Most Favoured Nation: Carbon Club

The US doesn't like CBAM, and Mercosur.

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Bloomberg’s Alberto Nardelli has written a story drawing attention to the fact that the US is still trying to wriggle its way out of the EU’s forthcoming Carbon Border Adjustment Mechanism (CBAM):

Alberto Nardelli @AlbertoNardelli

NEW: The US is seeking an exemption to the EU's carbon border adjustment mechanism as part of talks to agree a global arrangement on steel and aluminum, sources tell @EMPosts, @europressos and me

bloomberg.comBloomberg - Are you a robot?

This has been rumbling for a while.

The US’s position is that, rather than the CBAM, the EU should work with the US to create a carbon club (or rather ‘Global Arrangement on Sustainable Steel and Aluminium’). The carbon club would be open to market economies¹ if the average emissions intensity of their steel and aluminium production was no higher than TBC% of similar goods produced in the two cleanest carbon club members **AND** they agree for TBC% of government-procured steel and aluminium to be “near-zero or low emission”.

Members of the carbon club would then apply tariffs on steel and aluminium imports from countries outside of the club. These tariffs would be tiered and relative to the carbon intensity of production in the country of import.

The EU obviously doesn’t want to join this club. Both because it already has the CBAM ready to go, but also because the club would definitely be in breach of its WTO obligations, particularly given the US does not have a domestic carbon price.²

However, the EU is having to play along with these discussions with the US because it committed to do so as part of the deal to get the US to suspend the Trump-era trade war tariffs on steel and aluminium. And it has until October to work something out.³

In terms of actively excluding the US from the CBAM. The only existing route towards full exemption is for the US to link its non-existent emissions trading system (ETS) to the EU’s. Given the US’s ETS does, as just mentioned, not exist, this is probably not going to happen.

In the absence of full linkage, the EU CBAM still allows importers to take into account the carbon price paid (either through an ETS, carbon tax or similar) in the market of origin. Unfortunately, the US does not have a domestic carbon price.

BUT, the US argues it does have regulations that promote decarbonisation. Shouldn’t these be taken into account?

First — Cool! So does the EU.

But also, if the US’s regulation does actually lead to its steel and aluminium being lower carbon then the CBAM will already take that into account, given that importers are only required to pay for (via a slightly convoluted scheme of purchasing and surrendering CBAM certificates) the exact quantity of CO2 embodied in the imported goods. No CO2, no problem.

So what’s the EU to do?

Option 1:

• Play along with the US and pretend this is about climate change and not actually about justifying continued tariffs on Chinese steel and aluminium.

Option 2:

• Ignore the US. CBAM is happening; carbon club is a silly idea … who cares if the US reapplies its steel and aluminium tariffs to EU exports.

Option 3:

• Some sort of fudge, probably involving more discussions. Kick the can as far as possible.

If I were a betting man, I’d go with Option 3.