This is a guest post by David Kleimann, PhD, writing in personal capacity. He wishes to thank Aaron Cosbey and Simon Lester for helpful comments on an early draft of this post. All errors remain the author’s alone. He would also like to thank Todd Tucker and Tim Meyer for fruitful and inspiring discussions in past and future.
On October 31, the European Union and the United States agreed on temporary measures to settle their dispute over US Section 232 national security tariffs on EU steel and aluminium products. In addition to opening a tariff rate quota for historical EU export volumes, the agreement introduces ‘Global steel and aluminium arrangements to restore market oriented conditions and address carbon intensity’. The passage makes for a curious mix of transatlantic policy objectives in the areas of steel sector decarbonization, carbon border adjustments, trade defence instruments, and inbound investment screening:
Compatible with international obligations and the multilateral rules, including potential rules to be jointly developed in the coming years, each participant in the arrangements would undertake the following actions: (i) restrict market access for non-participants that do not meet conditions of market orientation and that contribute to non-market excess capacity, through application of appropriate measures including trade defence instruments; (ii) restrict market access for non-participants that do not meet standards for low-carbon intensity; (iii) ensure that domestic policies support the objectives of the arrangements and support lowering carbon intensity across all modes of production; (iv) refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity; (v) consult on government investment in decarbonisation; and (vi) screen inward investments from non-market-oriented actors in accordance with their respective domestic legal frameworks.
To enhance their cooperation and facilitate negotiations on a global sustainable steel and aluminium arrangements, the EU and the United States agree to form a technical working group. Through the working group, the EU and the United States will, among other things, confer on methodologies for calculating steel and aluminium carbon-intensity and share relevant data.
The EU Perspective
To be sure, these declared aspirations provide ample space for each party to continue initiatives they are, individually and separately, already implementing or planning to implement, or to describe events that are happening or will happen anyways without any action required whatsoever (as for the last category, quite within the tradition of the EU commitment to import more soybeans and LNG made in the EU – US Joint Statement of 25 July, 2018).
From an EU perspective, indeed, the two paragraphs don’t require much if anything new at all. In 2017, first, the EU reformed its trade defence instruments (TDI) to replace its non-market economy status AD calculation methodology by a methodology based on ‘significant distortions’ of prices and costs due to state intervention and to broaden the scope of its anti-subsidy rules. Measures adopted on the basis of these instruments restrict and will continue to ‘restrict market access to exporters that, due to conditions of non-market orientation, contribute to excess capacity’. The European Commission’s legislative proposal for a carbon border adjustment mechanism (CBAM) covers the energy intensive trade exposed (EITE) sectors of steel and aluminium, amongst others, and will ‘restrict market access for non-participants that do not meet standards for low-carbon intensity’ starting in 2026. The EU Framework for Foreign Direct Investment Screening coordinates EU Member States' efforts in that area, including the ‘screening of investments from non-market-oriented actors’. The transatlantic ‘technical working group’, finally, would then serve the EU to socialize its approaches with respect to the individual instruments with the US partner. This appears to be particularly opportune with regard to its CBAM, an area where the US is lagging behind substantially, and ‘consultations on investment on decarbonization’. Those are always good.
The US Perspective: Team Tucker & Meyer’s ‘Green Steel Deal’
Looking at the US side of things, I came across an article authored by Aime Williams from the FT. Ms. Williams notes that…
“the US administration is heading tentatively down the policy path set out a few months ago by Todd Tucker of the Roosevelt Institute and Timothy Meyer of Vanderbilt University in this paper (which is worth rereading in light of this new deal). They argue that the US doesn’t need to go down the same path as the EU and introduce carbon pricing, but can still work with allies to reach sectoral agreements that agree on how to measure carbon intensity and impose tariffs on carbon-intensive industries.” [If you liked this, you may also like this – h/t to @SteveCharnovitz for the precious find]
I followed Ms. Williams literature recommendation to learn more about the Biden administration’s reported source of inspiration. Curiosity faded quickly, however, and concern set in instead: the concern that the plan of Team Tucker/Meyer (henceforth: TTM) for a ‘Green Steel Deal’ with the European Union could indeed be the substance US officials are aiming for when they continue negotiations over the announced arrangements over the next two years. This is because the plan is quite dramatically unfit to support the achievement of any of its proclaimed objectives. Rather, it would, if implemented, leave both sides and the rest of the world worse off in terms of climate targets, sectoral competitiveness, market orientation, and economic welfare generated through trade compared to any currently conceivable alternative scenario.
