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United States Government Accountability Office:
Washington, DC 20548:
July 8, 2009:
The Honorable Max Baucus:
Committee on Finance, Chairman:
United States Senate:
Subject: Climate Change Trade Measures: Considerations for U.S. Policy
Makers:
Dear Mr. Chairman:
Changes in the earth's climate attributable to increased concentrations
of greenhouse gases may have significant environmental and economic
impacts in the United States and internationally. To mitigate climate
change effects, countries are taking or considering varying approaches
to reducing greenhouse gas emissions, such as carbon dioxide, which is
the most important greenhouse gas due to its significant volume. These
approaches range from measures to increase energy efficiency to longer-
term efforts to develop technologies to establish a less carbon-
intensive energy infrastructure. A U.S. policy to mitigate climate
change may require domestic production facilities to achieve specified
reductions or employ a market-based mechanism, such as establishing a
price on emissions.
Between 2007 and 2009, Congress introduced a number of climate change
bills, many of which contained proposals for a domestic emissions
pricing system, such as a cap-and-trade system[Footnote 1] or a carbon
tax[Footnote 2]. Through greenhouse gas emissions pricing, governments
create an incentive for parties to lower their greenhouse gas emissions
by placing a cost on them. However, imposing costs on energy-intensive
industries in the United States could potentially place them at a
disadvantage to foreign competitors. In addition, emissions pricing
could have negative environmental consequences, such as "carbon
leakage," whereby emissions reductions in the United States are
replaced by increases in production and emissions in less-regulated
countries. As the Congress considers the design of a domestic emissions
pricing system, a key challenge will be balancing the need to reduce
greenhouse gas emissions with the need to address the competitiveness
of U.S. industries.
In anticipation of Senate deliberation on climate change legislative
proposals, you asked us to examine how greenhouse gas emissions pricing
could potentially affect the international competitiveness of U.S.
industries, and to examine trade measures being considered as part of
proposed U.S. climate change legislation.[Footnote 3] On July 6, 2009,
we briefed your staff covering: (1) what is known about estimating
industry effects, (2) examples of industries that may be vulnerable to
a loss in international competitiveness from emissions pricing, (3)
trade measures and other approaches to address competitiveness issues,
and (4) the potential international implications of trade measures. A
copy of the slides presented at the briefing is attached.
To address these objectives, we interviewed officials and reviewed
climate change literature and documents from relevant federal agencies,
international organizations, policy institutes, businesses,
professional organizations, and universities; reviewed and analyzed
climate change legislation introduced between 2007 and 2009 and
congressional hearing records; we reviewed and presented summary
results for two studies that attempt to quantify the potential
international competitiveness effects on domestic industries from
greenhouse gas emissions pricing; and conducted interviews with
officials from the embassies of Australia, Brazil, Canada, China, the
European Union, and Mexico. We conducted our work from October 2008 to
July 2009 in accordance with all sections of GAO's Quality Assurance
Framework that are relevant to our objectives. The framework requires
that we plan and perform the engagement to obtain sufficient and
appropriate evidence to meet our stated objectives and to discuss any
limitations in our work. We believe that the information and data
obtained, and the analysis conducted, provide a reasonable basis for
any findings and conclusions in this product. For additional details
regarding our scope and methodology, see appendix I.
We are sending copies of this report to interested congressional
committees and to other parties. In addition, the report will be
available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions or wish to discuss this
material further, please contact me at (202) 512-4347 or
yagerl@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Christine Broderick (Assistant Director), Etana Finkler,
Kendall Helm, Jeremy Latimer, Maria Mercado, and Ardith Spence, made
significant contributions to this report. In addition, Karen Deans,
David Dornisch, Grace Lui, and Jena Sinkfield provided technical
assistance.
Sincerely yours,
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Climate Change Trade Measures: Considerations for U.S. Policy Makers:
July 2009:
Why GAO Did This Study:
Global climate change is one of the most significant long-term policy
challenges facing the United States, and policies to mitigate climate
change will have important economic, social, and environmental
implications.
Members of Congress have introduced several bills to address the
problem of climate change, many of which establish domestic emissions
pricing by requiring firms that emit greenhouse gases either to pay a
tax or to hold emission allowances. Whichever approach is taken,
domestic emissions pricing could produce environmental benefits by
encouraging U.S. firms to reduce their emissions of greenhouse gases.
But such pricing could also harm U.S. firms' competitiveness,
especially in energy-intensive industries where firms compete
internationally. Additionally, there could be increased emissions
abroad if production were to increase in other countries as a result of
increased domestic costs of production resulting from a U.S. climate
policy (carbon leakage). To help reduce impacts on U.S. firms and
prevent carbon leakage, several climate change bills have also included
trade measures or output-based rebates. The bills have included trade
measures that would require importers to purchase emission allowances
or pay a border tax for the greenhouse gas emissions associated with
their imports. They have also designed output-based rebates to
financially rebate industries for the costs incurred under a domestic
emissions pricing system.
Briefing Structure:
Background (slides 3-4):
Section 1: Estimating Industry Effects (slides 5-10):
Section 2: Potentially Vulnerable Industries (slides 11-20):
Section 3: Trade Measures (slides 21-31):
Section 4: International Trade Implications (slides 32-35):
Appendices (slides 36-46):
Estimating Industry Effects: Estimating the potential effects of
domestic emissions pricing for industries in the United States is
complex. If the United States were to regulate greenhouse gas
emissions, production costs could rise for certain industries and could
cause output, profits, or employment to fall. Within these industries,
some of these adverse effects could arise through an increase in
imports, a decrease in exports, or both. Estimates of adverse
competitiveness effects are generally larger for industries that are
both relatively energy and trade intensive. In 2007, these industries
accounted for about 4.5 percent of domestic output.
Estimates of the effects vary because of key assumptions required by
economic models. For example, models generally assume a price for U.S.
carbon emissions, but do not assume a similar price by other nations.
In addition, the models generally do not incorporate all policy
provisions, such as legislative proposals related to trade measures and
rebates that are based on levels of production.
Potentially Vulnerable Industries: Proposed legislation suggests that
industries vulnerable to competitiveness effects should be considered
differently. Industries for which competitiveness measures would apply
are identified on the basis of their energy and trade intensity. Most
of the industries that meet these criteria are in primary metals,
nonmetallic minerals, paper, and chemicals, although significant
variation exists for product groups (sub-industries) within each
industry. Additional variation arises on the basis of the type of
energy used and the extent to which foreign competitors' greenhouse gas
emissions are regulated.
To illustrate variability in characteristics that make industries
vulnerable to competitiveness effects, we selected example sub-
industries within primary metals, non metallic minerals, paper
products, and chemicals based on multiple factors. For example, we
selected sub-industries that met both the energy and trade intensity
criteria, examples that met only one criterion, and examples that met
neither, but had significant imports from countries without greenhouse-
gas pricing.
Trade Measures: Trade measures have been proposed to help address
potential industry and environmental effects of a domestic emissions
pricing system; however, questions exist about their proposed
effectiveness. Supporters argue that trade measures may help prevent a
decline in output by U.S. producers, prevent carbon leakage, and create
leverage for other countries to reduce emissions. Opponents raise
concerns that trade measures may motivate retaliatory actions,
undermine efforts to secure multilateral consensus, and generate little
leverage. In addition, potential implementation challenges may exist.
Output-based rebates are measures that offset incurred costs to
industries due to emissions pricing and can take the form of a per-unit
rebate, allocation of allowances or tax credit. These rebates have been
proposed to address competitiveness effects; however, limitations with
these measures may also exist. For example, output-based rebates may
increase costs for industries that do not receive them, under certain
conditions.
How a trade measure is ultimately designed will have important
implications for the effectiveness of the overall measure in addressing
industry and environmental effects. For example, delaying the timing
for when the trade measure goes into effect could result in the measure
being a more effective leveraging tool, and would provide other
countries an opportunity to implement similar carbon mitigation
policies to reduce global emissions. On the other hand, having the
trade measure go into effect simultaneously when the domestic cap-and-
trade system goes into effect may reduce impacts on U.S. industry
competitiveness.
International Trade Implications: A unilateral U.S. trade measure could
have important international implications on U.S. bilateral and
multilateral trade relations. For example, other countries could view
U.S. trade measures as trade restrictions or sanctions, which could
lead them to implement restrictions against U.S. exports. Attention
also has focused on the potential for trade measures or output-based
rebates to be challenged under World Trade Organization (WTO) rules.
Assessing the international trade implications is difficult for a
number of reasons. One is that it depends in part upon how other
nations reduce their carbon emissions, and whether they perceive any
U.S. measures as likely to affect their exports. In addition, the
outcome of any WTO challenge, if any, would be uncertain and may depend
on how the measure is implemented.
Objectives, Scope, and Methodology:
GAO was asked to examine the potential effects of greenhouse gas
emissions pricing on U.S. industries' international competitiveness and
trade measures being considered as part of U.S. legislative proposals
to address climate change.
Specifically, we examined: (1) what is known about estimating industry
effects; (2) examples of industries that may be vulnerable to a loss in
international competitiveness from emissions pricing; (3) trade
measures and other approaches to address competitiveness issues; and
(4) potential international implications of trade measures.
To address these objectives, we interviewed officials and reviewed
climate change literature and documents from U.S. agencies,
international organizations, policy institutes, and professional
organizations; reviewed and analyzed climate change legislation
introduced between 2007 and 2009 and congressional hearing records;
reviewed and presented summary results for two studies attempting to
quantify the potential international competitiveness effects on
domestic industries from emissions pricing; and conducted interviews
with officials from the embassies of Australia, Brazil, Canada, China,
the European Union, and Mexico.
The Office of the United States Trade Representative provided technical
comments on this report.
The analysis in this report reflects changes to the American Clean
Energy and Security Act of 2009 (HR 2454), as of June 26, 2009.
For additional details regarding our scope and methodology, see
appendix I.
[End of section]
Background: Greenhouse Gas Emissions:
The Greenhouse Effect:
Greenhouse gases, such as carbon dioxide, methane, nitrous oxide, and
other gases, increase temperatures by trapping heat that would
otherwise escape the earth's atmosphere. The heat-trapping effect,
known as the greenhouse effect, moderates atmospheric temperatures,
keeping the earth warm enough to support life. Although each unit of
non-carbon-dioxide greenhouse gas generally has a greater warming
effect than each unit of carbon dioxide, carbon dioxide is the most
important greenhouse gas because of its significant volume. The potency
of other greenhouse gases may be expressed in terms of their warming
potential relative to carbon dioxide, or their carbon dioxide
equivalent.
Estimated Growth in Emissions:
According to the IPCC, in 2004, developed countries, including the
United States, constituted 20 percent of the global population, but
were responsible for nearly half of global greenhouse gas emissions.
However, the IPCC projects that between 2000 and 2030, two-thirds to
three-quarters of the projected increase in global carbon dioxide
emissions will occur in developing countries. The IPCC also projects
that compared with 2000, global greenhouse gas emissions will increase
between 25 percent and 90 percent by 2030 in the absence of policies to
reduce greenhouse gas emissions worldwide.
The Intergovernmental Panel on Climate Change (IPCC) was established to
provide scientific and objective information on climate change.
According to the IPCC, global atmospheric concentrations of greenhouse
gases have increased markedly as a result of human activities over the
past 200 years, contributing to a warming of the earth's climate.
