Responding to Critics of the Global Arrangement on Sustainable Steel and Aluminum
July 18, 2023
By Todd N. Tucker, Timothy Meyer
On July 10, 2023, Bruegel (a think tank based in Brussels) published a working paper criticizing a June 2021 working paper of ours for the Roosevelt Institute entitled “A Green Steel Deal: Toward Pro-Jobs, Pro-Climate Transatlantic Cooperation on Carbon Border Measures,” as well as a December 2022 concept paper by the Biden administration for a Global Arrangement on Sustainable Steel and Aluminum (GASSA). This blog post responds to select points made in the Bruegel paper, which seems to willfully mischaracterize both our arguments and the negotiation history between the US and the EU. Nonetheless, we will highlight a few areas of agreement and disagreement. Given the relatively short time left for the US and EU to come to a deal, it is important for the public and negotiators to have full information from a diversity of perspectives.1
Domestic Metals Must Decarbonize
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.2 (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.)3
It is thus odd that the Bruegel paper says “both the TMP [Tucker-Meyer Plan] and the USTR [Office of the US Trade Representative] 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” (page 3). As our paper makes clear, countries will differ in how they decarbonize their domestic sectors (and the major point of our work in this area is to emphasize the policy and political value of that flexibility), but it is imperative that they do so.4
Much has changed since the June 2021 publication of our paper. 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. So it is again odd that the Bruegel paper says “the US lacks a domestic legislative or other path for the decarbonisation of its integrated blast furnace steel mills” (page 11).
Procurement and Other Areas of Agreement
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.
Moreover, the Bruegel paper calls for assistance to developing countries, elaboration of new international rules on green subsidies, and the value of considering bifurcating emissions intensity requirements by production methods (e.g., blast furnaces versus electric arc furnaces versus direct reduction). We agree with these ideas, some of which formed elements of our June 2021 proposal. We also agree with the idea that Trump’s 232 tariffs should be phased out between GASSA members—indeed, that is a core plank of the 2021 proposal, as well as a central purpose of USTR negotiating with the EU on a sectoral deal.
The Bruegel paper states, “A transatlantic arrangement for steel and aluminium to address carbon intensity is an opportunity for the US in particular to align its climate and trade policies progressively with the EU standard and best practices, which are laser-focused on creating efficient incentives for abatement at home and abroad, as well as achieving effective decarbonisation and carbon-leakage policies. . . . Priority should be given to cooperation on prerequisites of carbon-leakage policies, including first and foremost, the joint development of methodologies for pricing and measurement of carbon emissions” (p. 14). Elsewhere, the paper praises the EU counterproposal for the following provision: “[F]inally, and interestingly with respect to the substantive content of the US Inflation Reduction Act, the Commission proposes to commit GSA members to change any domestic legislation not in line with prohibitions on domestic content, assembly and sourcing requirements, with a view to conforming with WTO obligations” (p. 12).
Our 2021 paper reviewed the historical record and social science literature on carbon pricing and concluded that the US was unlikely to adopt domestic carbon pricing, and that there were substantial legal, institutional, and practical reasons for that.5 And indeed, the IRA does not price carbon. Our paper predated the bill, but it is clear that the local content requirements (like them or not, and there’s a growing scholarly and policy literature on their policy and political value) were the political price of getting a Senate majority to vote for them. We know this because the pivotal vote—Sen. Joe Manchin (D-WV)—has said so. Moreover, there is no evidence that the omission or inclusion of these features dooms the US’s climate ambition. Indeed, the prevailing view in Europe seems to be that they will be too effective.
Europe deserves credit for being an early mover on climate. In some areas, European policymakers have effectively wielded the bloc’s position as an early mover to shape the default international regulatory norms. These have, however, generally been in discrete fields like accountancy standards that do not implicate the entirety of national economies. It would be surprising indeed if countries agreed to structure their climate policies—which impact entire economies—in the same way across borders.
To think that Europe can coerce the US to adopt carbon pricing or get rid of its marquee climate policy as the price for a bilateral deal on steel is, to be polite, unrealistic and thus not a productive proposal. The US approach was hard-fought, and even attempting to unravel it would risk the US having no climate policy at all.6 Moreover, many national governments, industries, and labor unions in Europe would like to see climate policy look more like Biden’s. The CBAM itself already is generating considerable controversy in international trade circles from India and others. The practical impact of the EU drawing lines in the sand around pricing and the IRA will be no US deal, the US pivoting to negotiating with other countries, and the EU losing the opportunity to shape the GASSA’s terms. Moreover, the steel and aluminum tariffs on EU exports to the US that were provisionally waived from 2021 to 2023 will snap back into place. European policymakers, after complaining post-IRA that they wanted cooperation across all clean energy sectors with the US, will have failed to produce a deal in the industry and sector that is most amenable to one. And the EU would still be facing domestic and international criticism over the CBAM.