On a critical note, the plan showcases TTM’s misconception of the objective of carbon border adjustments. Most importantly, however, the ‘Green Steel Deal’ suffers from a number of design flaws that are worth unpacking here with a view to laying bare the plan’s inherent disconnect between policy objectives, means, and outcomes.
On a more positive note, TTM’s ‘Green Steel Deal’ truly makes for a masterpiece of policy planning, if one is not overly concerned about industrial decarbonization and market orientation, that is. For a policy paper, TTM’s ‘Green Steel Deal’ is not an easy read, with core assumptions of the plan hidden in plain sight yet scattered across the after all lengthy document in non-committal language: victory by implication and ambiguity.
On substance, I’m going to go out on a limb here and argue that one can only fully appreciate the brilliance of TTM’s art of obfuscation if one reads the document as an anti-thesis to the ‘polluter pays principle’. That is because, in TTM’s plan, literally everyone pays for the industrial decarbonization of the US steel sector, except for the US steel sector.
Cheeky but clever: Elements of TTM’s Green Steel Deal
In essence, TTM’s ‘Green Steel Deal’ foresees the creation of a transatlantic climate club of the ‘deep integration’ type. Condition for membership is the obligation to ‘green’ the domestic steel sector by requiring the sector-wide adoption of ‘green production methods’ within 10 years time. The document includes somewhere between "very little" and "practically no" further committed language on the transatlantic decarbonization dimension of the plan, which remains, as a result, nebulous at best and clear as mud at worst. This is important as a matter of emphasis placed by the authors who, instead, dedicate considerable attention and detail to tariff based border protection against steel from ‘dirty countries’ - countries that do not commit to TTM’s climate club. Tariffs, we infer, must be useful instruments for decarbonization. And this is where things become magical: TTM “argue that the US, the EU and like-minded countries should harvest an early win in the fight against the climate crisis by imposing a common external tariff on carbon-intensive steel imports, while, - as the Paris Agreement contemplates – allowing each other flexibility to pursue a range of decarbonization strategies domestically.”
Flexible winning side-by-side with the sword of the transatlantic common external tariff! How could the EU say ‘no’ to such charming courtship. As I would argue: by thinking the plan through starting with the end, and that leads us right to where it hurts: the invoice. The division of costs among the various actors in this play reveals that the web of industrial, trade, and environmental policy measures that TTM spins has one overarching aim and effect: that is to protect the US national steel sector to the maximum possible, if not completely, from the financial burdens associated with an inevitable socio-economic necessity in the history of human civilization: decarbonisation. This is extremely well done because, given that polluter-cost-avoidance (PCA) makes for the key outcome, characteristic, and arguably objective of the authors, it is entirely obscure at the outset and artistically weaved into the different sections and policy instruments of TTM’s manuscript. Carbon priceless, as they say. Cheeky but clever.
Greedy but Clever: The Transatlantic Common External Steel Tariff
Let’s take the Common External Tariff (CET) proposed by TTM as an example. The EU has a CET. The EU loves its CET. She is proud of her CET because it represents one of the key achievements of the Union, the externalization of its internal market through its common commercial policy, the EU’s trade and investment policy. ‘Let’s give those Europeans their CET’, TTM thought, and propose that domestic administrative agencies on both sides would convert average incremental producer costs of greening production methods (compared to production of conventional steel) into tariff rates for border adjustment. Now, those average incremental producer costs of greening production methods are, in essence, a subcategory of average environmental regulatory adaptation costs of steel producers. Average environmental regulatory adaptation cost is also what other US authors have favored as the baseline for a US border adjustment. There are several important caveats to calculating CBAs on this basis, compared to converting an explicit carbon price (a carbon tax or an ETS) into a CBA, but I will come to that a bit later.