Climate change is a long-term and global issue because greenhouse gases
disperse widely in the atmosphere once emitted and can remain there for
an extended period of time. Among other potential impacts, climate
change could threaten coastal areas with rising sea levels, alter
agricultural productivity, and increase the intensity and frequency of
floods and tropical storms. While the effect of increases in greenhouse
gas emissions on ecosystems and economic growth is expected to vary
across regions, countries, and economic sectors, a panel of 18 climate
change economists convened by GAO in coordination with the National
Academy of Sciences agreed that the Congress should consider using a
market-based mechanism to place a price on emissions, and 14 of the 18
panelists were at least moderately confident that the benefits of
taking these actions would outweigh the costs. See GAO-08-605.
As shown in figure 1, the United States emitted more carbon dioxide
than any other country in 2006, while China recently surpassed the
European countries that are members of the Organization for Economic
Cooperation and Development (OECD) as the world's second largest
emitter. On a per capita basis, the United States and Canada rank first
and second in carbon dioxide emissions. Between 1990 and 2006, carbon
dioxide emissions grew substantially in both China and India.
Figure 1: Data on Global Carbon Dioxide Emissions (Millions of metric
tons):
[Refer to PDF for image: combined line and vertical bar graph]
United States:
1995 Emissions: 5133.3;
2006 Emissions: 5696.8;
2006 Emissions per Capita: 19.
China:
1995 Emissions: 3021.8;
2006 Emissions: 5648.5;
2006 Emissions per Capita: 4.28.
OECD Europe:
1995 Emissions: 3856.4;
2006 Emissions: 4101.8;
2006 Emissions per Capita: 7.6.
Russia:
1995 Emissions: 1582.9;
2006 Emissions: 1587.2;
2006 Emissions per Capita: 11.14.
India:
1995 Emissions: 782.6;
2006 Emissions: 1249.7;
2006 Emissions per Capita: 1.13.
Canada:
1995 Emissions: 465.1;
2006 Emissions: 538.8;
2006 Emissions per Capita: 16.52.
Korea:
1995 Emissions: 364.8;
2006 Emissions: 476.1;
2006 Emissions per Capita: 9.86;
Mexico:
1995 Emissions: 309.6;
2006 Emissions: 416.3;
2006 Emissions per Capita: 3.97.
Brazil:
1995 Emissions: 238.4;
2006 Emissions: 332.4;
2006 Emissions per Capita: 1.76.
Source: International Energy Agency data on carbon emissions from fuel
consumption.
[End of figure]
[End of section]
Background: International Negotiations And Emissions Pricing:
Greenhouse gas emissions reductions in all major countries will be
required to stabilize greenhouse gas concentrations at a level that
would prevent dangerous climate change. In 1992, 192 countries,
including the United States, joined the United Nations Framework
Convention on Climate Change (UNFCCC), an international treaty to
consider what may be done to reduce and adapt to global warming. In
1998, the United States signed the Kyoto Protocol, an international
agreement to specifically limit greenhouse gas emissions. The United
States is not bound by the protocol's terms because it was not ratified
by the Senate. Both the UNFCCC and the Kyoto protocol operate under the
principal of "common but differentiated responsibilities" to reflect
the agreement that each nation must contribute to addressing climate
change, but that the magnitude of its efforts should differ according
to national circumstances. For example, under the protocol, only Annex
I countries have quantified emission reduction obligations. To
negotiate the next round of international commitments, parties to the
UNFCCC agreed to the "Bali Action Plan" in December 2007.
Countries can take varying approaches to reducing greenhouse gas
emissions. Since energy use is a significant source of greenhouse gas
emissions, policies designed to increase energy efficiency or induce a
switch to less greenhouse gas-intensive fuels, such as from coal to
natural gas, can reduce emissions in the short term. In the long term,
however, major technology changes will be needed to establish a less
carbon-intensive energy infrastructure. To that end, a U.S. policy to
mitigate climate change may require facilities to achieve specified
reductions or employ a market-based mechanism, such as establishing a
price on emissions.
Proposed Legislation Includes Two Options for Domestic Emissions
Pricing Systems:
Through greenhouse gas emissions pricing, governments create an
incentive for parties to lower their greenhouse gas emissions by
placing a cost on the emissions. Proposed U.S. legislation includes two
basic approaches to greenhouse gas emissions pricing: a carbon tax
system and a cap-and-trade system. A carbon tax system would impose a
fee on emissions of greenhouse gases. Under a cap-and-trade system, the
government would cap greenhouse gas emissions, limiting the total
quantity of emissions from regulated sources under the system. The
government would also issue allowances, or permits to emit greenhouse
gases, equal to the overall cap or quota. Regulated sources would be
required to hold enough allowances to cover their emissions, and
allowances could be bought and sold as needed to meet the system's
requirements in the least expensive manner.
Several bills to implement emissions pricing in the United States have
been introduced in the 110th and the 111th Congresses. These bills have
included both cap-and-trade and carbon tax proposals. Some of the
proposed legislation also include measures intended to limit
potentially adverse impacts on the international competitiveness of
domestic firms.
The Kyoto Protocol:
The Kyoto Protocol, adopted in Kyoto, Japan, and ratified by more than
180 countries, sets legally binding emissions targets for 37
industrialized countries and the European Community (Annex I
countries).
The Bali Action Plan:
The year 2012 will mark the end of the first commitment period of the
Kyoto Protocol. In Bali, Indonesia, in 2007, countries agreed to the
Bali Action Plan, which defined a process and timeframe to enable the
full effective and sustained implementation of the Convention through
long-term cooperative action up to and beyond 2012. According to the
Bali Action Plan, the negotiations process is scheduled to conclude in
December 2009 at a major summit in Copenhagen, Denmark.
Existing Emissions Pricing Systems:
Greenhouse gas emissions pricing has been implemented in several other
cases, including a cap-and-trade system in the European Union (EU) and
carbon tax systems in Sweden, Finland, Norway, and the Netherlands. The
world's largest emissions pricing system, the European Union Emissions
Trading Scheme (EU ETS), covers CO2 emissions from more than 11,000
energy-intensive installations. The EU ETS began with a pilot phase
that ran from 2005 to 2007. Its second trading period is currently
under way. For more information see GAO-09-151.
[End of section]
1. Estimating Industry Effects: Introduction:
In this section, we present information on what is known about how U.S.
emissions pricing could potentially affect industry competitiveness.
Importantly, estimating the effects of domestic emissions pricing for
industries in the United States is complex. For example, if the United
States were to regulate greenhouse gas emissions, production costs
could rise for many industries and could cause output, profits, or
employment to fall. However, the magnitude of these potential effects
is likely to depend on the greenhouse gas intensity of industry output
and on the domestic emissions price, which is not yet known, among
other factors. Additionally, if U.S. climate policy were more stringent
than in other countries, some domestic industries could experience a
loss in international competitiveness. Within these industries, adverse
competitiveness effects could arise through an increase in imports, a
decrease in exports, or both.
To estimate the potential economic effects of U.S. emissions pricing on
domestic industries, models require key assumptions, which cause
estimates to vary. In this section, we review two economic models that
specifically estimate competitiveness effects for U.S. industries. In
each, larger adverse effects occur for those U.S. industries that are
both relatively energy and trade intensive. We also present information
on the potential for adverse international competitiveness effects to
be a source of carbon leakage.
U.S. emissions pricing effects on production costs and output:
For regulated sources, greenhouse gas emissions pricing would increase
the cost of releasing greenhouse gases. As a result, it would encourage
some of these sources to reduce their emissions, compared with business-
as-usual. Under domestic emissions pricing, production costs for
regulated sources could rise as they either take action to reduce their
emissions or pay for the greenhouse gases they release. Cost increases
are likely to be larger for production that is relatively greenhouse
gas intensive, where greenhouse gas intensity refers to emissions per
unit of output. Cost increases may reduce industry profits, or they may
be passed on to consumers in the form of higher prices. To the extent
that cost increases are passed on to consumers, they could demand fewer
goods, and industry output could fall.
While emissions pricing would likely cause production costs to rise for
certain industries, the extent of this rise and the resulting impact on
industry output are less certain due to a number of factors. For
example, the U.S. emissions price and the emissions price in other
countries are key variables that will help to determine the impact of
emissions pricing on domestic industries. However, future emission
prices are currently unknown. Furthermore, to the extent that emissions
pricing encourages technological change that reduces greenhouse gas
intensity, potential adverse effects of emissions pricing on profits or
output could be mitigated for U.S. industries. Additionally, policy
options such as output-based rebates could also offset some of the
added costs of emissions pricing for some firms but involve tradeoffs,
such as possibly increasing costs for firms that do not receive them.
Estimated effects from economic models of emissions pricing:
Several studies by U.S. agencies and experts have used models of the
economy to simulate the effects of emissions pricing policy on output
and related economic outcomes. These models generally find that
emissions pricing will cause output, profits or employment to decline
in sectors that are described as energy intensive, compared with
business-as-usual. In general, these studies conclude that these
declines are likely to be greater for these industries, as compared to
other sectors in the economy. However, some research suggests that not
every industry is likely to suffer adverse effects from emissions
pricing. For example, a long-run model estimated by Ho, Morgenstern,
and Shih (2008) predicts that some U.S. sectors, such as services, may
experience growth in the long run as a result of domestic emissions
pricing. This growth would likely be due to changes in consumption
patterns in favor of goods and services that are relatively less
greenhouse gas intensive.
Potential international competitiveness effects depend in part on the
stringency of U.S. climate policy relative to other countries. For
example, if domestic greenhouse gas emissions pricing were to make
emissions more expensive in the United States than in other countries,
production costs for domestic industries would likely increase relative
to their international competitors, potentially disadvantaging
industries in the United States. As a result, some domestic production
could shift abroad, through changes in consumption or investment
patterns, to countries where greenhouse gas emissions are less
stringently regulated. For example, consumers may substitute some goods
made in other countries for some goods made domestically. Similarly,
investment patterns could shift more strongly in favor of new capacity
in countries where greenhouse gas emissions are regulated less
stringently than in the United States.
Economists such as Aldy and Pizer (2009) have defined adverse
international competitiveness effects as the part of a decline in
domestic output that is due to a shift of production abroad in response
to emissions pricing, or the part of a decline in domestic output that
not also matched by a decline in domestic consumption. For example, if
domestic output were to fall by more than domestic consumption, the
difference could be explained by changes in trade patterns through a
reduction in exports, an increase in imports, or both.
Factors that may affect international competitiveness:
Stakeholders and experts have identified two criteria, among others,
that are important in determining potential vulnerability to adverse
competitiveness effects: trade intensity and energy intensity. Trade
intensity is important because international competitiveness effects
arise from changes in trade patterns. For example, if climate policy in
the United States were more stringent than in other countries,
international competition could limit the ability of domestic firms to
pass increases in costs through to consumers. Energy intensity is
important because the combustion of fossil fuels for energy is a
significant source of greenhouse gas emissions, which may increase
production costs under emissions pricing. International competitiveness
effects may also depend on other factors, including transportation
costs and access to markets for natural resources, capital, or labor.
Industries that are both relatively trade intensive and energy
intensive include primary metals, nonmetallic minerals, paper products,
and chemicals. These four industries provided around 4.5 percent of
total U.S. output in 2007.
Legislation passed in June 2009 by the House of Representatives, H.R.
2454, 111TH Cong. (2009), uses the criteria of trade intensity and
energy intensity or greenhouse gas intensity, among others, to
determine eligibility for the Emission Allowance Rebate Program that is
part of the legislation. H.R. 2454 specifies how to calculate the two
criteria. Trade intensity is defined as the ratio of the sum of the
value of imports and exports within an industry to the sum of the value
of shipments (output) and imports within the industry. Energy intensity
is defined as the industry's cost of purchased electricity and fuel
costs, or energy expenditures, divided by the value of shipments
(output) of the industry.
