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On March 26, the German Marshall Fund, in partnership with the British Embassy, hosted a public event on Capitol Hill to discuss economic competitiveness and cap-and-trade policy. A top concern among U.S. lawmakers is that a cap-and-trade program would increase the production costs for U.S. firms in trade-sensitive, energy-intensive sectors. Some industry stakeholders argue that this would put U.S. firms at a disadvantage relative to overseas competitors, and potentially cause energy intensive industries to relocate to countries with less stringent climate regulations. This potential migration of energy intensive industries is often referred to as carbon leakage.

The event featured a panel of six speakers representing several of the key U.S. and European stakeholders in the climate debate.  Peter Zapfel, assistant to the deputy Director-General at DG Environment, European Commission; Felix Chr. Matthes, the research coordinator for energy and climate protection at the Öko-Institute for Applied Ecology; Marty Spitzer, director of legislative affairs at the Center for Clean Air Policy; Rhian Chilcott, Head of Washington, DC, office of the Confederation of British Industry; Tom Gibson, CEO of the American Iron and Steel Institute; and  Elizabeth Drake, an Associate at the law offices of Stewart & Stewart. Cathleen Kelly, director of the Climate & Energy program at the German Marshall Fund, moderated the discussion. Congressman Jay Inslee (D-WA) provided closing remarks.

Peter Zapfel and Felix Matthes discussed how the European policy makers worked with key stakeholders to build consensus around the EU Emissions Trading System (EU ETS).  Mr. Zapfel described how the European Union launched its groundbreaking Emissions Trading Scheme in 2005, covering 45% of total EU CO2 emissions.  In December 2008, the European Union finalized a package of policies on climate and energy to broaden the scope and ambition of the EU ETS.  Mr. Matthes discussed how European policy makers decided against including border adjustments in the EU ETS and instead opted to freely allocate emissions allowances to trade exposed industries as the primary means to address carbon leakage.

Rhian Chilcott from the Confederation of Business Industries (CBI), which represents 200,000 U.K. companies, including heavy manufacturers and 33% of the U.K. workforce, discussed how CBI strongly supported the EU ETS. They do this primarily for business reasons, primarily to gain a first mover advantage and avoid the risk of more costly regulation in the future and loss of customers concerned about climate change.

All three American panelists advocated using a combination of border tariffs and free emissions allowances to address competitiveness concerns. Elizabeth Drake, representing the steelworkers, also discussed the merits of a carbon tax instead of cap-and-trade. Tom Gibson argued that the potential migration of U.S. manufacturers to countries without carbon regulations would unacceptable from both an economic and environmental viewpoint. Additionally, the Mr. Gibson suggested that the U.S. steel industry is more exposed than other sectors, and its efficiency is already at a very high level. Felix Matthes pointed out that the EU ETS created a carbon price that made it cost-effective for a German steel company to use the waste heat from its blast furnace to generate electricity, increasing efficiency from 25% to 45%.  In addition to supporting border tariffs, Mr. Gibson suggested sectoral agreements as the best way to engage developing countries.

Congressman Jay Inslee of Washington provided the closing remarks, a fitting ending to the event.  In his statement, he expressed an interest in addressing competitiveness concerns through policy measures that are both WTO-compliant and diplomatically effective.  He went on to describe, in detail, the plan put forward in H.R.1759, legislation he introduced with Congressman Mike Doyle of Pennsylvania that addresses U.S. industry and labor concerns about competitiveness impacts and carbon leakage. Their legislation would freely allocate up to 15% of total emissions credits under a European-style cap-and-trade program, distributing emissions allowances to energy intensive industries on the basis of product output, to reduce climate policy compliance costs while rewarding greenhouse gas efficient production.