During the first ten years, steel exporters from non-member countries – that are all presumed to pay less than equal regulatory adaptation costs compared to producers in transatlantic territory – would be subject to a transatlantic common external tariff (CET) based on the average of national cost conversions. TTM’s stroke of geniuses: US producers are currently and for the time being, as discussed further below, confronted with no regulatory adaptation at all but instead receive subsidies that incentivize industrial transformation. The ‘US greening steel production methods within ten years regulation’, as a result of the Transatlantic Green Steel Deal, would thus make for the only regulatory burden applicable on the US side. This compares to the carbon costs charged to European producers via the ETS and various other EU and member state level regulatory constraints. It follows that a transatlantic average of costs arising from ‘greening steel production methods’ converted into CET protection would severely overprotect US producers at the cost of relatively less protection afforded to EU producers. Greedy but clever.
Citing a Brookings study, TTM claim that a tariff rate of between 25 per cent (coincidentally mirroring Trump’s 232 national security tariffs), at the lower end, to 50 per cent, at the higher end, approximates an accurate border adjustment for costs of greening production methods. But those estimates are not only highly speculative, they also misrepresent the source’s explainer, which states that the numbers make for the conceivable range of greening steel cost premiums at the end of the decarbonization process. TTM, however, are eager to apply at least the lower end estimation at the beginning of the process already.
In a very bold (read: ‘evidently false’) statement at the beginning of their manuscript, TTM pledge to “explain why the EU’s CBAM approach is technically and politically unworkable basis for transatlantic cooperation; why a steel-focused tariff and strategy is a superior starting place and what legal, political and economic considerations should inform the design of what we call the Green Steel Deal.” This is where the reader may run the risk of a Freudian slip, that is to read green ‘steal’ deal because, to be sure, the Common External Tariff on steel products has no functional purpose for industrial carbonization whatsoever. It’s only raison d’etre is to ‘steal’ revenue from US consumers, EU producers, and Chinese exporters and provide US steel producers with a twofold compensation for the greening costs it did not pay in the first place: first, through tariff protection and second through the steel trade present of R&D subsidies for green steel production methods financed through steel tariff revenue. Greedy but clever.
Ten Years In: ‘Dirty Steel Ban’ and ‘Green Steel Standard’
After ten years of transition, ‘dirty steel’ imports and dirty domestic production would be banned entirely. What ‘dirty’ really means remains TTM’s transatlantic decarbonization secret. What we know from the manuscript is that it would come in the shape of an origin neutral product standard indicating a maximum permissible embedded carbon intensity by which domestic and foreign producers ought to adhere if they wish to sell steel in the transatlantic marketplace.
The carbon emission product standard could certainly have applied from year one instead of year ten, and thereby led to zero instead of x-amount exposure to imported embedded emissions. That, however, would have deprived TTM of the only revenue source and confronted the domestic sector with actual costs and sacrifices. But luckily, in view of polluter-cost-avoidance, tariff protection and subsidies apply during the first ten years, the ‘dirty steel ban’ only afterwards.
Admittedly, we do learn in the course of a seemingly educational discussion of various production methods in a different part of the document - that ‘electric arc furnace [EAF] can be mostly decarbonized if recycled steel is used as feedstock and if the electricity that feeds the furnace itself is decarbonized.’ This makes for crucial information for the US policy-maker because it means that 65 per cent of the US steel sector is ‘mostly decarbonized’ if fed with scrap steel and renewable energy electricity. 65 per cent is the share of EAF mills in the US and, roughly, also in the EU. Moreover, we learn that “[T]he majority of further reductions would then come from changes in the Blast Furnace [BF] process, such as the use of natural gas, carbon capture and storage (CCS), direct electrolysis (DE) of iron ore, or hydrogen reduction.”
It follows that the brunt if not all costs of the US decarbonization strategy for transatlantic steel sales would have to be borne by electricity generators and sellers that feed the arc furnace with renewable energy; non-club-exporters’ decarbonization costs, which they are presumed to afford gladly in order to access the powerful because lucrative transatlantic market, as well as their tariff payments to the US government. The latter should be “plowed”, TTM tell us, right back into domestic R&D subsidies for green steel production technologies.
