Europe’s real climate muscle is its market, and US is realising it

Almost lost in all the headline news generated at the whirlwind G20 and COP26 summits was a steel and aluminium trade agreement between the EU and US that removes a major trade irritant left over from the previous American administration.

US manufacturers will get access to cheaper clean steel and aluminium from Europe while Europeans with a hankering for Kentucky bourbon or Harley-Davidson motorcycles will find those products and others more affordable.

But underlying the prosaic numbers is a more transcendent development: for the first time the cost of carbon emissions is being embedded in the metals deal. The EU plans to make that routine through its carbon border adjustment mechanism (CBAM) that places a levy on carbon-intensive products, part of the strategy to cut EU-wide emissions 55 per cent by 2030.

Unable to influence geopolitics through military power, the EU is increasingly using its real power as the most desirable market globally, a compelling trading bloc of 27 nations with 450 million affluent consumers and some of the greatest manufacturers in the world. Starting first with metals, cement and energy, if you want to sell into the EU, you will need to pay the carbon price. And though US President Joe Biden is having trouble pushing his most progressive policies through a majority of Congress, it is clear he and his advisers are interested in following the EU lead.

The US-EU deal includes future development of a long-term plan to confront other nations on overproduction and applies pressure on exporters of carbon-intensive steel, though specifics have yet to be negotiated.

“Not only does today’s deal remove one of the largest bilateral irritants in the US-EU relationship, it actually transforms it into joint forward progress on two central challenges,” said Biden’s National Security Adviser Jake Sullivan.

The agreement was clinched on the sidelines of the G20 meeting in Rome held in the lead-up to the COP26 global climate summit, which by design is about bargaining and voluntary steps. The summit carries no mandates or enforceable requirements.

The new EU-US metals deal is not just a simple return to the status quo of 2018. It is a template for efforts to address the existential threat of climate change, starting by reining in overproduction in the steel industry, one of the biggest CO2 emitters in the world.

“Together, the United States and European Union will work to restrict access to their markets by dirty steel and limit access to countries that dump steel in our markets, contributing to worldwide oversupply,” the White House said.

It is a small step towards fixing a “leaky” system on carbon pricing and emissions regulations. The EU has robust carbon market with rules and prices that push industries to reduce pollution. But imported goods often don’t face such constraints.

The EU’s answer is CBAM, effectively an import levy on carbon-intensive products. If it works as designed, the programme incentivises companies to invest in green technologies, and not just in Europe. Overseas producers will have to comply to access the market. Other nations could also join in the effort, creating a club of economies dedicated to curbing global warming through carbon taxation.

Carbon border levies weren’t scheduled to be formally discussed at the COP26 summit under way in Glasgow, but European Commission President Ursula Von der Leyen said the EU will push ahead, starting with plans to tax a handful of imported raw materials based on their carbon content.

“We will now introduce slowly but surely a carbon border adjustment mechanism that says if you come with dirty products on our market, you have to pay a price as if you were in the emissions trading system of the European Union,” von der Leyen said at a COP26 side event. “But we prefer that you keep the money in your economy by putting a price on carbon in your economy.”

Can the border tax, or the threat of it, actually work to clean up dirty emissions? The answer is yes, at least according to Turkey. Its climate envoy to the COP26 summit said the threat CBAM helped push the country to finally ratify the 2015 Paris Climate Accord just weeks before the event in Glasgow began. A Franco-German guarantee of $3.2 billion in financial support helped push Turkey to sign the Paris accord, but CBAM — which would hit Turkey hard — also played a role, said envoy Mehmet Emin Birpınar.

Former senator and secretary of state John Kerry, special climate envoy for the US, said Biden wants to evaluate Europe’s CBAM and that the US could deploy its own border adjustment tax.

Other nations might also be interested, but the EU’s tough love for the climate is far from universally embraced. In addition to developing counties that say they can’t afford to clean up their act so quickly, even some in the EU are strongly resisting.

At the COP26 summit Czech Prime Minister Andrej Babiš called the EU’s climate proposals “dangerous”.

“This is not a deal but an ideology,” he said, adding that the initiative would hurt citizens by making fossil fuels more expensive.

Poland is also a vocal critic of EU policies. Warsaw recently called for “revision or postponement” of the bloc’s 2030 climate plan, blaming the recent surge in energy prices on the EU’s carbon trading system.

For its part, major mineral producer Australia said it will rely on science, not taxes, to address the climate crisis.

“It will be met by those who frankly are largely not in this room,” Australian Prime Minister Scott Morrison told COP26. “It will be our scientists, our technologists, our engineers, our entrepreneurs, our industrialists and our financiers that will actually chart a path to net zero.”

That might sound good in theory, but those more wary of human nature know often the only way to ensure consistent action is self-interest – and few want to lose income because they didn’t adapt.

In such an important issue all civilised leverage possible should be used. Europe’s real muscle is its market.

Jon Van Housen and Mariella Radaelli are veteran international journalists based in Milan