CO2 border tax adjustment for steel imports: Attention, steel processors!

With a share of around 7 percent of global CO2 emissions, the steel industry is in the middle of the climate protection debate. Recently, the calls of EU steel producers for a climate border tax adjustment on steel imports have become louder. This is intended to offset the burdens of European climate policy and strengthen the international competitiveness of the EU steel industry. The request is understandable in principle but raises many questions. Steel processing companies have every reason to be sensitive. Because in the end they could be the stupid ones.

What is it about?

Leading representatives of the EU steel industry are calling louder and louder for the introduction of a "CO2 compensation" on steel imports into the EU to compensate for the burdens resulting from European climate policy. This is nothing more than customs duties on steel imports from countries with a supposedly less strict climate regime than the EU.

At the "European Steel Day" of the European steel association Eurofer in June, the topic took up a lot of space and was discussed above all in terms of cost compensation. It was stated that steel which is  sold on the EU market must be subject to the same CO2 costs, irrespective of the place of manufacture. Assuming CO2 emissions of 1.8 tons per ton of crude steel and a CO2 price of 25 €, the EU industry would face additional costs of 45 € per ton of steel, it was argued. Since international competitors would not have to bear these costs, a compensation would be necessary for imports in order to maintain the competitiveness of the EU steel industry. One way of doing this would be to impose the same CO2 costs on a tonne of imported steel as are incurred on average for a tonne produced in the EU.

Last year, a so-called "green import tax" was discussed at the National Steel Summit in Saarbrücken. Within this concept steel imports with particularly high CO2 emissions would be subject to a customs duty.

The background to these considerations is the 4th trading period of the EU Emissions Trading Scheme, which begins in 2021. Even if a different impression is sometimes created, the costs of the certificates are not yet a serious factor today. This will change, however, from 2021 onwards, because then the quantity of freely allocated certificates will be gradually reduced. The additional certificates required for production must be purchased at the respective stock exchange price. The free allocation is based on emission values (benchmarks) set by the EU Commission, which are, however, controversial. The allocation of the steel industry will be, according to the “Wirtschaftsvereinigung Stahl”, about 20 percent below the emissions of the most efficient plants, in 2030 even by 30 percent and more. On a broad scale, the reduction potentials of the now increasingly explored production processes with low CO2 emissions are not likely to take effect until after 2030. Thus, the EU steel industry is in fact threatened with additional costs for parts of the production.

CO2 border tax adjustment: already questionable in principle

The concerns of the European steel industry are understandable. The industry is a victim of an EU climate policy that is taking a stand on its own because it apparently cannot enforce internationally valid rules. Global climate protection is not being promoted in this way, but local industry is threatened existentially. The EU steel industry cannot be accused of trying to find a way out.

Nevertheless, the concept of a CO2 border tax must be critically questioned. The idea already raises many questions in principle. This is because, in general, it relies on state dirigisme with a high risk of misallocation. A climate tariff would perhaps strengthen competitiveness on the domestic market, but not on the export markets. Perhaps it is also too short-sighted to look only at higher costs and argue that these cannot be passed on to customers. It is not at all unlikely that "green steel" will become a sales argument for customers who are concerned about sustainability that also justifies a higher price. Above all, however, practical implementation raises many questions.  

Pure cost compensation makes no sense

If one gets more involved with the concept of a CO2 bordercompensation, one first has to decide on which basis this should take place. The border adjustment brought into play by Eurofer which purely aims to compensate for international cost disadvantages makes no sense. After all, it is a comparatively climate-friendly steel production that is to be protected and not a specific cost position. Above all, the consequences would be highly questionable if average CO2 costs in EU steel production were to serve as the basis for a border adjustment. The highest additional costs will be faced by the EU producer furthest away from the target values. The less the EU steel industry on averageapproaches the emission targets, the higher on average the CO2 costs of production would be and the higher the levy on imports would be. In this way, there would be no pressure to change, and the ecological incentive effect would be largely pulverised. Steel would simply become more expensive at the expense of steel processing companies.

