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On July 17, GMF hosted an all-morning workshop on Capitol Hill entitled "Cap-and-Trade,Competitiveness, and International Trade: The Implications of the Latest Data and Legislative Developments."  The workshop, organized by GMF with the support of the Transatlantic Climate Bridge initiative and the Nicholas Institute for Environmental Policy Solutions at Duke University, focused on the costs and benefits of a range of policy options that could be included in a U.S. emissions trading system to address concerns about potential negative impacts on the competitiveness of energy-intensive, trade-exposed U.S. industries. The event drew over 50 senior Congressional and administration staff, including key players in the U.S. cap-and-trade debate from the White House, the U.S. Department of State, the Treasury Department, Congress, and the Congressional Budget Office.

Background

Following the passage of the historic Waxman-Markey Bill in the U.S. House of Representatives at the end of June, cap-and-trade is now the focus of the U.S. Senate where lawmakers are beginning to consider options to address U.S. industry concerns about impacts on their competitiveness. The workshop explored the implications of these options for U.S. industries, the international climate negotiations, and U.S. compliance with international trade rules. It featured three panels.

Panel I: What does the data tell us about climate policy and industrial competitiveness?

The first panel, moderated by Tim Profeta, director of the Nicholas Institute, addressed the empirical evidence to date for the vulnerability of U.S. industry to competitiveness impacts under carbon regulation. Andrea Bassi of the Millennium Institute presented the key findings from a recent report he co-authored (with Joel Yudken of High Road Strategies) on the impact of climate policy on energy-intensive manufacturing in the United States. He predicted that higher energy prices as a result of CO2 regulation would lead to modest to high impacts on production costs, profits and market shares of U.S. heavy industry. His projections were based on a worst-case scenario that assumed no massive investment in technology and no equivalent regulation of carbon in foreign countries, and he emphasized that the government can play a key role in facilitating a timely transition from "brown" to "green" practices, which would significantly decrease the costs to firms.

Carolyn Fischer, of Resources for the Future (RFF), presented some of the latest RFF modeling of the competitiveness impacts of cap-and-trade on energy-intensive industry. These studies found that carbon prices at the level of recent proposals would reduce domestic production of energy-intensive goods by between 1 percent and 4 percent in the most heavily affected manufacturing sectors. However, a sizeable share of this impact was due to reduced consumption—that is, conservation and switching to greener substitutes—rather than lost market share to foreign competitors. She also noted that output-based rebates (as foreseen in the Waxman-Markey Bill) would greatly reduce the undesired competitiveness effects that lead to carbon leakage, but also dampen some of the desired changes in domestic consumption.

Gary Hufbauer, of the Peterson Institute for International Economics, found that a cap and trade program could reduce industry production by 1 percent, noting that this could represent a big hit for individual industries. One of the key issues drawn out by this panel was the need for a policy that strikes a balance between minimizing dramatic changes in production costs for industries, while still maintaining incentives for firms to invest in mitigation through new technologies and more efficient processes and inputs. Additionally, while many of the panelists asserted that we have enough data and studies on potential competitiveness impacts to decide on the appropriate policy response, Congressional staff in the audience called on the administration for more data and analysis to allow them to respond to the concerns of individual sectors.

Panel II: Current legislative proposals on trade and competitiveness

The second panel, moderated by Cathleen Kelly, director of GMF's Climate & Energy Program, focused on the emerging U.S. legislation. Tim Profeta explained the key competitiveness-related provisions in the Waxman-Markey bill. Using a "Goldilocks" analogy, he discussed efforts by lawmakers to prevent the competitiveness measures from being "too hot" in their impact by raising costs for U.S. heavy industry. On the other hand, he pointed out that there's a danger that the legislation will end up being "too cold" or too heavy-handed against importers from countries without comparable climate regulations and could damage U.S. long-term competitiveness by failing to incentivize the development of new clean technologies.

Michael Grubb, of The Carbon Trust & Climate Strategies, presented the findings of his forthcoming GMF policy paper, identifying ten insights based on the EU's experience with its own Emissions Trading System. He emphasized that competitiveness impacts are restricted to a half-dozen industries (aluminum, paper, steel etc.) and cautioned the need for targeted policy responses. He also noted that EU and US researchers seem most divided about the effectiveness and efficiency of output-based rebates (as foreseen in Waxman-Markey, but not used in the EU ETS): they can help solve the competitiveness problem but reduce incentives to cut CO2 emissions through the economic supply chain. Assessments differ widely about the severity of the efficiency loss. This led to a lively debate between the audience and panel about the tradeoffs required under any approach to allocating emission allowances for free.

Panel III: Competitiveness, climate policy, and the international trading system

The final panel, moderated by Sean Mulvaney, director of GMF's Economic Policy Program, focused on the linkages between U.S. climate policy and the international trading system. Gabrielle Marceau, of the World Trade Organization (WTO), emphasized that both the WTO treaty and its case law allow for governments to impose barriers to trade in order to protect the health of their environment and citizens, but that the law generally does not allow discrimination between products based only on differences in production methods, which would be the case for most CO2 trade-related laws and regulations. Therefore, she emphasized that the justification for any climate-related trade measure would have to be environmental and respect the requirements of the Article XX exceptions. Marceau said that the ideal outcome was an international agreement on how to tackle trade and climate change and that in general the WTO treaty provides legal weight to norms and standards developed in other international expert forums.

Jennifer Haverkamp, of the Environmental Defense Fund, noted that any climate legislation would have to include provisions addressing emissions leakage and competitiveness for purely political reasons, as any other bill would not be passed by Congress, and observed that the Waxman-Markey Bill includes provisions requiring any trade-related measures to be WTO-compliant. She suggested that one positive effect of the high profile of the trade-related measures in Waxman-Markey was that it sent a clear signal prior to the United Nations Climate Change Conference 2009 (COP15) that the U.S. Congress is serious about wanting all major emitters, including those in the developing world, to adopt serious domestic policies to reduce emissions. She also noted that countries could agree as part of the United Nations Framework Convention on Climate Change (UNFCCC) negotiations to include border adjustment provisions in a new climate treaty, and that countries seeking international recognition of domestic trade provisions could pursue that through either the UN negotiations or the WTO.

Warren Maruyama, former general counsel of the Office of the U.S. Trade Representative (2007-2009) and now with Hogan & Hartson, argued that border measures under Waxman-Markey would raise serious WTO concerns and would likely lead to major trade frictions with key developing countries, e.g. China and India. He also noted that while the free emission rebate allowances have gotten less attention, they appear to represent a WTO-inconsistent export subsidy, since Waxman-Markey's formula for determining trade-intensity (one determinant of the allocation of free allowances) includes an industry's level of exports. Maruyama argued that the only long-term fix is to negotiate a multilateral agreement on climate change, which includes commitments by the major developing countries, such as China and India, to take on binding emissions targets, and multilaterally-agreed provisions relating to the use of border carbon measures.  The only other way to finesse concerns about the impact of cap-and-trade on U.S. industrial competitiveness would be a carbon or energy tax, since under WTO rules the U.S. could impose a border tax on imports and rebate the tax on U.S. exports.