Unfortunately for the People’s Republic of China, which remains the only explicitly mentioned target country of the scheme, EAF makes for only six percent of production in the Middle Kingdom. But that certainly doesn’t mean that the PRC and its producers cannot play a role in TTM’s efforts to organize international support for the decarbonization of the steel sector of one of the richest and most powerful nations in the world. At the very least, Chinese producers would still be eligible to contribute the very share of tariff costs that is not passed through to US consumer.
Finally, given the stack of WTO legal problems that the implementation of this proposal would cause - because it is deeply and utterly protectionist and discriminatory - TTM have already thought of a solution, of course. Club members would forge a WTO alliance dedicated to amending WTO law to enable the legality of their very regime and other climate change mitigation policies, including green industrial subsidies and public procurement. On the basis of such a dramatically illegitimate policy, a consensus among WTO members will not emerge, while the EU is now stuck with an approach that questions the basic tenets of WTO law, jeopardizing the credibility of not only her international climate but also of her trade policy leadership.
The Worst of Two Worlds: The Ubiquitous Policy Design Flaws of the ‘Green Steel Deal’
The plan, in sum, foresees the creation of a transnational ‘deep integration’ regime that provides for safe passage of Trump’s 232 national security tariffs to an allegedly decarbonizing sectoral arrangement. (However, TTM do not want to rule out that, if opportune, the transatlantic green steel deal CET would apply on top of Trump’s 232 national security tariffs since their raison d’etre, global overcapacity, was still existent, cf. FN 17). The scheme, by implication, would oblige the European Union and other club members to adopt Trumpian steel tariff protection to their own steel imports from China and others. In a second step, the EU would be required to increase such protection over ten years time from the Trumpian baseline of 25 per cent, eventually evolving into a formal ban of dirty steel imports and sales. Interestingly, the plan would extend the reach of the proposal of Congressmen Peters and Coons for an ‘import polluter fee’ – which I discussed with TTM here and here - and export its massive design flaws to the European Union. It is interesting to note, too, that the Coons/Peters bill had reportedly been killed by the White House but now magically resurrects in the shape of a market oriented and decarbonized Trojan Horse in the space of transatlantic cooperation. Cheeky but clever.
The design flaws of TTM’s proposal and the misconception it is based on are as manifold as they are severe. I discuss the most critical technical issues below. Crucially, overall, the proclaimed decarbonization objectives of the TTM proposal are either completely or largely disconnected from outcomes - due to the employment of sometimes dramatically inadequate policy instruments or their simple omission. It remains entirely unclear, for instance, how and over what time period the US and her partners would implement decarbonization beyond the first ten years. Leaving timing aside, what is most striking is the (careless, at best) omission of a dynamically increasing carbon intensity product standard – a ratchet mechanism – without which decarbonization cannot progress beyond the first decade.
CBAM Objectives: A Misconception
A preliminary note on the concept and objectives of carbon border adjustments: the plan’s key feature, a transatlantic common external tariff on steel, i.e. a carbon border adjustment for domestic producers’ regulatory adaptation cost in the shape of a ‘green production methods regulation’, is, according to TTM, aimed at incentivizing China et al to decarbonize. With that, TTM’s CBA is no short of a coercive beggar-thy-neighbour climate policy, which reveals the authors’ misconception of the primary if not exclusive legitimate purpose of carbon border adjustments, that is to prevent or to offset carbon leakage, i.e. production substitution effects that result in the compensation or even overcompensation of emission reductions in abating jurisdictions through increased production in unregulated jurisdictions. CBAs only complement national decarbonization efforts at the border by levelling the playing field among domestic and foreign producers. They can politically secure domestic abatement efforts and guard against abatement losses to polluting jurisdictions. Ex ante empirical studies demonstrate that CBAs can, if properly designed, be effective in preventing or offsetting carbon leakage. The literature provides no evidence whatsoever in support of TTM's hypothesis, however, that CBAs set sufficient incentives for foreign producers to decarbonize. Decarbonization abroad, therefore, remains a leap of faith and the European Commission’s CBAM proposal’s implicit and clearly subordinate aim.
GATT Legal Consistency: Roadblock or Test for Effective Climate and Trade Measures?
