The PROVE IT Act, officially known as the Providing Reliable, Objective, Verifiable Emissions Intensity and Transparency Act, is a bait-and-switch that will ultimately lead to one thing– creating a carbon tariff. This legislation, currently under consideration in the Senate, aims to address carbon intensity by establishing a comprehensive regulatory and bureaucratic framework. While supporters of the bill have made a lot of lofty claims about its benefits, they admit that the PROVE IT Act paves the way for the eventual creation of a carbon border adjustment tariff. This would undoubtedly lead to an array of negative consequences for the agricultural sector that many in the farming industry are sleeping on. From bureaucratic complexities to increased costs and unintended retaliation, lawmakers should reject this misguided plan that would disproportionately harm American farmers.
One of the primary concerns of the PROVE IT Act is the expansion of bureaucracy and regulation it would bring. The proposal outlines a vast regulatory infrastructure that would lay the groundwork for future sector-specific and product-specific tariffs based on carbon intensity. This approach, while aiming to address environmental concerns, risks overreach into domestic policy initiatives. Specifically, the legislation subjects a wide range of products to a study on emissions intensity, from traditional manufacturing materials like aluminum and steel to low-carbon green energy products such as solar cells and biofuels. The complexity of analyzing and updating the carbon intensity of these products every five years presents a daunting task for the Department of Energy (DOE), requiring considerable fiscal resources that the bill does not authorize.
Setting the stage for new tariffs, regardless of the rationale behind them, inevitably risks raising costs for U.S. businesses and consumers. History has proven this undeniable fact time and time again. Drawing parallels with previous tariffs, such as the Trump Administration's steel tariffs, reveals the potential economic impact. Despite claims that domestic steel producers may benefit, downstream manufacturers faced increased costs. The PROVE IT Act sets us down a slippery slope toward similar consequences, affecting various industries, primarily agriculture.
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The potential impact on U.S. agriculture alone should be a deal-breaker for all lawmakers, particularly with the inclusion of nitrogen, potassium, and phosphate fertilizers in the bill. A precedent set by countervailing duties on phosphate fertilizers in 2021 resulted in a substantial rise in fertilizer prices. Research from Oklahoma State University indicates a 34 percent increase for diammonium phosphate (DAP) and a 31 percent increase for triple superphosphate (TSP) over what prices otherwise would have been. 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, ironically, could increase U.S. agriculture’s carbon intensity by lowering crop yields. Lawmakers should reject any legislation that risks pulling us in this direction.
Additionally, the PROVE IT Act's impact on global trade dynamics cannot be ignored. The risk of retaliation from trading partners is a genuine concern, with historical evidence showing that retaliatory tariffs can have a substantial impact on long-term GDP growth. Agriculture, being a high-profile target for retaliation, would suffer the consequences of increased trade tensions.
While supporters of the bill have argued that it would help in the fight to lower global emissions, the effectiveness of such an approach remains uncertain, especially considering the geopolitical landscape. Major fertilizer producers whom the Act targets, like China, Russia, and India, may choose to ignore any future carbon tariffs, especially as those nations and others are developing their own trade alignments with a stated goal of becoming more independent of the U.S. and de-dollarizing their global transactions. Further, the carbon tariffs that the legislation may lead to are likely to face challenges under the World Trade Organization (WTO). The possibility of a WTO challenge arises from the requirement for equal treatment of imports and the potential violation of national treatment obligations.
The PROVE IT Act would create an unnecessary threat to trade policy and advances an agenda defined by expanded bureaucracy, increased costs for businesses, lower economic output, fewer jobs, and higher costs for consumers. The potential repercussions for American farmers, especially in the context of carbon tariffs on fertilizers and retaliatory tariffs on U.S. exports, highlight the need for a more well-thought-out strategy to address environmental concerns without jeopardizing the livelihoods of those in the agricultural sector. Lawmakers should go back to the drawing board and reject the PROVE IT Act and any other legislation that risks eventual carbon tariffs.
Dave Juday is an agricultural economist and commodity market analyst, and founder and principal of The Juday Group.