HIGHLIGHTS

•  Although the carbon border tax proposed by the U.S. Congress in July may be delayed from the original 2024 proposal, it is likely to be implemented.

•  The steel industry will be a major target, and the U.S. market margin rate could fall by more than 4% depending on carbon prices in the U.S.

•  As soon as the EU CBAM is implemented in earnest in 2026, the EU market margin rate is expected to drop by an additional 24%.

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Carbon border tax officially proposed by the U.S. Congress

•  On July 19, the U.S. Democratic Party proposed the "FAIR (Fair, Affordable, Innovative, and Resilient) Transition and Composition Act," a policy that imposes carbon taxes on imports such as fossil fuels, aluminum, steel, and cement from 2024.

- As part of the $3.5 trillion stimulus plan agreed to by the Democratic Party, this measure aims to raise funds for the country's economy in addition to pressuring China and other trading partners.

•  The bill faces two obstacles, both internal and external. On the domestic front, it's about passing by Congress, and on the international front, it's about complying with WTO rules.

-  The bill is expected to face resistance in Congress. The Republican Party is opposed to the stimulus plan due to inflation fears and tax burdens. However, the Act can still be passed with a simple majority of votes without Republican support if the issue is handled as a "budget reconciliation." 

-  To comply with WTO rules, carbon prices paid by producers in the United States should be clearly defined. However, there is no federal carbon tax. → Under the Act, the Treasury will be obligated to calculate the environmental costs borne by producers in the United States annually. Whether this method will be consistent with the WTO is debatable.

•  It is expected that there will be procedural difficulties. However, given that President Biden's campaign pledge was that climate and environmental measures should be tied to tariff rates and that the U.S. and the EU are already discussing carbon taxes, the U.S.' introduction of carbon borders will be unlikely to fail. 

- Although it may arrive later than 2024, as the Act proposed, it is likely to be introduced following an amendment.

Korea emits 1.5 times more carbon from steel and aluminum than does the U.S.

•  In terms of only the items subject to the carbon border tax, Korea's steel and aluminum unit emissions are 53-54% higher than those of the United States, and 21% lower in petroleum products(Figures 1-3).

•  In particular, for steel, Korea and the US have a gap in emissions of 0.51 tCO₂, which is greater than that of the EU.

- This is because the U.S. electric furnace process has the world's highest percentage.The U.S. produces 66% of its steel through electric furnaces, while Korea produces 33%.

•  In the case of aluminum,aluminum imported by Korea emits 11.4 tCO2/ton, which is already higher than the aluminum emissions in the United States, which is 8.94 tCO2/ton. The reason for this is that major sources of import such as Australia and India have high power emission factors.

•  Korea is highly competitive only in upstream petroleum product emissions, which are 29% lower than those of the United States. → In other words, the carbon border tax of petroleum products will be close to 0%.

- Korea, which mainly imports crude oil from OPEC, has better upstream emissions than the United States, which imports crude oil from Canada and South America.

•  Except for fossil fuel, which is positioned high in carbon intensity, Korea’s steel and aluminum exports are subject to carbon border taxes. Exports of steel and aluminum to the U.S. between 2019 and 2020 amounted to 3-4 trillion won, accounting for 3-5% of exports to the U.S

The issue is that it is difficult to predict how much US carbon prices will be 

•  A major concern with the U.S. carbon border tax is how the government will set carbon prices.

•  The FAIR Act stipulates that the Ministry of Finance shall calculate carbon border tax annually based on the "environmental cost" per emission.

 - The term "environmental cost" is defined as the average cost borne by companies in the U. S. to comply with the laws and policies introduced to reduce greenhouse gases. The logic is that carbon prices will be calculated in reference to costs incurred in complying with the Clean Air Act, the automobile emission rating system, and the emission trading system.

 - This may be the most reasonable approach for the U.S. where carbon prices do not exist at federal level. 

 - Although there are no official figures calculated by the government, the cost estimated by the Natural Resources Defense Council (NRDC) in 2020 was around $9.4/tCO₂

•  Carbon allowance price, which can be a reference to carbon prices, is $17/tCO₂ in California, while they are $7.0-7.6/tCO₂ in Massachusetts and the RGGI (“Regional Greenhouse Gas Initiative,” which is a power sector emission trading system involving 11 U.S. Eastern states).

 -  However, it is difficult to say that Massachusetts and RGGI reflect the industry's carbon costs because they do not obligate companies to engage in the emission trading system.

