How a successful Global Arrangement on Sustainable Steel and Aluminum could function while delivering maximum benefits to workers and the environment.
Introduction and summary
The Global Arrangement on Sustainable Steel and Aluminum (GASSA)—a proposed agreement to increase trade in steel and aluminum produced in a way that emits lower greenhouse gas emissions—may be the most ambitious trade initiative pursued by the Biden administration and offers a template to move beyond the traditional neoliberal approach to free trade. Much has been written on why GASSA would be a game-changer for U.S. trade policy, including by the authors of this report. To date, however, there has been little exploration of how GASSA, or an expanded GASSA-like arrangement that includes more trading partners, would work—until now.
This report describes key decision points and makes recommendations about implementing a trade arrangement that affords preferential market access on the basis of carbon intensity and creates a common approach to address nonmarket overcapacity. These include: 1) preconditions that members of the arrangement should commit to before joining, including respect for high standard labor rights, a coordinated strategy to addressing overcapacity, and a commitment to broad industrial decarbonization; 2) a tariff structure that advantages low-carbon steel and aluminum imported from like-minded partners over dirty imports from nonmarket economies such as China; 3) the use of benchmarks, which grow more ambitious over time, to assess what counts as “low-carbon”; and 4) reforms to the nation’s customs system so that U.S. officials can distinguish between low- and high-carbon goods at the border.
The United States has gone from a climate laggard to a climate leader in just a few short years. Key to unlocking this progress has been moving past a neoliberal approach that lets market actors decide where and how—and how dirty—to produce goods and services and moving toward using a green industrial policy that can restructure production at the speed and scale needed to meet the United States’ commitments under the Paris Agreement.
This new industrial strategy is being executed through several tracks. First, the Inflation Reduction Act and the CHIPS and Science Act channel grants, loans, and tax credits to bring online a new supply of clean energy and manufactures, from goods from semiconductors and electric vehicles to green hydrogen and low-carbon steel. Second, the Infrastructure Investment and Jobs Act creates demand for this new supply through public works programs using domestically produced, clean steel and other inputs. Third, an emerging international climate and trade strategy complements this domestic agenda by rewriting international rules that condition access to national markets on respecting the climate.
Among international climate strategies, GASSA is furthest along. Launched in October 2021 between the United States and the European Union, it would set up a trans-Atlantic arrangement that could eventually expand to a club of countries. Participating countries would agree to offer preferential market access based on carbon intensity, while also agreeing to joint actions to address the challenge of nonmarket practices in the steel and aluminum industries. The choice of these two metals is not accidental. They account for about 11 percent of global carbon dioxide emissions and nearly one-third of industrial emissions. Moreover, countries such as China have been flooding global markets with excess, dirty production, and as a result, the metals are already subject to extensive trade protection measures.
Although the United States, the European Union, and their industries share a common interest in greening and stabilizing steel and aluminum trade, progress on the negotiations has been frustratingly slow. The United States has made a number of proposals over two years of negotiations, but the European Union remained in a more passive and reactive mode. After missing a deadline in October 2023 for finishing these talks, both sides extended a relative “peace” on bilateral trade flows, allowing for more negotiation time.
The authors of this report have previously written about the historic opportunity that GASSA would present. To summarize, GASSA or a GASSA-like agreement would strengthen U.S.-EU coordination, helping to write the rules of 21st-century trade. However, no new timeline has been announced, and there are reasons to believe the European Union currently lacks sufficient motivation to come to a deal that meets the needs of the United States and of industries and workforces in both America and Europe.
While it is difficult to know exactly how the negotiations will unfold moving forward, the opportunity for the United States to create a new global trade paradigm that affords market access based on carbon-intensity and addresses nonmarket overcapacity is too important to abandon. The European Union’s Carbon Border Adjustment Mechanism (CBAM) essentially means that the European Union will continue to be important in discussions over any GASSA-like arrangement, but it may be unwilling to make the compromises necessary for a cooperative approach to decarbonizing the metals trade. For that reason, these twin objectives could very well become the basis of negotiations with other ambitious trading partners and—if successful—could become the organizing principle for a global system looking for a new means to organize and manage trade relations. Indeed, in remarks at Columbia University on April 16, Special Presidential Envoy for Climate John Podesta suggested precisely this kind of expanded approach, calling for discussions with U.S. “partners and allies around the world, from the UK to Australia to the EU.”
