Thanks to Tim Meyer and Ben Heath for responding to my "The Effectiveness of the GASSA in Reducing Carbon Emissions" post, in which I argued that trade remedies could undermine their argument for tariffs designed to encourage decarbonization of the steel and aluminum sectors.
Let me first say that I was very excited to see this statement from them about trade remedies:
In the original Green Steel Deal proposal, one of us, writing with Todd Tucker, called for a “peace period” among club members, in which they would not challenge each other’s decarbonization efforts. Although the proposal did not separately discuss trade remedies, it would be sensible to include them in the peace period as well.
To be honest, I thought about declaring victory at this point and calling it a day! If Todd, Tim, and Ben can get a trade remedy carveout for clean energy goods, that would be quite an accomplishment.
But not surprisingly, I thought of more things to say.
One big picture point is that, while I agree that steel and aluminum are important, I don't think having the U.S. focus so heavily on these two sectors as part of international talks is a good idea. The way this comes across is that the U.S. wants to emphasize the areas in which it sees itself as particularly good in terms of carbon emissions, such as steel, and deemphasize the areas in which it is bad. The political strategy here seems to be to find an approach under which the U.S. only has to do a little work on decarbonization while others have to do a lot. Maybe that's fine as an opening negotiating tactic, but the U.S. has to be willing to address its problem areas. For this reason, I think its proposals might go over better as part of a broader international decarbonization plan, rather than an initiative devoted to just steel and aluminum.
More generally, Tim and Ben put a lot of emphasis on the value of clubs. I do think clubs can be helpful here, but if we are thinking about effectiveness in relation to decarbonization, there may be better ways to construct the club.
In my view, the most effective approach to decarbonization is a globally coordinated carbon tax. Tim and Ben make reference to the use of "unilateral CBAMs," and it's possible we will end up with a bunch of uncoordinated CBAMs that complement domestic efforts. But before we go down that road, what I would push for here is an internationally agreed set of domestic taxes on industrial products (including steel and aluminum of course) that is based on the carbon intensity of the products. Ideally, just about all countries would sign on, and would apply the agreed upon taxes, but it could end up being just a club of willing governments. (You can accomplish something similar through regulations rather than taxes, but that might be harder to coordinate).
Believe me, I understand why this will be hard to achieve politically! I have theories about how a revenue-neutral carbon tax could get support from across the political spectrum here in the U.S., but they are just theories. However, as Tim and Ben note, "the world just experienced the hottest month on record and 2023 is likely to replace 2016 as the hottest year on record," and "climate effectiveness should be the lodestar." Thus, we need to come up with a policy that offers a significant reduction to carbon emissions. It may be politically easier to do something less, but at a certain point you are watering the policy down so much that it doesn't have enough of an impact to come close to solving the problem.
Staying with political considerations for a moment, I understand why Tim and Ben (and Todd) want to try to use the existing Section 232 steel and aluminum tariffs as part of a political compromise that gives the steel and aluminum industries something they want while also doing something constructive on decarbonization. But keep in mind that there is a big omission when you rely on tariffs: Domestically made products sold in the home market won't be affected. That's a significant gap in coverage. If we really want to give companies an incentive to reduce their carbon emissions, let's apply the measure to all products, not just internationally traded ones. If you are only using tariffs, companies could respond by just decarbonizing enough production to satisfy the demand for traded products. I'm still skeptical that countries will do much of this at all (it would help if Tim, Ben, and Todd could get that trade remedy carve out), but nevertheless, there are inherent limitations if you rely on tariffs.
Another problem with tariffs as opposed to taxes is the conflict they will almost certainly generate. Even if you put aside the issue of WTO compliance, there is still the issue of more basic trade conflict. Tim and Ben talk about getting "Canada, Turkey, Mexico, Korea, etc." on board with this effort. But how will these countries react to the U.S. GASSA proposal? My sense is that many people in these countries will have concerns about this approach. Can the U.S. bring them on board with some combination of carrots and sticks? Maybe. We do have a lot of carrots and sticks to throw around! (Although I can imagine several circumstances in which the carrot funding dries up). But if there's an alternative plan that people in other countries would consider more fair and effective, why not put that one out there? If we are trying to coordinate a global effort, it's worth thinking about how the rest of the world sees things.
Also related to foreign governments, let me just reiterate something from my previous post: It would be really helpful to get China on board with this. This is a challenge because just about everyone in the U.S. has something they want China to do or not do at the moment. Establishing a hierarchy of demands is difficult, but this one is pretty important. If we are trying to lower carbon emissions in steel, aluminum, and other industrial products, it would be great to have the biggest manufacturer on board. And I don't think that creating a club that excludes them is likely to be successful in this regard.
Finally on tariffs, if we are going to use tariffs for decarbonization, how about doing things a different way? In their rebuttal, Tim and Ben talk about the value of "preferential trading rules," noting as examples "the GATT/WTO itself, the EU, and the expansion of the Canada-US Free Trade Agreement to include Mexico." If these are the examples they like, how about a plurilateral trade deal that lowers existing tariffs on goods produced with low carbon emissions? At one point, Tim and Ben even refer to "a common market for green steel and aluminum." Maybe they would be on board with this idea then? From what I can tell, their current proposal focuses only on imposing tariffs above those previously agreed through trade negotiations, with some countries then being exempted from those higher tariffs. But as an alternative, we could lower the existing tariffs for imports of low carbon goods. A trade remedy carveout fits nicely with this idea.
Assuming that internationally coordinated carbon taxes or a tariff lowering trade agreement are just too difficult politically, which they may be, an alternative club approach -- or maybe it can include everybody, so it's not really a club -- is to develop proposals for subsidies that are strictly tied to decarbonization efforts, and then have an environmental exception that exempts those subsidies from challenges at the WTO (and via CVDs). The SCM Agreement did have a limited environmental exception, but it expired. I think it could make sense to have it brought back in broader form. In theory, GATT Article XX(g) could be used for this, but most people believe that Article XX does not apply as an exception to the SCM Agreement. Thus, to make sure these subsidies are permitted, let's draft an SCM Agreement exception that makes it crystal clear.
Tim and Todd did mention subsidies and other domestic actions in their piece published at the same time as the one by Tim and Ben:
With the Inflation Reduction Act in August 2022, the US greenlit a nearly $12 billion program (half-public, half-private) for heavy industry decarbonization, with additional incentives for carbon capture and other emissions-controlling pathways. Also that month, the CHIPS and Science Act created a Low Emissions Steel Manufacturing Research Program that will advance relevant R&D efforts at the Department of Energy. The November 2021 Infrastructure Investment and Jobs Act and executive orders helped launch a Buy Clean agenda that is set to decarbonize government-procured steel and aluminum. The Department of Energy has published an industrial decarbonization roadmap that identifies iron and steel as a priority, and is spending billions to create green hydrogen hubs that can supply the steel industry. Bipartisan groups in Congress are active on developing further legislation to decarbonize steel. And US firms continue to make moves toward further decarbonizing of steel. 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. ...
This seems like a good start, although some of the details are a bit fuzzy. I think we can get more specific here, and then make the case to others as to why they should do the same thing. And for developing countries that can't afford it, we can fund it. Again, politically difficult, I know! But sometimes a problem is serious enough that you have to find a way to do things that are politically difficult.