The energy intensity measure specified in this legislation, however,
might not be an ideal measure of vulnerability. First, the relationship
between energy expenditures and emissions from energy use is
indeterminate. For example, energy expenditures depend on the price of
fuel and on the quantity of fuel used, while emissions from energy use
depend on the quantity and type of fuel used. Additionally, an increase
in energy prices may cause expenditures on energy to rise and energy
use to fall, which could also cause emissions from energy use to fall.
Second, the energy intensity measure might not reflect the extent to
which substitutes for energy are available. For example, regulated
sources may be able to reduce their energy intensity or switch to
energy sources that are less greenhouse gas intensive. To the extent
that less greenhouse gas intensive substitutes are available, some
industries could reduce the effect of emissions pricing on their costs
and on their competitiveness.
Key assumptions of models that estimate competitiveness effects:
Key assumptions made by economic models of emissions pricing include,
among others, the domestic emissions price, the emissions price in
other countries, the level of industry aggregation, and the time
horizon during which producers may adjust their production methods or
energy sources in response to emissions pricing.
* Domestic emissions price: The domestic emissions price could affect
the size of a potential increase in production costs from emissions
pricing. In particular, increases in production costs are expected to
be larger when the domestic emissions price is greater. Under a carbon
tax system, the domestic emissions price would equal the tax per unit
of emissions. Under a cap-and-trade system, the domestic emissions
price would equal the market-clearing allowance price, at which the
quantity of allowances supplied equals the quantity of allowances
demanded.
The domestic emissions price could also depend on cost containment
features of an emissions pricing system, such as banking, borrowing or
carbon offsets, among other features.
* Emissions price in other countries: Together with the domestic
emissions price, the emissions price in other countries will help to
determine the relative stringency of climate policy in the United
States. When the difference between the domestic emissions price and a
lower emissions price in other countries is larger, U.S. industries may
be more likely to experience adverse competitiveness effects from
domestic emissions pricing. Under a cap-and-trade system, differences
in the allowance price between two countries may dissipate if
international trading of allowances is allowed.
* Level of aggregation: The range of estimated effects may depend on
the level of industrial or sectoral aggregation used. For example,
estimates for highly aggregated sectors could mask more extreme
variation at the more narrowly aggregated sub-industry level.
* Time horizon: In models of economic activity, the amount of time
considered after policy implementation may affect model results. For
example, the time horizon may affect the ability of firms to pass
through added costs to consumers in the form of higher prices, change
their production processes, or develop and adopt new technologies. A
longer time horizon could also allow for investments in new capacity.
* Policy Scenarios: Model results may depend in part upon the range of
policy scenarios incorporated. For example the incorporation of trade
measures and output-based rebates may affect the results.
Estimates of competitiveness effects are uncertain:
Table 1 presents results from two studies that attempt to quantify the
potential competitiveness effects on domestic industries from emissions
pricing. For each study, a range of estimates is reported for two
effects: (1) the potential decline in domestic, energy-intensive
manufacturing output that is due to U.S. emissions pricing and (2) the
part of this decline that is due to adverse international
competitiveness effects. The adverse competitiveness effects are
computed as the difference between the production and consumption
impacts of emissions pricing. For example, if production declines by
3.7 percent and consumption declines by 2.9 percent as a share of
production, the adverse competitiveness effect equals the -0.8 percent
change in production that is not matched by a change in domestic
consumption.
In both studies, estimates of competitiveness effects are generally
greater for industries that are relatively trade and energy intensive.
The estimated impacts depend on key assumptions of the models used to
generate these results. Both studies assume unilateral action by the
United States, or an emissions price of $0 per ton of carbon dioxide in
the rest of the world, which may overstate the estimates of adverse
competitiveness effects for U.S. industries to the extent that other
countries also regulate greenhouse gas emissions.
Aldy and Pizer's (2009) model allows for some adjustments and is
consistent with a time horizon of 1 year to a few years. Ho et al.
(2008) generate their long-run estimates using a model that allows for
more adjustments.
Table 1: Estimates of Emissions Pricing Effects on Energy-Intensive
Manufacturing Industries in the United States:
Estimated decline in industry output due to emissions pricing (range of
estimates):
Study: Aldy and Pizer (2009): 1.0% - 4.3%;
Study: Ho, Morgenstern, and Shih (2008): 0.91% - 1.30%.
Part of estimated decline in industry output due to adverse
international competitiveness effects (range of estimates):
Study: Aldy and Pizer (2009): 0.3% - 1.8%;
Study: Ho, Morgenstern, and Shih (2008): 0.42% - 0.68%.
Domestic emissions price (per ton of carbon dioxide):
Study: Aldy and Pizer (2009): $15;
Study: Ho, Morgenstern, and Shih (2008): $10.
Emissions price in other countries (per ton of carbon dioxide):
Study: Aldy and Pizer (2009): $0;
Study: Ho, Morgenstern, and Shih (2008): $0.
Time horizon:
Study: Aldy and Pizer (2009): 1 year to a few years;
Study: Ho, Morgenstern, and Shih (2008): Long run.
Number of industries in model:
Study: Aldy and Pizer (2009): 400+;
Study: Ho, Morgenstern, and Shih (2008): 21.
Number of industries for which results are reported by authors:
Study: Aldy and Pizer (2009): 55 energy-intensive;
Study: Ho, Morgenstern, and Shih (2008): 21.
Number of industries included in the ranges of estimates reported
above:
Study: Aldy and Pizer (2009): 55;
Study: Ho, Morgenstern, and Shih (2008): 3 most energy-intensive.
Incorporation of trade measure and output-based rebate policies:
Study: Aldy and Pizer (2009): no;
Study: Ho, Morgenstern, and Shih (2008): no.
Source: GAO analysis of results reported by Aldy and Pizer (2009) and
Ho, Morgenstern, and Shih (2008). Note: The number of industries in
both reflects, in part, the level of industry aggregation. While Aldy
and Pizer (2009) examine more than 400 industries at a more narrowly
aggregated level, they report estimates only for 55 energy-intensive
industries among the more than 400 industries they examine. Ho et al.
(2008) examine industries at a more aggregated level and report
estimates for all 21 manufacturing and nonmanufacturing sectors that
they consider. Ho et al. (2008) also report estimates of the effects of
emissions pricing on industry output for multiple time horizons, but
they report both production and consumption effects--both of which are
necessary to compute competitiveness effects--only for their long run
estimates. For the study by Aldy and Pizer (2009), the estimated
decline in industry output and the part that is due to competitiveness
effects are reported as a percentage of industry output. For the study
by Ho et al. (2008), the estimated decline in industry output and the
part that is due to competitiveness effects are reported as a share of
sectoral consumption.
[End of table]
International competitiveness effects and carbon leakage:
Reducing carbon emissions in the United States could result in carbon
leakage through two potential mechanisms. First, if domestic production
were to shift abroad to countries where greenhouse gas emissions are
not regulated, emissions in these countries could grow faster than
expected otherwise. Through this mechanism, some of the expected
benefits of reducing emissions domestically could be offset by faster
growth in emissions elsewhere, according to Aldy and Pizer (2009).
Carbon leakage may also arise from changes in world prices that are
brought about by domestic emissions pricing. For example, U.S.
emissions pricing could cause domestic demand for oil to fall. Because
the United States is a relatively large consumer of oil worldwide, the
world price of oil could fall when the U.S. demand for oil drops. The
quantity of oil consumed by other countries would rise in response,
increasing greenhouse gas emissions from the rest of the world. These
price effects may be a more important source of carbon leakage than the
trade effects described above. See Fischer and Fox (2009) and EPA
(2009).
[End of section]
2. Potentially Vulnerable Industries: Introduction:
In this section, we provide some information on certain U.S. industries
that, by paying a price on greenhouse gas emissions, could potentially
lose competitiveness compared with foreign industries without
comparable climate policies. Among many factors, two key indicators of
potential vulnerability to adverse competitiveness effects are an
industry's energy intensity and trade intensity. Proposed U.S.
legislation specifies that: (a) either an energy intensity or
greenhouse gas intensity of 5 percent or greater; and (b) a trade
intensity of 15 percent or greater be used as criteria to identify
industries for which trade measures or rebates would apply. Since data
on greenhouse gas intensity is less complete, we focus our analysis on
industry energy intensity. Most of the industries that meet these
criteria are in primary metals, nonmetallic minerals, paper, and
chemicals, yet there is significant variation in specified
vulnerability characteristics among different product groups ("sub-
industries"). The following pages include examples of this variation,
as well as information on the type of energy used and location of
import and export markets. Data shown are for the latest year
available, with additional discussion of proposed vulnerability
criteria in appendix I and industry information in appendix II.
Energy and trade intensities of the four manufacturing industries, in
the aggregate, generally meet both vulnerability criteria in proposed
legislation. As shown along the right axis in figure 2, nonmetallic
minerals is the most energy intensive at 6.1 percent in 2006. As shown
along the left axis, chemicals is the most trade intensive, at 45
percent in 2007. While chemicals does not have an energy intensity of 5
percent or greater--and is located outside of the shaded area--several
sub-industries within chemicals meet that vulnerability criterion.
Together, these four industries provided 23 percent of total U.S.
manufacturing output in 2007 and had trade flows of about $500 billion.
As shown by the size of the column, chemicals is the largest industry,
with output of $664 billion in 2007. Accordingly, chemicals also
accounted for the largest share of carbon dioxide emissions from
manufacturing, at 22 percent in 2002. However, the estimated greenhouse
gas intensity of chemical products--the level of carbon dioxide emitted
per unit of energy--was less than that for both primary metals and
nonmetallic minerals in 2002.
Figure 2: Energy and Trade Intensity Are Indicators of Vulnerability:
[Refer to PDF for image: 3-D bar graph]
Primary Metals:
Value of output: $241 billion;
Energy Intensity: 5.2;
Trade Intensity: 40.4%.
Non-Metallic Minerals:
Value of output: $119 billion;
Energy Intensity: 6.1%;
Trade Intensity: 20.4%.
Paper:
Value of output: $168 billion;
Energy Intensity: 5.5%;
Trade Intensity: 22.5%.
Chemicals:
Value of output: $664 billion;
Energy Intensity: 3.6%;
Trade Intensity: 45.4%.
Criteria for industry vulnerability:
Over 5% energy intensity and over 15% trade intensity.
Source: GAO analysis of Department of Energy emissions data and
Department of Commerce energy data for 2006 and trade and output data
for 2007.
[End of figure]
2.1. Potentially Vulnerable Industries: Primary Metals Examples:
As shown by sub-industry examples in figure 3, energy and trade
intensities differ within primary metals. For example, primary aluminum
meets the vulnerability criteria with an energy intensity of 24 percent
and trade intensity of 62 percent. Ferrous metal foundries meets the
energy intensity criteria, but not the trade intensity criteria. Steel
manufacturing--products made from purchased steel--and aluminum
products fall short of both vulnerability criteria. Iron and steel
mills has an energy intensity of 7 percent and a trade intensity of 35
percent and is by far the largest sub-industry example, with a 2007
value of output of over $93 billion.
Figure 3: Energy and Trade Intensity Indicators Vary by Sub-Industry:
[Refer to PDF for image: 3-D bar graph]
Iron and steel mills:
Value of output: $93.2 billion;
Energy Intensity: 6.7%.
Trade Intensity: 34.7%.
Electrometallurgical products:
Value of output: $1.7 billion;
Energy Intensity: 6.7%.
Trade Intensity: 71.0%.
Steel manufacturing:
Value of output: $19.9 billion;
Energy Intensity: 2.6%.
Trade Intensity: 10.1%.
