Weekly Analysis

Weekly Analysis

U.S.-EU Steel Tariff Deal May Set Path For Broader Global ‘Carbon Club’

November 15, 2021

The Biden administration’s agreement with the European Union (EU) to set aside Trump-era tariffs on steel and aluminum imports in favor of limiting carbon intensity, as way of addressing excess capacity, could lead to a “Carbon Club” that would eventually include Japan, and even China, according to an EU official.

The “idea behind” the U.S.-EU agreement is whether a carbon club could be developed, European Commission Directorate General for Climate Action Jos Delbeke said last week, adding “I think that's an attractive proposition but it would only work if we have the major emitters in this, such as…the EU, the U.S, and I would add China…with an explicit carbon pricing policy.”

At the same time, U.S. Commerce Secretary Gina Raimondo appeared to open the door to Japan joining a future carbon agreement, announcing Nov. 12 plans to lift tariffs and begin a new round of talks in part to address excess capacity of steel and aluminum that she said is “driven largely” by Chinese exports made possible in part by lax carbon controls.

Delbeke made his remarks during a Nov. 9 webinar hosted by think tank Resources for the Future (RFF) in response to a U.S.-EU announcement Oct. 31 to address the over-capacity of aluminum and steel by establishing a “technical working group” on how to limit the carbon intensity of these industries.

“While the trade and environmental implications of the agreement will be developed over time, the establishment of this working group to share data and develop a common methodology for assessing the embedded emissions of trade in steel and aluminum suggests interest, and I would say perhaps an intent, in establishing the U.S. and EU aluminum and steel [carbon] club,” said RFF Climate Strategies Director Ray Kopp during the Nov. 9 webinar.

“Perhaps a club with common emission performance standards that might be developed” as a “mechanism by which competitiveness issues, at least within the EU and the U.S., might be aligned with the performance standards associated with reducing emissions from those hard to abate sectors,” Kopp added.

The U.S.-EU agreement invites “other link-minded economies to participate in the arrangements,” according to a White House “fact sheet.” The U.S.-EU announcement was made on the sidelines of the Group of 20 (G-20) meeting in Rome. The G-20 includes Japan, China, India and Russia, suggesting the potential global sweep of the U.S.-EU effort to reign in the carbon intensity of steel and aluminum manufacturing by some of the world’s largest emitters.

The idea of carbon clubs is not new, but the recent U.S.-EU and U.S.-Japan announcements appear to set the stage for international efforts to limit perceived dumping of aluminum and steel from China as a test case of sorts for establishing such a performance-based group.

A club would allow participants to bypass tariffs, such as those envisioned by the EU’s proposed carbon border adjustment mechanism (CBAM) program, by standardizing the cost of reducing carbon emissions through standards, while parties outside the club could face stiff border fees for steel and aluminum products produced with lax carbon controls.

Energy-Intensive Commodities

U.S. and European policymakers have been struggling with how to take into account the carbon intensity of manufacturing energy-intensive commodities such as steel and aluminum without running afoul of World Trade Organization rules that prohibit subsidies to protect domestic producers.

Last summer, the EU unveiled its proposed CBAM program which is in its pilot phase with the first revenues under the program expected to be paid in 2026.

In the U.S., lawmakers have proposed a carbon border adjustment (CBA) program which would impose a fee on imports based on the domestic carbon control compliance costs for U.S. manufacturers.

Sen. Chris Coons (D-DE) and Rep. Scott Peters (D-CA) have introduced a bill that is seen as the leading CBA proposal, while advocates acknowledge its passage is not likely anytime soon.

One of the complicating factors for setting an international CBA is the fact that the U.S. does not have a nationwide price for carbon, while other countries such as EU members impose a carbon price as part its emissions trading system established in 2005.

Establishing a carbon club for steel and aluminum manufacturing could sidestep some of those challenges by addressing competitiveness concerns through performance standards -- and the abatement costs of complying with those requirements -- rather than creating a mechanism for assigning embedded carbon costs for imported products which economists say can be complicated particularly in the absence of a carbon price.

Under the U.S.-EU agreement, Delbeke sees greater interest by China to participate in a potential carbon club than India, another major emitter, because China already has a domestic carbon trading system while India has been slow to embrace such carbon market mechanisms.

Delbeke said initial analyses of the CBAM show the greatest impact will be on immediate trading partners such as Russia, while China will be more in play as the program expands to address heat-intense products such as steel and aluminum.

“So dealing with China is going to be a very, very different ball game as soon as the indirect emissions are going to be included” for steel, aluminum, fertilizer and other “electricity intensive products,” Delbeke said, noting that next phase of the CBAM “needs much more elaboration.”

“There is quite a distinction between the case of India and China,” Delbeke noted regarding who might be candidates for carbon club participation.

“China is developing a nationwide carbon market and the industrial products that are mentioned or in the scope” of that initiative are the same products covered by the CBAM, Delbeke said. “So if they want to go quick, they can go quick,” he added. “Very different in India. I think it’s a completely different context where carbon markets are not taking off for decades to come,” Delbeke said.

Japan Deal

For its part, the U.S. is already reaching out to Japan to extend carbon intensity constraints on steel and aluminum manufacturing in Asia.

“These consultations present an opportunity to promote high standards, address shared concerns, including climate change, and hold countries like China that support trade-distorting non-market policies and practices to account,” Raimondo said in a Nov. 12 statement.

“The United States and Japan will seek to resolve bilateral concerns in this area, including the application of Section 232 measures, trade flows, and the sufficiency of actions that address steel and aluminum excess capacity with the aim of taking mutually beneficial and effective actions to restore market-oriented conditions and preserve our critical industries,” she added.

Section 232 of the Trade Expansion Action allows the president to restrict the imports of goods and materials deemed a national security risk. “Replacement of Section 232 tariffs with tariff-rate quota (TRQ),” is a stated priority of the U.S.-EU agreement announced last month.

“The United States will replace the existing tariffs on EU steel and aluminum products under Section 232 with a TRQ under Section 232. Under the TRQ arrangement, historically based volumes of EU steel and aluminum products would enter the U.S. market without the application of Section 232 tariffs to meet the demands of downstream users,” according to the White House fact sheet.

“Negotiation of global steel and aluminum arrangements that restore market-oriented conditions and address carbon intensity,” is another priority of the agreement. “The U.S. and EU resolved to negotiate future arrangements for trade in the steel and aluminum sectors that take account of both global non-market excess capacity as well as the carbon intensity of these industries. The U.S. and the EU agreed to form a technical working group to enhance their cooperation and facilitate negotiations on these arrangements, and will invite like-minded economies to participate in the arrangements,” the White House says. -- Rick Weber (rweber@iwpnews.com)


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