Thanks to Tim Meyer and Todd Tucker for taking the time to respond to my questions about how the U.S.-EU Section 232 deal could lower carbon emissions. Not surprisingly, their response raises more questions for me, and I am still skeptical that this new arrangement will lead to lower emissions. I have some very specific questions and comments in this regard in reaction to what they said, and I also have some broader questions that make me wonder whether this approach is at all workable.
First, let me talk about the domestic side of the equation. In my view, the best way to approach the issue of reducing the carbon emissions that result from manufacturing is to first take domestic action to address your own carbon emissions problems, and then come up with an international component that roughly matches the domestic action. What you will end up with, ideally, is something close to a non-discriminatory set of regulatory/tax measures that apply both internally and externally. On this point, Tim and Todd suggest that the U.S. is "contemplating ... subsidies for industrial decarbonization in Build Back Better and the Bipartisan Infrastructure Bill." (Perhaps what they have in mind here is Sec. 30471 of the House Build Back Better Act (see p. 459).) I have some doubts about how much impact this will have on the carbon emissions of the U.S. steel and aluminum industry, but assuming it did, that would be a start. Opening with carbon tariffs is a bad move, in my view, and genuine efforts at domestic improvements are a better approach. So, let's see what happens with reducing U.S. steel/aluminum industry carbon emissions through the Biden administration's infrastructure plans. That could help illuminate whether a carbon tariff plan has a chance to make an impact on emissions. (I should point out that domestic producer subsidies of the sort contemplated here are often problematic, in the sense of leading to trade conflict. Subsidies to purchasers of clean steel/aluminum might be a better way to go).
Second, I'm sorry to have to point to trade remedies again, but if the Biden administration's plans involve subsidies, well then we're back to the sort of problems I raised in my original post. To the extent the U.S. industry is thinking about exporting its new and improved, squeaky clean steel and aluminum, these subsidies could subject it to countervailing duties. Of course, maybe they aren't expecting to export much, in which case it's less of a problem. But if they actually did have the cleanest steel and aluminum, I'm not sure why they wouldn't be trying to market it that way and sell it all around the world.
Third, staying on the trade remedies theme, I really think the fundamental flaw here is the linking together of dumped and dirty products. Tim and Todd say: "the arrangement will result in an ever-expanding wall against dirty, dumped steel and aluminum." But everyone needs to understand (and I think most readers of this blog do) that you can't expect companies to stop dumping. Generally speaking, it's not something they know they are doing. It's not a choice, like, "hey, let's dump our products in this foreign market," and companies won't generally know if they are dumping before some trade remedy agency tells them they are. It's not easy to run an internal calculation of whether your pricing practices will lead to a finding of dumping. (No doubt it can be done, at least to some degree of accuracy, but it would be costly). Rather, for the most part, dumping just involves a set of calculations that, if carried out in a certain way, will lead to a finding that you are dumping. Just about everyone can be found to be dumping under the right methodology. Now, if the issue is with government distortions to markets, that's something you could try to target. (I would very much like to see Tim and Todd push for action against government distortions to markets, and I was excited to see their reference to "market orientation"!) But if you are setting up this new arrangement in such a way as to target both "dumped" and "dirty" products, you may be asking too much. If a foreign producer needs to satisfy both conditions, all their efforts to clean up emissions could be for naught in terms of getting access to the U.S. market. As I said in my original post, if you could set this up in a way that clean steel and aluminum could avoid tariffs regardless of whether there was dumping, then you might be able to create some good incentives to reduce carbon emissions. But I don't think the domestic industry and unions are going to go for that. And in addition, also as mentioned in the original post, while governments could offer domestic incentives for cleaner production, avoiding the carbon tariff only to get slapped with a countervailing duty because of the subsidies would be really annoying.
Fourth, the response from Tim and Todd makes specific reference to China, and China is clearly one of the keys here. But China's imports of these products are already severely restricted by existing AD/CVDs. I'm not sure this new arrangement will give them much in the way of an incentive to decarbonize production. China's distorted steel sector is a famously difficult problem, and we should definitely think about what actions to take in this regard, but unilateral trade restrictions have been tried to death and don't hold much promise here. Maybe try going to the WTO and invoking some of the expansive WTO-plus accession protocol provisions China agreed to? Worth a shot, in my view.
Turning to the broader questions, I want to make two related points that touch on the credibility of the whole exercise. If I'm in the shoes of India, or Brazil, or South Africa, I might have a negative reaction to all of this for two reasons: 1) It doesn't seem fair to focus so much on industries where U.S. production is relatively clean; and 2) given U.S. per capita carbon emissions, the U.S. isn't really in a position to be telling other countries to clean up.
On the first one, what seems to be happening in the Section 232 deal is that the U.S. is choosing to make steel -- I'm less sure about aluminum in relation to its comparative carbon emissions -- the focus of its carbon emissions plan for industrial manufacturing. However, that's not a neutral and objective choice, picked randomly from a ping pong ball machine. Rather, it seems like a strategic decision to focus on an area where we think we won't have to do as much in terms of cleaning up. I would expect other countries to push back on this. They might say something to the effect of: "Hey, you can't just pick steel because your production does well there. Let's talk about production in a wide range of sectors, and throw in some where your production is dirty and you actually need to do some work." (This point is connected to a general complaint of mine about trade negotiations, which is that everyone wants the agenda focused on other countries' sins, not their own sins. In my view, this is a big reason why we've had so much trouble getting significant WTO deals finished.)
On the second one, when you look at comparative figures for per capita carbon emissions, the United States doesn't fare so well. That's something that developing countries who are being told to clean up their production notice. And that takes me back to a point I made above. If I were the Biden administration, I would really focus heavily at the start on reducing domestic carbon emissions. That would add some credibility to efforts to push other countries to reduce their own emissions. The Biden administration is talking a lot about reducing carbon emissions. We'll see how far that goes in practice.
Let me sum up this way. I think there is a way to get to lower carbon emissions in these and other sectors. My main objection is to using "restrict access to their markets for dirty steel and limit access to countries that dump steel in our markets" as the key principle on which the effort is based. Instead of this, I would try to identify the most carbon intense production practices and facilities in these and a number of other key sectors around the world. Then I would try to put together a funding mechanism that helps reduce emissions at the dirtiest ones in a balanced way. In contrast, I think that converting existing tariffs that trading partners thought were unjustified into a new version of the same tariff, with an ostensibly different justification, in order to induce changes in behavior among our trading partners even though it's not at all clear we are particularly virtuous, is the wrong approach and is unlikely to have much success.
