Industrial Decarbonization and Competitiveness: Building a Performance Alliance

Reducing greenhouse gas (GHG) emissions from carbon-intensive industrial sectors like steel, aluminum, cement, and chemicals will be aided by the introduction of new low- and zero-carbon production process technologies. While the cost of new technologies will decline over time, in the short run they will likely cost more than more carbon-intensive, incumbent technologies. When the products from these sectors are exchanged on highly competitive international markets, decarbonization efforts could therefore lead to lost competitive advantage vis-à-vis nations with weaker environmental policies.A recent issue brief, “Industrial Decarbonization and Competitiveness: A Domestic Benchmark Approach” (hereafter, “Benchmark”), introduced an idea for a domestic emissions reduction policy that targets the US industrial sector, paired with a border adjustment tariff. The Clean Competition Act recently introduced by Senator Sheldon Whitehouse (D-RI) builds on the paired policy structure. As US industry continues to decarbonize, these paired policies would protect domestic producers from competitive imports, maintain competitiveness in export markets, and provide incentives for trading partners to increase environmental ambition.In this issue brief, we introduce the related idea of a “performance alliance” in which a group of countries align industrial decarbonization efforts and trade policies to maintain competitiveness, limit leakage of emissions, and provide incentives for others to pursue ambitious decarbonization policies. This idea can be traced to work on “climate clubs,” initially popularized by William Nordhaus. The most recent reference to a climate club can be found in the G7 Leaders Communiqué, released May 20, 2022. Catalyzing leadership, action, and inclusivity is a key element of the G7 grouping and suggests the idea of an alliance more than the notion of exclusivity and protectionism suggested by a club.The international policy proposed in the Clean Competition Act and the EU carbon border adjustment mechanism (CBAM) proposal point to implicit climate clubs. In the EU case, a nation exporting primary commodities to the European Union could be a member of the club if that nation imposes a carbon price on its domestic production. That carbon price for the nation’s primary commodities would have to be equal to or greater in magnitude to the price charged within the European Union. In such a case the exporting nation does not face an EU-imposed border fee. In the case of the Clean Competition Act, a nation exporting primary commodities to the United States could be a member of the club if the GHG intensity of its domestic primary commodity production is less than the US benchmark intensity. In such a case the exporting nation does not face a US-imposed border fee. If one were to consider the Clean Competition Act and the EU CBAM as forms of climate clubs, true members of each club might further align their own border measures to match the European Union and the United States.Admission to such an EU club requires the adoption of a common policy to address emissions from the industrial sector; that policy is a specific and explicit carbon price. Admission to such a US club requires environmental performance on a par with the United States, where that performance is measured in terms of GHG intensity of production. We might think of the EU approach as a policy club, while thinking of the US as a performance club.In the remainder of this issue brief we elaborate on the idea of an alliance, rather than a “club,” where members work to drive industrial sector decarbonization—this would happen through an alignment of efforts and advanced technology that levels the playing field of economic competition and negates the need for border measures within the alliance. Border measures would remain a component of this approach for countries that do not choose to increase their ambition and join the alliance. The border measures need not be harmonized among the alliance members. This reduces the protectionist feel of the alliance.