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.
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
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
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
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.
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
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
SocialFunds.com 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
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.