How the US and EU Can Rewrite Trade Rules to Fight the Climate Crisis

Originally published in French in Le Grand Continent, and in Spanish in El Grand Continent.

On last week’s visit to the United States, European Commission President Ursula von der Leyen reaffirmed a joint commitment with President Joe Biden to put the Global Arrangement on Sustainable Steel and Aluminum (GASSA) at the center of Trans-Atlantic climate and trade cooperation. Announced initially in October 2021, this historic deal envisions a group of like-minded states that will agree on a set of measures to curtail market access for carbon-intensive steel and aluminum—together, these two metals account for just over 10 percent of the global GHG emitted in 2021¹—and fight market-distorting practices in the metals sector. As an initial show of good faith, the United States suspended the section 232 national security tariffs that President Trump had imposed on EU steel and aluminum² to help address the market-depressing effects of subsidized Chinese overcapacity that had long been unchecked. Meanwhile, the EU suspended its retaliatory tariffs on US products as well as its WTO dispute over the tariffs. Furthermore, the allies agreed to establish a technical working group to discuss a methodology for measuring the carbon embedded in traded steel and aluminum.

Although promising first steps, the details of the GASSA remain to be fleshed out. In December 2022, the United States tabled its initial proposal, in the form of a concept paper, with the EU. According to news reports, the paper proposes two major features of the GASSA. First, to ensure that only states truly committed to GASSA’s goal of decarbonization in a manner that addresses global overcapacity, the concept paper calls for membership criteria. Members would have to meet certain emissions standards for the covered metals,³ commit not to contribute to excess global capacity, and limit activity by state-owned enterprises. Second, the plan calls for GASSA members to jointly impose a series of tariffs on metals produced in environmentally harmful ways. In exchange for joining GASSA and imposing these tariffs, members would enjoy more favorable trading terms with each other, especially for green steel and aluminum.

Like all good international agreements, the GASSA would help countries ensure credible commitments on shared goals. This is particularly important for the US. The Obama administration helped conclude the Paris Accords, which Trump rapidly pulled out of. US trading partners have good reason to doubt whether US words on climate today will be followed up by deeds tomorrow. The Biden administration is addressing this in two important ways. First, domestically, the United States Inflation Reduction Act (IRA) is spending nearly $400 billion on decarbonization, and potentially two to three times that, including on incentives for greening steel and aluminum production. This will mean jobs and economic development across the country, disproportionately in so-called “red” (Republican) states and districts. These jobs, in turn, will entrench the IRA and the green transition more generally by giving Republicans who may have opposed the IRA and other climate efforts a political incentive to support their continued implementation. Second, the GASSA will ensure that domestic producers undertaking costly decarbonization efforts are guaranteed a market protected from cheap but carbon-intensive metals. These efforts will reorganize interest group politics so as to make it virtually politically impossible for the US to backtrack on its climate commitments. Even an ideologically unsympathetic Trump or DeSantis presidency will find it hard to take away jobs from manufacturing workers. Meanwhile, the EU itself is not immune from backtracking. Despite a better and more consistent rhetoric around climate, EU carbon pricing has consistently lacked a bite on heavy industry, and just in March, key EU countries blocked a phase-out of internal combustion engine vehicles. The GASSA will help all its members adhere to higher standards than the enforcement-lacking Paris Accords.

While we have not seen a public response to the US concept paper from the EU side, past interventions (and limited press reporting) indicate an understandable desire to not have the GASSA (which would apply to only two sectors) derail European progress towards a Carbon Border Adjustment Mechanism (CBAM), which would apply to a broader range of industries. European policymakers have also publicly and regularly invoked the importance of designing climate policies that are consistent with WTO rules. They might worry, for instance, that the preferential treatment members would receive under GASSA would violate the WTO’s most-favored nation rule—the rule that prohibits discriminating among WTO members—and would require members to violate their commitment to other WTO members to keep tariffs on steel and aluminum imports below agreed levels. Finally, in virtually any discussion of trans-Atlantic climate cooperation, Europeans express concern that the United States does not have a domestic carbon pricing system akin to the EU’s Emissions Trading Scheme.

