The European Union’s pending implementation of the world’s first large-scale climate and trade policy will benefit the U.S. and expand production in important American industries while potentially boosting U.S. exports to the European Union. Our analysis shows why this policy would actually be a boon for American manufacturers as opposed to a trade barrier, even though the Trump administration’s trade representative has already included the new policy on its list of “Foreign trade barriers.”
The EU is aiming to slash its emissions 90 percent by 2040 — one of the more ambitious emissions reduction pathways in the world — and has legally committed to reach climate neutrality by 2050. To get there, it has implemented the European Green Deal, which includes tightening its climate regulations and carbon pricing system known as the Emissions Trading System.
However, if costs go up for European firms as a result of this regulatory upgrade, it would put the EU at a competitive disadvantage when trading with countries that do not have similarly stringent policies in place. Envisaging this situation, the EU will be implementing a Carbon Border Adjustment Mechanism.
While technically complex, the fundamental idea of the CBAM is simple: it imposes the carbon price paid by domestic producers on the imports of the same goods, irrespective of where they are produced, into Europe. By charging the carbon emissions embedded in the goods being imported into Europe, the system will ensure the application of the same carbon price to both domestic products and imported products, thus reducing the risk of industrial production and their associated carbon emissions to countries that do not have similarly stringent decarbonization policies in place. In effect, the adjustment counters a self-imposed disadvantage for European production.
CBAM is expected to take effect in 2026, covering a first set of carbon-intensive goods — cement, electricity, fertilizers, iron and steel, aluminum and hydrogen — that are included in the EU’s Emissions Trading System.
The U.S. has cited various concerns over the last few years about the potential repercussions of CBAM on the exports of steel and aluminum to Europe. But CBAM actually represents a good deal for the U.S., enabling its steel and aluminum exporters to increase their market share in Europe.
Why? Because the U.S. has lower emission intensities compared to those of other major exporters to Europe, due to more advanced and cleaner steel and aluminum processes.
The U.S. uses more electric, rather than coal-based, production processes, which brings down emissions, and U.S. industries benefit from abundant low-cost natural gas, which also creates a competitive and emissions advantage over such countries as China, India and South Africa, major exporters to the EU.
China’s steel production is around three times more carbon-intensive than American steel, while Indian steel is more than 50 percent more carbon-intensive on average, when accounting for the carbon emissions associated with the electric power used in steel production. For aluminum — an equally power-hungry manufacturing process — producers in coal-abundant South Africa likewise tend to emit more than six times the carbon for every ton produced.
Because of their lower carbon intensity, this means that the Carbon Border Adjustment Mechanism would give an advantage to U.S. steel and aluminum exporters to Europe. U.S. producers would pay lower carbon costs than producers from most other countries. The implementation of CBAM is therefore in the self-interest of the United States, as its comparatively clean manufacturers would take European market share away from dirtier producers.
Catherine Wolfram is a professor at the MIT Sloan School of Management; Kimberly Clausing is a professor at UCLA School of Law; Milan Elkerbout is a fellow at Resources for the Future; and Simone Tagliapietra is a senior fellow at Bruegel.
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