so Constraint 2 is not met. The policy also is consistent with WTO rules; no burdens are placed on foreign imports and MFN and national treatment rules are not violated so Constraint 3 is satisfied. The most important difficulty comes in Constraint 1.a concerning “buy-in” from domestic firms. The less burdensome impact on foreigners means that domestic steel companies will complain, i.e. raise the issue of competiveness to officials.

Table 4 contains a summary of this and other scenarios in terms of Constraints 1-4.

# **Scenario 2:  Firm-specific Border Tax**

Under Scenario 2, the U.S. government imposes a border tax of $25/tonne of CO2 emissions to “offset” the fact that Chinese and Brazilian governments have imposed no such burdens. The impact on the unit revenue now would vary dramatically across countries and across technology types. Among all BOF producers across regions, U.S. firms would receive the highest revenue ($490) while Brazilian and Chinese firms would receive $478 and $443, respectively. Among EAF users, there is much less variation though Chinese firms are once again most affected by pricing carbon in both scenarios. The carbon efficiency of Brazilian EAF firms yields $533 per ton of steel coil, which gives them the highest net unit revenue of all firm types considered in Scenario 2.

If one assumes for simplicity that the foreigners continue to sell at an unchanging domestic price of $540 and therefore fully bear the burden of the tax, this is equivalent to an 18 percent tax on Chinese BOF steel exports (compared to 9 percent for the North American equivalents).<sup>20</sup> For the Chinese EAF producer, the tax is equal to only 4 percent (compared to 3 percent for U.S. firms using EAF). For Brazilian producers, this rate is much lower than their Chinese counterparts at 11 percent (BOF) and 2 percent (EAF). Notably, this means that Brazilian EAF steel producers would be taxed by a lower amount than their U.S. counterparts according to OECD carbon footprint estimates.

Imposing differentiated border taxes on imported steel does satisfy some of the policy constraints. It likely would result in support from domestic firms (Constraint 1a). It also would provide incentives for foreign firms to use the less intensive carbon technique (Constraints 2). It would plausibly be consistent with WTO national treatment rules (individual domestic and foreign firms are both charged according to their carbon emissions). And since the U.S. therefore might win a WTO dispute, foreign firms may be loath to ask their government for a formal complaint at the dispute body.

The real problem rests with Constraint 4. Unfortunately, one cannot look at the steel coil and know if it is produced by one technique or the other.<sup>21</sup> One cannot perform tests on the steel itself since the CO2 is not contained in the steel but instead is emitted in the production process. Similar problems occur for requiring importers to buy emission permits as envisioned under various U.S. legislative proposals. Without cooperation by the Chinese and Brazilian governments and their respective industries, such a program would be extremely difficult to administer. In short, this brings up all of the informational issues addressed above.

> 20 Naturally, the tax incidence in practice would not fully be born by exporters but the magnitude is still instructive.

> 21 There are certain steel types that currently cannot be produced economically using EAF processes (e.g. exterior grade auto steel) because of the impurities present in recycled steel.  For many other products, including flat rolled coil used in many situations, EAF and BOF processes could both be used.  Moreover, the range of items where EAF produced steel is used has expanded dramatically in recent years;  a few decades ago, minimills produced only for the low-end long product market such as rebar.

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