Ferrous metal foundries:
Value of output: $20.1 billion;
Energy Intensity: 5.7%.
Trade Intensity: 9.1%.
Primary aluminum:
Value of output: $6.7 billion;
Energy Intensity: 23.6%.
Trade Intensity: 62.0%.
Aluminum products:
Value of output: $16.7 billion;
Energy Intensity: 4.2%.
Trade Intensity: 11.2%.
Criteria for industry vulnerability:
Over 5% energy intensity and over 15% trade intensity.
Source: GAO analysis of Department of Commerce energy data for 2006 and
trade data for 2007.
[End of figure]
Among the primary metals sub-industry examples, types of energy used
also vary. Iron and steel mills use the greatest share of coal and
coke, and steel manufacturing and ferrous metal foundries use the
greatest proportion of natural gas. Since coal is more carbon intensive
than natural gas, sub-industries that rely more heavily on coal could
also be more vulnerable to competitiveness effects. The carbon
intensity of electricity, used heavily in the production of aluminum,
will also vary on the basis of source of energy used to generate it and
the market conditions where it is sold. Data shown for "aluminum"
include primary aluminum and aluminum products and net electricity is
the sum of net transfers plus purchases and generation minus quantities
sold.
Figure 4: Type of Energy Used Is Important for Carbon Intensity (share
of total 2002 energy consumed as a percentage of BTUs):
[Refer to PDF for image: stacked vertical bar graph]
Iron and steel mills:
Coal and Coke: 56.3%;
Natural Gas: 28.7%;
Renewables and Other: 2.3%;
Net Electricity: 12.7%.
Electrometallurgical products:
Coal and Coke: 18.5%;
Natural Gas: 25.9%;
Renewables and Other: 11.1%;
Net Electricity: 44.4%.
Steel manufacturing:
Coal and Coke: 0.0%;
Natural Gas: 53.3%;
Renewables and Other: 11.1%;
Net Electricity: 35.6%.
Ferrous metal foundries:
Coal and Coke: 18.2%;
Natural Gas: 46.7%;
Renewables and Other: 2.4%;
Net Electricity: 32.7%.
Aluminum products:
Coal and Coke: 0.0%;
Natural Gas: 28.5%;
Renewables and Other: 30.7%;
Net Electricity: 40.8%.
Source: GAO analysis of data from the Department of Energy.
[End of figure]
Industry vulnerability may further vary depending on the share of trade
with countries that do not have carbon pricing. To illustrate this
variability, figure 5 provides data on the share of imports by source,
since imports exceed exports in each of the primary metals examples. As
shown, while primary aluminum is among the most trade intensive, the
majority of imports are from Canada, an Annex I country with agreed
emission reduction targets. For iron and steel mills, over one-third of
imports are from the EU and other Annex I countries, not including
Canada ("EU plus"). However, for iron and steel mills, almost 30
percent of imports are also from the non-Annex I countries of China,
Mexico, and Brazil. While less trade intensive, steel manufacturing and
aluminum products each has greater than one-third of imports from China
alone.
Figure 5: Source of Imports Is Important for Trade Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2007 total imports (percentage):
Iron and steel mills:
EU Plus: 34.8%
Canada: 17.1%
China: 13.1%
Mexico: 7.5%
Brazil: 8.3%
Other: 19.2%.
Electrometallurgical products:
EU Plus: 8.9%;
Canada: 3.2%;
China: 11.3%;
Mexico: 0.9%;
Brazil: 5.5%;
Other: 70.2%.
Steel manufacturing:
EU Plus: 19.3%;
Canada: 13.7%;
China: 36.9%;
Mexico: 7.3%;
Brazil: 0.7%;
Other: 22.1%.
Ferrous metal foundries:
EU Plus: 23.0%;
Canada: 13.3%;
China: 31.5%;
Mexico: 5.0%;
Brazil: 5.3%;
Other: 24.9%.
Primary aluminum:
EU Plus: 4.1%;
Canada: 65.1%;
China: 1.3%;
Mexico: 1.3%;
Brazil: 2.7%;
Other: 25.5%.
Aluminum products:
EU Plus: 17.1%;
Canada: 32.6%;
China: 33.9%;
Mexico: 3.3%;
Brazil: 0.6%;
Other: 12.5%.
Source: GAO analysis of data from the International Trade
Administration.
[End of table]
Adverse competitiveness effects from emissions pricing could increase
the already growing share of Chinese imports that exists in some of the
sub-industries. Among the examples, iron and steel mills, steel
manufacturing, and aluminum products exhibit a growing trade reliance
on Chinese imports since 2002. This trend has largely been driven by
lower labor and capital costs in China and, according to
representatives from the steel industry, China has recently been
producing 50 percent of the world's steel.
Figure 6: Sub-Industries With Growing Share of Imports from China:
[Refer to PDF for image: multiple line graph]
Year: 2002;
Iron and steel mills: 2.7%;
Steel manufacturing: 11.4%;
Aluminum products: 6.1%.
Year: 2003;
Iron and steel mills: 3%;
Steel manufacturing: 15.6%;
Aluminum products: 9.6%.
Year: 2004;
Iron and steel mills: 7.3%;
Steel manufacturing: 20.1%;
Aluminum products: 17.6%.
Year: 2005;
Iron and steel mills: 7.8%;
Steel manufacturing: 27.6%;
Aluminum products: 26.3%.
Year: 2006;
Iron and steel mills: 11.7%;
Steel manufacturing: 33.7%;
Aluminum products: 34.2%.
Year: 2007;
Iron and steel mills: 13.1%;
Steel manufacturing: 36.9%;
Aluminum products: 33.9%.
Total U.S. imports by value (U.S. dollars in millions):
Iron and steel mills:
2002: $12,558;
2003: $10,808;
2004: $23,355;
2005: $25,131;
2006: $33,060;
2007: $30,445.
Steel manufacturing
2002: $1,110;
2003: $1,184;
2004: $1,792;
2005: $1,884;
2006: $1,916;
2007: $1,822.
Aluminum products
2002: $498;
2003: $549;
2004: $718;
2005: $913;
2006: $1,209;
2007: $1,183.
Source: GAO analysis of data from the Department of Commerce.
[End of figure]
2.2. Potentially Vulnerable Industries: Nonmetallic Minerals Examples:
Among nonmetallic minerals sub-industry examples, cement has the
highest energy intensity, at 16 percent, and glass and clay building
materials have the highest trade intensity, at 36 percent and 35
percent, respectively. While, concrete is the largest sub-industry,
with a value of output of over $30 billion in 2007, it fails to meet
both of the vulnerability criteria and thus lies outside of the shaded
floor area. Lime and gypsum meets the energy intensity criteria but
fails to meet the trade intensity criteria.
Figure 7: Energy and Trade Intensity Indicators Vary by Sub-Industry:
[Refer to PDF for image: 3-D bar graph]
Cement:
Value of output: $10.2 billion;
Energy Intensity: 15.6%;
Trade Intensity: 12.4%.
Concrete
Value of output: $30.1 billion;
Energy Intensity: 1.7%;
Trade Intensity: 0.0%.
Lime and Gypsum
Value of output: $8.6 billion;
Energy Intensity: 12.3%;
Trade Intensity: 4.1%.
Glass
Value of output: $22.4 billion;
Energy Intensity: 8.7%;
Trade Intensity: 36.0%.
Clay Building Material
Value of output: $3.3 billion;
Energy Intensity: 13.6%;
Trade Intensity: 35.3%.
Mineral Wool
Value of output: $6.0 billion;
Energy Intensity: 8.7%;
Trade Intensity: 18.1%.
Criteria for industry vulnerability:
Over 5% energy intensity and over 15% trade intensity.
Source: GAO analysis of Department of Commerce energy data for 2006 and
trade data for 2007.
[End of figure]
Cement and lime rely on coal and coke sources for about 60 percent of
energy consumed, while glass and mineral wool rely on natural gas for
over 65 percent of energy consumed. Since coal is more carbon intensive
than natural gas, sub-industries that rely more heavily on coal could
also be more vulnerable to competitiveness effects. Data on energy use
by the sub-industry examples excluded from the chart are not currently
reported by the Department of Energy.
Figure 8: Type of Energy Used Is Important for Carbon Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2002 total energy consumed (percentage of BTUs):
Cement:
Coal and Coke: 59.7%;
Natural Gas: 5.1%;
Renewables and Other: 24.7%;
Net Electricity: 10.5%.
Lime:
Coal and Coke: 62.3%;
Natural Gas: 7.5%;
Renewables and Other: 25.5%;
Net Electricity: 4.7%.
Glass:
Coal and Coke: 0.0%;
Natural Gas: 76.1%;
Renewables and Other: 3.0%;
Net Electricity: 20.9%.
Mineral Wool:
Coal and Coke: 5.8%;
Natural Gas: 67.3%;
Renewables and Other: 1.9%;
Net Electricity: 25.0%.
Source: GAO analysis of data from the Department of Energy.
[End of figure]
For the nonmetallic mineral examples, total imports exceed total
exports. As shown in figure 9, glass has the largest share of imports
from China, at 26 percent. Another 17 percent of glass imports are
sourced from Mexico. For the other trade-intensive sub-industries of
cement, clay building material, and mineral wool, about 30 percent of
imports are from China, Mexico, and Brazil. Conversely, nearly 60
percent of lime and gypsum imports are from Canada.
The one sub-industry where exports comprise more than 60 percent of
trade flows is concrete, with 30 percent of concrete exports sold to
markets in Mexico and the Middle East.
Figure 9: Source of Imports Is Important for Trade Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2007 total U.S. imports:
Cement:
EU Plus: 10.5%;
Canada: 29.2%;
China: 18.5%;
Mexico: 8.7%;
Brazil: 2.9%;
Other: 30.2%.
Concrete:
EU Plus: 20.6%;
Canada: 79.4%;
China: 0.0%;
Mexico: 0.0%;
Brazil: 0.0%;
Other: 0.0%.
Lime and Gypsum:
EU Plus: 3.3%;
Canada: 59.9%;
China: 3.6%;
Mexico: 32.5%;
Brazil: 0.0%;
Other: 0.7%.
Glass:
EU Plus: 36.7%;
Canada: 11.8%;
China: 26.3%;
Mexico: 16.8%;
Brazil: 0.5%;
Other: 7.9%.
Clay Building Material:
EU Plus: 60.2%;
Canada: 0.5%;
China: 8.9%;
Mexico: 14.9%;
Brazil: 8.0%;
Other: 7.5%.
Mineral Wool:
EU Plus: 26.6%;
Canada: 41.2%;
China: 9.8%;
Mexico: 18.6%;
Brazil: 0.2%
Other: 3.6%.
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
Since 2002, a trend of increasing Chinese imports as a share of total
imports is evident for glass and mineral wool. While the share of
cement imports from China declined from 2006 to 2007, reliance on
Chinese imports has also grown relative to 2002. According to
representatives of the U.S. cement industry, Chinese production costs
are between 20 percent and 40 percent of those in the United States.
Figure 10: Sub-Industries With Growing Share of Imports from China:
[Refer to PDF for image: multiple line graph]
Chinese imports as a share of total imports (percentage):
Cement:
2002: 7.1%;
2003: 7.1%;
2004: 6.4%;
2005: 12.9%;
2006: 25.7%;
2007: 18.5%.
Glass:
2002: 18.2%;
2003: 18.9%;
2004: 19.9%;
2005: 22.5%;
2006: 24.4%;
2007: 26.3%;
Mineral Wool:
2002: 2.1%;
2003: 3.2%;
2004: 3.7%;
2005: 7.9%;
2006: 8.7%;
2007: 9.8%.