This strategy is particularly interesting, as it turns the traditional neoliberal approach to trade on its head. No longer would the United States or other developed economies offer market access on the promise, or in the hope, that eventually trade would lead to alignment on standards for workers or the environment. GASSA or a GASSA-like agreement, rather, would ensure that standards come first, as a prerequisite before a trading partner would benefit from preferential market access. Such a structure may start with steel and aluminum, given the sector’s unique trade exposure, but could easily encourage decarbonization and high standards in other sectors as well. This idea shares a strong sentiment with the comments made by Brazilian Finance Minister Fernando Haddad at a recent meeting with his G20 counterparts, where he called for a “new globalization” based on social and environmental principles.
The steel and aluminum sectors offer a few major advantages as a starting point for this type of innovative approach to trade. First, steel and aluminum are already subject to extensive trade controls globally. Second, likely participants have established environmental regulatory systems, including protocols for carbon accounting, which may reduce the administrative burden needed to make a tariff based on carbon intensity successful; as Podesta noted, developing common approaches to these accounting problems should be a major object of international cooperation. Third, the global steel and aluminum industries have been particularly affected by China’s nonmarket overcapacity, putting producers in market-based, high-standard countries and their workers at a disadvantage that has resulted in job losses and a decline in international competitiveness.
In the United States, steel production is often far less carbon intensive than production in China. GASSA or a GASSA-like agreement would thus do more than provide an incentive for steel producers to decarbonize: It would turn a carbon advantage into a meaningful market advantage that could facilitate additional investment in U.S. steel capacity and create goods jobs. A similar dynamic exists elsewhere, including in the European Union, Canada, the United Kingdom, Japan, South Korea, and Brazil—all potential partners in the creation of a GASSA-like structure.
Thus, while it is possible to envision a GASSA-like structure for other sectors, this report focuses on the design choices needed to move a steel and aluminum trade regime forward, either with the European Union or with other negotiating partners. The goal is to highlight the policy options that negotiators must consider in order to reach an agreement that is maximally beneficial to steel and aluminum workers and the economic and national security of both the United States and its partners as well as focuses on the global effort to address climate change.
Prerequisites to joining the global arrangement
Prerequisites to joining a GASSA-like structure are central to ensuring that a global arrangement can fulfill its objectives of conditioning market access on participants meeting ambitious climate and labor standards, as well as addressing overcapacity in the industry. This can ensure that proper, coordinated actions are taken to address the nonmarket practices of others and can reduce the risk of resource shuffling, i.e., producers simply exporting their cleaner products and selling locally their dirtier products without any actual movement toward decarbonization. Prerequisite commitments can also be used to advance the values of global arrangement participants related to labor rights, broader climate cooperation, and support for shared research and development (R&D). At least four types of threshold commitments should be required for joining the arrangement.
Labor rights
Global arrangement participants should meet certain labor rights requirements in their steel and aluminum sectors that go beyond merely passing labor laws—particularly if markets with a history of lax enforcement are allowed to join. A high-standard commitment to worker health and safety, appropriate pay, and support for unionization and collective bargaining, for example, could all be included in a prerequisite commitment for participants of the global arrangement. The Facility-Specific Rapid Response Mechanism in the United States-Mexico-Canada Agreement has been a successful tool for policing compliance with these labor standards, and negotiators should consider including a similar mechanism in the global arrangement as well.
Industrial decarbonization
As noted above, a feature of GASSA or a GASSA-like structure is the flexibility participants would have to adopt different kinds of domestic decarbonization measures to improve on the EU CBAM. Some countries, such as the United States, may prefer an approach that focuses on regulatory standards and subsidies. Others, such as the European Union, may prefer systems that are more focused on taxation or carbon pricing. The prerequisite standards should be sensitive to the fact that different members may have different political and legal constraints in approaching domestic decarbonization.
At the same time, the resource shuffling problem is most effectively addressed if participants agree on some broad benchmarks for domestic decarbonization. These could be framed in terms of results rather than the adoption of specific domestic measures. Still, the benchmarks would ensure that carbon-intensive production cannot just continue to thrive via domestic consumption.
