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May 22, 2009
Effective Policies Can Limit Competitiveness Impacts of Climate Change Legislation
    by Robert Kropp

In the second of a two-part series, the climate change policy implications of the Pew Center's report on competitiveness impacts on US business are explored.

In its report entitled The Competitiveness Impacts of Climate Change Mitigation Policies, the Pew Center on Global Climate Change concluded that while climate change legislation in the US will not have a significant economic impact on manufacturing as a whole, there is the possibility of more significant impacts on narrowly defined industries in the energy-intensive sectors.

The report argues that the impact of climate change legislation, such as the proposed American Clean Energy and Security Act (also known as the Waxman-Markey bill), on these industries could be mitigated within a cap-and-trade program by such practices as allocating emissions allowances in a manner that subsidizes production.

In a Congressional Policy Brief entitled Addressing Competitiveness in U.S. Climate Change Policy, the Pew Center elaborated on the policy recommendations it sets for consideration by legislators. While acknowledging that international agreements offer the best recourse against competitiveness concerns, the brief focuses on "targeted transitional policies to directly address competitiveness concerns in the period preceding the establishment of an effective international framework."

The brief explores five options for the mitigation of the effects of climate change legislation on vulnerable industries. The first option explored, that of excluding vulnerable industries or entire sectors from coverage under a cap-and-trade program, would limit the scope of a cap-and-trade program, undermine the goal of reducing greenhouse gas (GHG) emissions, and reduce economic efficiency by giving exempted industries an economic advantage.

The second option, compensating vulnerable industries for the costs of GHG regulation by such means as providing free emission allowances and tax credits or rebates, would provide for both greater environmental effectiveness and economic efficiency than the option of exclusion. However, this option does have the disadvantage of extending beyond addressing only the issue of competitiveness, but would compensate companies in vulnerable industries for all of the increased costs associated with GHG regulation.

A third option would be to provide assistance to vulnerable companies to help them transition to the adoption of lower-GHG technologies. Under this option, assistance to both workers and communities can be provided when competitiveness impacts cannot be avoided.

Another strategy considered in the brief is imposing a cost on energy-intensive imports from countries with weaker environmental regulation, by such means as requiring the purchase of reserve allowances at a price set by the US government. While this approach could be effective in reducing domestic competitiveness impacts, it would not help US producers in the global market. Furthermore, whether the legality of such unilateral measures would be consistent with World Trade Organization (WTO) rules is questionable.

According to the brief, "Another approach that would help reduce emissions within and outside the United States, while addressing competitiveness concerns, is to negotiate international agreements setting GHG standards or other measures within energy-intensive globally-traded sectors." A sector-by-sector approach could exist alongside a cap-and-trade program, with emissions allowances that are based on standards agreed to internationally.

In conclusion, the policy brief observes that "policymakers must seek to balance the goal of preserving US competitiveness against other objectives such as the environmental effectiveness and economic efficiency of a domestic climate program and enhancing international relations and agreements." Of the options explored in the brief, border adjustments in such forms as reserve allowances are recommended only as a measure of last resort.

In testimony before the House Energy and Environment Subcommittee in March, Eileen Claussen, President of the Pew Center, focused on transitional policies to mitigate potential competitiveness impacts. Claussen offered three recommendations for Congress to consider while crafting environmental legislation.

The first item recommended by Claussen in her testimony was to encourage the President to "negotiate a new multilateral climate agreement establishing strong, equitable, and verifiable commitments by all major economies."

Claussen's second recommendation was that incentives for a multilateral climate agreement be included in domestic legislation, including support for decisive action on the part of major developing nations such as China and India.

Finally, Claussen recommended that cap-and-trade legislation include transitional measures to lessen the impacts on both energy-intensive industries and the workers and communities the industries support. spoke with Elliot Diringer, Vice President for International Strategies at the Pew Center, about the Waxman-Markey legislation that recently passed the House Energy and Commerce Committee and is expected to be voted on by the full House before Memorial Day.

"The bill provides for output-based allocation to energy-based industries while keeping them in the cap-and-trade program," said Diringer. "Originally, the bill gives 15% of total allowances to be allocated based on production levels until 2025, and then declines over the following five years. We believe the bill adequately addresses competitiveness concerns."

The bill also allows for the use of unilateral border measures, but only as a last resort, if the allowances aren't effectively addressing competitiveness issues. Provisions are also included for incentives to developing countries, reduced deforestation, and support for the development of alternative energy technologies.

Observing that the bill as passed by Energy and Commerce Committee contains many of the provisions recommended by the Pew Center, Diringer said, "Let's hope it stands. The bill has a long way to go before final passage."

If passed by the House, the bill would then require passage by the Senate to become law.


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