Total imports by value ($US dollars in millions):
Cement:
2002: $938;
2003: $924;
2004: $1,140;
2005: $1,567;
2006: $1,837;
2007: $1,325.
Glass:
2002: $4,293;
2003: $4,436;
2004: $4,947;
2005: $5,125;
2006: $5,491;
2007: $5,726.
Mineral Wool:
2002: $332;
2003: $360;
2004: $448;
2005: $510;
2006: $577;
2007: $489.
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
2.3. Potentially Vulnerable Industries: Paper Products Examples:
Sub-industry examples within paper products also show variation in
energy and trade intensity. Pulp mills is the most trade intensive, at
98 percent. Paper mills is the largest sub-industry, with a 2007 value
of output of over $51 billion and its trade intensity is 30 percent.
Pulp mills and paper mills each has an energy intensity of 8 percent
and, thus, meet both vulnerability criteria. While paperboard mills has
an energy intensity of 12 percent, it does not meet the trade intensity
criteria. Paperboard containers fails to meet both criteria but was the
second largest sub-industry in 2007, with a value of output of over $47
billion.
Figure 11: Energy and Trade Intensity Indicators Vary by Sub-Industry:
[Refer to PDF for image: 3-D bar graph]
Pulp Mills:
Value of output: $4.3 billion;
Energy Intensity: 8.4%;
Trade Intensity: 98.2%.
Paper Mills:
Value of output: $51.4 billion;
Energy Intensity: 8.4%;
Trade Intensity: 30.1%.
Paperboard Mills:
Value of output: $23.2 billion;
Energy Intensity: 12.3%;
Trade Intensity: 0.9%.
Paperboard Containers:
Value of output: $47.7 billion;
Energy Intensity: 1.8%;
Trade Intensity: 6.4%.
Criteria for industry vulnerability:
Over 5% energy intensity and over 15% trade intensity.
Source: GAO analysis of Department of Commerce energy data for 2006 and
trade data for 2007.
[End of figure]
In paper mills and paperboard mills, the largest share of energy
consumed is from the relatively less carbon-intensive renewable and
other (such as fuel oil and steam) energy sources. An additional 20
percent of energy consumed is from natural gas, while coal and coke
sources provide 14 percent of energy for paper mills and 9 percent of
energy for paperboard mills. While energy use data for pulp mills is
reported by the Department of Energy, consumption of coal and coke,
specifically, is not publicly available, so percentage shares could not
be computed. Data on energy use by paperboard containers are not
currently reported.
Figure 12: Type of Energy Used Is Important for Carbon Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2002 total energy consumed (percentage of BTUs):
Paper Mills:
Coal and coke: 14.3%;
Natural gas: 20.6%;
Renewable and other: 57.4%;
Net electricity: 7.8%.
Paperboard Mills:
Coal and coke: 9.3%;
Natural gas: 20.7%;
Renewable and other: 63.9%;
Net electricity: 6.2%.
Source: GAO analysis of data from the Department of Energy.
[End of figure]
For the paper products sub-industry examples, total imports exceed
total exports. For each, the largest share of imports is from Canada,
an Annex I country with agreed emission reduction targets. However, for
the most trade-intensive example of pulp mills, 19 percent of imports
are from Brazil. While paperboard containers has a trade intensity of
only 6 percent, 27 percent of imports are from China.
Figure 13: Source of Imports Is Important for Trade Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2007 total U.S. imports:
Pulp Mills:
EU Plus: 4.2%;
Canada: 74.1%;
China: 0.3%;
Mexico: 0.1%;
Brazil: 18.6%;
Other: 1.7%.
Paper Mills:
EU Plus: 27.3%;
Canada: 62.1%;
China: 3.9%;
Mexico: 1.2%;
Brazil: 0.5%;
Other: 5.0%.
Paperboard Mills:
EU Plus: 5.7%;
Canada: 93.3%;
China: 0.9%;
Mexico: 0.0%;
Brazil: 0.0%;
Other: 0.1%.
Paperboard Containers:
EU Plus: 9.1%;
Canada: 49.7%;
China: 27.3%;
Mexico: 4.4%;
Brazil: 0.1%;
Other: 9.1%.
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
Among the paper products sub-industries, paperboard containers is the
only example with a significant share of imports from China. While
paperboard containers fails to meet the trade-intensity vulnerability
criteria, emissions pricing could magnify the growing share of imports
from China for that sub-industry. From 2002 to 2007, this share has
grown from 11 percent to 27 percent of U.S. imports.
Figure 14: Sub-Industries With Growing Share of Imports from China:
[Refer to PDF for image: line graph]
Chinese imports as a share of total U.S. imports:
Paperboard Containers:
2002: 11.0%;
2003: 14.3%;
2004: 16.3%;
2005: 19.1%;
2006: 22.0%;
2007: 27.3%.
Total imports by value ($US dollars in millions):
Paperboard Containers:
2002: $790;
2003: $875;
2004: $926;
2005: $1,033;
2006: $1,187;
2007: $1,275.
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
2.4. Potentially Vulnerable Industries: Chemicals Examples:
Among chemicals examples, alkalies and chlorine is the most energy
intensive, at 26 percent, and nitrogenous fertilizers is the most trade
intensive, at 82 percent. Except for industrial gases, each of the
examples meets the energy and trade intensity criteria for
vulnerability. Industrial gases, the largest sub-industry example, with
a 2007 value of output of almost $9 billion, has an energy intensity of
15 percent but a trade intensity of only 5 percent. Not shown in figure
15 is petrochemicals, with a 2007 value of output of almost $62
billion. The Department of Commerce does not publicly provide energy-
intensity data for petrochemicals, though industry experts estimate it
to be at above 5 percent but below 20 percent. The year 2007 trade data
indicate a petrochemicals trade intensity of below 15 percent.
Figure 15: Energy and Trade Intensity Indicators Vary by Sub-Industry:
[Refer to PDF for image: 3-D bar graph]
Alkalies and Chlorine:
Value of output: $6.5 billion;
Energy Intensity: 26.2%;
Trade Intensity: 28.1%.
Carbon Black:
Value of output: $1.5 billion;
Energy Intensity: 7.6%;
Trade Intensity: 24.4%.
Nitrogenous Fertilizers;
Value of output: $5.4 billion;
Energy Intensity: 14.4%;
Trade Intensity: 81.5%.
Industrial Gases:
Value of output: $8.8 billion;
Energy Intensity: 14.5%;
Trade Intensity: 5.4%.
Artificial and Synthetic Fibers:
Value of output: $8.6 billion;
Energy Intensity: 6.3%;
Trade Intensity: 42.2%.
Criteria for industry vulnerability:
Over 5% energy intensity and over 15% trade intensity.
Source: GAO analysis of Department of Commerce energy data for 2006 and
trade and output data for 2007.
[End of figure]
Carbon black relies mostly on renewable and other sources of energy
that are relatively less carbon intensive than coal. Nearly all of the
energy consumed by nitrogenous fertilizers is from natural gas. In
chemical sub-industries, a portion of the carbon contained in the
energy source is also sequestered in the product rather than emitted to
the atmosphere. Data on certain energy uses by type for sub-industries
not shown in figure 16 is not publicly available and percentage shares
could not be computed.
Figure 16: Type of Energy Used Is Important for Carbon Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2002 total energy consumed (percentage of BTUs):
Carbon Black:
Coal and Coke: 0.0%;
Natural Gas: 22.7%;
Renewables and Other: 75.0%;
Net Electricity: 2.3%.
Nitrogenous Fertilizers:
Coal and Coke: 0.0%;
Natural Gas: 97.4%;
Renewables and Other: 0.2%;
Net Electricity: 2.4%.
Source: GAO analysis of data from the Department of Energy.
[End of figure]
For the chemicals examples, total imports exceed total exports.
Nitrogenous fertilizers is the most trade intensive, and less than 40
percent of imports are from Annex I countries--Canada and EU Plus--
while 40 percent of imports are from either Trinidad and Tobago or
countries in the Middle East. Conversely, imports from Canada provide
60 percent of imports for carbon black. Imports from China, Mexico, and
Korea account for 20 percent or more of imports in industrial gases and
artificial and synthetic fibers.
Alkalies and chlorine is the only sub-industry example where exports
comprise more than 60 percent of trade flows, with 15 percent to
Brazil, 13 percent to Canada, and 12 percent to Mexico.
Figure 17: Source of Imports Is Important for Trade Intensity:
[Refer to PDF for image: stacked vertical bar graph]
Share of 2007 total U.S. imports:
Alkalies and Chlorine:
EU Plus: 29.7%;
Canada: 40.8%;
China: 7.5%;
Mexico: 4.5%;
Korea: 7.6%;
Other: 9.1%.
Carbon Black:
EU Plus: 23.8%;
Canada: 59.6%;
China: 0.8%;
Mexico: 7.1%;
Korea: 0.3%;
Other: 8.4%.
Nitrogenous Fertilizers:
EU Plus: 13.2%;
Canada: 23.8%;
China: 3.5%;
Mexico: 0.3%;
Korea: 0.0%;
Other: 59.8%.
Industrial Gases:
EU Plus: 33.1%;
Canada: 33.2%;
China: 16.4%;
Mexico: 6.6%;
Korea: 0.0%;
Other: 10.7%.
Artificial and Synthetic Fibers:
EU Plus: 35.1%;
Canada: 15.8%;
China: 10.3%;
Mexico: 8.7%;
Korea: 12.2%;
Other: 17.9%.
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
From 2002 to 2007, the share of imports from China has grown for
alkalies and chlorine, industrial gases, and artificial and synthetic
fibers from a share of less than 2 percent to a share of between 8
percent and 16 percent. According to representatives from the chemical
industry, growing imports from China are also evident for industry
downstream products, such as plastics.
Figure 18: Sub-Industries With Growing Share of Imports from China:
[Refer to PDF for image: line graph]
Chinese imports as a share of total U.S. imports:
Alkalies and Chlorine:
2002: 0.7%;
2003: 1.0%;
2004: 1.2%;
2005: 2.4%;
2006: 10.1%;
2007: 7.5%.
Industrial Gases:
2002: 1.8%;
2003: 4.2%;
2004: 5.7%;
2005: 9.4%;
2006: 8.3%;
2007: 16.4%.
Artificial and Synthetic Fibers:
2002: 1.9%;
2003: 2.7%;
2004: 3.4%;
2005: 7.8%;
2006: 10.2%;
2007: 10.3%.
Total imports by value ($US dollars in millions):
Alkalies and Chlorine:
2002: $160;
2003: $207;
2004: $253;
2005: $454;
2006: $460;
2007: $400.
Industrial Gases:
2002: $125;
2003: $128;
2004: $148;
2005: $160;
2006: $160;
2007: $176;
Artificial and Synthetic Fibers:
2002: $1,626;
2003: $1,644;
2004: $1,814;
2005: $2,230;
2006: $2,322;
2007: $2,471;
Source: GAO analysis of data from the International Trade
Administration.
[End of figure]
2.5. Potentially Vulnerable Industries: Summary of Industry Examples:
This section provides data on energy and trade characteristics for sub-
industries within primary metals, nonmetallic minerals, paper, and
chemicals. As shown by the data, characteristics that contribute to an
industry's or sub-industry's potential vulnerability to adverse
competitiveness effects vary significantly among the examples provided.
Additional variation would likely exist for factors not discussed, such
as transportation costs and access to markets for natural resources,
capital, and labor. As a result, the data provided are not sufficient
to determine if one sub-industry is more vulnerable than another.
Instead, the data suggest that an assessment of vulnerability that is
based only on a sub-industry's energy and trade intensity may mask
important differences in vulnerability among industries assessed.