Likewise, the importance of subsidies to the green transition creates a potential conflict among nations. Existing trade rules allow—and in some cases domestic law may require—countries to impose additional duties called “trade remedies” on subsidized imports. Arrangement participants should agree not to impose new countervailing duties (CVD)—a type of trade remedy imposed on subsidized imports—on steel or aluminum imported from another participant’s market if a subsidy that would otherwise be subject to CVD protection was provided to facilitate the decarbonization of metals production in their home market and the subsidy was not contingent on export. Failing to do so could eliminate the market access for green metals that the arrangement seeks to create.
Finally, it may make sense for markets agreeing to join the global arrangement to also commit to continuous improvement to decarbonize their industrial sectors outside the steel and aluminum sectors. Possible commitments could include financial or investment pledges or specific decarbonization targets linked to a country’s climate commitments.
A strategic approach to overcapacity
Participants in the global arrangement should coordinate their responses to steel and aluminum overcapacity. This is different than how to handle steel produced by markets outside the global arrangement. There should be a coordinated approach to trade enforcement, ensuring that steel and aluminum produced using nonmarket, illegal, or unfair subsidies does not compete with steel produced by market-based suppliers. This could, for example, take the form of an additional common tariff or even a ban on steel or aluminum produced in nonmarket economies, effectively creating new export opportunities for low-carbon steel produced in fellow GASSA markets to replace dirtier steel produced in China.
R&D collaboration
Participants in the global arrangement could agree to collaborate on joint R&D projects related to the decarbonization of steel and aluminum production as well as a common approach to broad deployment of decarbonization techniques and technologies across GASSA markets. While it will be important to maintain a clear market advantage for firms willing to develop and invest in the decarbonization of their output, there may be situations where joint or collaborative R&D can help the entire industry become more sustainable. Negotiators should consider identifying such opportunities and ensure that global arrangement participants work together to leverage them to maximum effect.
Decision points within GASSA or GASSA-like trade regime
The second, and perhaps most complicated, type of design questions in the development of GASSA or a GASSA-like structure involve the mechanics of how a tariff regime would work for those countries that have agreed to the prerequisite commitments and joined the arrangement. These include the following questions.
Who should be invited to join?
Initial negotiations were bilateral between the United States and the European Union, but the United States should consider inviting others, including the United Kingdom, Canada, South Korea, Japan, Australia, Norway, and Brazil, to join the existing talks. Moreover, if the European Union remains reluctant to agree to such terms, the United States should begin talks on a GASSA-like agreement with one or more of these other potential partners, recognizing that any potential negotiating partner(s) must share a similar level of ambition toward climate, market principles, and core labor rights.
From an economic perspective, the more steel-producing (and steel-consuming) countries that join, the more market advantage that would be provided for lower-carbon steel and aluminum. However, negotiating the mechanics of a carbon-based trade regime with so many countries may force negotiators to lower their ambition to meet the needs of the “lowest common denominator.” Balancing ambition—and certainly, high standards for industrial decarbonization, labor rights, and dealing with overcapacity—with the desire for inclusivity will thus be critically important.
It will also be essential to consider when and how new partner countries could join. Ideally, the arrangement would be open to anyone willing to adopt the common tariff scheme and able to meet the prerequisite standards, but participants may want to impose additional requirements, such as the approval of the existing participants—a common requirement in trade agreements. Relatedly, negotiators must also consider how and when to enforce the terms of the arrangement against existing partner countries. Environmental treaties such as the Montreal Protocol contain compliance mechanisms that could provide a model, and participants may wish to consider even harsher sanctions, such as possible expulsion from the global arrangement for participants who persistently fail to meet their obligations.
What should the tariff structure be?
Negotiators should consider setting three tariff rates in order to balance simplicity and functionality with climate impact:
- A tariff rate for steel and aluminum that is produced in a market that is part of the global arrangement and with a carbon intensity below a specific limit
- A higher tariff rate for steel and aluminum produced in a market that is part of the global arrangement but with a carbon intensity that is above the limit
- An even higher tariff rate that would presumptively apply to steel and aluminum produced in a country outside the global arrangement, regardless of its carbon intensity, unless nonparticipants could demonstrate that they have complied with the arrangement’s standards
For example, steel and aluminum imports that meet the conditions under the first rate could be tariffed at 0 percent. Steel and aluminum imports that meet the conditions under the second rate could be tariffed at 25 percent. And steel and aluminum imports that meet neither the first nor second rates could be tariffed at 75 percent, or even face an outright ban, unless the importer can verify that it meets some or all of the arrangement’s standards. A nonparticipant exporter could potentially be entitled to a tariff rate lower than that ordinarily charged under the third rate if the metal falls below a specific carbon-intensity threshold and the exporter can demonstrate full compliance with all the arrangement’s standards, including labor standards and treatment of imports from nonmarket economies.
