Fighting Climate Change Through Trade

The climate crisis is spiraling out of control. Over the last several decades, extreme heat exposure has increased 200 percent for urban populations, causing thousands of premature deaths annually in the United States. Recent heat waves in India and Pakistan saw temperatures exceeding 120 degrees Fahrenheit, putting over a billion lives at risk. Soaring temperatures in Europe in July have killed thousands, sparked raging wildfires, and melted airport tarmacs. Government spending on the humanitarian needs of people displaced by global warming has risen 800 percent, and military forces around the world are reorienting their national security strategies to take account of the climate.

Yet the policy response in the United States has been halting at best, if not downright counterproductive. In 2001, President George W. Bush rejected the 1997 Kyoto Protocol, which sought to place limits on emissions of greenhouse gases. In 2017, President Donald Trump withdrew from the Paris climate deal just two years after his predecessor had helped craft the accord. And in June, the U.S. Supreme Court decided to all but eliminate the Environmental Protection Agency’s most efficient tool for reducing the carbon emissions of power plants. Policymakers across all three branches of government have fiddled while the planet burns.

President Joe Biden has struggled to advance his climate agenda in the face of opposition from members of his own party in the Senate. Frustrated, he considered declaring a climate emergency last week, a move that would unlock various executive powers that can be used to tamp down U.S. emissions. But no matter what Biden manages to achieve with such a declaration, a less conspicuous initiative is already underway that offers quieter hope for progress.

In October 2021, the United States and the European Union pledged to pursue a Global Arrangement on Sustainable Steel and Aluminum. The deal would harness the power of trade policy to decarbonize two heavy carbon-emitting industries, steel and aluminum production. It not only promises to help curb emissions and speed the green transition of those two key metals-producing sectors but also hopes to establish a template that can be adapted to other industries in the future. At a broader level, the agreement signals the recognition of policymakers in Washington and Brussels that certain matters cannot be left to the market any longer. The state has got to act. 

HOW TO MAKE METAL GREEN

The accord consists of several components. First, the United States and the EU will establish a common method of measuring the carbon intensity in steel and aluminum production. Second, they will restrict imports of dirty steel and aluminum—that is, metals produced with a high intensity of carbon emissions—from entering their markets. Third, both sides will ensure that their domestic policies support further decarbonization of these industries at home, which are already cleaner than those of major producers such as China thanks largely to the use of recycled metals. Finally, and this makes it a global deal and not simply a bilateral one, the agreement is in principle open to any country that wants to join and embrace these obligations.

The focus on steel and aluminum is not surprising: these industries are among the top emitters of carbon dioxide, accounting for a tenth of all emissions globally, or roughly that of the entire country of India with its population of over 1.3 billion people. Trying to curb emissions from these industries requires collaboration on trade. If the transatlantic partners forced their metals industries to engage in expensive decarbonization efforts without some type of wider trade strategy, they would only succeed in padding China’s comparative advantage in low-cost production. China is already the world’s dominant metals producer.

The production of steel and aluminum accounts for a tenth of all carbon emissions.

Aside from the policy rationale, the global agreement is smart politics. Consumers will feel little pain from attempts to decarbonize the metals industries. For example, according to a 2021 report by the Mission Possible Partnership, a public-private coalition working to decarbonize heavy industries, a shift to green steel will increase the cost of an automobile or an offshore wind turbine by less than a percentage point, a modest increase likely to be palatable for the general public. At the same time, this small increase in cost will account for a big reduction in emissions, as steel accounts for ten percent of the emissions from car production and 44 percent of those from wind technology.

The Trump administration raised tariffs on steel and aluminum in 2018, notionally for national security reasons. This action and its rationale rankled many European officials, who lambasted their ally for treating them like adversaries. The pact resolves these tensions by reestablishing duty-free trade between the two trading partners (subject to some agreed-upon limitations) and shelving disputes at the World Trade Organization (WTO) incited by Trump’s tariffs. Biden’s approach not only lowered the temperature with European allies but also reoriented metals trade policy around what the Pentagon and a wide variety of experts increasingly see as a leading threat to national security: climate change.  

TAMING THE MARKET

That seriousness of purpose suggests a welcome and overdue shift in Washington. The agreement heralds a novel departure from decades of dogmatic trade policy that surrendered undue power to the market and hollowed out the state. The prevailing wisdom in many Western countries in recent decades dictated that states leave economic decision-making largely to market actors and focus policy instead on insulating these actors from popular democratic demands. In trade, governments crafted international agreements that sought to encompass much of the economy, tailoring state involvement to the interests of elites and casting democratically imposed regulations as “nontrade barriers.” A particularly Orwellian example of this is the WTO’s Trade-Related Aspects of Intellectual Property agreement, known as TRIPS, which treats active state policies to remove patent barriers for COVID-19 vaccines as an impermissible interference in the “market.” Up is down, down is up, and pharmaceutical corporations are laughing all the way to the bank.      

