U.S. Carbon Markets Support CBAM Future

With the start of the new year, carbon border adjustment mechanisms (CBAMs) are moving from theory into practice. This is an important aspect of international climate policy that is intended to prevent carbon leakage, where energy‑intensive manufacturing moves from countries with stricter climate rules to those with weaker standards, and to protect domestic industries from being undercut.

The European Union’s CBAM definitive period will begin to be enforced this year, requiring importers of carbon‑intensive goods like steel, aluminum, and cement to pay a charge linked to the EU Emissions Trading System carbon price. In the United States, recent legislation such as the Clean Competition Act, the Foreign Pollution Fee Act, and the data-focused PROVE IT Act signal growing bipartisan interest in a U.S. CBAM that would align current trade policy with climate ambition. In this new regulatory context, existing U.S. compliance and voluntary carbon markets are complementary infrastructures that can make any future U.S. CBAM more credible and workable.

Compliance carbon markets such as California and Washington’s cap‑and‑invest programs already impose a legally binding carbon price on many industries that are backed by detailed monitoring, reporting, and verification (MRV) processes. These programs generate facility‑level emissions data and auction histories that demonstrate the real carbon costs domestic producers are already paying. A U.S. CBAM could credit state‑level carbon costs against border charges on exports, mirroring how the EU CBAM deducts explicit carbon prices paid in the country of origin. Such an approach would reward early moving states, reinforcing the value of existing compliance markets, and create incentives for broader adoption of transparent, economy-wide carbon pricing. Over time, voluntary carbon markets would further complement this system by helping firms manage residual emissions and demonstrate decarbonization progress alongside formal compliance obligations. This information is foundational for CBAM design as it enables accurate calculation of associated emissions and helps avoid double-taxing domestic firms for carbon costs they have already paid.