values will remain a reporting option.   The complexity of measuring both direct and indirect emissions, combined with the challenge of determining accurate default values, creates significant hurdles for Europe’s CBAM implementation. Without clear, consistent methods for calculating embedded emissions, the risk of inaccuracies and unintended market distortions increases.   Compliance and Fairness  A notable design choice of Europe’s CBAM is that it applies to imports of the covered products from all countries. This was done, in part, to avoid giving an advantage to imports from any specific country or countries, upholding a core principle of the international trading system. Although the EU has led the way in thinking about how to ensure a fair application of CBAM, challenges remain. In developing a CBAM, countries need to be mindful of finding a balance between addressing carbon leakage while ensuring that reporting requirements do not create additional burdens on economic activity and inadvertently hurt development opportunities.   Of course, the process of collecting that data is especially burdensome on small and medium-sized enterprises, regardless of where they are located. Yet, while measuring embedded emissions is an administrative challenge for firms across the world, a 2021 study by the Institute for Advanced Sustainability Studies identified statistical capacity—a nation’s ability to collect, analyze, and disseminate high-quality data about its population and economy—as a critical factor in assessing the vulnerability of countries affected by CBAM.   Even if the emissions associated with their export production are relatively low, monitoring and reporting carbon emissions can be costly for firms in countries with less capacity to collect the relevant data. In contrast, countries with robust statistical and monitoring systems face fewer challenges in compliance. Consequently, the implementation of CBAM could exacerbate existing inequalities, placing developing countries at a disadvantage in the global market.   The EU is currently the only market to have enacted a CBAM, offering important lessons as it goes through the process of implementation and enforcement. For one, the EU has faced criticisms that its mechanism functions as a disguised trade barrier that disproportionately degrades developing countries’ access to the European market. While estimates from the European Commission indicate that African countries’ exports to the EU could fall by as much as €2.1 billion ($2.4 billion) by 2030 due to the CBAM, a joint report by the African Climate Foundation and the Firoz Lalji Institute for Africa at the London School of Economics and Political Science predicts a reduction in African exports to the EU by 5.7 percent, with higher impacts on covered sectors like aluminum, iron and steel, and cement. Moreover, because many developing countries are not significant contributors to emissions, applying an additional barrier to market access on their exports raises significant concerns about fairness.  Current debate in the United States on imposing carbon border taxes further illustrates the potential for unfair treatment that could result from specific policy designs. For example, one proposal under consideration suggests the imposition of a carbon fee at the border but no equivalent fee imposed on domestic producers. This is a departure from the EU’s model, which bases the border fee off the domestic price of carbon. Thus, the border carbon adjustment helps level the playing field to make imports match the cost of making those goods in the EU.   The lack of a domestic carbon tax in current U.S. proposals fuels concerns that such policies are not advancing legitimate climate goals, but rather serve to protect domestic industries from foreign competition. As a result, ensuring that CBAMs are designed with fairness in mind—applying equal treatment to both domestic and foreign producers—is crucial to avoiding protectionist outcomes that could hinder international collaboration and trade.  Revenue  The revenue generated from the CBAM and how it will be used is also an important consideration for policymakers. The EU CBAM is estimated to generate approximately €2 billion ($2.3 billion) per year. That revenue will mostly go back into the EU’s budget, while some will also be dispersed to EU member states. A part of the revenue is also reserved to provide technical support for developing countries, which is necessary to ensure that they can adapt to new rules despite having fewer resources for compliance.  A 2025 report by the Climate Leadership Council estimates that imposing U.S. tariffs on certain imports with different levels of pollution intensity could generate anywhere between $120 billion and $240 billion from 2026 to 2035. While the American Action Forum cautioned about the anti-competitive aspects of the Foreign Pollution Fee Act, they estimated that the bill would raise up to $212.8 billion from 2026 to 2035. Furthermore, the Silverado Policy Accelerator found that a fee on high-emissions steel imports would be a significant revenue generator, though the potential for revenue on other sectors was more complicated.  However, it is important to keep in mind that while a border carbon adjustment would generate some revenue, the amount pales in comparison to the additional funds that could be raised by a domestic carbon tax. Such revenues could be spent on domestic infrastructure and other investments to support sustainable and competitive manufacturing. For example, the EU Emissions Trading System raises €50 billion ($56.8 billion) annually, part of which goes into member states’ national budgets with the remainder going to support EU-wide funds for energy and innovation.   Ultimately, a carbon border adjustment without a corresponding domestic carbon tax would not raise significant revenues and the amount it could raise would vary over time in response to import levels, making it an unreliable revenue source.  Opportunities for Action  As the United States considers its own CBAM, several opportunities for action exist that are worth consideration. However, all of those avenues will be difficult to pursue if basic data and reporting on GHG emissions are cut back. Not only will a lack of accurate data make it impossible to address decarbonization goals, but it also raises serious questions about the validity of any border adjustment proposal’s implementation. Without accurate data, it will be difficult to rollout a CBAM, and it will make it equally difficult to maintain credibility for the measure itself. Whether the Donald Trump administration would support such a measure remains unclear despite its emerging bipartisan support. Therefore, the following actions could be pursued if there is a serious desire to tax dirty production, at home, or abroad:  Support the passage of the PROVE IT Act (Sens. Chris Coons D-DE, Kevin Cramer R-ND). This bipartisan legislation would direct the Department of Energy to collect data on average emissions intensity in select products in the United States and in other countries. This would help inform the development of a border carbon adjustment or other policies in the future, but in the immediate term, provide valuable information on emissions in the United States and abroad, including where the United States has a competitive advantage (Products include aluminum, steel, cement, crude oil, fertilizer, natural gas, plastics, and more.)   Develop a comprehensive mapping of the various policy objectives of border carbon adjustment policies (e.g., promoting industry decarbonization, enhancing competitiveness, reducing carbon leakage, incentivizing climate action in other countries) against specific CBAM design options to aid in determining how best to align those choices with U.S. priorities.   Outline the guiding principles that would allow the United States to design border carbon adjustment policies that sufficiently discourage trade in high-GHG products, meaningfully reduce emissions, and operate within a framework capable of generating adequate revenue. While domestic carbon taxes hold the primary revenue-raising potential, a carbon tariff could create pathways for the implementation of domestic carbon pricing systems. As such, it is important to explore framing these principles within a cohesive, long-term strategy.   Define the optimal scope of a potential U.S. CBAM, balancing climate impact with the need for administrative and political feasibility. This includes consideration of the implications of a phased implementation approach, taking cues from the EU CBAM, and evaluating which sectors should be prioritized for inclusion in the initial rollout. This analysis could be informed by data and findings from the successful implementation of the PROVE IT Act, particularly in identifying high-impact sectors and designing a framework that aligns with U.S. economic and environmental priorities.   Examine how default values could be structured to avoid discouraging decarbonization efforts. This includes examining whether default values should be permanent and applied at the country or firm level.  There is a risk that if the United States adopts a carbon tariff without a domestic carbon tax, it could encourage other countries to follow suit. If there are no standardized means of measuring embedded emissions globally, there is a risk that country-level carbon tariffs will instead function as protectionist barriers and fail to improve climate outcomes.   As momentum builds globally around carbon pricing and border carbon adjustments, the United States faces a pivotal choice: whether to lead with a coherent, climate-focused strategy or risk falling behind in shaping the rules of a low-carbon global economy. A well-designed CBAM, integrated with a domestic carbon pricing system, offers not only a tool to curb emissions but also an opportunity to bolster U.S. innovation, competitiveness, and climate leadership on the world stage.