Trade Tools for Climate Action: Designing Tariffs for Decarbonization

Tariffs can play multiple roles: they have traditionally been used as instruments of trade policy, and the Trump administration has increasingly employed them as foreign policy tools to extract concessions from other countries. Although tariffs have seldom been associated with climate action, as the climate crisis intensifies, they could also be a tool for reducing greenhouse gas emissions.

One promising approach involves employing differentiated carbon tariffs, the practice of applying different duties on ostensibly similar products based on their embedded emissions—that is, the emissions that went into their production. By raising the comparative costs of carbon-intensive imports, differentiated carbon tariffs could help internalize the climate externalities associated with emissions-heavy production, driving a shift toward low-carbon goods and contributing to global emissions reductions.

What Is at Stake

Embedded emissions in tradable goods account for roughly 20–30 percent of global greenhouse gas (GHG) emissions. As only a handful of sectors—including aluminum, cement, and iron and steel—account for over 75 percent of those embedded emissions, tariffs targeting those sectors could be a particularly effective emissions-reduction strategy. Among those sectors with disproportionately high levels of carbon intensity, aluminum and steel stand out as especially suitable targets for differentiated carbon tariffs.

First, the aluminum and steel industries are two of the most carbon-intensive sectors worldwide, together accounting for approximately 9 percent of global emissions. Those emissions largely stem from production processes that remain heavily reliant on coal. In 2020, approximately 73 percent of steel was produced using the coal-intensive, primary blast furnace–basic oxygen furnace route, which generated around 2.2 metric tons (mt) of carbon dioxide (CO₂) per mt of crude steel. In contrast, about 26 percent of steel was produced via the cleaner scrap-based electric arc furnace route, which emitted roughly 0.3 mt CO₂ per mt of output. Greening the production processes of those industries is critical to meet global climate targets.

Second, tariffs on aluminum and steel are already significant, largely due to policies enacted under President Donald Trump. In 2018, the Trump administration imposed a 25 percent tariff on steel and a 10 percent tariff on aluminum imports under Section 232 of the Trade Expansion Act of 1962, citing, among other concerns, global excess capacity and the need to reduce reliance on “foreign producers for aluminum and ensure that domestic producers can continue to supply all the aluminum necessary for critical industries and national defense.” Those tariffs were adjusted through exemptions, quotas, tariff-rate quotas, and product-specific exclusions for certain countries, including Argentina, Australia, Brazil, Canada, the European Union, Japan, Mexico, South Korea, Ukraine, and the United Kingdom. The tariffs were maintained throughout the Biden administration.

Shortly after his return to office in 2024, Trump expanded those tariffs, eliminating all exemptions. For aluminum, the rate was increased from 10 percent to 25 percent for all countries except Russia, where imports already faced a 200 percent duty. Subsequently, tariffs on both aluminum and steel were raised to 50 percent.

This escalation creates a unique opportunity to reframe tariffs as a dual-purpose tool that addresses both national security and climate objectives. Rather than applying across-the-board tariffs that penalize all imports regardless of emissions intensity, a climate-responsive approach would impose higher tariffs only on the most carbon-intensive products. This strategy would balance concerns about declining U.S. aluminum and steel production with climate goals by targeting tariffs specifically at the dirtiest imports.

Take steel as an example. The United States consistently ranks among the cleanest steel producers globally. As U.S.-produced steel achieves some of the lowest CO₂ emission intensities worldwide, imposing higher tariffs on steel from higher-emissions producers would maintain the Trump administration’s focus on import dependence, global overcapacity, and the competitiveness of domestic production. Conversely, lower tariff rates on imports meeting U.S. environmental standards would incentivize low-carbon production and help shift markets toward cleaner steel. If differentiated tariffs were widely applied by major importing countries, the resulting higher tariffs would depress demand for high-carbon steel and create incentives for shutting down dirty steel plants, thereby lessening the oversupply problem.

Advancing A Climate-Responsive Trade Policy

Applying carbon tariffs on aluminum and steel products on the basis of their embedded emissions is within reach. First, the practice of differentiating otherwise similar products based on how they are produced—known as process and production methods (PPMs)—has long been embedded in the structure of global trade. This practice underpins both trade enforcement and product classification. For example, in the United States, Customs and Border Protection (CBP) can detain goods suspected of being produced with forced labor unless importers can demonstrate otherwise. Enforcement is based not on the physical traits of the product but on its production method.

Similarly, the Harmonized System (HS), which governs product classification globally, recognizes distinctions rooted in production processes. For instance, HS heading 9701 classifies paintings, drawings, and pastels “executed entirely by hand” separately from similar artwork created using other methods—a non-product-related PPM. In this case, the production method, rather than any observable characteristic of the finished good, determines its classification. Those examples illustrate that PPMs are already a legitimate basis for differentiated treatment in international trade.

The HS, maintained by the World Customs Organization, classifies products under standardized six-digit codes. Countries, including the United States, can and do expand those codes further. Under the Harmonized Tariff Schedule of the United States (HTS), goods are categorized into eight-digit tariff lines and ten-digit statistical lines. Introducing differentiated carbon tariffs would require breaking down nonstatistical tariff lines further to distinguish otherwise similar goods by their emissions. This tariff breakout would allow countries to apply higher duties to carbon-intensive products while rewarding cleaner alternatives with lower rates. Such a mechanism would create a market-based incentive for producers to reduce emissions in exchange for enhanced market access.

