CRU: U.S. Carbon Tax on Aluminum and Steel Long on Vision, Short on Details

• Recognize the costs incurred by U.S. companies in producing cleaner products due to emissions-related laws and regulations

• Account for those costs by levying a fee on imports in carbon-intensive, trade-exposed sectors

• Support international climate cooperation and the reframing of trade around climate

• Direct revenue to the development and commercialization of high-impact emissions reductions technologies; and

• Create a new Resilient Communities Grant Program for states to support climate adaptation, transition assistance, and the communities facing the most severe impacts of climate change and historic pollution. (Source: Joint Press Release Offices of Peters-Coons)

Those are lofty goals. The challenge will be to come up with pragmatic ways to execute on the vision.

There are several issues that come to mind immediately. One, the tax would apply only to a few select products.

“The import fee will be based on the domestic environmental cost incurred and will initially cover goods that are both carbon-intensive and exposed to trade competition, including aluminum, cement, iron, steel, natural gas, petroleum, and coal,” according to a summary of the bill.

Second, and the most problematic challenge, is the tax would not be based on a carbon emissions trading system (EMS).

As you know, the U.S. does not have a national EMS, but several localized programs:

• Nine states in the Northeast (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont) operate the Regional Greenhouse Gas Initiative (RGGI). It was established in 2008 and applies to CO2 emissions from fossil fueled power plants above 25 MW.

• California has a very active greenhouse gas trading market and is second in size to the EU EMS. It came into effect in 2013 and covers emissions from a broad number of sources. California also has aligned itself with the Quebec and Ontario EMS.

The lack of a national benchmark to price clear carbon emissions could make the process of determining the tax very cumbersome. A better approach would be to first impose a domestic cost for carbon and apply a corresponding border adjustment tax. This is what the EU is considering with its Carbon Border Adjustment Mechanism (CBAM).

Some experts argue that trying to pass a border tax without an EMS becomes an exercise in reverse engineering carbon price based on cost and not market dynamics.

The proposed bill calls on the Treasury Department to coordinate with other agencies (Office of Management and Budget, U.S. Trade Representative, Commerce) to annually determine what carbon costs domestic producers face under climate-change regulation.

That would cover costs under the Clean Air Act and state/regional rules such as RGGI and California. It might also capture indirect costs from new clean energy standards if such legislation was enacted.

Some experts believe this is really the proper approach, you focus on direct costs of climate change and back into the required tax to stop carbon leakage…which is high(er) carbon-intensive imports entering the U.S. market without penalty.

No one really is arguing against stopping carbon leakage, but there are complicating issues. One example is how to fairly credit foreign producers who have incurred their own costs for carbon compliance. EU producers will surely want to be projected on this if the U.S. tax goes ahead.

This is why any multilateral or bilateral trade talks must incorporate decarbonization policy, otherwise they invite major conflict over CBAM or FAIR.

What Should We Expect From This?

The mechanics of executing this bill will be difficult in the absence of a national carbon pricing system. Anyone who was around for the failed attempt to institute U.S. Cap and Trade in 2010 knows this is an arduous task, with major battles over carbon allowances and protected industrial sectors. However, a national EMS would really simplify the process of applying any carbon border tax. An EMS also provides a continual price clearing mechanism that would be market-sensitive. That seems much more practical than annual government calculation of perceived costs.

There does seem to be agreement between both political parties on the desire for a level playing field on trade. No one disagrees that holding American companies to a higher standard of emission while allowing high(er) carbon-intensive imports is not going to fly.

Bipartisan support for a final bill may not move quickly. Both parties’ sides may want to see the outcome of the 2022 elections to determine what political capital they have before charging into this issue more aggressively.

Like the CBAM situation in the EU, the U.S. version of carbon border tax is not likely to impact the physical markets for 2-3 years. However, the very fact that the conversation is happening should underscore the fact that eventually decarbonization will become a reality. The sooner we prepare for it, the better.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

Request more information about this topic.

Learn more about CRU’s services at www.crugroup.com