Last year, Senators Kevin Cramer (R-ND) and Chris Coons (D-DE) jointly proposed the “Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency (PROVE IT) Act.” This bill aims to direct the Department of Energy (DOE) to carry out a detailed assessment comparing the emissions intensity of goods manufactured in the U.S. with those produced abroad. The scope of the analysis would encompass a broad spectrum of products, ranging from conventional materials like aluminum and steel to low-carbon technologies such as solar panels and biofuels. Given the numerous variables affecting carbon intensity, particularly in foreign contexts, the analysis could be highly subjective. While the PROVE IT Act seems focused on data collection, it also sets the stage for introducing a carbon border adjustment tariff and a domestic carbon tax, potentially increasing costs for Americans on essentials like food and fuel, which have already risen due to inflationary policies under the Biden-Harris administration.
The legislation poses a significant threat to U.S. agriculture, as it includes critical inputs for crop production, such as fertilizers, oil, refined petroleum products like diesel, and petrochemicals. Additionally, building materials like aluminum, steel, and cement are essential for constructing farm infrastructure, including barns, grain bins, silos, and equipment sheds. New carbon border tariffs could escalate building material costs, impeding U.S. farmers’ ability to invest in updating their facilities—a challenge already exacerbated by the high-interest rates of the Biden-Harris administration. Moreover, these tariffs would not only affect imported goods but would also drive up the costs of domestically produced items by increasing production expenses.
Furthermore, the PROVE IT Act could influence global trade dynamics by provoking potential retaliatory actions from trading partners. Agriculture could become a primary target for such retaliation, exacerbating trade tensions and impacting the U.S., the world’s largest agricultural exporter.
The Threat of Additional Tariffs on Fertilizer
U.S. farmers are expected to spend $31.7 billion on fertilizers this year, and any threat of new tariffs on imported fertilizer would add to farmers’ cost of production and erode their operating margins. This year’s estimated fertilizer costs are more than 37 percent higher than the 2016 to 2020 five-year average of $23.1 billion. Fertilizer costs spiked in 2021 when countervailing duties were applied to phosphate fertilizer imports from Morocco at 19.97 percent and Russia in a range from 9.19 to 47.05 percent. Those duties resulted in an estimated 85 percent of the world’s tradable supply of phosphate fertilizers subject to U.S. tariffs, which were a significant factor in pushing fertilizer prices to record highs. At the end of June 2024, diammonium phosphate (DAP) fertilizer prices at $760 per ton were 147 percent higher than in July 2020 when the U.S. Commerce Department began the process of imposing the duties. Those duties show how detrimental new carbon tariffs would be on fertilizer imports on which U.S. farmers rely, adding to the cost of food which has already escalated during the Biden-Harris administration.
There has also been recent volatility in fertilizer prices that a carbon border tariff would exacerbate. In 2022, farm fertilizer costs hit a record of $36.85 billion – nearly 60 percent higher than the 2016 to 2020 average – due to domestic and global supply chain issues after the COVID lockdowns and Russia’s invasion of Ukraine that resulted in a global shortage of fertilizer as both countries are large exporters of the product. The tariffs noted above added to the record prices, hitting farmers’ bottom line. Similarly, new carbon border tariffs would exacerbate any further market volatility.
The Joint Research Centre of the European Commission completed an analysis of the carbon intensity of global fertilizer production that resulted in high potential tariffs via the EU’s Carbon Adjustment Border Mechanism (CABM). According to the European Commission’s analysis, the weighted average global emissions intensity for the production of anhydrous ammonia is 2.82 metric tons of carbon dioxide equivalent per ton of fertilizer, and for urea is 1.9 metric tons of carbon dioxide equivalent per ton of fertilizer. The EU CABM could provide a benchmark for a U.S. carbon border tariff. The price of carbon under the CABM is forecast to be €80.00 ($88) per metric ton in 2025, prior to it going fully into effect on January 1, 2026. Adopting the EU carbon pricing scheme, weighed against the 12-month average prices of anhydrous ammonia and urea in the United States from June 2023 to June 2024, would result in an effective tariff of more than 31 percent on anhydrous ammonia and more than 29 percent on urea.
A potential U.S. carbon tariff could, however, be significantly higher. The Biden-Harris administration almost quadrupled the social cost of carbon to $190 per metric ton, more than twice that of the EU. The cost is used in studies by the Biden-Harris administration to assess the “environmental impact” of fossil fuel projects. Using this carbon value calculation would push the cost of carbon tariffs even higher than adopting the EU model. Both would be devasting to U.S. agriculture’s competitiveness and add inflationary pressure to the U.S. food supply, driving food prices higher for American families.
Other Issues
A domestic value for carbon is fundamental to imposing any new tariffs. The emissions profile of industries in exporting countries would not be sufficient. Unless U.S. manufacturers were subject to a domestic carbon tax or required to purchase a carbon allowance permit like those under the EU’s Emissions Trade System (ETS), a carbon tariff would not provide the required “like treatment” between domestic and foreign producers under the rules of the World Trade Organization (WTO). If carbon tariffs were imposed without a U.S. domestic tax or carbon emissions value price, such tariffs would be challenged in the WTO, which would allow trading partners to impose their own retaliatory tariffs, and would fall heavily on U.S. agricultural exports. The PROVE IT Act is thus a proxy for a new tax which must be assessed for the scheme to work.
Conclusion
Given that U.S. farmers heavily rely on imported fertilizers, the imposition of carbon tariffs on these essential agricultural inputs would raise costs, reduce net farm income, and could increase U.S. agriculture’s carbon intensity by lowering crop yields. That is, fewer acres would be in production, yields would be reduced, and farmers’ cost of production would increase, with no benefits for consumers or the U.S. economy. The United States would also cede its competitive advantage in food production and agricultural exports as a carbon border tax would disproportionately harm American farmers. Without a domestic carbon tax to go along with the border tariff, the possibility of a WTO challenge would arise due to the requirement for equal treatment of imports and the potential violation of national treatment obligations. The PROVE IT Act would advance an agenda defined by expanded bureaucracy, increased costs for businesses, lower economic output, fewer jobs, and higher costs for consumers.
