The EU emissions trading system and relevant lessons for the U.S. climate policy debate
On June 13, GMF, in partnership with the Heinrich Böll Foundation, hosted the first in a series of dialogues for congressional staffers featuring experts on European and U.S. climate and energy policy. The event featured Charlotte Streck, founding partner and Director of Climate Focus, a Dutch advisory company working on carbon trading projects based in Rotterdam and Rob Bradley, Director of International Climate Policy Initiative at the World Resources Institute in Washington, DC. Their discussion focused on how the EU has addressed concerns about program costs and potential impacts on the economic competitiveness of energy-intensive industries.
Charlotte Streck argued that five year allocation periods are too short to trigger technology change and should be extended to eight years or longer. Long term vision and banking of emissions allowances is essential to the success of such initiatives. Allowance allocation involves a transfer of substantial wealth and must be handled wisely to ensure equitable and efficient distribution, and to avoid widespread windfall profits for industry. Ms. Streck indicated that free carbon emission allocation is needed at first for political acceptance of a cap and trade system, but should be phased out and gradually replaced by a purely auction based system.
Economic sectors that have the ability to add the cost of emission reductions into the price of their commodities or services (e.g., the power sector) can cope better with emissions regulation than industrial sectors that compete on world markets, therefore industrial sectors should receive some emissions allowances for free. She emphasized that offsets are an efficient and market-friendly cost containment mechanism, as they allow for lower cost emission reduction options outside of the sectors covered by the emissions trading scheme.
Rob Bradley argued that U.S. cap and trade programs should be kept as simple as possible. He warned against trying to create policies that extend into 2050, as it will make it politically impossible to support. He suggested starting simple and gradually expanding the system. The greatest challenge facing the U.S. will be calls for protectionism from high energy usage industries like steel, aluminum, and cement. He advised against responding too aggressively to calls for protectionist measures, such as imposing a border taxes on imported goods from countries without comparable climate policies. He indicated that trade flow from China of steel, aluminum, cement and other energy intensive industries into the U.S. is relatively low, so an import tax or border adjustment against these sectors would do little to make more expensive domestic products competitive and serve only to create diplomatic tension. Including a border adjustment in cap and trade legislation would serve only to antagonize China and India, rather than entice them to the climate negotiating table. Rather than include border adjustments in U.S. climate legislation, Mr. Bradley recommended an output rebate approach. Such an approach would involve compensating industry for the cost of compliance with climate policies based on the efficiency of their output
Participants discussed the potential negative side effects of border adjustments, including initiating a possible trade war with China. Ms. Streck suggested that the EU border adjustment clauses in the new EU climate and energy package are not taken seriously by industry. They are viewed as a political tool to send a strong signal to U.S. policy makers to address climate change. Participants agreed that there were many problems with including border adjustments in any U.S. cap and trade policy, but acknowledged that concerns about impacts on U.S. competitiveness have been voiced so strongly that it would be politically difficult at this point to design a climate program without including them. The audience posed questions surrounding the differences between a cap and trade system and a carbon-based tax. Mr. Bradley pointed out that there is little political appetite for any additional taxes in the current political atmosphere in the United States. Finally, participants discussed the Biden-Lugar amendment introduced during the Senate floor debate in early June that calls on the U.S. to participate in a future climate treaty that includes legally binding emission reduction commitments from all major emitters, including China and India. Participants felt that such commitments would be critical to address the competitive concerns in the United States and to ensure U.S. participation in a future international climate treaty.