Industrial Decarbonization and Competitiveness: A Domestic Benchmark Intensity Approach

To achieve the net-zero ambitions of the Paris Agreement, emissions from the “hard-to-abate,” greenhouse gas–intensive industrial sectors (steel, aluminum, cement, and chemicals) must be reduced. The pace of current decarbonization efforts will be aided by the introduction of new low- and zero-carbon production technologies driven by government policies. In many cases, products from these sectors are exchanged on highly competitive international markets, raising concerns that domestic decarbonization policies could result in lost competitive advantage vis-à-vis nations with weaker environmental policies.To address such competitiveness concerns, decisionmakers have proposed policies to couple domestic industrial decarbonization efforts with trade policies and thereby address three goals: a) maintain domestic competitiveness against imports produced in countries with relatively weaker environmental policies, b) maintain competitiveness in export markets, and c) provide incentives for trading partners to improve their environmental performances. A prominent example of such a trade policy is a carbon border adjustment mechanism (CBAM) that applies a fee to imported goods. A proposed CBAM is under active discussion in the European Union and CBAM legislation is in the early stages of development within the US Congress. Traditionally, trade policies to address competitiveness concerns have been proposed as a layer on top of a country’s preexisting approach to decarbonizing the industrial sector. Another approach, which may be more appropriate for the current state of global climate policy, is to design an industrial decarbonization policy that natively and explicitly addresses competitiveness concerns.This issue brief outlines such an alternative approach. This policy would define a performance metric for a selected set of industrial sectors and apply a fee based on the greenhouse gas (GHG) content of produced goods in those sectors, but only to the extent the goods’ GHG content exceeds the metric. The fee would be applied equally to both foreign and domestically produced goods, maintaining a level playing field. Overall, this policy approach inherently addresses competitiveness concerns and creates incentives to reduce emissions down to the performance metric, while offering additional advantages. By starting with a performance metric close to current US industrial performance, it would primarily affect those trading partners with higher emissions and not US producers. By assessing the fee only on emissions above the performance metric, the metric would reduce potential effects on the price of regulated industrial goods compared to a traditional carbon price, thereby minimizing downstream and export disruptions.In a follow-on issue brief, we will introduce the idea of an alliance of like-minded nations working to drive decarbonization in selected industrial sectors through an alignment of comparable efforts. Such an alignment would level the playing field of economic competition and negate the need for border measures within the alliance. Border measures would continue to be imposed on countries that do not choose to meet the minimum comparable effort and join the alliance.