After COP26 climate conference, the carbon trade war will inch closer

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If there’s one signal we should see from the COP26 climate summit in Glasgow, it is the increasing likelihood of a carbon trade war. World leaders can’t agree but, sooner or later, someone will pay the price of transition. Politics being politics, those leaders will want it to be somebody else.

In Glasgow, there was no Donald Trump denying the climate threat. U.S. President Joe Biden was pledging commitment. British Prime Minister Boris Johnson opened proceedings with a Dr. Strangelove warning that the planet is strapped to a ticking doomsday device. Then world leaders disagreed broadly about sharing the burden.

Mr. Biden had just come from the G20 in Rome, where he said China and Russia “basically didn’t show up” in terms of climate commitments, while back in Washington, a U.S. bill with climate measures was being delayed and watered down in Congress. Chinese President Xi Jinping e-mailed his statement, which stressed wealthy countries must do more. India’s Prime Minister, Narendra Modi, pledged net-zero emissions but not till 2070, and noted that on a per-person basis, India’s emissions are lower than those of rich nations.

There was a trade development a few days ago that might give us a peek at what lies ahead. The U.S. and the European Union ended a dispute over tariffs that Mr. Trump had slapped on steel by agreeing to negotiate the “world’s first carbon-based sectoral arrangement on steel and aluminum.”

They agreed to create a carbon club. At least for steel and aluminum.

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Together, the U.S. and the EU will work to counter steel imports from countries that produce steel using a lot of carbon. And also to counter imports from countries flooding the world with excess steel at low prices. In both cases, we’re talking primarily about China.

According to the U.S. outline, both the U.S. and EU will discourage imports of “dirty steel” made with lots of greenhouse gas emissions. China is the world’s largest emitter, and its steel industry accounts for 10 to 20 per cent of the country’s carbon emissions.

Presumably, such measures will mean carbon border tariffs on steel and aluminum – both as environmental measure and trade sanction. And, importantly, the U.S. signalled that other countries that produce relatively low-carbon steel and don’t engage in dumping can join the club. Canada’s steel industry wants in.

“We really don’t want to be left behind,” said Catherine Cobden, president of the Canadian Steel Producers Association.

Imagine what it could eventually mean: a bloc of countries, mostly Western countries, imposing tariffs on high-carbon steel suppliers, notably China. Presumably, China would retaliate with its own trade measures.

But the adoption of carbon tariffs is starting to appear inevitable. The EU is already looking at a broad Carbon Border Adjustment Mechanism, so European firms that bear the cost of decarbonization won’t be undercut by cheaper goods from countries that don’t. In theory, Canada is considering border adjustments, too, but that’s risky for a small market whose biggest trading partner is not on the same page. And the U.S. is not there yet.

In Glasgow, Mr. Trudeau said he sees border adjustments as a way for good climate citizens – countries that put a price on carbon or bear the costs of decarbonization – to create a level playing field. He argued that Quebec aluminum is the cleanest in the world, but it has to compete with aluminum from other countries using processes that are harmful to the environment.

But instead of border adjustments, Mr. Trudeau argued for a global minimum price on carbon. In other words, he wants everyone to pay a comparable price for combating climate change. The problem is, that’s the thing countries keep disagreeing about in places such as Glasgow.

There has been some progress, but national leaders still face the task of doing something that has never been done before: getting the whole world to agree on sharing the costs of addressing a planetary threat.

Still, unless you do not believe the threat of climate change is real, you can assume there will be inexorable pressure over time. The threat will become more imminent. Countries will be forced into action. National leaders will want to force others to share the burden. If there is no global agreement, they will do it through trade. Each time talks such as those in Glasgow end in stalemate, a carbon trade war inches closer.

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