How the US steel industry could benefit from a carbon tax and ‘border adjustment’

Washington Examiner
May 26, 2021
By Josh Siegel

Both the United States steel industry and the environment would be big winners if policymakers imposed a new tax on carbon-intensive imports with a similar duty on their domestic counterparts, according to a new report.

Domestic steel producers have an advantage over China and other competitors in keeping carbon emissions down, the GOP-backed Climate Leadership Council said in the report issued Wednesday. But they need legislative help to keep the playing field level, the authors said.

The report, written by CRU Consulting for the Climate Leadership Council, found that applying a domestic carbon price and an equivalent tax on producers who sell in the U.S. market would deliver a competitive advantage to domestic steelmakers, who would see their sales and profitability rise as they displace imports.

“The study’s findings challenge the assumption that U.S. climate leadership will invariably harm American competitiveness,” said Greg Bertelsen, CEO of the Climate Leadership Council. “By establishing a new order on climate and trade with a carbon price and border carbon adjustment, the U.S. can rapidly cut emissions, reinvigorate manufacturing, create jobs and encourage other countries to switch to clean energy all at the same time.”

The problem is that right now, President Joe Biden and Democrats in Congress are not prioritizing a carbon tax as part of its infrastructure and climate legislative push, as the policy has fallen out of favor among liberals and has drawn only minimal Republican support.

Meanwhile, the administration is considering taxes on imports of carbon-intensive goods, fulfilling a Biden campaign promise to punish China and other countries that are “failing to meet their climate and environmental obligations.”

But economists warn such a policy, known as a border carbon adjustment, would be unworkable unless the U.S. also imposed a carbon tax or a similar pricing scheme on its own domestic goods.

The Climate Leadership Council, founded by former GOP secretaries of state James Baker and the late George Schultz, favors a carbon tax starting at $40 per ton. That tax would return the revenue to taxpayers instead of spending it on clean energy investments or to cut other taxes.

For carbon tax proponents, imposing a matching border carbon adjustment has long been viewed as essential to avoid harming the competitiveness of U.S. industries. If exporters of carbon-intensive goods such as steel, aluminum, cement, glass, and some agricultural products have to pay a fee equivalent to the U.S. carbon tax, it would remove the incentive for companies to move overseas to avoid paying the domestic fee.

The new Council report finds U.S. steelmakers are much more carbon-efficient than most of their competitors.

That means if subject to a U.S. carbon import tax, most overseas steelmakers looking to export their goods would pay a higher price compared to domestic manufacturers with a smaller pollution footprint facing a carbon price.

Imposing a border carbon adjustment could also force competitors to lower their emissions if they want a piece of the U.S. market, the Council said.

The report found that top exporters of flat steel products (for example, used in the manufacture of automotive body sheets) to the U.S., such as Canada, Mexico, Japan, South Korea, and China, emit 50%-100% more carbon emissions per ton of output than U.S. producers on average. U.S. long steel (used in many construction applications) is produced with four times less carbon intensity than the global average, with only Canadian and European steelmakers close to the U.S. regarding its low rate of emissions.

The European Union and Canada have already implemented domestic carbon pricing systems, and both could impose border carbon adjustments by imposing a tax on the exports of countries that don’t put a price on pollution.

All together, the report found that a domestic carbon price with a matching tax on imports could decrease steel imports by nearly half and potentially eliminate imports from carbon-intensive countries such as China and Brazil, the report found.

U.S. steelmakers could see a 32%-41% increase in profits and a 7%-9% rise in sales.

“Today, U.S. manufacturers get no credit for producing goods with fewer emissions than their international competitors,” Bertelsen said. “Climate policy can reward U.S. manufacturers for their cleaner operations and give them a competitive advantage over high-emitting manufacturers overseas.”

The report contains some caveats in that it only models the effects of the carbon price and border adjustment based on the steel market as of 2019, when the Trump administration applied a 25% tariff on steel from nearly every country in the world.

Tariffs were only dropped in the case of Canada and Mexico, but otherwise remain in place today.