* Primary metals examples: Primary aluminum is the most energy and
trade intensive, yet the largest share of imports is from Canada. Iron
and steel is the largest sub-industry that is both energy and trade
intensive and also has the greatest reliance on coal and coke energy
sources. Steel manufacturing and aluminum products fall short of
meeting the trade-intensity criteria, but compared with the other
examples, have the largest share of imports from China and the most
pronounced trend of an increased import share from China since 2002.
* Nonmetallic mineral examples: Cement is the most energy intensive and
has a relatively greater reliance on coal and coke energies. Glass is
the most trade intensive and has the largest share of imports from
China. Both cement and glass show an increasing share of Chinese
imports since 2002. Concrete, while not meeting the trade-intensity
criteria, exports more than it imports, with almost one-third of
exports destined for markets in Mexico and the Middle East.
* Paper examples: Paper mills is the largest sub-industry example,
although most imports are from Annex I countries. Almost one-fifth of
pulp mill imports is from Brazil, although pulp mills is the smallest
example that meets both energy and trade intensity criteria. Paperboard
containers do not meet either vulnerability criteria, but show an
increasing share of imports from China since 2002.
* Chemicals examples: Nitrogenous fertilizers is the most trade
intensive, and 40 percent of imports are from Trinidad and Tobago or
countries in the Middle East. Alkalies and chlorine are the most energy
intensive and exports account for 79 percent of trade flows, of which,
over one-fourth are to markets in Brazil and Mexico. Industrial gases
do not meet either vulnerability criterion, but compared with the other
examples, have the largest share of imports from China and the most
pronounced trend of an increased import share from China since 2002.
[End of section]
3. Trade Measures: Introduction:
In this section, we discuss the use of trade measures and output-based
rebates to address potential competitiveness and environmental effects
of a domestic emissions pricing system. Through trade measures, such as
a border tax adjustment or a border allowance requirement,
international competitors without comparable climate policies would pay
for greenhouse gas emissions associated with their exports to the
United States. Output-based rebates have been proposed as another type
of measure to offset the costs of climate policy for sectors that are
exposed to unregulated competition through payments based on a per-unit
government rebate or tax credit, or a per-unit allocation of emissions
allowances.
How a trade measure is ultimately designed will have important
implications for the effectiveness of the overall measure in addressing
industry and environmental effects. In terms of output based rebates,
the extent and design of the rebates could help address the industry
effects, but could also affect the costs to other industries.
In this section we provide explanations of key features of trade and
output-based measures included in climate change legislation introduced
between April 2007 and June 2009. We also provide information on a
range of views regarding the value of trade and output-based measures
as policy tools to address competitiveness and environmental concerns.
Additionally, we provide information on the potential implementation
challenges associated with implementing these measures.
3.1. Trade Measures: Different Types:
American Electric and Power Border Allowance Requirement:
Some of the climate change bills introduced between April 2007 and June
2009 included provisions for a border allowance requirement. A border
allowance requirement proposal was developed by the American Electric
Power (AEP) and trade union representatives with the International
Brotherhood of Electric Workers (IBEW). The AEP/IBEW proposal was
introduced in July 2007 in S. 1766, 110TH Cong. (2007) and was also
included in various other legislative proposals.
Trade measures have been proposed to address competitiveness and
environmental effects associated with implementing a domestic emissions
pricing system, such as a cap-and-trade system or a carbon tax system.
Generally, in the context of a domestic emissions pricing system, trade
measures would impose a cost or other requirement on energy-intensive
imports from countries with weaker climate policies. Various types of
trade measures exist for addressing competitiveness effects associated
with a domestic emissions pricing system. Among the cap-and-trade and
carbon tax legislative proposals we examined, border tax adjustments or
border allowance requirements are the most frequently proposed type of
trade measures.
Border Tax Adjustment:
According to experts, a border tax adjustment is a levy applied by the
federal government, on certain imported goods at the border. Key
features of a border tax adjustment include the following:
* Tax proportionate to the imports' embedded carbon: Generally, the tax
applied to the import would be based on the carbon emissions associated
with the production of the imported good.
* Tax equivalent to domestic compliance costs: Generally, the federal
government would charge imported goods the equivalent of what a
domestic producer of a similar good would pay to comply with a domestic
emissions pricing system.
Border Allowance Requirement:
According to experts, a border allowance requirement is a measure that
would require importers to purchase allowances from the federal
government prior to importing goods into the United States. Generally,
key features of a border allowance requirement include the following:
* Establishes a separate pool of allowances: In some of the cap-and-
trade bills proposed in 2008, the federal government would establish a
reserve of allowances separate from allowances established in the
domestic cap-and-trade system. The border allowances that importers
would be required to submit would come from this reserve allowance
pool.
* Comparable action determination: Importers of goods from foreign
countries that do not take "comparable action" to the United States to
limit greenhouse gas emissions, would be required to submit allowances
to accompany exports to the United States of the covered good.
* Documentation at the border: Prior to entering the United States,
importers would have to purchase allowances from the federal
government, and submit a written declaration at the border stating that
the good is accompanied by the required number of allowances.
Generally, the number of allowances required would be proportionate to
the embedded carbon content of the import.
3.1. Trade Measures: Supporters' Views:
Some policy analysts, industry stakeholders, climate change experts,
and government officials argue that trade measures help address
competitiveness and environmental effects associated with domestic
emissions pricing systems. For example, some supporters contend that
trade measures may do the following:
* Prevent a decline in output by U.S. producers: Trade measures would
help level the playing field by imposing similar costs on imports from
countries without comparable carbon mitigation policies. The potential
exists for certain U.S. firms to lose business to energy-intensive
imports from countries with weaker climate policies. Moreover, firms
could further lose international competitiveness due to the indirect
costs of purchasing more expensive U.S. energy. As a result, U.S. firms
in vulnerable industries could suffer a loss in output, profits, and
employment.
* Prevent carbon leakage: Trade measures would prevent U.S. energy-
intensive industries from shifting production to countries without
comparable carbon mitigation policies, resulting in carbon leakage,
where emission reductions in the United States are replaced to some
degree by production and emission growth in less regulated countries.
Supporters of trade measures stated that carbon leakage could lead to
higher volumes of greenhouse gas emissions worldwide.
* Create leverage on other countries to reduce emissions: Trade
measures would create incentives for major trading partners to adopt
similar climate policies. For example, proponents of trade measures
argue that trade measures could potentially provide leverage to U.S.
climate negotiators in their efforts to establish a global framework
that includes other major emitting nations. Some industry stakeholders
with whom we spoke, for example, stated that the potential benefit of a
trade measure in increasing pressure on developing countries may trump
its adverse economic effects. These stakeholders said that countries'
statements of opposition to proposed trade measures provided evidence
of their effectiveness in providing leverage.
* Political acceptability: If a climate change bill is to pass, it will
be necessary that the bill include a provision like a trade measure to
address competitiveness effects. Policy experts stated that most
climate change proposals with trade measures have garnered support from
industries that could be affected by a domestic emissions pricing
system.
3.1. Trade Measures: Opponents' Views:
Some policy analysts, climate change experts, and government officials
raise concerns that trade measures may motivate retaliatory actions,
undermine efforts to secure multilateral consensus, and generate little
leverage. For example, some opponents contend that trade measures may
do the following:
* Motivate retaliatory action: An important implication of U.S. trade
measures is how they would be perceived by other countries and impact
negotiations aimed toward an international climate agreement. Opponents
argued that trade measures could be viewed by other countries as an
antagonistic step, and could lead to retaliatory action from other
countries.
* Undermine efforts to secure international consensus: While there is
general agreement that the global scope of the climate change problem
will require actions from all major emitting nations, there are
differing views on the impact that trade measures may have in securing
an international consensus. Foreign government officials with whom we
spoke, declined to give formal positions on trade measure proposals
given that a climate change bill has not yet passed Congress. But some
officials expressed concerns over the unilateral application of a trade
measure by the United States and said that competitiveness effects
would be better addressed through multilateral discussions. Because
multilateral approaches involve commitments to reduce greenhouse gas
emissions by more than one country, they also level the playing field.
Multilateral approaches include international agreements, such as the
Kyoto Protocol, or international action, as when countries
independently decide to reduce their emissions of greenhouse gases.
Multilateral approaches may involve sectoral agreements, leveling the
playing field worldwide within an industry. Foreign embassy officials
also stated that trade measures are not likely to be effective tool to
leverage other countries to take steps to reduce emissions and that a
unilateral U.S. trade measure could add to the challenge of developing
multilateral consensus on climate change mitigation efforts.
* Generate little leverage on other countries to reduce emissions: The
effectiveness of trade measures in creating leverage on foreign
countries to reduce emissions will vary with the share of their output
that is imported into the United States compared with the share that is
consumed domestically or exported to other countries. In addition, some
policy experts we spoke to note that in some cases, the emission costs
that foreign firms will have to pay on their imports into the United
States may not be sufficient to motivate them to change domestic
production processes. For example, in each of the vulnerable industries
listed in table 2, less than 1 percent of total Chinese output is
imported into the United States, although the share may be higher for
individual firms. Instead, most of the Chinese output in these
industries is consumed domestically or in countries that may or may not
impose a domestic emissions pricing system. Nonetheless, in certain
cases, a U.S. trade measure may be effective in providing some degree
of leverage. For example, U.S. iron and steel imports represent more
than 8 percent of output in Brazil and more than 10 percent of output
in Mexico. In addition, U.S. imports of nitrogenous fertilizers from
the Middle East are more than 20 percent of production from that
region.
Table 2: U.S. Imports as a Share of Foreign Output (percentage of
metric tons):
Brazil:
Iron and steel: 8.3;
Primary aluminum: 5.0;
Cement: 1.1;
Pulp products: 10.8;
Nitrogenous fertilizers: 3.5.
China:
Iron and steel: 0.5;
Primary aluminum: 0.3;
Cement: 0.9;
Pulp products: 0.1;
Nitrogenous fertilizers: 0.5.
India:
Iron and steel: 0.7;
Primary aluminum: 0.0;
Cement: 0.0;
Pulp products: n/a;
Nitrogenous fertilizers: 0.0.
Mexico:
Iron and steel: 10.6;
Primary aluminum: n/a;
Cement: 5.6;
Pulp products: 1.1;
Nitrogenous fertilizers: 8.3.
Middle East:
Iron and steel: 0.1;
Primary aluminum: 6.5;
Cement: 0.2;
Pulp products: 0.0;
Nitrogenous fertilizers: 22.1.
Source: GAO analysis of production data from the U.S. Geological Survey
and the Food and Agriculture Organization and trade data from the
Department of Commerce.
Notes to Table:
Data are for 2007, except for cement and nitrogenous fertilizers with
data for 2006.
Iron and steel production figures include those for pig iron, direct-
reduced iron, and raw steel.
Cement production figures are for hydraulic cement.
Pulp products production figures represent the total for "pulp for
paper" products within FAOSTAT.
Nitrogenous fertilizer production figures represent tonnage by total
nutrients within FAOSTAT.
Not included in the iron and steel import figures above were about 38
million liters from Mexico.
[End of table]
3.1. Trade Measures: Implementation Challenges:
Trade measures could present implementation challenges, particularly
with obtaining necessary data to measure the carbon content of imports,
and to evaluate and assess climate change actions of other countries.