The use of tariffs to punish non-club-membership – and therefore induce decarbonization– is possibly a futile effort but it would most definitely have the ‘intended or actual coercive effect on the specific policy decisions made by foreign governments’ that the Appellate Body in the US-Shrimp dispute found to be unjustifiable under the General Exceptions of GATT Article XX. Speaking of WTO legality, a second preliminary note is warranted: TTM want their readers to believe that “making WTO consistency a primary consideration significantly limits the potential for aggressive climate measures, as well as cooperation among like-minded countries”. This is a poisonous allegation at a time when the Democratic Party’s policy elite in Washington DC increasingly embraces Trump’s ‘America First’ paradigm under a different name. Save the fact that TTM’s plan does not actually entail any aggressive climate measures, pitching outcome legitimacy of CBAs against WTO legal consistency suggests, on the first sight, a curious ignorance of the operation of basic GATT rules. It is well known that WTO jurisprudence on Article XX GATT General Exceptions gives WTO members broad discretion to adopt a discriminatory measure as long as the discrimination inherent to that measure is rationally linked to the achievement of the protected legitimate policy objective. It further provides WTO members with an objective assessment of the suitability and effectiveness of a measure to achieve a legitimate purpose. In other words, a measure’s effectiveness makes for a prerequisite of WTO legal consistency. This observation could give rise to the suspicion, on the second sight, that TTM have something else in mind, notably to discredit perfectly functional WTO legal provisions with a view to providing extra-legal justifications for steel protectionism disguised under the banner of climate objectives. Yet, international political support for a CBAM and the credibility of transatlantic leadership will crucially depend on the de jure legitimacy of the measure in question, which, as stated above, can only be derived from the linkage of policy instruments and their effects to the achievement of protected objectives.
It is unfortunate, in this context, that the ‘Green Steel Deal’ proposal by TTM consistently employs second or third best and US-centric means that are either disconnected or only loosely linked to stated purposes.
Caveats of Regulatory Adaptation Cost Conversions: The US needs a Price on Carbon!
TTM’s common external tariff rate applicable during the first ten years, for starters, would be calculated in accordance with a methodology that converts average domestic regulatory adaptation costs - in this case: the incremental average producer costs of greening production methods - into an ordinary customs duty. This approach is - whatever the precise methodology of cost conversion -, for several reasons, quite clearly second best to the use of average explicit carbon costs (e.g. a carbon tax or an ETS charge). The conversion of average regulatory adaptation costs into a tariff is much less precise and accurate in projecting incentives for abatement at home and abroad. The individual nature of producers’ abatement cost curves implies that cost averages converted into border charges will inevitably over-protect some and under-protect other domestic producers. The selection and conversion of individual regulatory measures into average cost is, moreover, associated with a degree of econometric complexity and arbitrariness of choice. The US methodology of choice, in other words, is far from an exact science. All of the beforementioned pitfalls would be avoided if the US shifted abatement efforts to a threefold synergistic combination of a carbon price, carbon intensity product standard, and subsidy instruments. This could be done with relative ease in the steel sector in particular, where producers currently face little to no regulatory abatement costs at all. Adding a transatlantic regulatory layer of implicit costs alone, on the other hand, is making one’s life unnecessarily complicated. The US needs a carbon tax, which she can then offset 1:1 at the border if need be.
Methodological pitfalls are also the reason why the European Commission’s CBAM proposal disregards regulatory adaptation costs at home and abroad as input for cost conversions into a border adjustment. Conversions of implicit carbon costs, in addition, hardly lend themselves to international CBAM cooperation: a requirement to calculate the equivalence of all third country regulatory measures relevant for exports in relation to an explicit or implicit carbon cost imposed at home, to be sure, would confront implementing agencies with a herculean task and may render the adoption of a CBA a mission impossible for many governments that operate in resource scarce environments. The use of explicit carbon prices (i.e. a carbon tax or ETS charge) as the sole variable of carbon cost equivalence across jurisdictions, on the other hand, is a straightforward and, importantly, transparent exercise. It therefore undeniable that it makes for the by far superior policy instrument.
