The American Carbon Border: Foreign Pollution Fee Act in 2026

The Cassidy Graham vehicle and the 2025 reintroduction #

Senator Bill Cassidy, Republican of Louisiana, first introduced the Foreign Pollution Fee Act as S.3198 in November 2023, framed to convert the United States low carbon advantage in natural gas, nuclear, and renewables into a tariff lever rather than a domestic carbon price. The 2023 vehicle died in Senate Finance but set the design template: embodied emissions benchmarked against a domestic peer, partner tiering, and explicit avoidance of any cap and trade or carbon tax on US producers. Cassidy reintroduced the bill as S.1325 in April 2025 with Lindsey Graham as lead Republican coauthor, joined by Roger Wicker, Kevin Cramer, Sherrod Brown, and Bob Casey, reflecting the manufacturing belt center of gravity.

The 2025 text is tighter than the 2023 draft. It expands covered sectors from six to twelve, formalizes Treasury and EPA joint rulemaking, and sets a sixty month implementation runway with a foundation period in years one and two during which importers report embodied emissions without paying. The Hammill amendment adopted in October 2025 markup narrowed Treasury Secretary discretion on partner tier assignment by requiring a published methodology and fixed annual recertification, addressing the 2023 critique that the bill created a presidential carbon tariff with no statutory ceiling. Senate Finance staff drafts circulated in February 2026 indicate the fee will run on a per ton CO2 equivalent basis with sector benchmarks reset every three years against a rolling five year average of US producer emissions intensity.

Scope, methodology, and the embodied emissions test #

The covered scope is the broadest yet attempted in any active carbon border proposal. Steel and aluminum carry over from 2023. Cement, fertilizer, hydrogen, refined petroleum products, lithium ion batteries, and solar modules were added in 2025. The October 2025 markup added glass, iron, and a defined basket of refined critical minerals: nickel, cobalt, lithium hydroxide, lithium carbonate, manganese sulfate, and rare earth oxides. The basket maps to Harmonized System chapters 25 through 28, 31, 38, 70 through 76, 84, and 85, capturing roughly 480 billion dollars of 2025 US imports per USITC DataWeb queries.

The methodology is a peer benchmark test rather than an emissions tax. For each covered HS code, EPA with the Department of Energy publishes a domestic producer emissions intensity benchmark in tons CO2 equivalent per physical unit. Imports declare embodied emissions on a verified life cycle basis covering scope one and scope two plus electricity inputs. The fee applies only to the gap above the US benchmark, which insulates domestic producers from direct cost and underwrites the bipartisan coalition. A Resources for the Future working paper from February 2026 estimates this design delivers about 62 percent of the abatement a full upstream carbon price would achieve at the same border, with the residual reflecting uncovered scope three and the absence of a domestic price signal.

Partner tiers, USMCA carve out, and FTA conditionality #

The partner tier architecture is the political innovation that distinguishes the Foreign Pollution Fee Act from EU CBAM. EU CBAM is uniform across origin and adjusts only for verified producer level emissions. Cassidy Graham keeps the methodology uniform but stratifies the benchmark by country of origin, generating lower effective rates for partners the United States classifies as climate aligned. Tier one applies to China and to any country designated as a non market economy under Title VII of the Tariff Act. Tier two captures India, Vietnam, Indonesia, Thailand, and a list of emerging market manufacturers, with a conditional carve out if the partner enters a binding emissions reporting and methane mitigation MOU with EPA. Tier three covers FTA partners and treaty allies including Korea, Japan, Australia, and the EU, with rebates where the partner operates a comparable carbon pricing mechanism.

Mexico sits in a category of its own. S.1325 includes a USMCA carve out that reduces the effective fee on Mexican origin imports to a residual administrative charge if Mexico maintains methane reporting equivalence on oil and gas, electricity sector emissions transparency, and steel and cement traceability under USMCA Annex 313. The carve out expires automatically on a failed EPA recertification, the lever that gives the bill leverage on Mexican industrial policy without reopening USMCA itself. Atlantic Council analysis from January 2026 notes this design pulls the 2026 USMCA review into a de facto carbon governance negotiation, a framing several Mexican officials have welcomed as a way to align Pemex and CFE reporting with North American norms.

Revenue scoring and the CBO window #

CBO published its preliminary score of the S.1325 staff draft in February 2026 at 113 billion dollars over the 2027 to 2036 budget window on a static basis. The dynamic score, incorporating import substitution toward tier three partners and domestic producers, falls to 78 billion. The figures sit below 2023 vintage estimates because the 2025 draft narrowed the highest tier rates and exempted small developing country imports below a per shipment threshold. They sit above the EU CBAM equivalent in proportional terms because the US scope is broader and partner tiering generates higher effective rates on a larger share of trade.

The score has three sensitivities. The first is the Chinese pass through assumption, where CBO uses 60 percent fee absorption in Chinese export prices and 40 percent pass through to US importers. Mercatus Center analysis from March 2026 argues for closer to 30 percent absorption based on Section 301 revealed elasticities, which would lift the static estimate by roughly 22 billion over ten years. The second is the India MOU probability, which CBO assumes at 50 percent. The third is the interaction with the IRA 45V hydrogen credit and the 45Y clean electricity credit. If domestic producers receive both the IRA credit stack and import protection from the fee, the implicit subsidy intensity rises, which drives the WTO actionable subsidy concern. USTR published a March 2026 discussion paper signaling support for the partner tier architecture as consistent with prior US practice on Section 301 and Section 232, and confirmed Treasury through CBP rather than USTR would administer the fee.

