Subsidies not optimal solution for clean steel, aluminum: panel

Government subsidies in the steel and aluminum industries do not represent the best approach for achieving decarbonization initiatives because they instead pose the risk of counterintuitively contributing to environmental concerns, industry representatives and observers said Feb. 24.

"We're increasingly seeing subsidies claiming to encourage better environmental practices," Julia Nielson, deputy director of trade and agriculture for the Organization for Economic Cooperation and Development, said during a panel discussion hosted by the Washington International Trade Association.

"What do we know about the design of that kind of work, and is it actually having the impact that we think? Because as we know, nobody will ever say 'this is my reelection subsidy.' There is always another reason for a subsidy."

Nielson said subsidies can have other unintended effects on the environment and emissions as production capacity increases. These impacts can be augmented or mitigated by methods of production, use of technology and raw material consumption, and these factors should be examined more closely when subsidies are involved, she added.

Alan Price, a partner and head of trade practice at law firm Wiley Rein, said the consequences of subsidies for the metals industries have best been represented in China.

"As we look at Chinese subsidies, a lot of them are cloaked in environmental terms," he said. "We just have to be mindful that you can reduce your per ton amount of pollution but add to the overall problem by constantly enlarging total capacity and having devastating price effects that undercut competitive producers."

Subsidization in China has also forced other countries to provide similar support to their steel and aluminum industries, Price said, adding that "too often industries survive or not survive based upon the levels of subsidies."

The North American aluminum industry has largely been able to lower its carbon emissions over the last 30 years with an increased emphasis on recycling while China's emissions have increased exponentially amid industry subsidization, Aluminum Association board chairman Buddy Stemple said.

"Subsidies tend to encourage extraction, production, processing and export in greenhouse gas-emitting production systems based largely on fossil fuels," he said. "Subsidies also discourage the development of energy saving and waste reducing recycling systems, which is particularly important for aluminum as it is 100% recyclable."

Stemple also serves as the CEO of downstream aluminum producer Constellium Rolled Products.

Need electrical grid improvements

The panelists discussed how recycling has been key for lowering emissions in the US steel and aluminum sectors, but Price said energy-intensive primary production will always be needed.

To promote "greener" production, Price said governments can help the industries by improving electrical grid infrastructure and funding third-party research in new decarbonization technologies, instead of offering subsidies for capacity upgrades.

"Energy dependency is a key issue towards competitiveness, and we need to get the grid cleaned up to provide adequate amounts of clean energy from reliable sources that can run 24/7," he added. "Whether you are a steel mill or aluminum smelter, you have to really run 24/7, and you can't go up and down when the sun goes up and down or the wind stops blowing."

A government focus on clean energy availability and new research can limit the risks facing metals producers as they test their own decarbonization technologies in response to market needs.

"What is not useful is governments investing in technology for the steel industry that is [standard technology], like funding conversion to electric arc furnaces and direct-reduced iron," he said, adding that this practice has been increasingly evident in Canada and Europe. "That technology already exists, and people should do it on a market basis."

Combating subsidies

Stemple said the US has been able to protect its steel and aluminum industries from foreign-subsidized capacity with effective trade enforcement and multilateral agreements with international trade partners, but more action is needed.

"We need to update the WTO [World Trade Organization] rules on industrial subsidies to discipline countries that engage in non-market-oriented practices, including massive and harmful state subsidies," he said.

Price said a carbon border adjustment mechanism would also benefit and protect the US metals industries and promote more sustainable capacity, though the approach is complex and will take time to implement correctly.