This is a guest post by David Kleimann (PhD) - a visiting fellow at the Brussels based Bruegel think tank. He wishes to thank Todd N. Tucker and Timothy Meyer for productive debates in past and future.
In July of this year, I published a Bruegel working paper titled ‘Section 232 Reloaded: The False Promise of the Transatlantic ‘Climate Club’ for Steel and Aluminium’. In this paper, I analyze a plan for a transatlantic “green steel deal” authored by Todd N. Tucker and Timothy Meyer and compare EU and US negotiation proposals for a so-called “Global Steel and Aluminium Arrangement (GSA)”.
In said Bruegel publication, I write that
“both the TMP [Tucker/Meyer plan] and the USTR negotiation proposal place great emphasis on taxing imported steel and aluminium, but do not credibly suggest parallel domestic restrictions on high-emission US steel and aluminium production. (…) What’s more, both the TMP and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation. (…) It is therefore argued here that both the TMP and the initial USTR negotiation proposal are ill-suited to support the achievement of proclaimed policy objectives other than maintaining the tariff protection afforded to US steel and aluminium industries, as originally imposed by the Trump Administration.”
In a response to my paper published by the Roosevelt Institute, Tucker & Meyer contend that my Bruegel publication “seems to willfully mischaracterize both our arguments and the negotiation history between the US and the EU”. This is a very serious allegation. It would require, one imagines, that the authors can substantiate their claim, at least in parts. This is not the case. A diligent review of Tucker & Meyer’s arguments can only lead to the conclusion that their claim is baseless, unfounded, and their arguments riddled with errors. Moreover, Tucker & Meyer’s response reinforces the impression that they either do not fully appreciate or, alternatively, downplay the scale and quality of the US industrial decarbonisation challenge while they double down on the justification of blatantly protectionist US policy proposals.
In the remainder of this post, I address Tucker & Meyer’s claim in detail and further elaborate on my argument that the US has not been a credible negotiator for a “clean steel deal” proposed by Tucker & Meyer or a ”global sustainable steel and aluminium arrangement” as proposed by the United States Trade Representative (USTR).
In a nutshell: the analysis of USTR’s initial negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement” demonstrates that USTR does not intend to make any commitments prescribing US domestic industrial decarbonisation of the steel and aluminium sectors. At the same time, the USTR proposal outlines a plan, in great detail, for discriminatory customs tariffs that would only be loosely related to the emission intensity of steel and aluminium imports. Their adoption would set highly distortive incentives, if any, for third country producers to decarbonize.
Carbon-intensity based market access restrictions can legitimately be enacted as a corollary and mirror of domestic restrictions on industrial emissions once these are in place. A well-designed carbon border adjustment along the lines of established best practices, or non-discriminatory product standards enforced at the border, can legitimately complement equivalent restrictions on domestic industrial produce and emissions. Such measures can prevent carbon leakage, help generate domestic political support for emission regulation and taxation, and even set precise incentives for third country producers to decarbonize.
Both the Tucker/Meyer plan and USTR’s initial negotiation proposal turn this logic upside down by frontloading an elaborate and arbitrary import tariff regime while domestic carbon pricing or other restrictions on domestic industrial emissions (and hence: credible bilateral GSA commitments, for that matter) remain elusive. The political strategy underlying these plans is, if implemented, bound to infuriate trading partners and will sow conflict in US international relations in the years to come. This is avoidable. Instead of engaging third countries in negotiations over ‘carbon tariffs’, the US government should prioritize domestic legislative initiatives to advance industrial emissions regulation, systematically engage stakeholders to ensure the political sustainability of such endeavors, mirror cost-imposing policies at the border, and provide aid for industrial decarbonisation in resource-scarce third country jurisdictions.
The salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US energy intensive trade exposed (EITE) industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ applying to imports without imposing a similar tax or restrictions on domestic industrial emissions. The result of respective preparatory US legislative efforts is not a forgone conclusion. The US may yet turn to more constructive and less isolationist policies. It is clear, however, that a new quality and scale of US ‘green’ industrial protectionism and the (painful) paradox of American climate nationalism is becoming a prospect that US partners are now forced to address.
I. US ‘green’ protectionism and transatlantic steel and aluminium negotiations
In my recent Bruegel publication, I write that “both the [Tucker & Meyer plan] and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation.” Tucker & Meyer take issue with this sentence and claim, as noted above, that it makes for a mischaracterization of their arguments and the negotiation history between the US and the EU.