Such a structure would ensure that joining the global arrangement—with its commitments related to labor rights, broad decarbonization, treatment of imports from nonmarket economies, and R&D cooperation—provides a country with advantages that could not be obtained simply by producing low-carbon steel without ensuring labor rights or addressing overcapacity. Dramatically simplifying the tariff structure within GASSA could also expand the domestic toolkit to ensure the industry does, in fact, decarbonize.
One alternative structure could have the tariff rate slide based on the carbon intensity of the product—essentially a common CBAM. Rather than have two different tariff rates, one for low-carbon steel and aluminum and another for high-carbon steel and aluminum, the structure would assign a tariff rate based on a set conversion factor relative to the amount of carbon in the piece of steel or aluminum. This would more easily align the carbon-based tariff to other carbon border adjustments but would likely run into implementation, transparency, and predictability issues. In addition, unless steel produced with less than a specific level of carbon were allowed to enter another partner’s market tariff-free, it would ensure that at least some tariff was assigned to every imported product, reducing the potential attractiveness of significantly investing in decarbonization—and likely limiting the attractiveness of joining the global arrangement for some potential participants. Indeed, the amount of paperwork involved with tracking and verifying precise carbon intensities, as well as trying to account for the interaction with nonparticipants’ CBAMs, is itself a substantial barrier to trade in green steel and aluminum—a criticism of the EU CBAM and a feature that could significantly weaken the incentives to invest in and trade green metals.
Another alternative would be to have a single tariff rate for participants of the global arrangement—likely zero—and a much higher rate for nonparticipants. This would maximize simplicity and could provide a further incentive for markets to join the arrangement. However, this approach might also offer too great an advantage for the dirtiest steel producers in markets that join the arrangement: They would be granted the same market advantage as less carbon-intensive producers in their same market. This problem could be solved by requiring each participant to adopt similar domestic carbon intensity standards for steel and aluminum production. But a benefit of the GASSA-like structure is that it allows participants some flexibility in how they approach domestic regulation of carbon. This is a significant difference from, and improvement over, the EU CBAM, which exempts only countries that adopt a domestic carbon pricing scheme linked to the European Union’s Emissions Trading System.
What separates high-carbon steel and aluminum?
Assuming a multitier tariff design outlined above, negotiators must choose the line that would separate the low and high tariff rates for steel and aluminum imported from other participants of the global arrangement—that is, the line between the first and second tariff rates detailed above. Several options exist, including a demarcation line based on the importing country’s average emissions in its steel and/or aluminum sector. This approach would ensure that the more a country’s steel and aluminum sector decarbonizes, the more trade protection it would receive. The challenge, however, is that such a system would be difficult to predict going forward, as the national average would change frequently, albeit hopefully always in a cleaner direction. This could slow investment and hamper the types of long-term procurement contracts common in the industry. It would also give the dirtiest steel producers in a market an advantage since they would benefit from the decarbonization investments of their competitors.
A second option would be to set the demarcation line based on the exporting markets’ carbon intensity, ensuring that only those companies that produce low-carbon steel relative to their domestic competitors would have access to the markets of other global arrangement participants. This may incentivize investment in multiple places simultaneously. The challenge, though, with this option is that a market with a higher-than-normal average carbon intensity could have its steel and aluminum advantaged in the market instead of lower-carbon steel produced in a fellow global arrangement participant where the national average is lower. Another concern is that this option could encourage creative resource shuffling without an overall decline in carbon intensity. Both options also involve participants having different demarcation lines, further complicating trade among participants and reducing the value of joining.
For this reason, a third option may be preferable: setting the demarcation line based purely on a particular carbon-intensity score. The benefit of this approach is that it provides long-term transparency; investors know that if they can produce steel and aluminum at a certain level, they will receive the market advantage that comes from being able to export duty-free into other global arrangement markets. It would also allow negotiators to set a carbon intensity demarcation line that decreases over time, driving continual investment in decarbonization, while dealing with issues of resource shuffling through the prerequisite commitments that partners would make to join the arrangement. While this could incentivize the carbon intensity of individual firms’ production to bunch at or near the demarcation line, the peg to a specific carbon score would ensure that the entire sector’s decarbonization efforts would at least be sufficient to achieve broader climate objectives. The line could be set to achieve the carbon emissions levels needed to meet a particular climate target—for example, 1.5 degrees Celsius. If negotiators ultimately choose this option, determining the appropriate carbon level and rate of decline will be extremely important, and likely quite contentious.