Second, in February 2025, the U.S. International Trade Commission (USITC) released detailed product-level data on the emissions intensities of aluminum and steel products made in the United States. This dataset provides a benchmark for comparing emissions embedded in imports and lays the foundation for a technically feasible differentiated carbon tariff structure for aluminum and steel products.

Such a structure would require drafting differentiated tariff lines for all imported aluminum and steel products, along with defining emissions thresholds for those lines based on USITC data. For example, three tiers could be established: (1) a high tariff rate, equivalent to the current 50 percent rate on aluminum and steel products, applied to imports with emissions intensities exceeding U.S. benchmarks; (2) an intermediate tariff rate for imports with emissions intensities aligned with those of the United States; and (3) a low tariff rate or duty-free treatment for imports with emissions intensities below the U.S. average. Additional tiers could be introduced to provide finer granularity, reducing incentives for producers to limit emissions reductions to just meeting the nearest threshold.

The table below provides an example of how hot-rolled flat iron or nonalloy steel products—more commonly known as steel sheets, strips, and plates—can be classified beyond their basic HTS code based on their embedded emissions.

Finally, this system could be implemented using existing U.S. verification capabilities: importers could either be asked to use country- and sector-specific values of emissions intensities or submit their own production emissions data through established customs platforms. The Environmental Protection Agency and CBP could validate those reports using modified versions of their current auditing systems for chemical imports under the Toxic Substances Control Act.

The emergence of improved methods for calculating emissions across supply chains also makes it more technically and administratively feasible to implement a differentiated carbon tariff framework. One such approach is the E-liability accounting method, a real-time system for tracking GHG emissions that represents a major advancement over earlier standards. Unlike previous models—such as the GHG Protocol, which relied on estimates and aggregated data—E-liability applies well-established cost accounting principles, measuring emissions at each stage of production and recording them as environmental liabilities. Each transaction carries an auditable carbon ledger that tracks the verified emissions embedded in that product, enabling producers (and ultimately importers) to account for emissions across entire value chains in real time. This granularity allows for precise product-level carbon intensity assessments that more accurately reflect a product’s true carbon footprint. By linking verified emissions data directly to traded goods, the E-liability system reduces ambiguity, lowers administrative burdens, and strengthens the environmental integrity of differentiated carbon tariffs.

Opportunities for Action

A tariff regime that differentiates products based on embedded carbon represents a viable strategy for reducing emissions in some of the most carbon-intensive sectors. Whether the Trump administration would support such a measure remains unclear. However, a differentiated tariff regime has the potential to attract bipartisan support because it advances priorities valued across the political spectrum.

For those concerned about economic resilience, that policy would reduce dependence on carbon-intensive imports (especially from countries responsible for global overcapacity), safeguard U.S. industrial capacity and critical infrastructure supply, and ensure that foreign producers cannot undercut domestic firms by externalizing their carbon costs. For those focused on advancing climate goals, that policy would also help downstream manufactures access more sustainable inputs, directly align trade with decarbonization objectives, and strengthen U.S. leadership in global climate policy. Further, although tariffs on Chinese goods remain broadly popular across party lines, a system that explicitly targets high-carbon imports rather than individual countries avoids running afoul of longstanding trade law principles. Therefore, if there is to be a pathway for a climate-responsive tariff system, the following actions should be pursued:

• Start with aluminum and steel. Those high-emission sections, which are politically and economically significant, are prime pilots for a differentiated carbon tariff regime. Recent developments make it administratively and technically feasible to create a policy that both rewards production with low-embedded emissions and discourages continued operation of carbon-intensive facilities, all while maintaining alignment with the overall existing trade policy framework.
• Implement the system through legislative action. In the near-term, adjustments could be made to the existing Section 232 aluminum and steel proclamations, using supplemental findings from the Department of Commerce to justify carbon-based adjustments to existing tariffs and CBP procedures to apply emissions-based rates at the border. The legislative route would be more durable, clarify World Trade Organization compliance, and allow future expansion to other sectors. Any congressional action would need to explicitly reconcile new carbon-differentiated tariffs with future Section 232 duties to avoid conflicts.
• Update the HTS. Create new or modified lines tied to GHG intensity for aluminum and steel under Chapters 72, 73, and 76 of the HTS. CBP would implement those changes at the border using verified producer data or default emissions values drawn from USITC figures or recognized databases, ensuring accurate classification, enforceability, and administrative feasibility.

Differentiated tariffs offer more than an update to trade policy—they offer a practical tool for aligning international commerce with global climate imperatives. The structure and precedent already exist. The technical capacity is largely in place or will soon be. And, in sectors such as aluminum and steel, high tariffs are already a fact of life. There is no reason not to make those tariffs smarter, reducing costs for downstream industries while positioning the United States as a global leader in steering global markets toward decarbonization. Done right, such a policy could catalyze the type of international coordination around climate-responsive trade needed to drive real cuts in the GHG emissions.

Mario R. Osorio Hernandez is a Senior Fellow at Georgetown University Law Center's Center on Inclusive Trade and Development.