This is incorrect. Nothing in the Tucker & Meyer response, their plan for a “green steel deal”, or USTR’s negotiation proposal contradicts the finding quoted above. To the contrary, let’s recall:
- Both the TMP and the USTR proposal’s adoption would effectively exempt US steel and aluminium exports from EU CBAM charges, thereby nullifying the decarbonisation incentives that the EU CBAM sets for US steel and aluminium production;
- The TMP calls for the adoption of an import tariff on steel of between 25% and 50% for the first ten years of the scheme’s operation, without corresponding restrictions on domestic steel production. In addition, Tucker & Meyer propose that the tariff revenues collected from importers should be used to subsidize the US steel industry;
- The USTR negotiation proposal would similarly result in the application of tariffs on non-club members without requiring any taxation or any corresponding restriction on emissions for domestic producers;
- To be eligible for preferential market access under the transatlantic club arrangement, crucially, the USTR proposal requires that an import shipment originates from a country whose average steel and aluminium industry emission intensity is similar to the average emission intensity of those industries in the United States and the EU, and thereby vastly reduces incentives for individual third country producers to decarbonize;
- The US steel industry is (if measured in terms of average industry-wide emission intensity) – already the cleanest in the world, which is a result of a competitive restructuring process of the US steel sector in the 1990ies (and not of climate policy or emission regulation). In essence, US steel producers made major private investments in mini-mills operating lower-emission electric arc furnaces. US proposals for a global steel and aluminium arrangement, in other words, picked a sector for bilateral negotiations that requires comparatively little decarbonisation. Average US aluminium industry emission intensity, in contrast, is much higher than in many countries, which may explain why USTR, in its initial negotiation proposal, included an opt-out clause for commitments on aluminium.
In summary, the policy design features proposed by USTR and the TMP would have two main immediate effects:
- Members of such an arrangement would permit themselves to apply import taxes on steel (and aluminium) that are only loosely related to the carbon intensity of specific steel import shipments, thereby setting highly distorted incentives for individual third country steel and aluminium producers. For instance, a zero-emission-steel shipment originating from non-member jurisdiction would be charged a punitive tariff, whereas a high-emission-steel shipment originating from a member jurisdiction would be subject to preferential market access. Put in yet other words, the proposed scheme would allow that two distinct steel import shipments, which are characterized by the exact same carbon intensity, are taxed differently based on criteria that individual producers cannot cater to.
- Members of the arrangement would not be required to apply the same tax (or an equivalent restriction, or, in fact, any restriction at all) on domestic steel and aluminium produce that is characterized by the exact same carbon intensity as taxed imports. At the same time, domestic steel producers would receive subsidies funded by tariff revenues (as proposed by the TMP). In other words, while steel imports from non-members – clean or not – would be taxed, even the most polluting domestic coal-fired blast furnace produce would remain free of equivalent, similar, or in fact any related restrictions and, moreover, exempt from the EU CBAM if exported to the EU.
It is not the purpose of this post to delve into a discussion of WTO compatibility of the “green steel deal” proposed by Tucker & Meyer or USTR’s negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement (GSSA)”. It may suffice to note at this point that the impossibility of justifying such a scheme under WTO law appeals to common sense and indicates functionality of WTO law in this area (eg GATT Article XX General Exceptions).
II. US industrial decarbonisation and transatlantic steel and aluminium negotiations
At the center of Tucker & Meyer’s response to my Bruegel publication stands the argument that the paper did not appropriately account for domestic industrial decarbonisation elements of their plan or USTR’s negotiation proposal. This is incorrect.
Tucker & Meyer write:
“First, we agree with the Bruegel paper that the US should work to further decarbonize its domestic heavy metal sectors, and not only impose trade restrictions on dirty imports. Indeed, the very first plank of our Green Steel Deal proposal was that “like-minded countries would create a steel-focused international climate club, where the condition of membership is to convert, as soon as is feasible, all domestic steel production to green methods” (p. 20). After year 10, we proposed that “products—domestic and imported alike—that meet green standards will be allowed on the market; products that don’t, won’t” (p. 24). Similarly, the US’s December 2022 negotiating proposal links the imposition of tariffs to the average or maximum intensity of domestic production, which would ratchet in ambition over time as the domestic industries further decarbonize. (The Bruegel paper praises the inclusion of a ratchet mechanism in Europe’s counterproposals, without noting that the initial US concept paper also included a ratchet.)”
Despite some fortunate agreement in principle, this paragraph deserves thorough unpacking and refute.