Moreover, negotiators should consider the practicality and expediency of developing different demarcation lines for steel produced from electric arc furnaces and blast furnaces. This bifurcation would create incentives to reduce emissions in blast furnace steel production—which will remain a significant component of American and global steel production for the foreseeable future—and avoid a scenario where GASSA creates a protected market for electric arc furnace-produced steel with little incentive for further decarbonization. By giving blast furnaces an incentive to decarbonize even if they cannot meet the same decarbonization standards as electric arc furnaces, this bifurcation would address the resource-shuffling problem in which blast furnace production is consumed domestically and not decarbonized. This sort of bifurcation is already happening at the federal level through the Biden administration’s new Buy Clean policy and is under consideration in Europe through the European Union’s CBAM. Notably, steel produced in the United States is far less carbon intensive than steel produced in China, regardless of the method used to make the steel. Chinese steel produced by the traditional blast furnace produces about 50 percent more emissions than steel made by a blast furnace in the United States. In contrast, steel produced by an electric arc furnace in China is roughly three times more carbon intensive than steel produced by similar processes in the United States.
Is there a limit on the amount of tariff-free steel and aluminum allowed to enter a market?
The current import regime negotiated by the United States with the European Union, Japan, the United Kingdom, and others allows for a tariff rate quota, above which imported steel is tariffed at 25 percent. A global arrangement structure could potentially cap the amount of low-carbon steel allowed to enter a domestic market tariff-free, creating a fourth tariff level for low-carbon steel exceeding a set amount. This fourth tariff rate would likely be below the tariff on high-carbon steel from global arrangement participants but still be assessed some level of tariff since it would exceed the cap allowed to be imported tariff-free. However, to promote design simplicity and provide a strong incentive to decarbonize, the authors support removing any import limit for low-carbon steel produced by a global arrangement partner.
How is carbon intensity measured?
Negotiators must decide whether the carbon-intensity score assigned to a piece of steel or aluminum includes Scope I, Scope II, and/or Scope III emissions. From a climate perspective, including all three makes the most sense. However, this raises considerable transparency, reporting, and verification challenges. Scope I emissions are the easiest to assess and will likely become required because of regulatory actions in most places. Scope II emissions are more challenging and likely not something that every steel and aluminum producer can accurately calculate at present, but they also account for a lot of the carbon advantage U.S. steel producers enjoy over others. And Scope III emissions may be even harder to calculate for most firms—and even harder to verify for everyone else. But without a process to estimate Scope III emissions, the threat of the global arrangement failing to accurately account for major sources of emissions is simply too high.
Scope I, II, and III emissions in the steel and aluminum sectors
Understanding the different types of emissions is important to assessing the carbon intensity of a particular product. In the steel and aluminum sectors, Scope I emissions refer to direct emissions produced in the production of a metal. This can be the result of running machines (blast furnaces, for example) as well as the electricity used to power facilities used in production. Scope II emissions are created by the production of energy that is purchased by a steel and aluminum manufacturer in its production. And Scope III emissions refer to those caused by a steel and aluminum company’s suppliers and customers, as well as the emissions caused in transporting component parts and materials to a production facility.
For this reason, the United States and the European Union—and others, if the global arrangement negotiations are expanded—should name a team of technical experts to develop a consistent, uniform, and mutually acceptable methodology for calculating the embedded emissions of a piece of steel or aluminum, as well as plans to educate steel producers and consumers on how to use the methodology. This will likely include using environmental product declarations or other commonly used reporting mechanisms.
One thing to note: It may be possible to evolve this part of the global arrangement over time if, for example, in the first years of the system, only Scope I emissions could be included. Eventually, the system could expand to include Scope II and Scope III emissions, perhaps providing global arrangement participants the opportunity to develop a consistent, transparent, and verifiable method for calculating the impact of these emissions on a product’s unique carbon-intensity score.
At what level is a steel or aluminum product assessed a carbon-intensity score?
