EU and US Struggle to Cooperate on Trade Rules to Support Decarbonization

American, German and British environmental and trade politics experts agreed at an American-German Institute event on "Squaring the Transatlantic Circle" on climate policy that although it seems like Western Europe and the U.S. should be united on goals and interests, their economic competition and even pride stand in the way.

Roosevelt Institute Industrial Policy and Trade Director Todd Tucker expressed concern about the stalled negotiations on the global arrangement for sustainable steel and aluminum. Although the U.S. does not export much steel and aluminum to Europe -- and the EU only accounts for 14% of imported steel in the U.S. -- the two sides were not able to agree on how to preference metals produced with less carbon intensity, and how to erect barriers to metals made with non-economic overcapacity.

Tucker said that the global arrangement was a model "for what could have been." He said that in theory, negotiations are still ongoing. If it does conclude, he said, it can show how trading partners can reach agreement on sectoral trade deals that advance environmental goals.

But if the two "don’t show proof of concept where there’s a reason to cooperate," he said, it will be much harder in other sectors, where there's more direct competition.

University of Sussex Environmental Law Professor Emily Lydgate said that the U.S. has its own goals in negotiating with the EU -- it wants to be exempt from the Carbon Border Adjustment Mechanism -- and the EU wants to have critical minerals mined or processed or recycled in its territory qualify for Inflation Reduction Act electric vehicle battery tax credits.

Lydgate said the U.S. wants carbon intensity performance measures to be considered when its exports face the carbon border tax in the EU. But as the law is written, only a price on carbon equivalent to those paid by EU producers will erase the tariff.

"This approach makes it really difficult to bridge that divide," Lydgate said.

She said some of the difficulty the EU and the U.S. have when trying to cooperate on regulation is due to "sheer stubbornness." She pointed to how long it took the two sides to reach a mutual recognition agreement on pharmaceuticals.

She said the U.S. and the EU are both "regulatory superpowers. Both sides are not used to being imposed on -- they’re used to imposing on others."

She said the North American and domestic preferences in the IRA harm green tech companies operating in the EU, the U.K. or other places. "It's hard not to respond to that as a competitive threat," she said.

Niskanen Center Deputy Director of Climate Policy Shuting Pomerleau agreed with Lydgate's assessment on the hurdles to cooperation, and said she doesn't think they will agree on a "climate club" approach that would lower barriers to trade in each other's goods.

The CBAM seems to be inspiring other countries, though in different ways. Pomerleau noted that there have been several legislative proposals in the U.S. to impose its own carbon border tariff, though given the fact there is no national price on carbon, she doesn't think there's a good way to justify whatever that tariff is. She said trying to convert firms' costs for complying with the Clean Air Act or other environmental requirements into an equivalent carbon tax would be very difficult.

German researcher Charlotte Unger, from the Research Institute for Sustainability Helmholtz Centre Potsdam, noted that Brazil is thinking about creating a domestic carbon tax because otherwise its exports to Europe will become more expensive for EU buyers.