Examples of potential implementation challenges include the following:
* Determining the embedded carbon content in imports: Generally,
imposing a trade measure on an import would require a determination of
the embedded carbon content, or the amount of greenhouse gases emitted
during the production of the imported good. According to experts,
accurately measuring the embedded carbon content for specific items
would be challenging. Furthermore, climate policy experts point out
that while determining the embedded carbon content in standardized
products like steel, primary aluminum, and basic chemicals would be
difficult, it would be even more challenging to assess the embedded
carbon content of products that rely on these goods for final assembly.
Additionally, climate policy experts noted that, variations in the type
of energy used can result in different carbon intensities for goods
that appear identical at the border. To accurately assess the embedded
carbon content of a product, the administrator of the program would be
required to obtain specific plant-level information on the production
process of the import from foreign countries.
Accurately measuring the embedded carbon content of an import would
require significant data, resulting in several data reliability
concerns with obtaining carbon data from international inventories.
Experts and industry stakeholders alike reported that obtaining data
from foreign producers could be a challenge, and that using data from
international inventories could raise several data reliability concerns
as the United States would have no way of verifying that the data
obtained was accurate. In addition, under the S. 3036 110TH Cong.
(2008), importers would have to submit a declaration statement at the
border declaring the imported good is accompanied by the required
number of allowances. Agency officials we spoke to noted that officials
would not know if the information contained in the declaration was
accurate.
* Evaluating and assessing climate change actions: As previously
discussed, a key feature of a trade measure provision is the
requirement of determining the comparability of other countries'
actions to address climate change. According to policy experts, among
some of the cap-and-trade bills introduced, some have not clearly
defined or assessed the method for determining how other countries'
actions on climate change would be assess by the U.S. government. In
order for the implementing agency to assess the comparability of
different countries, the criteria for making this determination would
have to be defined either in the legislation or implementing
regulations.
3.1. Trade Measures: Design Trade-Offs:
In designing a trade measure, there are a range of possible options to
consider as illustrated in table 3. The design features of trade
measures involve different trade-offs that will have implications for
the effectiveness of the overall measure in addressing competitiveness
and environmental concerns.
For example, a key design consideration is the timing for when the
trade measure would go into effect. Delaying the implementation of the
trade measure could result in the measure being a more effective
leverage tool because it would provide other countries with an
opportunity to implement similar carbon mitigation policies. On the
other hand, industry stakeholders with whom we spoke argued that a
delay in implementing the trade measure could adversely affect U.S.
industries by incurring costs under a domestic emissions pricing system
that their foreign competitors would not face. According to some
stakeholders, this could result in U.S. industries being at a
competitive disadvantage compared to foreign competitors.
The method for determining the comparability of other countries'
actions also involves important trade-offs. Given the different
approaches being utilized to address climate change, questions have
been raised over whether these different actions would be deemed
comparable to U.S. efforts. Industry groups have argued that the method
for determining comparability should be based on quantitative criteria
that are equivalent to criteria U.S. producers must meet. However,
providing flexibility on determining comparability allows countries to
utilize the approach best suited for reducing emissions in their
individual country.
Table 3: Policy Experts Cite Trade-offs Involved in the Design of Trade
Measures:
Feature: Date when the trade measure goes into effect;
Options: The trade measure can go into effect simultaneously when a
domestic cap-and-trade system goes into effect or at a later date;
Design trade-offs: Having the trade measure go into effect
simultaneously when the domestic cap-and-trade system goes into effect
may reduce impacts on U.S. industry competitiveness. Delaying the
implementation of the trade measure allows time for international
climate negotiations and for countries to take action on reducing their
emissions.
Feature: Type of products covered;
Options: Climate bills in the 110th Congress limited coverage of the
trade measure to specified products such as importers of steel,
aluminum, and cement; whereas other bills expanded coverage to
manufactured goods that met eligibility criteria;
Design trade-offs: Limiting product coverage may exclude industries
vulnerable to competitiveness effects. Expanding product coverage
increases federal challenges to track emissions.
Feature: Defining comparable action;
Options: Proposals have varied in stringency and level of detail in
outlining the methodology for determining comparable action;
Design trade-offs: Quantitative criteria for assessing comparable
action may not measure the level of effort on climate policy that a
country actually undertakes. Flexibility and discretion on
comparability determinations increases uncertainty for industry
stakeholders.
Feature: Calculating border allowance requirements;
Options: Proposals have varied in the level of detail in outlining the
methodology for calculating the number of allowances industries will be
required to submit at the border. Earlier proposals based border
allowance requirements on averages for country industry sectors; H.R.
2454 delegated the decision to the future implementing agency;
Design trade-offs: Basing border allowance requirements on industry
average increases implementation feasibility as firm-level data likely
not available; Using industry average for baseline may limit incentives
to improve efficiency and would penalize efficient firms.
Source: GAO analysis of selected climate change legislation introduced
between April 2007 and June 2009 that included trade measures.
[End of table]
3.2. Trade Measures: Alternative: Output-Based Rebates:
Output-based rebates have been proposed as policy alternatives to using
trade measures. These rebates would be provided to energy-intensive (or
greenhouse gas-intensive) and trade-exposed industries to cover their
increased costs from the carbon pricing system. Under legislative
proposals, EPA would determine the average energy (or greenhouse gas)
intensity per unit of production for each relevant industrial sector
and then distribute allowances based on each facility's amount of
production. Although some industry stakeholders note that output-based
rebates address competitiveness effects by compensating covered firms
for incurred costs, some climate policy experts note that output-based
rebates could distort pricing, could reduce incentives for firms to
engage in conservation, and may drive up the cost of the program.
Output-based Rebates:
Output-based rebates are measures designed to financially rebate
industries for the costs incurred under a domestic emissions pricing
system. According to policy experts, key features of an output-based
rebate include the following:
* Tied to firm's level of output: Generally, output-based rebates would
be tied to a firm's level of output. For example, firms that expand
their operations will receive a larger rebate, while firms that
downsize but continue to produce in the United States will receive a
smaller rebate. Firms that move offshore or shut down would receive no
rebate. A rebate can take the form of a per-unit rebate or tax credit,
or a per-unit allocation of emissions allowances.
* Compensates for incurred costs: For a facility with an average level
of energy intensity (or greenhouse gas intensity) these rebates would
cover both direct and indirect costs. These would include their own
emissions and costs associated with higher energy prices and technology
purchases to improve energy efficiency. Providing allowances based on
average industry intensity, energy intensity and production levels,
rather than providing them based on each firm's historical emissions,
is intended to reward the most efficient facilities and create an
incentive for continued efficiency improvements.
H.R. 2454 111THCong. (2009) included provisions for output-based
rebates to offset the costs incurred by firms to comply with a cap-and-
trade system. Two other climate change bills, H.R. 7146, 110tTHCong.
(2008) and H.R. 1759, 111tTHCong. (2009), also incorporated output-
based rebates. In all three proposals, allowances would be distributed
among certain energy-and trade-intensive industries according to an
individual firm's output.
Supporters' Views:
Some policy analysts, climate change experts, and government officials
argue that output-based rebates may address some of the limitations
associated with using trade measures. For example, some supporters
contend that output-based rebates may do the following:
* Mitigate costs incurred by U.S. producers: Output-based rebates are
necessary to compensate U.S. firms for costs incurred while complying
with a domestic emissions pricing system. Supporters note that trade
measures only apply costs to foreign competitors at the border, while
output-based rebates affect producers' costs for both domestic and
export markets. Among the key supporters of output-based rebates are
stakeholders in energy-intensive industries who note that energy costs
are a substantial portion of their manufacturing costs. According to
these stakeholders, proposals that mitigate costs at the production
level, either by allocating free allowances to qualifying facilities or
rebating the costs of allowances offsets the disincentive created by
higher energy prices in the United States.
* Reward efficient firms: Output-based rebates are generally allocated
in proportion to current levels of production rather than being fixed
to historical measures. Supporters argue that because the rebates or
allocations are tied to production levels, individual firms have an
incentive to increase their production. According to supporters,
rebates reward the most productive plants and stimulate investments in
efficient technology. Moreover, the rebates would benefit firms that
face competition from foreign suppliers in markets at home or global
export markets or both.
* Use U.S. data: Implementing output-based rebates may be more
manageable than implementing trade measures. For example, in proposed
legislation, agencies would only require data from U.S. data sources to
identify firms that would be eligible for output-based rebates. This
differs from trade measures which would require data from foreign
firms' production, which could be more difficult to obtain. In
addition, legislative proposals have generally been explicit about the
U.S. data sources and criteria to be used in identifying eligible
industries.
Opponents' Views:
Some policy analysts, climate change experts, and government officials
argue that despite several advantages identified with using output-
based rebates, several potential limitations also exist. For example,
some opponents contend that output-based rebates offset the costs of
climate policy for sectors that are exposed to unregulated competition,
and thereby lower the incentives for those firms to engage in
conservation and reduce their energy intensity. Similarly, output-based
rebates would likely result in relatively lower output prices for the
products produced by firms receiving rebates, thereby reducing the
incentives for consumers of those products to conserve. Moreover, some
climate policy experts argue that output-based rebates create a subsidy
for certain energy-intensive industries which would require non energy-
intensive firms to engage in greater efforts to reduce the emissions
intensity of their production.
Potential Implementation Challenges:
Although the data requirements for an output-based measure may be more
manageable than those of a trade measure, some challenges related to
identifying electricity distribution data exist. For example, under HR
2454, 111TH Cong. (2009), EPA would be required to obtain production
data on various commodities from energy-intensive industries, including
electricity distribution data. Data on electricity use on a facility-
by-facility basis is not currently collected by government agencies.
Provisions in either the legislation or in implementing regulations
would have to be explicit on how to obtain data on electricity use.
Additionally, according to EPA officials, the methodology outlined in
HR 2454, 111TH Cong. (2009), for how to determine eligible industries
does not align with data that would be collected under EPA's proposed
mandatory greenhouse gas reporting rule. According to climate policy
experts, standard mechanisms for reviewing eligibility for the rebates
are needed to ensure that the policy does not over compensate certain
industries.
3.3. Trade Measures: Legislative History Of Trade Measures And Output-
Based Rebates:
Between April 2007 and June 2009, several cap-and-trade and carbon tax
bills were introduced with provisions to address the potential
competitiveness and environmental effects of implementing a domestic
emissions pricing system. For example, of the cap-and-trade bills that
we examined and that were introduced during that period, some included
trade measures such as an allowance requirement at the border or a
border tax.
As illustrated in figure 19, two bills introduced in 2009 have included
provisions for using output-based rebates. The most recent bill, H.R.
2454, 111th Cong. (2009) includes a provision for output-based rebates.
Under that bill, energy intensive and trade exposed industries would
receive allowances to cover their increased costs.
Several industry stakeholders with whom we spoke, reported that output-
based rebates and trade measures could function as complimentary
measures to address competitiveness concerns. For example, in H.R.
2454, 111THCong. (2009), the output-based rebates would be phased out
by 2035 unless the President decides to extend them. In that bill, the
trade measure would go into effect after 2020, unless the President
determines it would not be in the national interest and Congress passes
an affirmative joint resolution within 90 days.
Some stakeholders have stated that having the trade measure to go into
effect at a later time may provide time for the United States to be
part of international negotiations on climate change.
Figure 19: Proposals Move toward Using Output-Based Rebates to Address
Competitiveness Concerns:
[Refer to PDF for image: illustrated timeline]
Border tax adjustment:
110th Congress:
HR 2069 (Stark), introduced April, 2007;
HR 3416 (Larson), introduced August, 2007.
111th Congress:
HR 1337 (Larson), introduced March, 2009.
Border allowance requirement:
110th Congress:
S. 1776 (Bingaman-Spector), introduced July, 2007;
S. 3036 (Boxer-Lieberman-Warner), introduced May, 2008;
HR 6186 (Markey), introduced June 4, 2008;
HR 6316 (Doggett), introduced June, 2008.