WTO and constitutional exposure #

The principal WTO exposure runs through GATT Article III on national treatment and Article I on most favored nation. The Article III argument is that a peer benchmark calibrated to US producer emissions intensity discriminates against like imported products, because two physically identical tons of steel face different fees by origin. The Article I argument is sharper because the partner tier design is explicitly origin based. The defense rests on Article XX (b) and (g), which permit measures necessary to protect human health or conserve exhaustible natural resources subject to the chapeau against arbitrary discrimination or disguised restriction on trade. Atlantic Council and Peterson Institute analyses argue that the published methodology and fixed annual recertification cycle introduced by the Hammill amendment strengthen the chapeau defense by removing executive discretion in tier assignment.

The constitutional question is whether the fee rides EPA Section 115 of the Clean Air Act, which authorizes action against international air pollution endangering US welfare, or requires fresh statutory delegation under the Commerce Clause. S.1325 takes the cleaner path by creating explicit statutory authority rather than relying on Section 115, avoiding the major questions doctrine challenge that doomed the West Virginia v EPA 2022 trajectory. Title IV-A of the Clean Air Act, which underpins the acid rain trading program, is cited in the bill text as analogous precedent. The IRA stack interaction is the under examined risk: 45V hydrogen, 45Y clean electricity, and 45Q carbon capture credits deliver per unit subsidies to domestic producers, and a foreign challenger could plausibly argue that combining those credits with import protection is an actionable subsidy under the SCM Agreement, particularly for hydrogen and ammonia derivatives where 45V credits exceed marginal production cost. The Treasury and EPA joint rulemaking is the venue where this will be resolved.

EU CBAM, UK CBAM, and the mutual recognition question #

EU CBAM under Regulation 2023/956 entered its definitive period on 1 January 2026, with importers now surrendering CBAM certificates rather than simply reporting embodied emissions. The European Commission published a discussion paper in February 2026 inviting third country jurisdictions with comparable mechanisms to negotiate equivalence. The Cassidy Graham text includes a mutual recognition clause that would allow EU CBAM and the US fee to credit each other where methodologies converge. The practical effect would be that EU steel exported to the United States faces the residual tier three fee less the EU CBAM certificate cost already incurred at production, with a symmetric offset for US steel exported to the EU.

The mutual recognition path is not automatic. The EU methodology covers verified installation level emissions, while the US fee uses a peer benchmark calibrated to domestic intensity. The two reconcile at the high carbon producer end but diverge at the lower carbon end, where the EU recognizes installation specific gains the US benchmark averages out. RFF analysis from March 2026 estimates that converging on a verified producer level basis would lift US fee revenue by roughly 18 percent by closing the loophole under which a low carbon Chinese producer could currently claim a benchmark adjustment. UK CBAM enters force on 1 January 2027 under the December 2024 final policy decision, covering aluminum, cement, fertilizer, hydrogen, iron and steel, with ceramics and glass deferred. The UK design is closer to EU CBAM than to S.1325, using verified producer level emissions and a default value fallback, and shares enough methodological architecture with the US for mutual recognition to be viable. Australia continues to consult on a domestic carbon border mechanism with a stated 2027 decision point, and cited the Cassidy Graham architecture in its January 2026 issues paper as one of three reference models alongside EU CBAM and the UK design.

The political coalition and the 2026 to 2027 path #

The Foreign Pollution Fee Act has assembled a durable cross ideological coalition. Manufacturing belt Democrats see import protection for steel, aluminum, and cement without a domestic carbon price. Climate hawks see embodied emissions accounting at the border as a forcing function on Chinese and Indian decarbonization. Tariff conservatives see a revenue raising tool calibrated against China with no reciprocal domestic tax. AISI, the Aluminum Association, the Portland Cement Association, the Fertilizer Institute, API, and SEIA submitted favorable comment letters on the 2025 draft.

The path runs through Senate Finance markup expected in May 2026, a Senate floor vote targeted for the September 2026 work period, and a House counterpart not yet introduced. The House vehicle is the principal execution risk. Ways and Means Republican leadership has signaled openness but tied movement to a broader negotiation around the expiring 2017 individual provisions. The most likely outcome is Senate committee passage, a floor vote slipping to lame duck or early 2027, the foundation period beginning 1 January 2028, and first fee collection in 2030. Three execution risks dominate: the Treasury and EPA joint rulemaking, where the methodology and IRA stack interaction resolve; partner tier assignment, where the India MOU sets precedent for tier two; and the WTO posture, where a Chinese or Indian filing in 2027 or 2028 tests the Article XX defense before full collection.

Sources #

• S.1325 Foreign Pollution Fee Act of 2025 and committee markup record
• Preliminary cost estimate for S.1325, Foreign Pollution Fee Act, February 2026
• USTR discussion paper on carbon border measures and partner tier architectures, March 2026
• Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism, definitive period implementing acts
• Designing a US carbon border adjustment: peer benchmark methodology and revenue sensitivities
• The Foreign Pollution Fee Act and the Hammill amendment: scoring and statutory architecture
• Atlantic Council issue brief on USMCA carve out and Mexico methane equivalence under FPFA
• Carbon border adjustment and the trade system: WTO compatibility and partner tiering
• S&P Global Commodity Insights, FPFA scope and ad valorem equivalent estimates by HS chapter
• Pass through assumptions and revenue sensitivities in the Foreign Pollution Fee Act