Three observations are accurate: first, USTR negotiators are not in a position to make credible bilateral commitments on domestic emission reductions in the US steel and aluminium sectors, because the US currently lacks the necessary domestic policy toolkit to implement such obligations. Given the deficient US policy toolkit, secondly, Tucker & Meyer’s suggestion for a transatlantic obligation to ban ‘dirty steel’ after 10 years of discriminatory import taxation (as discussed on p. 7 of my paper) is neither credible nor realistic. Third, and perhaps unsurprisingly against this background, USTR’s negotiation proposal does not actually contain any commitments on US domestic emission reductions for the steel and aluminium sectors, but, in contrast, “exclusively targets third country steel exports” (p.3 of my Bruegel paper). In the following, I discuss these observations in reverse order.
i. USTR’s GSA negotiation proposal does not contain any commitments on US industrial emissions reductions
First (and contrary to Tucker & Meyer’s claim), my Bruegel paper takes note of a ratchet mechanism in both the US negotiation proposal (p.8 – “This benchmark would be adjusted downwards over time to reflect increasing ambition”) and the EU proposal (p.12). (Contrary to Tucker & Meyer’s claim, moreover, my paper does not “praise” the inclusion of a ratchet mechanism in either proposal).
Tucker & Meyer, secondly, misconstrue the function of said ratchet mechanism (note the term “similarly” in the paragraph quoted above). The function of the ratchet mechanism is not to impose obligations on GSA members to decarbonize their steel and aluminium sectors now or in the future. In contrast, the purpose of the provision is to tighten a condition for GSA membership over time. Both proposals contain the following text passage:
“The average emissions intensity of steel products and of aluminum products originating from a potential member could not be more than a certain percentage higher than the average emission intensity of similar goods produced in the [EU and the US]. This cut-off figure would be revised downward periodically based on updated emissions data, creating a ratchet mechanism to increase ambition over time.”
For greater clarity: it is the condition for GSA membership that becomes stricter as the initial GSA members periodically update data on their decarbonisation progress, which sets the benchmark for third countries’ entry to the club. The mechanism would not impose ratcheting restrictions on the permissible carbon intensity of US and EU domestic production at any given moment in time.
Third, it is noteworthy that the implication of the US and the EU proposals for this membership criterium differs significantly in one key aspect, among others, despite overlap in language: the US proposal links non-membership to punitive tariffs whereas the EU proposal does not.
To sum up: USTR’s negotiation proposal includes no commitments to US and EU emission reductions whatsoever.
ii. Proposals for a transatlantic agreement on emission reductions in the US steel and aluminium sectors lack credibility
In a section dedicated to the issue, I discuss Tucker & Meyer’s proposal for a ‘dirty steel product ban after 10 years’ (p.7):
“Without US domestic legislative instruments prescribing the decarbonisation of the US steel and aluminium sectors, the TMP’s vague bilateral legal requirement for ‘greening steel production methods within ten years’ would thus make for the only (and undefined) burden applicable to the US side, compared to the carbon price charged to European producers via the ETS in the period of 2026-2034”
The point here is obviously not to deny that Tucker & Meyer would like to see - after 10 years of discriminatory and unjustifiable taxation of steel imports - a yet to be defined product emission standard that would apply to domestic and imported steel products likewise. The point here is that – in view of the deficient US policy toolkit - the proposal for an international commitment of this kind is neither credible nor realistic. This may well be the reason why USTR’s negotiation proposal does not, as a matter of fact, include any commitments to domestic emission reductions.
To counter this impression, Tucker & Meyer point to a number of recent US policy developments, including the allocation of US$ 5,8 billion in a federal funding program for the decarbonisation of US energy-intensive manufacturing industries (e.g. steel, aluminium, cement, and chemicals), enhanced incentives for carbon capture, and public investments into clean hydrogen. Tucker & Meyer also cite the US Buy Clean Initiative (which introduces discriminatory ‘Buy American’ provisions in US government procurement of clean materials). “As the US only has a small number of the most carbon-intensive blast furnaces, this mix of private and supply- and demand-side policies puts a clean steel industry within reach”, Tucker & Meyer believe.
I generally agree with Tucker & Meyer that these programs are fortunate US policy developments. They are, however, vastly insufficient to achieve the decarbonization of the US steel and aluminium industries within 10 years (as proposed by the TMP) or even by 2040.
A look at US steel sector characteristics and recent developments in the industry make this point evident: in 2022, “the small number” of high-emission coal-fired blast furnaces (BF) referred to by Tucker & Meyer produced 31% of 80 million tons of US crude steel output whereas the electric arc furnaces (EAF) of US mini-mills accounted for the rest of US steel production. EAF emissions are relatively easy to abate through the decarbonization of energy generation. US blast furnace emission abatement, on the other hand, is notoriously difficult to accomplish both technologically and politically: in distinction to their EAF mini-mill counterparts, US integrated blast furnace based steel mills are unionized and located in the Midwestern swing states of Ohio, Michigan, and Pennsylvania, in addition to Indiana and Illinois. These factors render these installations political fortresses against efforts of full decarbonisation (which would require their operative closure) and import tariff reductions (e.g. the elimination of the Trumpian Section 232 steel and aluminium tariffs).
