The current US Administration’s recent string of tariff-related announcements has led to disarray globally, as its next actions and following outcomes remain unclear. However, it is clear that previous and future actions will have long-term impacts on global climate mitigation, green technology supply chains, and the energy transition. These impacts are highly relevant to the voluntary carbon market (VCM) and could have significant implications for market participants.
Tariff Update
Less than three months into Trump’s second term as the US President, Donald Trump upended the global trading system by announcing a “reciprocal” tariff on many nations, based on their trade surplus with the US, on top of a 10% universal tariff on US imports. Trade protectionism of this magnitude has not been seen since the Smoot-Hawley Tariff Act, nearly a century ago, and signals a shift away from the global trading system that has largely been in place since the 1980s.
The international response has been swift and severe. China, the primary target of these measures, has announced retaliatory tariffs on US agricultural products and technology exports, while also imposing new export restrictions on rare earth minerals critical for clean energy technologies. Other nations, including members of the EU and key US trading partners in Asia, have signalled their intent to challenge the tariffs and are considering their own countermeasures.
The US’s response to retaliatory tariffs from affected countries has varied, as some countries scrambled to negotiate with the United States, while others with a stronger market position, such as China, saw concessions such as tariff exemptions on electronics. The apparent backpedalling from the American administration comes following global equity and bond market implications, for instance, the massive sell-off of Treasury bonds.
As of 15 April 2025, the universal tariff remains in force, while “reciprocal” tariffs are on pause as the US currently works on trade deals with over a dozen trade partners. Trade discussions with the EU have stalled, so countries are gearing up for countermeasures to come into effect. Chinese imports still face a tariff of up to 145%, besides the electronics exception.
2025 Foreign Pollution Fee Act (FPFA)
Alongside the sweeping tariffs announced by President Trump, the Foreign Pollution Fee Act (FPFA) was proposed on 8 April 2025, which closely resembles the EU's Carbon Border Adjustment Mechanism (CBAM). The FPFA would impose a tiered fee, on top of a base 15% tariff, for select carbon-intensive imports, such as steel, aluminum, cement, and solar components, based on their emissions intensity relative to US equivalents. The bill is designed to level the playing field for US manufacturers and incentivize cleaner production globally by penalizing imports from countries with weaker environmental standards.
Senators Bill Cassidy and Lindsey Graham have reintroduced the legislation after first announcing it in 2023, with some changes made since. A notable change is the exclusion of fossil fuels in the updated version, which could be due to their coverage in the other tariffs proposed by Trump.
The FPFA is a notable development for the carbon dioxide removal (CDR) industry, as it allows importers to offset tariff costs by purchasing high-quality, verifiable carbon removal credits, with a preference for durable, US-based projects. This mechanism could drive significant new demand for carbon removal solutions and help scale carbon markets and CDR technologies, as exporters to the US now have greater incentives to leverage them, given they meet the FPFA’s criteria for offset use.
Besides tariffs, other legislative initiatives impacting ESG and sustainability are on the way, like the one proposed by US lawmakers that would prohibit certain US entities from being forced to comply with any foreign sustainability due diligence regulation, including the EU Corporate Sustainability Due Diligence Directive (CSDDD). The EU adopted the CSDDD in May 2024, which converts a range of international conventions into binding laws enforceable on American companies. New regulations would force US companies to adopt the EU’s net-zero carbon emissions target and other standards that exceed the requirements of US law, in addition to imposing severe financial penalties for violations.
In addition to federal policies, Republican states have largely signalled that they will push back against decarbonization with legislation prohibiting the use of company resources for greenhouse gas emissions measurement, unless required by federal law. As the Trump administration has rejected the UN Sustainable Development Goals, which casts doubt on the federal government’s support for climate-related disclosures and broader sustainability initiatives, other US states are developing regulations in anticipation of a regulatory gap at the federal level.
Why Tariffs?
Trade has remained a relatively bipartisan issue across the past few decades, seen through Republican and Democratic Presidents alike voicing concerns regarding the state of global trade and its impacts on the US. A key outcome that the current administration seeks through these tariffs is the reindustrialization of the US economy. The tariffs will shift the demand of American consumers towards domestically produced goods, driving the expansion of US manufacturing capabilities.
While some of its labour market benefits are debated, supply chain resiliency and national security remain central goals of onshoring key industries. A global pandemic, energy disruption from geopolitical conflicts, and the reliance on a single country for key input materials are factors driving the current tariff strategy in the US. China has been the central figure in the US’s crosshairs over the past few decades, as its evolving relationship has had major impacts on the development of domestic industry in the US.
Global solar technology trade in the early 2000s exemplifies what concerns the US may have and how this connects to climate mitigation. The first application of the modern solar cell can be traced back to the 1950s, through a US-based company. The US was the leading producer globally up until the late 90s, but was overtaken by other nations, with China emerging as the most dominant player in the 2000s. Chinese firms were able to export solar panels to the US and sell them well below what domestic firms could offer, otherwise known as dumping, due to government subsidies. This put US producers out of business before protectionist measures could be implemented. The US had attempted to revive the solar industry during the Obama Administration, through funding and trade restrictions, but it wasn’t enough to make the US a leader in solar.
Why Not Tariffs?
Recent analysis from the Penn Wharton Budget Model on 8 April 2025 estimated that Trump’s tariffs would reduce wages by 7% and gross domestic product (GDP) by approximately 8%. This would result in reduced consumption, which reduces its associated emissions in the short term, but it would also stifle clean energy investment and slow climate mitigation. Notable economists and business leaders mostly agree that the push for tariffs and the rapid changes in economic policy displayed by the US administration create “toxic uncertainty,” sending disruptive ripples of chaos throughout the markets and the world economy at large, and the VCM is no exception.
Decades of globalization have resulted in the differentiation of national economies, and China has become the most dominant manufacturer by far in terms of scale. Rare earth minerals essential for defence technologies and clean energy have faced further export restrictions by China. Many of the impacted materials are vital to electric vehicles (EVs), grid-scale batteries, and renewable energy technologies, and substitutes for certain goods are limited since China dominates the supply chain for many rare earth minerals needed for the energy transition.
Due to limited substitutes and domestic production barriers, the tariffs are expected to increase costs for certain goods, which may be passed down to consumers, without driving manufacturing to the US. For example, a study estimated solar module prices to be 20-30% higher by 2030 if China were to be excluded from the global supply chain and domestic producers instead supplied the US and Germany.
EVs are a notable import that demonstrates greater climate benefits from lower tariffs. Specifically, China’s ability to produce and export low-cost EVs to advanced economies at scale helps shift consumer demand away from combustion engines. More EVs on the road can develop infrastructure, such as charging stations, which can further incentivize adoption.
Impacts
Combined with the negative impacts on green technology supply chains, the other policies of the current US government could further tip the scales to benefit fossil fuels at the cost of low-carbon energy. This could increase lock-in risk as more extensive investments are made in oil and gas production, which could shift back the timelines of when clean energy infrastructure scales.
Broader onshoring trends could improve carbon emissions, given that US equivalents are overall less energy-intensive. However, energy production trends in the US could lead to a higher emissions intensity for the grid, impacting climate mitigation pathways and showing up in the form of greater Scope 2 emissions for companies. This limits the climate benefits of shifting production away from higher emissions intensity imports to the US, since the embodied emissions of US-based goods could increase. The FPFA, which calculates import fees based on the difference in emissions intensity, may also generate less revenue due to this effect.
As trade and climate policies become increasingly interlinked, market participants should continue to monitor the regulatory landscape. For deeper insights on how these trends could affect your strategy, contact our Market Intelligence team.