But many of these objections are misplaced. From the big picture point of view, the EU should embrace the economic and political implications of a deep decarbonization strategy that respects both the US’s and EU’s commitment to protecting workers. Reflexive objection to innovative trade and climate strategies will make it more difficult for nations to adopt domestic trade measures without undermining their commitment to workers, drive a wedge between allies jointly committed to decarbonization, and undermine support for the global trading system that has helped spread global peace and prosperity to much of the world over the last 70 years. Providing members of environmental trading clubs preferential treatment over nonmembers is also a well-established practice. The best example is the Montreal Protocol on Substances that Deplete the Ozone Layer–the most successful environmental treaty ever. Article 4 of the Montreal Protocol requires members to ban trade in controlled ozone-depleting substances with nonmembers. Members, however, are subject to an internal compliance process that is more forgiving while still holding out the possibility of trade-related measures for consistent noncompliance. This system gives states an incentive to join the international agreement and work toward the environmental goals it establishes, rather than remain outside the international agreement. In short, distinctions among members and nonmembers create incentives for cooperation over time that can produce greater environmental benefits.

At a more granular level, these objections also misunderstand both European trade policy and international trading rules. With respect to the former, the EU has already shown that it is willing to compromise on its application of the most-favored nation principle in the name of addressing climate change. The EU CBAM provides an exemption for non-EU members that either 1) participate in the EU ETS,⁴ or 2) adopt a carbon trading system and link it to the ETS. Basing CBAM exemptions on whether members join the EU’s ETS either outright or practically both converts the CBAM into a form of climate club and likely violates the most-favored nation obligation. More importantly, though, it is the exact same tactic that the United States has proposed the GASSA use. Both the US GASSA proposal and the EU CBAM would accord preferential treatment to countries that have adopted certain domestic decarbonization policies.⁵

The fact that the GASSA and CBAM would violate the most-favored nation obligation does not, however, mean that they would be WTO-inconsistent. WTO rules contain a series of exceptions for environmental protection (or more precisely the conservation of exhaustible natural resources like the atmosphere), public health, and national security. WTO rules also contain an exception for measures undertaken pursuant to an international commodities agreement, which the GASSA would arguably be. This exception is less well tested but provides an interesting avenue for the US and EU to explore in justifying cooperation over the GASSA or any other product-specific climate club.⁶

Properly understood, these exceptions should legitimate both GASSA and CBAM. There is no doubt the climate crisis is the biggest environmental, public health, and national security crisis of our time. The WTO director general has made a call for greater compatibility between the trade and climate regimes. WTO tribunals have already found that measures to protect the atmosphere can be covered by the environmental exception and have upheld restrictions on market access when those restrictions are tied to domestic environmental measures. Even WTO panels that have ruled against US national security tariffs on the grounds that there is an insufficient basis for finding “an emergency in international relations,” as required by that exception, would likely not be able to find the same flaws with measures designed to address the climate crisis. After all, 194 countries are party to the Paris Agreement on Climate Change and hardly a week goes by without new scientific findings on the urgent need for climate action if we are to stave off the worst effects of climate change. Perhaps more to the point, the war in Ukraine and European efforts to wean themselves off of Russian fossil fuels has made clear that decarbonization is fundamentally linked to global peace and security.

From a climate perspective, WTO compatibility should not be the first, second, or third order concern. While the climate crisis requires differentiating levels of ambition across countries, in 2023 it is untenable to treat every country in the same manner. While acknowledging the positive space that WTO exceptions create for members to pursue objectives like addressing climate change, WTO tribunals have often applied the exceptions in an excessively narrow way. The path to ensure the WTO-compatibility of aggressive efforts to fight climate change is not to try to design programs around the narrow strictures that WTO tribunals have sometimes proclaimed. Instead, nations should design cooperative tools that further the cause of fighting climate change, and WTO members should broaden their understanding of WTO exceptions to include such measures. Ironically, the EU itself has already tacitly followed this tactic with its CBAM, which almost certainly violates the WTO’s nondiscrimination rules and likely violates the narrowest understanding of WTO exceptions.

The EU and the United States have many more interests in common than they have apart. To showcase this, they should pursue an all-of-the-above strategy with CBAMs and a high-ambition GASSA that would apply a floor to tariffs that we might otherwise fluctuate under CBAM due to the way in which CBAM duties are linked to ETS prices.⁷ As we have argued elsewhere, WTO rules can and should be interpreted in a way that is favorable to this agenda. But if WTO tribunals do not go along, the United States and Europe can do what they’ve done many times before: rewrite the rules of the global order to make it more just and stable. In short, the international trading system failed to meet the challenge posed by the China shock generally and Chinese subsidization of overcapacity specifically. If it is to remain relevant, that system cannot stand in the way of solutions to the most pressing challenge of our time.

Timothy Meyer (@Tim_L_Meyer) is professor of law at Duke University Law School.