Given the regulatory lacuna in US government prescriptions for industrial decarbonisation, US operators of integrated steel mills continue to make major investments into the refurbishment of their high-emission production capacities. Cleveland Cliff, the Ohio based steelmaker that runs half of all integrated steel mills in the United States, continues to reline its blast furnaces in the years to come. (Note that the investment in a relining of a blast furnace allows for an additional 20-25 years of operation of the respective installation). One of the company’s announcements states that "[t]he carbon capture project is future. The hydrogen project is future because we still don't have hydrogen”. Meanwhile, the Cleveland Cliff just extended a coke supply contract over 1.2 million tons per year until 2035. Viewed in this context, it appears that the industrial decarbonisation of the US steel sector is currently out of reach.
Europe, no doubt, also experiences setbacks in industrial decarbonisation efforts targeting the steel and other sectors while EU funds and state aid are pouring into the decarbonisation of existing installations and development of clean production technologies. It is, however, the EU’s emission trading scheme (ETS) and the broader recently adopted fit-for-55 legislative program that makes the crucial difference, providing for a phase-out of free emission allowances between 2026 and 2034, full carbon pricing applying to every ton of industrial GHG emissions by 2034, and a parallel and commensurate phase-in of CBAM charges for emissions embedded in imports. These legislative accomplishments vastly diminish prospective returns on investments in emission intensive steel and other domestic industrial production and set incentives for the reduction of imported product emissions.
It is against this background that EU negotiators demand that initial or prospective GSA members have introduced domestic laws and regulations that will lead to measurable intermediate progress towards decarbonization by 2030 and 2040, as well as legally binding commitments towards full decarbonization of the steel and aluminium sectors by 2050.
This demand seems to give justice to the fact that no international agreement alone could possibly force the decarbonization of Midwestern steel mills and other emission intensive US industries. US industrial emission reductions will require tough and unenviable domestic political and legislative efforts towards effective emission regulation and/or taxation. Emission based import restrictions adjusting for a domestically charged carbon price could legitimately and sensibly be adopted in parallel. Alternatively, domestic product emission standards could be enforced at the border in a non-discriminatory manner. International cooperation will be important to ensure coherence and convertibility of such measures across jurisdictions.
A bilateral ‘rich-countries’ agreement on ‘carbon tariffs’ in absence of equivalent domestic restrictions, on the other hand, would earn contracting parties accusations of climate policy hypocrisy, ‘green imperialism’, and make a mockery of ambitions for an equitable global transition towards net-zero.
III. Miscellaneous provisions in transatlantic steel and aluminium negotiations
On government procurement and other provisions under negotiation, Tucker & Meyer write:
“We also agree with the Bruegel paper that it would be desirable to have GASSA members commit that a certain amount of their procurement of steel be low-emissions and that they should also explore other ways to incentivize low-emissions technologies. The Bruegel paper commends these elements in Europe’s counterproposal, while failing to mention that the same elements were in the initial US concept paper, or noting the progress the US has made on this front domestically.”
This is incorrect. The Bruegel paper mentions the inclusion of low-emission government procurement provisions in both negotiation proposals (p. 8 and p. 12). As regards progressing US domestic policies, it is noteworthy that the US federal government’s ‘Buy Clean’ initiative discriminates against foreign low-emission materials, thereby missing an opportunity to set incentives for third country producers to decarbonize. An in-depth discussion of this issue, however, exceeded the scope of my Bruegel working paper. I agree with Tucker & Meyer, however, that transatlantic leadership by example in the area of non-discriminatory government procurement of low-emission materials would be highly desirable.
Secondly, Tucker & Meyer claim, as quoted above that I commended the inclusion of a provision in the EU proposal that calls on GSA members to “consider additional policy measures to incentivize the adoption of promising emerging technologies” but failed to commend the inclusion of the same sentence in the US proposal.
This, too, is plainly and simply incorrect. My Bruegel paper does not refer to this sentence. However, I concur with Tucker & Meyer that it makes for a commendable provision.
IV. ‘Tariff first, decarbonize later’ – concluding thoughts on US climate & trade nationalism
To reiterate a point made further above: the salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US emission intensive industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ on imports that do not meet US average industrial emission intensity benchmarks, without imposing a similar tax or restrictions on domestic industrial emissions.
A policy implementation of this newly developing US climate and trade policy paradigm (which may be best described as ‘tariff first, decarbonize later’) is not a forgone conclusion but would further jeopardize US international credibility, place a heavy duty on US consumption of clean industrial produce, as well as undermine international climate and trade cooperation more broadly. It is this scenario that the European Union and other US partners may now be forced to address and prepare for if the US continues to move in the direction of ‘green’ industrial protectionism and ‘climate nationalism’, that is. There is, however, still time for the US to change course and to work more constructively with the EU and others to find non-isolationist policy solutions to the global climate challenge that generate the conditions for a just and more equitable global transition to net-zero emissions.
