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Biden could seek carbon taxes with same strategy Trump used for steel, aluminum

President-elect Joe Biden could try to unilaterally impose carbon taxes on imported goods or pressure countries into climate action with the threat of carbon penalties for dirtier imports by taking advantage of a decades-old trade law made popular under President Donald Trump, according to certain legal observers and members of Biden's transition team.

While campaigning to earn the Democratic presidential nomination, Biden endorsed carbon adjustment fees or quotas from countries that fail to meet climate change obligations. The proposal was not part of clean energy plans during the general election, however.

Since winning in November, the Biden transition team has recruited policy experts that previously called for him to set carbon tariffs using Section 232 of the Trade Expansion Act of 1962. The transition team did not respond to requests for comment about whether these views were internalized by the incoming administration.

The Trump administration opened eight probes under the statute, two of which resulted in tariffs on steel and aluminum imports that formed part of a global trade war, with the U.S. and China announcing a phase-one trade deal in December 2019.

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Unlike Trump's strategy, which used the national security tariff law with little coordination regarding U.S. allies, the Biden administration would have at least one ally as the European Union is expected to propose carbon border taxes in the summer of 2021.

Biden could find a potential deal in steel and aluminum imports, for example. The EU has been spurned by tariffs instituted by Trump and is expected to target steel imports in the upcoming tax package, with a potential second phase to include the aluminum sector. U.S. sector participants such as Cleveland-based iron ore and steel producer Cleveland-Cliffs Inc. and Pittsburgh-based aluminum producer Alcoa Corp. have highlighted decarbonizing operations as a top priority going into 2021.

"We definitely think that it is worth looking at the question [of a U.S. carbon border tax]," American Iron and Steel Institute President Kevin Dempsey said in an interview. The organization supports the steel and aluminum tariffs imposed by Trump, and Dempsey said this view was communicated to staff for the transition.

Dempsey said legislation will likely be the preferred route of the Biden transition to accomplish its climate policy goals. The executive would not endorse linking existing steel and aluminum tariffs to climate action but noted the two undecided Senate seats for Georgia and said there were a number of ways to look at the situation.

Rarely used tool

Prior to Trump, the trade authority was imposed by President Ronald Reagan in 1986 on imports of machine tools. Reagan's administration negotiated trade agreements with Japan and Taiwan that were extended through 1993. The U.S. Commerce Department initiated 26 investigations under Section 232 before Trump took office, 62% of which ended in findings against executive action.

From a policy perspective, the tactic would let Biden target some of the largest contributors to global carbon dioxide emissions without seeking Congressional approval. The International Energy Agency has said the energy intensity of global steel and aluminum operations must fall annually by 2.5% and 1.5%, respectively, through 2030 to avoid an increase in global warming of 1.5 degrees C.

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Proponents of this strategy said they believe that Section 232 gives the U.S. president wide authority to regulate the import of any product that harms national and economic security.

The U.S. government won a legal challenge against whether Trump was authorized to impose the steel and aluminum tariffs, giving a Biden administration room for cover, and any trade action on climate could further benefit from previous findings by the U.S. military on the national security threat posed by climate change, they said.

The move could especially affect China as the country's global steel and aluminum markets are the largest emitters of planet-warming greenhouse gases, according to Trucost data. Biden nominated Katherine Tai, a former Chinese enforcement official at the U.S. Trade Representative, to head that office, the Biden transition team announced Dec. 10, demonstrating that relations with China could be a top priority in upcoming trade policy.

"Courts have generally given the president a lot of rope to work with under the statutes. They have not been willing to substantively review the determination the president makes with respect to what counts as national security," Vanderbilt University trade law professor Timothy Meyer said in an interview. "So if President Biden were to say, 'Look, we're going to look at whether imports pose a climate change threat and we're going to regulate them on that basis,' I would expect the courts would take the same view they took on Trump's steel and aluminum tariffs."

Meyer and Todd Tucker, a political scientist and member of Biden's transition team for the Commerce Department, argued in an Aug. 24 column that Trump had used Section 232 in a way that showed his "political adversaries how to achieve their own policy goals." Peter Harrell, a former U.S. State Department official serving on the Biden transition team for that agency, said Aug. 5 in a Foreign Policy op-ed that Trump's use of Section 232 "demonstrated a highly effective way to circumvent the legislative process."

"His use of national security laws to impose tariffs and sanctions sets a precedent of a future Democratic president to address climate change even if Congress fails to act," Harrell wrote.

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Potential consequences

Invoking the trade law could carry significant political downsides for Biden, including increased costs for U.S.-based producers downstream in the steel and aluminum supply chains, Meyer acknowledged. Separately, after years of telling Trump that he was abusing executive power through his use of Section 232, Democratic politicians would have to defend a president using the same authority to advance a policy goal that could increase the price of goods and leave Republicans seething.

"There will be a lot of complaints from Congress. There were complaints when President Trump did it. There will be complaints if President Biden does it," Meyer said. "There is a political process the administration would have to manage. But legally, it is doable."

Pursuing a carbon border tax through Section 232 could also rankle allies with fewer environmental protections. Such a move on steel or aluminum, for example, could incidentally harm close allies that could challenge the levy on the international stage, such as India, Japan or Brazil, Trucost data showed.

A border adjustment out of concert with new climate policies within U.S. borders might also violate international trade rules. Jennifer Hillman, a former World Trade Organization appellate judge, said at an Oct. 13 virtual panel that the EU effort could be legally vulnerable unless the funding accrued under the levy was allocated toward domestic environmental policy goals.

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"There's more to global trading than just our EU partners. I think they're obviously a very critical ally and a component of a broader coalition, but I do think there are others out there where perhaps those mechanisms aren't quite in place for any number of domestic reasons," said Devin Sikes, a trade attorney with D.C.-based law firm Akin Gump.

Sikes told S&P Global Market Intelligence that after being contacted with the Meyer and Tucker column, individuals within his firm's lobbying unit communicated it was the first time they had been made aware of the potential.

"I'm not saying it's not possible, but [allies are] one thing that the administration would have to consider for the very reason that Section 232 is generally seen as kind of a blunt instrument that addresses imports from across the globe," Sikes said. However, Trump has demonstrated that it is possible to carve out exceptions for friendly nations harmed by these actions, he added.

Next moves

To pursue the strategy, the Commerce Department would have to investigate whether imports of steel and aluminum produced through carbon-heavy methods put national security at risk, Sikes said. If the department found in the affirmative, Biden would decide whether to recommend action.

The president can also use findings under Section 232 investigations as leverage in negotiating trade deals without imposing new trade actions. For example, after Commerce found that auto imports put national security at risk, Trump used the finding to negotiate a skinny trade deal with Japan that reduced tariffs imposed on U.S. agriculture exports and other goods in exchange for Japanese autos avoiding potential Section 232 tariffs.

"One possibility here is that, if in fact an investigation is initiated, a President Biden could try the same approach for negotiating potential agreements with China among other countries," Sikes said.

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Trucost is a part of S&P Global Market Intelligence. Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.