TTM rightly points at US domestic political obstacles (in the shape of Senator Joe Manchin’s opposition) to the adoption of an explicit carbon price to justify their choice. But Senator Manchin is a US domestic problem. It appears absurd to consider that political opposition from one single US Senator who suffers from regulatory capture by West Virginia’s coal industry, could induce partner governments such as the EU institutions to adopt inferior policy instruments and put a wedge into the machinery of international CBAM cooperation, which would eventually result in less ambitious global climate targets and carbon reductions. TTM’s expectation that US climate cooperation partner governments should submit to systemic US domestic political corruption and lower their climate policy standards and ambitions accordingly, moreover, is outright preposterous. Anu Bradford notes, for instance, that after the US Supreme Court’s ruling in Citizens United (…) many in the United States worry that the extent of business lobbying has distorted the democratic process. (…) Thus, if regulations in countries outside the EU are too permissive, too weakly enforced, or otherwise suboptimal, the Brussels Effect might be a desirable way of overriding them” (The Brussels Effect, p251). And while US domestic political contingencies may make for an insurmountable obstacle to level-up at this point in time, Anu Bradford’s insight provides a realistic and positive outlook in the medium-term, provided that the Union’s institutions do not compromise on the explicit carbon price imperative in the short term.
TTM leave us in the dark over the question, secondly, which US emission regulations could possibly add up to producer adaptation costs equivalent to a 25 percent or 50 percent border tariff adjustment. These figures need to be evaluated in light of the fact that US steel sector abatement policies are almost exclusively based on positive incentives, i.e. subsidies. Subsidies paid to domestic producers would naturally decrease the converted border adjustment rate because border adjustments are limited by law to the net implicit and/or explicit carbon costs imposed on domestic producers.
It is noteworthy, in this context, that it was the technological development of electric arc furnace (EAF) run mini-mills in North America which significantly advanced carbon competitiveness in the steel producing sector. But the success of mini-mill production by the end of the 20th century was not a consequence of US emission regulation. It was their promise to revive the US steel sector’s competitiveness as a result of major efficiency gains. In other words, for the US steel sector, economic and carbon efficiency have gone hand in hand rather than in contradiction to each other, casting doubts over the question of necessity and legitimacy of a US border adjustment for steel imports in the first place. It is at least questionable, whether firm level spending for technological upgrades are not at least partially attributable to the normal investment cycle rather than regulatory decarbonization requirements. In comparison to the TTM plan for a generous tariff of 25 percent to over 50 percent, the EU CBAM impact assessment cites an average tariff equivalent of ETS carbon costs paid by EU producers in all five covered sectors of only 4 percent by 2035.
Caveats of Country Wide Average Carbon Intensity Benchmarks
At least notionally, TTM’s plan proposes the use of one average carbon intensity benchmark for all countries for assessing compliance with the transatlantic ‘green production methods’ standard during the first 10 years. This makes, as noted further above, for both an arbitrary and unjustifiable choice of instrument. In planned practice, TTM simply assume that third countries do not adhere to the ‘green production method’ standard if they have not signed up to the club obligation and therefore render them subject to the transatlantic CET. Employing data of average country wide carbon intensities instead of data of actual emissions embedded in individual import shipments vastly distorts incentives for abatement and runs counter to TTM’s proclaimed external decarbonization objectives. Producers from ‘dirty countries’ (i.e. from jurisdictions whose producers on average do not meet the transatlantic green methods standard) receive virtually no individual incentive to advance decarbonization because an exemption from the transatlantic CET depends on country-wide and not individual decarbonization efforts. ‘Dirty producers’ from ‘clean countries’ (i.e. jurisdictions whose producers on average meet the transatlantic green methods standard), on the other hand, free-ride on the decarbonization achievements of competitors who produce ‘clean steel’ in the same jurisdiction.
In light of these considerations, the European Commission has included, in Article 7 and 8 of its CBAM legislative proposal, what Mehling and Ritz call an Individual Adjustment Mechanism (IAM). The IAM allows individual producers to demonstrate - by means of independent verification of actual emissions data - that the emissions embedded in their products are lower than the scheme’s benchmarks and ensure that carbon cost and embedded emissions stand in perfect correlation to each other, therefore setting highly efficient abatement incentives and providing for a stronger (because perfectly linear) relationship between the (legitimate) policy objective and the (discriminatory) adjustment instrument. In other words, the IAM not only enhances policy effectiveness but also the prospects of WTO GATT legal consistency. In the EU, CBAM emissions reporting will begins three years before CBAM charges apply, allowing for enough time to socialize the new practice with importers, producers, and government agencies.