These neoliberal theories have also influenced how many economists and policymakers have approached climate change. Instead of enlisting the full range of tools available for states to restructure their countries’ energy systems, Western governments have often preferred to propose levying taxes on carbon emissions and then leave it to market actors to figure out how best to adapt their production methods. Indeed, a 2019 letter signed by more than 3,600 economists in the United States championed the carbon tax as an alternative to the “command and control” regulation of the Environmental Protection Agency and industrial policy interventions such as the Green New Deal. The EU has implemented a carbon pricing mechanism known as the Emissions Trading System that depends on the market, with emitters buying and selling emissions permits whose prices can and do fluctuate wildly, sometimes due to financial speculation. At the border, the EU plans to deploy a carbon border adjustment mechanism—essentially, a tariff on the carbon cost of imported goods—to send similar price signals to importers. 

Price mechanisms are certainly useful, but they must be a part of a much broader strategy that seeks to do what the market cannot. Indeed, one of us (Stiglitz) has proposed to have the U.S. government calculate a price on the social cost of carbon consistent with the goal of achieving net-zero emissions. Under this plan, government agencies would have a more robust means of assessing the costs and benefits of regulatory action that adequately factors in the urgent need to decarbonize the global economy.

Indeed, recent historical and social science research has shown that there are no examples of price-based mechanisms delivering energy and environmental transitions on their own. In some cases, such as the United States’ trading mechanism for sulfur dioxide emissions (the world’s first large-scale pollutant cap-and-trade system, often thought to represent the success of market mechanisms), pricing followed rather than led successful administrative interventions. Engineers and policymakers on the ground collaborated to perfect scrubber technology on smokestacks before creating markets to help spread best practices to other sulfur emitters. Such hybrid approaches, which combine pricing mechanisms with other policy tools, such as procurement or public investment, promise to show how climate action can also create jobs and help communities. This makes sense: creating coalitions of winners from energy transitions can help overcome political blockages erected by incumbent industries, and recent survey results presented at the Aspen Ideas festival by Republican pollster Frank Luntz show that a job-focused approach to climate policy has bipartisan appeal.

Similarly, and with seemingly greater chance of becoming policy in the near term than domestic carbon taxes, the pact could fruitfully put a price on steel and aluminum imports whose embedded emissions exceed those of domestic producers, saving good union jobs at home while having an objectively verifiable benefit in the battle against climate change. This approach may be viewed by some as greatly inferior to an immediate, comprehensive trade agreement that seeks to enlist all countries and all goods and services in setting strong environmental standards. But such an accord is not in the offing. The perfect should not be the enemy of the good. The U.S.-EU deal on steel and aluminum is not only a step in the right direction but also holds out the prospect of helping the world move toward a still better agreement.  

GLOBALIZATION FOR THE COMMON GOOD

The United States and the EU have set a target of the end of 2023 to wrap up negotiations that finalize the global arrangement. Policymakers on both sides of the Atlantic should push for an ambitious agreement that models how international trade cooperation can be a force for decarbonization that broadly benefits citizens. Rules should be put in place not only regarding the direct emissions of metals production but also to ensure that metals producers use green electricity in their factories and green technologies along their value chains. Labor unions should also sit with governments in the negotiations to ensure that the green transition of the metals industries doesn’t leave workers behind. Environmental justice organizations should play a role in the elaboration of the agreement, since pollutants from steel and aluminum plants have long created disproportionate health costs for people on the fence line, especially in Black and Latino communities.

A transatlantic deal on metals could encourage a new, more sustainable model of globalization.

Western officials must make a concerted effort to bring developing countries into the deal to ensure that they have access to low-cost green metals and the technologies to produce them. At the same time, to the extent that the arrangement still allows some dirty steel to compete with and potentially undercut green steel, the United States must complement the accord with domestic measures including, for example, advance purchase commitments for green metals through the Defense Production Act that seek to provide a secure market and a fair price for green manufacturers. Although these and other emergency measures could always be rolled back by a Republican administration after the 2024 election, swift actions over the next two and half years could change business realities on the ground in a way that cannot be easily undone. As it becomes clearer that the global market of the future will cater to green products, businesses will not want to be left behind.

If done right, the global arrangement could provide a template for a new form of economic integration for other industries. Cement, chemicals, fertilizers, and forestry products are high-emitting industries that would make excellent candidates for a second phase. Action in one or two industries has helped encourage deeper trade cooperation in the past. The institutions erected in 1951 to manage the European Coal and Steel Community became the foundation not only for regional integration across other economic sectors in what would become the EU but also for joint action to modernize production, harmonize quality standards, prevent dumping by third parties, and even improve living standards and working conditions. Beginning slowly, with only a few critical industries, allowed European countries to gradually build a framework for economic integration that was responsive to a broader set of social, economic, and technological priorities, setting the course for deeper integration over the long term. Although less ambitious, the 1965 Canada–United States Automotive Products Agreement, which imposed rules on the trade of finished cars and car parts, paved the way for a broader Canadian and U.S. trade deal in the 1980s and for the North American Free Trade Agreement in the following decade.

At the very least, the United States and EU’s collaboration on steel and aluminum can help lead to common rules for other economies. But a more ambitious outcome remains possible. The global arrangement could come to represent a trade deal that addresses some of the major shortcomings that have undermined the legitimacy of globalization in general: namely, the persistent inability of states and markets to resolve concerns about labor, equity, environmental degradation, and the corporate abuse of power. With calls for “deglobalization” advancing, the arrangement could encourage a new, more sustainable model of globalization, one that doesn’t sacrifice the common good on the altar of the market.