A multilateral approach to climate and trade policy could revolutionize efforts to decarbonize heavy industries and counter non market overcapacity

In the fight against climate change, multilateralism remains paramount. The world cannot let the arguments of the day (in this case, the American president’s fixation on unilateral tariffs) stand in the way of concrete, cooperative action, particularly on global challenges like climate change and non market overcapacity. Coordinated industrial policy investments and international trade reforms must go hand-in-hand for the world to limit the worst effects of climatic change and to create thriving industries that bring prosperity to workers and their families.

The reality is that while each country’s Nationally Determined Contribution is important, taken together they have not yet added up to the emissions reductions necessary to meet the world’s climate targets, and their voluntary nature means that they will likely soon reach a point of diminishing returns. More will be required; and this means developing new approaches to multilateralism, particularly on issues like trade that by definition include more than one market. Fortunately, as the era of “race to the bottom” global commerce ends, there is an opportunity to rethink how trade and industrial policy can reset production patterns, encourage climate-friendlier manufacturing, and create a fairer, more equitable environment for workers around the world.

What is needed are state investments in heavy industries to facilitate both growth and meaningful decarbonization, as well as a global trade architecture that rewards and justifies those investments. Governments must invest in their domestic industrial bases to help deploy advanced, sustainable production techniques. But, trade rules need to provide better export opportunities to firms that produce with fewer emissions, operate sustainable supply chains, and meet the highest standards for workers’ rights. Such a system would supercharge each governments’ domestic climate agenda by creating fairer, more climate-aligned market dynamics to incentivize private companies to act in more sustainable ways.

The steel and aluminum industries could provide a useful demonstration of what multilateral, climate-aligned economic cooperation might entail. Together, these industries account for roughly eleven percent of global CO₂ emissions, and since both are highly trade exposed, their firms and workers have felt the brunt of nonmarket, distortionary, and carbon-intensive export practices of others. There is thus an economic security imperative to upgrade and expand existing steel and aluminum facilities in each of our countries, as well as a dire climate need to ensure that those facilities produce metals with a much lower emissions profile.

Some countries have sought to restrict high carbon exports of steel and aluminum (as well as other carbon-intensive industries) through the use of unilateral carbon border adjustment mechanism (CBAM) - a policy that assigns an import tariff based on the emissions profile of a good when it shows up at the border. The fewer emissions that it took to produce and transport the product, the lower the tariff, and the larger the market advantage for the producer. The European Union (EU) has taken this approach with its CBAM, which took effect in 2023 and is focused initially on aluminium, cement, electricity, fertilisers, hydrogen and iron and steel. Other governments have begun to consider similar CBAMs, usually focused on the same types of heavy, trade-exposed industries. CBAMs, when designed and implemented well, can be an important part of addressing the climate challenge. But CBAMs on their own do nothing to decarbonize domestic producers that do not export - nor do they address the market overcapacity that continues to limit the competitiveness of high standard, low-carbon producers in the global metals trade.

A different, potentially additive approach would be to work collaboratively with ambitious partners and allies that share the same desire to decarbonize heavy industries, reward high standard firms, counter non-market practices, and coordinate domestic investments. Rather than a hodgepodge of different CBAMs, this would mean that steel and aluminum producers would have a clearer market incentive to invest in decarbonization, since doing so would provide access to a much larger export market. It would also provide governments an opportunity to reward their more sustainable exporters with new business opportunities, while securing new partners with whom to address overcapacity, engage in joint R&D, and collaborate on broad climate action. And it would mean that rather than competing with one another, each partner countries’ domestic investments would be additive to a larger cross-border effort to address climate change and create sustainable industries.

Indeed, because so many markets face similar challenges - almost all of which are best dealt with in a collaborative, coordinated way - such an agreement should be open to any willing country able to make substantial, collaborative progress on industrial decarbonization and global overcapacity. A multilateral climate-aligned trade and investment agreement, for example, could include:

1) Ambitious preconditions that members meet before their exporters can benefit from the agreement’s best trade terms - things like high labor and human rights standards, a coordinated strategy to address market overcapacity, a commitment to economy-wide decarbonization, and a complimentary domestic investment strategy;

2) A tiered structure that eliminates tariffs on low-carbon steel and aluminum imported from partners, a larger duty on high carbon imports from partner markets; and even higher duties on imports from markets outside the agreement (and potentially a ban on the dirtiest imports); and

3) Clear benchmarks to determine what counts as “low-carbon” (and thus worthy of a lower tariff) that grow more demanding over time.

A multilateral pact could also put into practice a more collaborative approach to economic cooperation between likeminded governments, steering the future of trade policy away from a litigious negotiation of rules to limit domestic action and towards the development of a common playbook to improve the sustainability of domestic industries, protect local producers from unfair import competition, and bring prosperity to workers and their communities. In addition to carbon-based tariffs, each partner should thus pledge to upgrade and decarbonize its industrial base, amplifying corresponding actions made by other governments in support of their industries.