Caveats of Non-Cost-Crediting CBAM Policies
The provision of transparent, positive, individual and performance based commensurate incentives is also the rationale that should apply to the instrument of crediting explicit carbon costs paid by foreign producers in their home jurisdictions. TTM’s ‘Green Steel Deal’ does not include this option, neither in the transition phase nor after, whereas the European Commission’s CBAM proposal rightly envisages the crediting of explicit carbon costs paid abroad to any CBAM charges that may apply (Article 9). Not to credit carbon costs would set negative incentives against the adoption of explicit carbon pricing schemes in third country jurisdictions because emissions embedded in their exports would be charged – in violation of WTO law – twice. Non-crediting CBA policies also sets incentives for WTO incompatible (in regard of regulatory adaptation and ETS costs) and WTO compatible (for carbon taxes) export rebates, and may, crucially, increase the potential of triggering a global export refund arms race and rising carbon leakage rates that find their valve in international steel markets. Carbon cost crediting policies, as proposed by the European Commission, on the other hand, incentivize carbon pricing abroad, which makes for key source of abatement in TTM’s ‘Green Steel Deal’.
The functional benefits of cost crediting policies in regard of their contribution to achieving protected policy objectives, as noted above, also greatly increase the likelihood of WTO legal consistency. Non-crediting schemes such as TTM’s ‘Green Steel Deal’ proposal would likely be found to constitute a disguised restriction on international trade and/or an unjustifiable discrimination among different WTO members and therefore fail the basic tests of the chapeau of Article XX GATT.
Carbon Club Caveats
The perhaps most fundamental problem with TTM’s ‘Green Steel Deal’, however, lies elsewhere. It is the overambitious ‘deep integration’ institutional design of the proposed transatlantic carbon club, which would ironically lead, if implemented, to less net emission abatement compared to looser forms of integration or even the non-cooperation baseline scenario. This fact can be explained by structural differences among the proposed members, the EU and the US. The depth of integration among prospective potential members of a carbon club first and foremost ought to be a function of structural indicators of similarity including a shared (political economy dependent) level of ambition, similar administrative implementation and enforcement capacities, sophisticated existing climate and trade policy frameworks, as well as methodological and technological know-how.
But the difference between EU and US climate and trade policy toolkits, the structural divergence of the respective political economies and polities as well as overall prohibitive costs of aligning around a lower US denominator render the achievement of TTM’s proposed club features a mission impossible. A transatlantic carbon customs union would require integration at the level of currently inferior US policy instruments as discussed above. The US domestic climate policy toolkit simply does not feature the instruments necessary for effective cooperation on carbon pricing equivalence, a common border adjustment or even credible planning therefor. In consequence, the EU would have to shelve a highly sophisticated CBAM legislative proposal, unlink its CBA plans from its mature and tested ETS, and give way to various evidently less efficient, less effective, and WTO inconsistent solutions. And while it is out of the question that the Union’s institutions would accept such unreasonable demands, the EU’s ‘no’, which has already been expressed by the European Commission’s Director for Transatlantic Trade Relations, is likely to frustrate the widespread expectation of a transatlantic CET that has somehow already been internalized by the policy elite in Washington DC.
It should be noted, at this point, that it is not without coincidence that only one effective carbon club exists to date, which has set out to adopt a common external border charge for steel and four other EITE sectors, notably the deeply integrated European Union with its more than six decades old Common Commercial Policy and its Emission Trading Scheme (ETS) operated since 2005. Effective carbon clubs are not built in a day, at the very least, and the devolution of policy achievements to lower standards to accommodate the second best is not an option in light of the existential urgencies that drive 21st century climate and trade policy.
In this way, overambitious club design may well – through failure - give the notion of a climate club an unnecessarily bad reputation. Falkner, Nasiritousi, and Reischel note, for instance, that a prospective transatlantic climate club must be assessed on the basis as to whether it adds or distracts from the multilateral climate regime or diverts resources away from more effective national abatement efforts. Baron and Lee find, moreover, that conventional climate clubs built on the Nordhaus example, such as the ‘Green Steel Deal’, are too simplistic to address the complexity of the abatement challenge and therefore make for a “waste of time”.