In contrast, a successful US-EU deal will still give the EU a strong voice in shaping green steel rules, veto rights on future members, no return to Trump’s tariffs, a solid precedent for bilateral cooperation in other industries, and a strong US partner in jointly addressing criticisms over climate protections that Europe is already facing anyway. That’s a scenario worth striving for—given the immense stakes of a planet on fire.7
Click to read the footnotes
1The GASSA deals with two issues primarily: decarbonization and excess capacity. Our original paper only dealt with the former, and that is our focus here. Needless to say, it is of vital importance that strong trade remedies rules be in place, or the US and EU risk losing out to import floods of dirty or subsidized steel—at precisely the time they are asking domestic industries to make significant capital expenditures in decarbonizing their production.
2 In later work with Joseph Stiglitz and Isabel Estevez for Foreign Affairs in July 2022, one of us (Tucker) lauded the Biden administration’s proposal for including provisions to “ensure that their domestic policies support further decarbonization of these industries at home,” and noted that “the pact could fruitfully put a price on steel and aluminum imports whose embedded emissions exceed those of domestic producers.” The latter element—only charging tariffs for emissions intensity above the dirtiest domestic producers—would be a way to avoid the discriminatory impact of charging tariffs on above-domestic-average-emissions imports while not charging domestic levies on similarly situated domestic producers.
3The Bruegel paper claims that “at the core of the TMP lies the proposition that domestic administrative agencies on both sides convert average incremental producer costs of greening production methods (compared to production of conventional steel) into tariff rates for border adjustment” (p. 4). Our proposal is somewhat different: We propose beginning the imposition of tariffs and ending the imposition of tariffs based on policy fiat. This would be set at 25 percent in the first instance because that is what is already being charged under Trump’s tariffs, so markets have already been pricing in that rate to trade flows since 2018. After 10 years, the tariff would be converted into a product standard, effectively a ban on importing dirty steel. In the intervening period, we suggest policymakers could adjust above or below the 25 percent rate based on green premiums. However this discussion comes across in our working paper, we do not see the particular intervening regime as a critical element of the proposal. In any case, USTR has not followed our lead on any of these elements, and instead has pursued what we are now convinced is a more workable solution, which is more traditional tariff schedules based on club membership and emissions intensity. The European proposal, as Bruegel reports on it, contemplates additional schedules by production methods—an idea we find intriguing and a worthy subject of negotiation.
4Later, on page 4, the Bruegel paper actually notes that we recommend decarbonizing the domestic steel sector, and that we emphasize that the details of how are not the focus of our paper. It seems odd to fault a paper for omitting details we openly admit we are not offering—that’s a benefit of working papers meant to provoke certain but not all debates. We do, however, offer considerable discussion of why steel is an important sector to lead with on sectoral talks—far from the Bruegel paper’s claim that we cherry-picked it.
5At least in democracies, the approach to climate has to be at least passively supported by popular majorities. As such, climate statecraft is first and foremost about finding nationally workable solutions. In the US context, that had meant finding solutions outside of carbon pricing that have been blocked in the Senate (or could have been overturned by the Supreme Court) or formal treaties requiring supermajority support in the Senate. In contrast, the Supreme Court has never ruled against a federal spending decision. The policy value of the US’s subsidy approach has been validated by one of the best performances for an incumbent party in US history, and IRA subsidies surviving the recent budget negotiations. Moreover, the IRA’s “carrots” are facilitating various “sticks”, including state-level and federal-level regulation of emissions.
6Development of the CBAM—and the domestic Emissions Trading System (ETS) on which it is based—in the EU was likewise hard-fought. Negotiating the interface between the GASSA and the CBAM is thus one of the trickier aspects of GASSA negotiations. Neither the US nor the EU can realistically abandon these domestic policies. At the same time,the GASSA negotiations offer a forum to negotiate the relationship between a GASSA-based joint market-access restriction and the CBAM, while preserving both parties’ domestic policies and political commitments.
7A major focus of our writing on green steel—as we are not steel experts—is on issues of compatibility with WTO law. One of us is an international lawyer, as is the Bruegel author. It is thus curious to see so little substantive engagement from Bruegel on the jurisprudential issues we’ve raised extensively arguing that the US proposal in the GASSA has at least as plausible a case for WTO compatibility as the EU’s CBAM. As noted in another contribution to this series, the European Commission understandably defends its policies as WTO-consistent, given that it will be the defendant in any challenges to the measure and would not want to prejudice its arguments in those cases. But many trade lawyers unaffiliated with the EU, including in Europe, have expressed doubts about the EU CBAM’s WTO-compatibility as currently designed. See, e.g., Geraldo Vidigal & Ingo Venzke, Of False Conflicts and Real Challenges: Trade Agreements, Climate Clubs, and Border Adjustments,116 Am. J. Int’l L. Unbound (2022) (“If an alternative mechanism, such as the non-monetary disincentives used in the United States, is ‘comparable in effectiveness’ to carbon pricing, requiring the use of ‘essentially the same’ policy as the EU ETS would amount to arbitrary or unjustifiable discrimination in light of the objective of reducing carbon emissions (or preventing carbon leakage.”); Ilaria Espa, Reconciling the Climate/Industrial Interplay of CBAMs: What Role for the WTO?, 116 Am. J. of Int’l L. Unbound (2022) (“Origin-based discrimination is also virtually certain since those countries that are either integrated or linked to the EU ETS are exempted from the CBAM in violation of the most-favored nation clause.”).