Protectionism under the cover of climate change?

Protectionism under the cover of climate change?

The USA and EU are contemplating a policy combining trade and emissions reduction measures - using tariffs to penalise metals, primarily steel and aluminium, produced in countries with higher carbon intensity.

Blue View

The proposal, put forward by the USA to the European Union (EU), would create an international consortium of like-minded members to pursue trade in metals produced with low carbon intensity while imposing barriers on countries with higher carbon intensity. Although initially targeting steel and aluminium, such a plan could be extended to other materials.

The scheme could be modelled on the European Carbon Border Adjustment Mechanism (CBAM). The CBAM, when implemented, will impose import tariffs on countries which do not have carbon emissions as stringent as the EU, and, therefore, have lower production costs. The CBAM scheme would provide support and compensation for European industries which will have to drastically cut their carbon emissions. This is specifically the case for steel with the EU’s ‘Green Steel’ plan aimed at cutting emissions by 55% in 2030, based on the 1990 data, through replacing blast furnaces (BF) with electric furnaces (EAF) using scrap cum directly reduced iron (DRI), powered by renewable sources of energy.

Any potential US-EU agreement, whether based on simple tariffs or on a more complicated structure, would provide new grounds for excluding steel imports from China, Russia or any other country with steel production based on BFs. The devil will be, as usual, in the detail. A cross-country harmonised trade and emissions scheme would be complicated to implement and would face multiple commercial and political hurdles, internally and with the WTO.

Project Blue believes that the USA would be in an advantageous position immediately as more than 60% of its steel is produced through EAFs, enabling low carbon emissions. The EU, although committed to a de-carbonisation of its industry over the medium term, is still using BFs and coal for 60% of its steel production. The CAPEX costs of ‘Green Steel’ could exceed EUR5Bn for an average size steel plant, implying time and money to reach EU targets.  

For some, this will be seen as a much-needed industrial policy to target emissions from polluting sectors and regions.  For others, tariffs based on carbon emissions equate to protectionism under the cover of climate change. Project Blue believes that some measures of this nature will likely be enforced over the coming years. However, whether this specific US-EU approach will gain sufficient political and industrial interest in 2023 remains to be seen.   If it does and is successfully applied to steel and aluminium, the approach could be rolled out for other metals of chemicals over the medium term.

  • 14 Dec 2022
  • Steel & Alloys

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