•  The only "social cost" proposed by the U.S. government for carbon was $51/tCO₂.However, since this figure represents damage caused by greenhouse gases to society such as abnormal weather, health, and agricultural productivity, it differs from the actual cost paid by industries in the United States

•  For the items defined by the FAIR Act, $9.4 is the most consistent reference, which is the cost to NRDC of complying with greenhouse gas regulations, but that number may not be an official estimate from the government.

•  If aggressive action is taken by the Biden administration on climate change and carbon's social cost standards are strengthened early next year, compliance costs in the U.S. will likely increase even further than they currently are.

An analysis on the impact of the U.S. carbon border tax on steel exports

Major assumption

① Considering the uncertain outlook for carbon prices in the United States, carbon prices are assumed to be $10, $20, and $30.

② The carbon border tax imposed is borne by the exporter.

③ The Korean steel industry is not exempt from carbon border taxes due to the free allocation of emission allowances

•  When carbon prices are $10, 20, and $30/tCO2, the estimated tax amount for a ton of steel products is $15, 29, and 44 respectively, which leads to a 4-11% reduction in steel margin based on hot-rolled steel price of $383.

- Hot-rolled spread prices of $383 reflect the average price between September 2020 and August 2021 and is a record high that bounced excessively due to the resolution of COVID-19's influence. If calculatedbased on the lowest level of $241/year, the margin reduction rate expands to 6-18%.

•  However, it can be seen that the level is significantly lower compared to the EU CBAM's estimated tax amount of $90 for 2026, with the margin reduction rate of 24%.

- The wide gap in tax amounts between the EU and the US is due to the difference in carbon prices. The EU has operated the EU ETS for more than 15 years during which carbon prices were formed through the market and reached the level of national consensus.

- The United States has no consensus on carbon prices and has little experience in carbon trading, making it impossible to reach EU-level carbon prices in the short term.

Although the measure has many uncertainties, its impact on the steel industry is evident

•  Considering the uncertainty of carbon prices in the United States, it is difficult to determine the extent of damage caused by the carbon border tax, but it is immediately clear that the steel industry will suffer the most.

•  It is never a wise strategy to claim WTO violations by carbon border taxes while allowing domestic companies the ability to delay the transition to decarbonization and attempt to evade the inevitable international trends. Unfortunately, this is the stance currently taken by the Korean government and industry.

- The possibility cannot be ruled out that the US and EU will lead to WTO member states deciding on climate-related trade measures and establishing exceptions to the WTO environmental provisions. 

- Since the United States and the EU, which account for 20% of steel exports from Korea, are crucial markets to defend, active countermeasures are essential.

•  The short-term goal should be to closely monitor the direction in which the U.S. agrees on carbon prices in order to develop appropriate countermeasures, and in parallel, to encourage an accelerated decarbonization of the steel industry.

Reference

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En+Group. (2021). 『Korea's Progress toward Zero Carbon: The Transition to a Low Carbon Economy and the Role of Aluminum』

European Aluminium. (2020). Circular Aluminium Action Plan.

Hasanbeigi, A. and Springer, C. (2019). How Clean is the U.S. Steel Industry? Global Efficiency Intelligence.

Interagency Working Group on Social Cost of Greenhouse Gases, United States Government. (2021). Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates under Executive Order 13990.

Jing et al. (2018). ‘Carbon intensity of global crude oil refining and mitigation potential’ Nature Climate Change. October 2018.

Masnadi et al. (2018). ‘Global Carbon Intensity of Oil Production’ Science 361(6405). American Association for the Advancement of Science.

Ponciano, Jonathan. (2021.07.18). ‘'Hell Yeah I Would Leave': Lindsey Graham Suggests Republicans Copy Texas Democrats, Flee Washington To Block Infrastructure Vote’. Forbes. https://www.forbes.com/sites/jonathanponciano/2021/07/18/hell-yeah-i-would-leave-lindsey-graham-suggests-republicans-copy-texas-democrats-flee-washington-to-block-infrastructure-vote/?sh=8f292cf4a988

Pozzi, C. (2021.06.24). The EU Aluminium Industry at the Crossroads and the Need for an Effective Industrial Policy.Presentation.

Reuters. (2021.06.14). ‘Europe carbon prices expected to rise to 2030-industry survey’ Reuters.

The Aluminum Association. (2013). The Environmental Footprint of Semi-Finished Aluminum Products in North America.

The World Bank. (2021). Preliminary Study on the economic impact that EU CBAM could potentially impose on foreign exporters of products to the EU market.

U.S. Energy Information Administration. ‘U.S. Imports by Country of Origin’ accessed Aug. 11, 2021. https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbbl_a.htm

World Aluminium. (2018). Adddendum to the Life Cycle Inventory Data and Environmental Metrics for the Primary Aluminium Industry.