In March, Senior Fellow Richard Morgenstern testified before the U.S. House of Representatives Committee on Energy and Commerce. This article is based on his full testimony.
Due to the diversity of greenhouse gas (GHG) sources, efforts to address climate change will, of necessity, impact nations, industries, and individuals. In general, pursuing a cost-effective approach that minimizes the overall cost to society of achieving a particular emissions-reduction target will minimize the burden imposed on businesses and consumers.
The first step to addressing concerns about competitiveness should be paying close attention to considerations of cost and efficiency. Broad, market-based strategies—such as an emissions tax or a cap-and-trade program that effectively attach a price to GHG emissions—offer significant advantages. In order to limit hardships on selected industries, however, additional mechanisms to increase flexibility will be required. These could include recognizing offset credits from sectors or gases not included under the cap and from projects undertaken in other countries.
But even with a cost-effective strategy for reducing U.S. GHG emissions, some domestic producers will incur increased production costs and face increased challenges to their ability to remain globally competitive, particularly in trade-sensitive, energy-intensive sectors.
The question will likely be asked: why should U.S. firms be disadvantaged relative to overseas competitors to address a global problem? The difficulty, moreover, is not just political: if, in response to a mandatory policy, U.S. production simply shifts abroad to unregulated foreign firms, the resulting emissions "leakage" could wipe out some of the environmental benefits sought by taking domestic action.
As policymakers consider options to lessen these competitiveness impacts, an important caution is in order. As compelling as the argument for protecting vulnerable firms or industries might be, few provisions or program modifications designed to accomplish this can be implemented without some cost to the environment, as well as to the overall economy. Nor are trade-related actions costless: they might raise legality concerns under World Trade Organization rules or risk provoking countervailing actions by other nations.
Efforts to address competitiveness concerns in the context of a mandatory domestic climate policy typically involve one or more of the following options: weaker overall program targets; partial or full exemptions from the carbon policy; standards instead of market-based policies for some sectors; free allowance allocation under a cap-and-trade system; and trade-related policies, such as a border adjustment for energy- or carbon-intensive goods.
These options can also be mixed and matched to some extent. One option would be to start out with a generous allowance allocation for the most severely affected industries, which could then be phased out at a future time, either a certain date or once trade-related measures were in place or other key nations adopted comparable climate mitigation policies. In general, the more targeted policies will be difficult to police and many industries will have strong incentives to seek special protection by taking advantage of these various mechanisms without necessarily being at significant competitive risk.
A version of this article appeared in print in the Spring 2008 issue of Resources magazine.