Today, when a product shows up at a border, it is assessed a tariff based on its harmonized tariff schedule (HTS) code and its country of origin. HTS codes are harmonized globally at the six-digit level, meaning trade can flow relatively easily. But such a system of harmonized codes does not work for carbon intensity, so negotiators must agree on how to score a piece of steel or aluminum. In a perfect world, each piece of steel or aluminum would be assigned its own unique score, but this is challenging given the limitations of existing data. Nevertheless, working toward common standards for this type of product-specific carbon accounting should remain a goal for any government that wishes to join GASSA or a GASSA-like agreement.
An alternative might be to assign a piece of steel or aluminum a carbon score based solely on the market in which it was produced—essentially a national average. This would mean that a piece of steel produced in Canada would be assigned the Canadian carbon score. Canadian industry as a whole would have an incentive then to lower its overall emissions profile. Still, laggard firms would benefit the most from the decarbonization investments of their domestic competitors. This free-rider problem alone likely makes this approach unworkable in the absence of common domestic standards on decarbonization. Moreover, a national average would need to be regularly—likely annually—assessed and agreed to by other participants of the global arrangement. In addition to the free-rider problem, this approach could cause incessant bickering among global arrangement participants, as minor changes to a country’s national average could have important ramifications in the business environment—and, of course, each country’s government would strongly support its own domestic industry.
Another option would be to assess a carbon score based on the carbon emissions of the factory that created the piece of steel or aluminum. This would align better to the inclusion of Scope I, Scope II, and Scope III emissions, as Scope II and III emissions are often plant-specific, and would ensure that each company would benefit from its investments in decarbonization. However, if a plant significantly improved its carbon footprint, it might not enjoy the market advantage such an investment would entail until the next update to the plant’s carbon score. For instance, if plants were assigned a carbon score annually, an investment that is completed in January would wait another 11 months before it would be reflected in the import price of that company’s products.
Research underway into the emissions intensity of steel and aluminum production
The Environmental Protection Agency (EPA) already runs a Greenhouse Gas Reporting Program that collects and publishes emissions data from the metals sector, including steel and aluminum. The International Trade Commission (ITC) is currently investigating the greenhouse gas emissions intensity of steel and aluminum production in the United States, collecting both company- and facility-specific data. The results of the ITC investigation will supplement the data the EPA already collects to give the U.S. government an overall picture of the relationship between emissions in the steel and aluminum sectors and international trade flows.
When would the global arrangement take effect?
From a climate perspective, the faster a global arrangement system starts, the better. But it might be relevant to garner support for the arrangement to delay implementation to allow for decarbonization investments to come online.
Are there exclusions for products not made domestically?
Another decision point revolves around whether steel and aluminum products that are unavailable domestically should be subject to an exclusions process that would allow them to be imported duty-free into the market of a global arrangement member. From a climate perspective, this would create a significant loophole that could decrease the carbon impact of the global arrangement. But from a market, competitiveness, and political perspective, it may be necessary to continue offering tariff exclusions for those products not currently available in a country’s home market. If exclusions are offered, negotiators will need to determine whether the imported steel or aluminum must be from another global arrangement partner or from anyone. The preference would be the former, but it is possible that the product may not be available from any other global arrangement participant either, particularly if the arrangement is limited to only a few markets.
While not a large source of imported steel, negotiators may also consider providing some level of tariff-free exclusion for green steel produced in markets classified as a least developed country (LDC). Such an exclusion would be subject to a quantitative limit above which the standard GASSA tariffs would apply to avoid LDCs becoming pass-through jurisdictions for exporters from countries outside the arrangement seeking preferential access to GASSA markets. This could encourage broader investment in green steel production outside traditional markets, offering a pathway for LDCs to help shape the future of the steel industry more sustainably.
Is all steel and aluminum included?
The current HTS system includes 58 steel product categories, and the United States maintains roughly 800 10-digit import codes in the sector. Negotiators will need to determine whether the global arrangement should include all these unique products, or only imports in certain categories. Moreover, negotiators will need to consider whether downstream steel and aluminum products should be subject to similar carbon-based tariffs. Including all steel and aluminum products would be the most impactful from a climate perspective and would eliminate the need to negotiate along individual tariff lines or to parse finished goods into their component parts or materials, but it may make implementation unwieldy.