In addition, it has to be asked how and by whom the real additional costs are to be determined neutrally. These depend on factors such as the specific CO2 emissions per tonne of steel, the production volume and the CO2 price. This means that a wiede range between individual plants is just as pre-programmed as strong fluctuations over time. Should even the "dirtiest" EU plants benefit from a border adjustment? How often and on what basis should the border adjustment be adjusted? What happens if EU steel production falls and CO2 emissions and costs fall? Should only direct costs from CO2 trading or also indirect costs, for example from higher electricity prices, be taken into account? Will the European industry's discharges, resulting from special rules on certificate allocation and public funding of research programs for new technologies, be offset?

Individual CO2 emissions as a basis realistic?

If at all, border adjustment would not have to be based on cost differences, but on CO2 emissions. The further away the real emissions are from the EU target values, the greater the additional financial burden would have to be, regardless of the origin of the steel. This could be justified from an ecological perspective and would avoid discrimination against foreign suppliers. Whether it is politically clever and enforceable for the EU to impose its own climate targets on the whole world is another question. But even with this concept it would be crucial to refrain from average considerations. Rather, the emissions of each plant that wants to supply to the EU would have to be determined and then specifically compared with specific values of the same asset class in the EU.

This is because the average CO2 emissions of a country's steel industry say nothing about the CO2 emissions of a tonne of steel in a specific case. The CO2 emissions resulting from steel production in a country are primarily determined by the production share of EAF mills (low specific CO2 emissions) and integrated BOF mills (high specific CO2 emissions). In addition to the production route, individual factors such as age and modernity of the plants and the raw material mix  also play an important role. Despite a possibly lower average emission value of the EU, steel from countries with a higher average emission value can still emit less CO2 than comparable steel from the EU.  It is by no means the case that steel produced in the EU is always cleaner than imported steel. In many countries new, efficient steelworks have been built up in recent years by using modern European plant technology. These mills need not shy away from comparisons with older EU plants.

It would therefore be necessary to use an elaborate process to compare the CO2 emissions of each plant or at least of each manufacturer. It is doubtful whether the necessary operationaldata f of worldwide steelworks can be objectively procured and compared. It is therefore unlikely that such a concept, which is really oriented towards climate protection goals, will ever become reality.

Generalization entails dangers for steel processors

The great danger for steel processors in the EU is that "climate protection" will be used as a pretext to ward off unwelcome competition. In the public debate surrounding the "EU safeguard measures", the steel industry has increasingly succeeded in presenting imports as negative, harmful and worth fighting. Parts of the press and politics have adopted this anti-competitive attitude without reflection. This trend could become even stronger in the course of the discussion about a CO2 border levy. Attempts can already be seen to present the steel produced in the EU as "green" and the imported steel as "dirty". The recently increased price for CO2 certificates within the EU, which many steel companies are still not paying at all, is suddenly identified alongside imports as the cause of every evil. Although this has nothing to do with reality, it is convenient and could well fall on fertile political ground.

As a result, steel imports could end up being subject to an indiscriminately high "climate import tax", for which certainly a more euphonious term can be found. Competition would be eliminated and steel prices in the EU would rise. This would shift the problem of international competitiveness to the steel processing industry, which would then be the fool. Moreover, it is highly controversial whether an ecologically motivated import levy is compatible with the rules of the World Trade Organization (WTO). It is highly likely that the unilateral introduction of such an instrument by the EU would accelerate the wave of protectionism worldwide. The export-oriented German industry will need this least of all. Steel processors must therefore be very vigilant in the political discussions that are beginning right now.

The article was written by Andreas Schneider, StahlmarktConsult, steel market consultant from Leverkusen.

more information

Photo: StahlmarktConsult

The guest commentary reflects the opinion of the author, not necessarily that of marketSTEEL's editorial staff.