A carbon border tax is the best answer on climate change

Posted on 13.02.17 by

ArcelorMittal

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The European Parliament will vote on Wednesday on the EU’s latest proposals to significantly reduce carbon emissions. The next stage of the emissions trading system (ETS), the most ambitious since the scheme began in 2005, will bring a steep cut in the number of emissions allowances granted to industries.

by Lakshmi N. Mittal, Chairman and CEO 

The aim should be both to reduce emissions from Europe’s production and consumption

It is admirable that Europe wants to take the lead in showing the world what is possible when it comes to reducing emissions. Climate change is a clear threat and needs to be addressed. Designing policy appropriate for multiple sectors and industries is difficult and complex. But the extent to which Europe’s steel industry and the 320,000 people it employs directly will be affected based on current proposals needs to be understood before it is too late. Otherwise this could be the start of the further weakening of the European steel industry, which is already suffering from China’s overcapacity.

This is a warning to all those who care about the heritage of European steelmaking and believe manufacturing should remain a central part of its economy. Europe has always been at the forefront of industry. There is no reason why, with its strong technical knowledge, skilled workforce and excellence in research and development, it should not have a strong industrial future. But this requires politicians and lawmakers to recognise what creates a viable environment for an industry and ensure they do not legislate against it.

This is not an attempt to avoid doing our bit to help transition to a lower-carbon economy. European steelmakers recognise the need to reduce emissions — here and across the world. We have pilot schemes in place to test new technologies including carbon capture and utilisation. We are also working with our customers to help them reduce the carbon footprint of their products.

We agree with the EU’s climate goals. What we don’t agree with is the method that is on the cusp of being implemented in Europe. One of the major obstacles to success is that emissions are global. The aim of the system should be not just to reduce emissions from what Europe produces, but also to reduce emissions from what Europe consumes. This is particularly relevant for globally traded industries, like steel. Today Europe consumes approximately 160m tonnes of steel a year. Of that, 83 per cent is made in Europe. When the next phase of the ETS passes into law, the costs of European steel producers will rise significantly based on a carbon tax that could be approximately €30 a tonne.

Steel producers in another part of the world that sell into Europe will not have to pay that tax. They will therefore have a competitive advantage of roughly €30 a tonne over European rivals. In a sector characterised by global overcapacity this is a significant amount that jeopardises the long-term viability of much of Europe’s steel industry. Over the past 10 years the average gross profitability per tonne of European steelmakers has been €35. Take a potential average carbon cost per tonne of steel at €30 and you’re left with very little profit — and that’s before you get to the deductions that determine net profit.

The answer, I believe, is the introduction of border carbon adjustments to protect European competitiveness. It was interesting to note George Shultz and James Baker, both former US Treasury secretaries, arguing the same point last week with regards to America’s position on climate change, also making the point that this will also genuinely encourage other countries to follow suit.

Left as is, Europe will continue to need and consume the same amount of steel — but more of it will come from abroad, quite possibly from countries with lower environmental standards and higher levels of emissions than Europe’s producers, which are among the most efficient in the world.

Europe’s politicians need to ask themselves what success really looks like. An outcome where jobs are exported and carbon is imported — with no meaningful impact on total global emissions? Or a fair and equitable policy that incentivises investment and reduces emissions, while enabling the long-term sustainability of Europe’s steel industry?

The article was first published on FT.com on 12 February and in the Financial Times on 13 February.