Todd N. Tucker (@toddntucker) is director of industrial policy and trade at the Roosevelt Institute.

¹Steel and iron account for 2.6 gigatons of CO2 emissions per year, billion tons of CO2, and aluminum 1.1 gigatons.

²The United States initially imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from March 23, 2018. However, the United States suspended the application of the tariffs to imports from the EU to allow for exploration of an alternative solution. When one was not reached, the United States imposed the tariffs on imports from the EU starting from June 30 2018, see Proclamation 9739–Adjusting the Imports of Aluminum into the United States, April 30, 2018; Proclamation 9740—Adjusting Imports of Steel Into the United States April 30, 2018. Number of litigants challenged the legality of the tariffs under US constitutional and administrative law, although the courts largely rejected these claims. In full disclosure, one of us (Meyer) represented the plaintiffs in a constitutional challenge to Section 232. See American Institute for International Steel v. United States.

³ While the details are sketchy, there appears to be a desire to ensure that, over time, emissions associated with domestic production within GASSA members meet benchmark levels of reductions.

⁴Iceland, Liechtenstein, and Norway participate in the EU ETS but are not EU members. The EU thus understandably wants to treat them as EU ETS participants for purposes of the CBAM, but since they are not actually EU members this treatment discriminates among non-EU members in violation of the most-favored nation obligation. These three non-EU members are exempt from CBAM while other non-EU members are not. As discussed above, that discrimination may be (and should be) justifiable under exceptions to WTO rules–just as the GASSA should be. But it is nonetheless discrimination among WTO members.

⁵The difference is that the US is proposing tariffs based on a combination of club membership and emissions intensity, but is agnostic about the kinds of domestic measures that members use to reduce their emissions intensity. The EU’s preferred approach in the CBAM is based on a combination of whether a country has a carbon price (without considering other means of encouraging reductions, such as regulations), the level of the carbon price, and emissions intensity. The US proposal would thus have predictable tariff rates (and thus greater business certainty), while the EU rates would fluctuate and could remain too low to spur aggressive decarbonization–a problem that has afflicted the ETS on its own. The US approach would also allow countries to cooperate on climate-related international trade without requiring difficult, if not impossible, convergence on domestic approaches to decarbonization. The idea is that GASSA members would have to meet emissions intensity targets, but the specific approach to achieving those goals—be it a carbon price or regulatory approach—would be left to member states.

⁶There is a long history of international cooperation through commodity clubs, including for cocoa, coffee, olive oil, rubber, sugar, tea, tin, and wheat. Harvard University historian Jamie Martin has written about the roots of these policies in the interwar period, and how similar efforts were coordinated at the international level by the Roosevelt administration and allies as part of the World War II mobilization. Indeed, mid century, it was assumed this type of club would become so common a feature of international commerce that the GATT specifically needed the exception for this type of arrangement. More recent initiatives like the Multi-Fiber Agreement for textiles, voluntary export restraints on chips, and (most famously) OPEC are all examples of product-specific clubs.

⁷ EU CBAM prices are linked to EU ETS prices, which are themselves determined by the market and thus fluctuate. As noted above, they have often been too low to drive aggressive decarbonization, and the very fact that they fluctuate can make it difficult for businesses to predict their costs. A GASSA-based floor would fix these problems. This floor could work as follows. Say that, under the Global Arrangement, the US, EU, and other joining countries agree to charge zero tariffs on each other’s steel and aluminum exports (provided these meet an agreed threshold of carbon intensity), while dirty imports from non-club countries are charged a 25 percent tariff. Meanwhile, the nominal carbon price in the ETS has varied in recent years between five euros per ton of emissions to over 100 euros. EU policymakers could treat the “Global Arrangement” non-club rate of 25 percent as the minimum they would collect for dirty imports from outside the club, and when the Global Arrangement plus the ETS-linked price imply a rate of over 25 percent, charge that higher rate instead.

Meanwhile, there is nothing to keep the EU from applying the CBAM to US products outside of the steel and aluminum sectors—a clear tool that the EU has to keep pressure on the US to expand Global Arrangement-like sectoral deals to cement, chemicals, and other industries. US policy is also not standing still in this space, with bipartisan support in Congress for carbon tariffs on fossil fuels, petrochemicals, cement, and fertilizer. Indeed, this might be the only climate policy to be produced in this session of Congress. In short, there is a positive Transatlantic race-to-the-top dynamic, with each side forcing the other to increase its climate ambition.