For countries like Japan and South Korea, common carbon-based tariffs across a range of different markets would create clear signposts to guide industrial policy decisions going forward. Rather than reacting only to the European Union’s CBAM, for example, Japanese and Korean steel producers that decarbonize would have a larger and more uniform market in which to export low-carbon steel; and a competitive edge against cheaper, dirtier steel producers. Since steel and aluminum production accounts for almost 40% of Korea’s industrial greenhouse gas emissions and steel alone accounts for nearly 50 percent of Japan’s, such investments would serve two complementary purposes: they would maintain the competitiveness of key domestic industries, and help both countries achieve their climate goals.

In Australia, which holds the world’s largest reserve of iron ore (the primary raw material for steel production), a multilateral approach that advantages low-carbon metals would ensure that large state investments would be backstopped by market dynamics that favor stronger demand for green aluminium and steel. Australia's new Green Iron Investment Fund and green aluminium production credit, for example, are part of over AUD $5 billion in public investments to boost green metals production, which is important in its own right and part of Australia’s broader industrial policy strategy. But given the cost premium that currently exists for green metals, the dynamics and incentive structures of Australia’s export markets will be critical in determining the long-term viability of these investments.

In the United Kingdom, a multilateral approach would build back confidence in domestic steel production and reinforce actions taken by the UK government to support British Steel. The UK has proposed its own CBAM (coming into force early 2027) in an effort to level the playing field for carbon prices of overseas goods versus those produced domestically, and to prevent carbon leakage. Yet the UK steel industry - alongside other heavy carbon products - is also challenged by high energy prices and recent tariff impositions from its fourth largest export destination. A multilateral pact would not only strengthen investor confidence but also build resilience into the political economy of decarbonising heavy industry.

Some may question how such a paradigm shift in global trade policy would affect developing countries. We believe that any multilateral carbon-based trade agreement must account for the fact that many developing countries face immediate threats from climate change and could face an onslaught of subsidized dirty imports, particularly if the market for dirtier imports dwindles. While there are many ways to do this well, three ideas deserve particular attention. First, a portion of the proceeds raised through the tariff on higher carbon metals could be used to fund green industrial development and decarbonization projects in developing markets that have agreed to the arrangement - and thus have taken on commitments to keep out dirty imports. Second, there could be a phase-in period offered to developing countries that do produce steel and aluminum, allowing them more time to improve the carbon efficiency of their production, or perhaps a guaranteed market for green metals produced in developing countries. And third, a coordinated development finance strategy could be included to support  projects in developing country partners that create a new, less carbon-intensive supplier base for the global metals industry

In 2021, the United States and the European Union began negotiations over this sort of collaborative approach to climate-aligned trade, albeit without the collaborative investment approach a future multilateral agreement should include. The so-called Global Arrangement on Sustainable Steel and Aluminum would have rewarded lower carbon producers with preferential market access and, importantly, committed both sides to joint actions aimed at protecting local steel and aluminum producers from highly subsidized import competition. Those talks failed to produce a deal, but the idea is too good to let an initial setback stand in the way of meaningful progress on issues as important as industrial decarbonization and overcapacity.

No one should be pollyannaish about the difficulty of negotiating such an innovative, groundbreaking trade deal. Negotiating a multilateral agreement of any kind is difficult. Every country has its own constraints, its own domestic political situation, and its own unique constituencies. Questions about carbon accounting, tariff rates, exemptions, existing trade remedies will all need to be answered - and domestic investments coordinated. Each potential participant will also have its own unique legal authorities and way of operationalizing its commitments. That is OK; it's the way a multilateral agreement amongst equal partners should work. In fact, a sectoral trade and investment agreement that demonstrates that a coalition of likeminded and ambitious countries can work collaboratively together to address shared challenges like climate change and non-market competition would provide an important counterpoint to the American president’s blunt, often counterproductive unilateralism.

Some may question the World Trade Organization (WTO) compatibility of a club-like agreement that preferences imports on the basis of carbon intensity.  Such concerns are likewise unwarranted. WTO rules contain several exceptions for environmental protection, as well as public health and national security. Given that climate change impacts all three and WTO rules allow for international commodities agreements, which a multilateral sectoral arrangement on steel and aluminum trade would arguably be, an agreement like the one discussed here would be entirely consistent international obligations.

The accelerating effects of climate change make clear that every tool in the arsenal must be deployed to address it. Trade should be one of those tools. A carbon-based trade and investment agreement, particularly for heavy industries like steel and aluminum, would not only reorient markets to the advantage of higher standard, more sustainable producers, it would also create the conditions to amplify domestic climate actions and industrial strategies. Such an agreement should not mandate a universal decarbonization pathway for all to follow, but rather allow each country to pursue a domestic strategy based on its unique needs, aspirations, and constraints. It is the sort of climate-aligned, multilateral trade strategy needed to create a fairer, more sustainable future for our countries and the world.

Megan Corton Scott is the deputy director of the Labour Climate and Environment Forum (LCEF)

Ryan Mulholland is a senior fellow at the Center for American Progress

Mike Willliams is a senior fellow at the Center for American Progress