OTTAWA — Canadian governments have committed hundreds of millions for greener steel and aluminum to burnish the country’s industrial and climate credentials, but the sectors are straining against competitors from countries with weaker emissions standards.

Policymakers and producers are expecting growing demand for the alloys with lower carbon footprints, to build electric vehicles, cleaner buildings and renewable power installations for economies targeting net zero. “The world is going in one direction [which] is to green the supply chain,” Innovation Minister François-Philippe Champagne said last March. “Canada has a head start because we’ve already started to green aluminum [and] we did that with steel.”

Ottawa is helping to finance those transitions. In May 2018, the federal Strategic Innovation Fund and Quebec government each allocated $60 million to Elysis, a joint venture of multinationals Alcoa and Rio Tinto, to roll out an emissionless aluminum smelting process. Ottawa later kicked in another $20 million, and Apple now uses the material in iPhones. 

In July 2021, federal programs awarded $420 million to Algoma Steel and $400 million to ArcelorMittal Dofasco to switch their steel plants in Sault Ste. Marie, Ont. and Hamilton, respectively, to electric furnaces. Each conversion is forecast to reduce emissions by three million metric tonnes per year by 2030. (The iron and steel sector collectively accounted for about 13.5 million metric tonnes in 2021, according to data from Environment and Climate Change Canada.)

Both the aluminum and steel industries mostly sell in Canada and the U.S., where they’re competing with producers from countries that have weaker environmental requirements. U.S. rivals also don’t have to pay a carbon price. The G7 has raised concerns about “market-distorting industrial subsidies” creating “excess capacity” in both commodities.

“What we find ourselves facing is increasing competition in our markets from high-carbon imports,” said Catherine Cobden, CEO of the Canadian Steel Producers Association, citing China, India and Vietnam as major sources. Aluminium Association of Canada CEO Jean Simard said smelters here are competing with ones in India and the Middle East, neither of which has mandatory carbon pricing or trading systems like Canada’s. 

The lobby groups have called for Ottawa to address what they say are unfair trade practices costing them market share, including by considering border carbon adjustments. These are tariffs on imports from countries with low carbon prices or none at all. They’re designed to prevent so-called “carbon leakage,” in which greener operators lose out to emissions-intensive rivals, driving them to shift production to countries with looser rules. 

The adjustments “create a level playing field with competing regions that have no carbon pricing and benefit from very large subsidies to be able to compete on world markets,” said Simard. The aluminum sector’s top priority is ensuring its energy-intensive smelters maintain access to low-cost power in its base of Quebec and British Columbia. But Simard said the adjustments would help provide “license to grow” by keeping producers competitive in their main markets.

Finance Canada held consultations on adjustments between August 2021 and January 2022, but refused to disclose the results, or to say whether the government is considering implementing the measures. 

The European Union will become the first market to implement an adjustment mechanism in 2026, but the Canadian steel and aluminum sectors sell little there. So industry associations and former trade negotiators say Ottawa must coordinate any adjustment with Washington. Tariffs disrupt trade, so “it has to be a North American approach,” said Meredith Lilly, a Carleton University professor and former top federal foreign affairs advisor. Cobden agreed, saying, “We don’t want to get into a carbon trade war with the United States.” 

The sector groups also want Canada to join the U.S. and EU in negotiations on the Global Arrangement on Sustainable Steel and Aluminium. Launched in October 2021 following a trade dispute, the initiative is designed to address issues of overcapacity and carbon intensity. The two sides failed to meet their initial two-year timeline, and remain in talks. Finance Canada spokesperson Caroline Thériault said the government has been following the negotiations, and “regularly discussed” the issue with the U.S. and EU.

Government funding and policies to decarbonize industries can clash with the long-standing promotion of freer trade, noted Steve Verheul, formerly Canada’s chief trade negotiator. “If you’re forcing industries to pay much more in terms of costs to make their operations more environmentally-friendly, they then come back and ask for protection against imports that are not as environmentally-friendly,” he said.

Steel and aluminum may prove to be the canaries in the iron and bauxite mines. “We need to figure out how we can draw all these efforts to address climate change into trade policy,” said Verheul, now a fellow at the Public Policy Forum think tank and principal at advisory firm GT&Co. That’s because green industrial strategies—with their significant government incentives for emissions reduction—distort markets rather than opening them up. But Verheul said few governments are reconciling their climate and trade approaches.  

The steel and aluminum associations say their products are crucial to the energy transition and decarbonizing economies, and need Ottawa’s policy support to ensure they’re not shut out. “Everybody is on a net-zero pathway,” said Simard. “And we have one of the strategic tools to reach that goal.”