Indeed, in light of the prohibitive costs associated with the creation of a transatlantic carbon customs union, the EU and the US should focus their joint efforts on more flexible and pragmatic cooperation objectives that avoid, ideally from the outset, wrangling over which side adopts whose standards and practices. Some observers, for instance, have characterized recent US proposals for an import polluter fee or a clean steel deal with the EU as a ‘first bid in a negotiation’. While such attitudes are somewhat understandable extensions of specific cultural approaches to international negotiations, this, too, is a waste of time. Transatlantic cooperation on climate change mitigation does not seem to lend itself to be approached like a beef quota bargain. Rather, it should be viewed akin to a technical assistance opportunity, which knows only ‘winners’ (i.e. beneficiaries) as long as it is not loaded with secondary (e.g. protectionism) or tertiary (e.g. global power competition) objectives that distract from the only two legitimate ends of climate & trade nexus cooperation: industrial decarbonization and the prevention of carbon leakage.
A transatlantic arrangement for steel to address carbon intensity is an opportunity for the US in particular to progressively align its climate & trade policies with the EU standard and best practices that are laser-focused on creating efficient incentives for abatement at home and abroad as well as achieving effective decarbonization and carbon leakage policies. At the outset, a carbon customs union is not the right way to achieve this objective. The recent German key issues paper for an international carbon club may well be more suitable to the initial purposes of a progressively and incrementally integrating club because it entails a phased approach that retains full flexibility regarding the elements of cooperation and integration between jurisdictions that diverge from each other in terms of their regulatory, industrial, and political contingencies.
Priority should be given to cooperation on prerequisites of carbon leakage policies, including first and foremost, the joint development of standards for pricing and measurement of carbon emissions, joint industrial transformation/decarbonization efforts with specific timeframes, a dynamic emission ratchet mechanism, as well as transatlantic market and investment initiatives. Once joint pricing and measurement methodologies and product standards have been developed and enacted, members could envisage the progressive alignment of their border adjustment mechanisms. But the unknown marginal benefit of such initiatives does not render them a top priority. Cooperation with non-members to similar ends, and the provision of technical as well as financial assistance through a greening of aid for trade, would support the notion of a genuinely ‘open’ climate club.
Conclusions
If adopted by US officials in their negotiations with EU interlocutors over the next two years, TTM’s Green Steel Deal is certain to result in severe repercussions for transatlantic climate and trade diplomacy under the Biden administration and a waste of precious time. These are not empty phrases.
High ambition, expediency, precision and effectiveness in policy design and implementation are of essence when it comes to transatlantic cooperation on climate change mitigation. Yet, TTM’s ‘Green Steel Deal’ is neither the state-of-the-art nor anywhere near it. Instead, it has considerable potential to frustrate expectations on both sides of the Atlantic at this critical juncture and would, with near certainty, conclude in a high-profile diplomatic setback. That’s because the plan stands precisely zero chance of being adopted by the European side, neither in structure nor in content. The reasons are manifold, as discussed above. The ‘Green Steel Deal’ would tightly link ineffective climate and wasteful industrial policy and thus, figuratively speaking, put green lipstick on a protectionist pig. This unholy marriage would profoundly harm the international credibility and legitimacy of EU and US climate endeavours and carelessly jeopardize the achievement of a top priority policy objective by catering to domestic rent-seekers for short term political purposes.
TTM’s plan is policy made up of the worst of two worlds: it relies on instruments that are inadequate or third best solutions to the abatement challenge while it is appealing policy only for those on the far left and right whose political fate depends on the costly protection of uncompetitive domestic industries in the way Mancur Olson has so famously described it in ‘The Rise and Decline of Nations’.
If implemented, the plan would project an image of transatlantic abdication and further US decline instead of global policy leadership based on a role model of domestic modernization and efficient external incentives. The ‘Green Steel Deal’ in Todd Tucker’s and Tim Meyer’s version is unaffordable in multiple dimensions, including the notion of a Carbon Customs Union and should be binned immediately as a matter of principle and example of what transatlantic cooperation must not set out to pursue.
Climate change mitigation, the by far biggest challenge of our times, deserves nothing less than our undivided attention, policy and technological innovation, and ambition to achieve first best policy solutions and outcomes at all times.