What is more, given the intricacies of different metals supply chains, it is important that GASSA participants agree that the preferential tariffs that apply to GASSA participants only apply to products melted and poured (in the case of steel) or smelted and cast (in the case of aluminum) in another GASSA participant’s territory. This would ensure that steel and aluminum produced in a nonmarket economy are not offered a backdoor to the advantageous terms offered by GASSA membership.
How can carbon-intensity scores be verified?
It is critical to the functioning of any economic system that the participants trust the information they receive from others. Suppose a steel or aluminum producer is selling to a buyer in another global arrangement market. In that case, the two sides must trust that the carbon score reported by the producer is valid, and thus their product will be assessed an import tariff at the appropriate rate. However, this variable—unlike the product’s HTS code and country of origin—is subject to change. Thus, a question arises about when the score changes and who verifies that it is correct. Is there an independent verifier, or will the participants themselves do the verification? Participants will also want to negotiate penalties for false, and possibly for mistaken, reporting.
How should revenue raised from carbon tariffs be used?
Currently, revenue generated by tariffs is deposited into the U.S. Treasury. However, revenue generated from GASSA or a GASSA-like structure does not necessarily need to be treated the same way, although this would likely require a legislative change. It could, for example, be invested in certain activities such as additional industrial decarbonization projects, R&D, and more. The tariff could be structured to use the revenue generated to supercharge industrial decarbonization efforts and to better prepare steel and aluminum producers within participants of the global arrangement to address competition from nonmarket practices elsewhere. Another option would be to use some of the revenue as foreign aid to countries that are primarily consumers of steel produced elsewhere but lacking an export interest. This could induce these countries to join the global arrangement and/or impose external barriers on dirty steel or aluminum imports. Expanding the global arrangement in this way would provide additional market opportunities for cleaner steel produced in the markets of global arrangement participants while also narrowing the range of markets importing dirty metals, helping to reduce the global price suppression that Chinese overcapacity has inflicted on the global steel and aluminum market.
What is the interaction between GASSA and the EU CBAM?
If the European Union is included in GASSA, negotiators must determine the interaction between GASSA and the EU CBAM. The EU CBAM is essentially a tariff based on carbon intensity on core industrial products, including steel and aluminum. It is a unilateral measure that exempts other countries only insofar as they adopt and link a domestic carbon pricing scheme to the European Union’s system. In this sense, the EU CBAM reflects an effort to get the rest of the world to adopt the European Union’s domestic decarbonization policies. Initial implementation has already begun, and the European Union is set to start collecting import fees in 2026.
If the European Union agreed to join and implement GASSA or GASSA-like structure, negotiators would need to work out whether that structure would replace the CBAM for steel and aluminum imports or be layered on top of it. If the latter, the European Union would need to ensure that low-carbon imports from the United States are not “double-tariffed” under GASSA and the CBAM and that U.S.-produced low-carbon steel and aluminum, and potentially metals produced by other GASSA partners, remain competitive in the EU domestic market relative to dirtier alternatives from within the European Union.
Simply put, failure to adequately address the interaction with the EU CBAM in a manner fair to U.S. steel and aluminum producers, and their workers, would call into question the viability of the European Union as a negotiating partner in developing a GASSA structure. At the same time, the European Union—long a leader in tackling climate change—has invested much political capital in building its CBAM. The European Union may hope that by 2025 or 2026, political and regulatory momentum—both in the European Union and in other countries eager to minimize the burden on their exports to the European Union—will make the CBAM and the associated domestic carbon pricing schemes the de facto global standard. For this reason, the United States should move quickly in discussions with other allies if the European Union continues to prove reluctant.
Design for maximum effect
Negotiators in the United States and like-minded countries should seize the opportunity to create a new precedent for climate-friendly trade cooperation. And more important than demonstrating conviction is getting these design choices right. Negotiators should assess how different policy choices will affect key outcomes. These outcomes include:
- Overall carbon emissions of the steel and aluminum sector within global arrangement markets
- Overall emissions of the steel and aluminum sector globally
- Trade flows, since the changes in tariff rates would result in a changing of how steel and aluminum is imported and exported around the world
- Steel production, including where production takes place and how it is produced—for example, blast furnaces or electric arc
- Job creation and, to the extent possible, job creation by factory, state, and market
Understanding and messaging the impact of the policy choices that can improve these outcomes will be essential to maximizing the value of the carbon-based trade arrangement and to building the political support needed to ensure the arrangement endures into the future.