The climate crisis is the most important long-term challenge facing policymakers around the world. Addressing it will require deep economic transformations within and across national borders, and a mix of ambition and pragmatism about what nations’ individual political and legal constraints will permit. So far, existing approaches have failed to produce the necessary levels of emissions reduction. President Biden’s election, however, offers a chance for a new beginning. This working paper reviews the intersection of climate and trade policy, and in particular the divergent paths that conversations on decarbonization are taking in the US and European Union (EU). While the EU has made carbon pricing central to its decarbonization policy, the Biden administration has promised a new approach that deploys regulatory tools (standards) and industrial policy (investments). Both the US and the EU recognize the need to support their domestic decarbonization policies with a trade policy that prevents carbon leakage and reduces the embedded carbon consumed domestically via international trade. But the divergence in domestic approaches could put the two trading partners on an unnecessary collision course where trade is concerned. We argue that the US, the EU, and like-minded countries should harvest an early win in the fight against the climate crisis by imposing a common external tariff on carbon-intensive steel imports, while — as the Paris Agreement contemplates — allowing each other flexibility to pursue a range of decarbonization strategies domestically. Over time, this sectoral strategy — common external trade barriers on carbon-intensive imports combined with flexibility to choose among a range of domestic decarbonization measures — can and should be expanded to other industries. The steel industry is the ideal sector in which to begin transatlantic cooperation on trade and climate. It is one of the largest emitters of carbon in the manufacturing sector, is on track to consume 50 percent of available carbon budgets by 2050, is highly exposed to trade, and is already subject to extensive policy controls over which the US and EU are in negotiations. These elements make it an excellent candidate for an early demonstration both of how climate cooperation could be achieved later in other tradable industries and how trade policy can advance climate objectives. Our primary point of entry into this conversation is through governance and trade law questions, including at the World Trade Organization (WTO). Our analysis foregrounds legal and political constraints. In so doing, our hope is to offer a structure that sets activists, policymakers, economists, engineers, and others up for demonstrable success. And by converting a climate-blocking industry into a climate-supporting industry, the proposal alters climate politics and makes future climate supporting action more likely