Output-based rebates:
110th Congress:
HR 7146 (Inslee-Doyle), introduced September, 2008;
111th Congress:
HR 1759 (Inslee-Doyle), introduced March, 2009.
Output-based measure with potential border allowance requirement:
111th Congress:
HR 2454 (Waxman-Markey), passed in House, June 2009.
Source: GAO analysis.
[End of figure]
4. International Trade Implications: Overview:
Introduction:
In this section, we discuss potential international implications of a
U.S. trade measure, such as concerns about countries possibly
retaliating in response to a trade measure or its potential impact on
the multilateral trading system. In addition, we provide information on
the WTO dispute settlement process, a forum that facilitates the
resolution of specific trade disputes. We provide information on the
WTO provisions and key questions that may apply if a U.S. trade measure
or an output-based rebate were to be challenged at the WTO.
Assessing the international trade implications is difficult for a
number of reasons. One is that it depends in part upon how other
nations reduce their carbon emissions, and whether they perceive any
U.S. measures as likely to affect their exports. In addition, the
outcome of a WTO challenge, if any, would be uncertain and may depend
on how the measure is implemented.
Potential Bilateral and Multilateral Trade Impacts:
According to experts and foreign officials we spoke with, U.S. climate
change trade measures may have implications for U.S. and multilateral
trade relations.
* Potential for bilateral trade retaliation: Countries may view U.S.
trade measures as trade restrictions or sanctions, which could lead
them to implement restrictions against U.S. exports. Other countries
could potentially develop counter measures based on a different test of
"comparability," such as historical or per capita emissions, according
to trade experts we spoke with.
Although no other country has yet to implement a trade measure based on
greenhouse gas emissions, European officials have previously considered
the use of trade measures on countries, including the United States,
that have not taken actions that match European standards. In addition,
support within other countries for imposing trade measures could
increase if the United States implements a trade measure.
* Potential for increased trade tensions: A broader concern is that
escalating retaliation between the United States and other countries
could lead to significant global trade tensions. Given the volume of
trade in goods that could potentially be affected by trade measures
linked to greenhouse gas emissions, some officials and experts have
argued that escalating tensions and responses to these measures could
ultimately do significant harm to the functioning of the multilateral
trading system under the WTO. Trade experts told us that trade measures
and responses could potentially pose systemic challenges to the WTO and
its dispute resolution system. For example, multiple challenges brought
up by other countries based on different imported products could tie up
the system.
4.1. International Trade Implications: WTO Compliance Questions:
WTO Dispute Settlement Process:
* Consultation (up to 60 days);
* Panel Review (generally up to 6 months, but in no case more than 9
months);
* Appellate Stage (60 to 90 days);
* DSB Decision (generally up to 9 months and up to 12 months if the
panel report is appealed);
* Implementation Stage (if immediate compliance is impractical, member
given a 'reasonable period of time' to comply, which normally should
not exceed 15 months from adoption of report up to 15 months).
A unilateral U.S. trade measure or system of rebates linked to a
climate change policy may be challenged by other countries through the
WTO's dispute resolution process. Countries could potentially raise
different types of challenges depending on the design of the trade
measure or rebate, and several key questions may be relevant in the
consideration of a WTO dispute. These questions stem from the WTO
provisions under which the trade measures or rebates may be challenged
and reviewed, including the General Agreement on Tariffs and Trade
(GATT), and the Agreement on Subsidies and Countervailing Duties
(ASCM).
The following pages describe in more detail the questions, factors, and
WTO provisions listed in table 4.
WTO Dispute Settlement Process:
The WTO's dispute settlement system facilitates the resolution of
specific trade disputes and serves as a vehicle for upholding trade
rules and preserving the rights and obligations of WTO Members under
WTO agreements. WTO Members may request consultations concerning
measures affecting the operation of such WTO agreements. After
consultations, WTO Members can request the establishment of a panel to
hear their claims regarding alleged inconsistencies of other Member's
measures. The panel will issue a report of its findings, which will be
adopted by the WTO Dispute Settlement Body (DSB), unless a party to the
dispute appeals the panel's report, which is reviewed by the WTO
Appellate Body. WTO disputes can take several years or more to complete
the entire process. If the responding party does not prevail and fails
to comply with the rulings and recommendations of the DSB, the
complaining party may seek authority to suspend concessions or other
obligations under the WTO agreements.
Table 4: Key Questions That May be Considered in a WTO Challenge:
Key questions: 1. Is the trade measure consistent with WTO market
access requirements?
Discussion: Customs duties or other duties or charges on imports in
excess of schedules of concessions may not be imposed. Subject to
exceptions, prohibitions or restrictions, other than duties, taxes or
other charges, on imports may not be imposed;
WTO provisions: GATT Article II, XI.
Key questions: 2. Is the trade measure consistent with WTO non-
discrimination requirements?
Discussion: Measure must treat imported products no less favorably than
like domestic products;
WTO provisions: GATT Article III.
Key questions: 2. Is the trade measure consistent with WTO non-
discrimination requirements?
Discussion: Measure must also not discriminate among goods from
different countries;
WTO provisions: GATT Article I.
Key questions: 3. If not WTO consistent, is the trade measure covered
by a WTO environmental exception?
Discussion: Measure relating to conservation of exhaustible natural
resources or that is necessary to protect human, animal or plant health
is covered under WTO exceptions;
WTO provisions: GATT Article XX (b), (g).
Key questions: 3. If not WTO consistent, is the trade measure covered
by a WTO environmental exception?
Discussion: To be covered, measure must not be applied in a manner
which would constitute a means of arbitrary or unjustifiable
discrimination or be a disguised restriction on international trade;
WTO provisions: GATT Article XX chapeau.
Key questions: 4. Are output-based rebates consistent with WTO rules
governing subsidies?
Discussion: The rebates must not involve a specific subsidy or other
benefit that causes adverse effects to other WTO Members;
WTO provisions: ASCM.
Source: GAO analysis of legal scholars' views on questions and
provisions that may be relevant in analyzing trade measures contained
in climate change legislation for consistency with WTO rules.
[End of table]
4.1. International Trade Implications: WTO Compliance:
The following observations are based on comments from various legal
scholars and other non-governmental commentators on questions and
provisions that may be relevant in analyzing trade measures contained
in climate change legislation for consistency with WTO rules.
1. Is the Trade Measure Consistent with WTO Market Access Rules and
Commitments?
An initial question involves how a trade measure would be interpreted
and the corresponding GATT article under which the measure would be
reviewed.
* GATT Article II:1(b) prohibits a WTO Member from applying customs
duties or other duties or charges to imports in excess of the Member's
schedule of tariff concessions.
* GATT Article XI:1 prohibits prohibitions or restrictions, other than
duties, taxes or other charges, on imports, with certain exceptions.
* According to legal experts, a "border tax" imposed on imports
equivalent to a tax imposed on like domestic products may be WTO
compliant.
2. Is the Trade Measure Consistent with WTO Non-Discrimination
Requirements?
Trade measures must also be consistent with WTO non-discrimination
provisions covering most favored nation status treatment and national
treatment.
* Does a trade measure treat two like products differently depending on
country of origin? GATT Article I:1 provides, in part, that with
respect to customs duties and charges imposed on or in connection with
importation and exportation, and the method of levying such duties and
charges, any advantage granted by any WTO Member to any product
originating in any other Member is to be accorded immediately and
unconditionally to the like product originating in or destined for all
other WTO Members.
* Does a trade measure treat imported products less favorably than like
domestic products? GATT Article III:4 provides, in part, that imported
products shall be accorded treatment no less favorable than that
accorded to like products of national origin in respect of all laws,
regulations, and requirements affecting their internal sale, offering
for sale, purchase, transportation, distribution, or use.
Shrimp-Turtle Case - In this 1996 case, four WTO members challenged as
discriminatory a U.S. embargo on the importation of certain shrimp and
shrimp products from countries that had not been certified by the
Department of State as having a comprehensive sea turtle conservation
regime. The United States argued that the measure was justified under
article XX (g).
However, the WTO panel found, in part, that the U.S. measure was not
justified under article XX (g) because it met the panel's test of being
a "risk to the multilateral trading system." Upon appeal, the Appellate
Body rejected the panel's test and found that the measure fell within
article XX (g). However, the Appellate Body also found the U.S. measure
had been applied in an arbitrary and discriminatory manner.
The United States was ultimately able to comply with WTO rulings by
making changes in the way the law was administered, including revising
guidelines to establish greater transparency and due process in country
certification decisions.
3. If the Trade Measure Is Not Permissible Under Core WTO Obligations,
Would it Be Covered Under an Environmental Exception?
If a trade measure does not comply with GATT market access or non-
discrimination provisions, it may still be justified under certain GATT
environmental exceptions. A key consideration would be the
interpretation of the intended purpose of the measure and whether it is
designed to serve an environmental objective.
* Is the trade measure designed to serve an environmental objective?
- GATT Article XX (b) provides an exception for measures necessary to
protect human, animal, or plant life or health.
- GATT Article XX (g) provides an exception for measures relating to
the conservation of exhaustible natural resources if such measures are
made effective in conjunction with restrictions on domestic production
or consumption.
* How is the measure applied? The introduction (chapeau) to GATT
Article XX states that such measures must not be applied in a manner
that would constitute a means of arbitrary or unjustifiable
discrimination or a disguised restriction on international trade.
4. Are Output-Based Rebates Consistent with WTO Rules Governing
Subsidies?
The ASCM imposes disciplines on certain kinds of subsidies to domestic
producers, such as those that cause adverse effects to foreign
competitors.
* Is an output-based rebate or distribution of free allowances a
subsidy? To be considered a subsidy under the ASCM, a system of rebates
would need to involve (1) a "financial contribution" by the government
or any form of income or price support that (2) confers a "benefit" to
the recipient and (3) is "specific."
* Is the rebate an "actionable" subsidy that causes "adverse effects"
to the interests of other WTO Members? A further key question is
whether a rebate, if found to be a subsidy, would cause "serious
prejudice" to the interests of other WTO Members.
[End of section]
Appendix 1: Objectives, Scope, And Methodology:
Our research objectives were to examine: (1) information on estimating
industry effects; (2) examples of industries that may be vulnerable to
a loss in international competitiveness from emissions pricing; (3)
trade measures and other approaches to address competitiveness issues;
and (4) potential international implications of trade measures.
To address all of these objectives, we (1) reviewed relevant climate
change academic literature and federal agency documents; (2) reviewed
and analyzed studies and data on climate change from a variety of
sources, including past GAO work, the U.S. Census Bureau and
Departments of Commerce and Energy, international organizations, policy
institutes, and universities; (3) interviewed agency officials from the
Office of the U.S. Trade Representative (USTR); the Environmental
Protection Agency (EPA); the Departments of Commerce, State, Energy,
and Treasury, and the Department of Homeland Security's Customs and
Border Protection (CBP); (4) conducted interviews with subject-matter
experts selected from a population of individuals from government,
academia, business, and professional organizations. Several criteria
were used for selecting experts to interview including: type and depth
of experience, the expert's recognition in the professional community,
relevance of published work, professional affiliations, present and
past positions held, and other subject matter experts' recommendations.
Objective 1 and 2:
To better understand how implementing a domestic emissions pricing
system would likely affect the international competitiveness of U.S
industries, we reviewed relevant studies from GAO, EPA, the Department
of Energy's Energy Information Agency (EIA), and international
organizations. We also reviewed documents and interviewed experts from
policy institutes, universities, and industry.
Recently proposed legislation identifies industries potentially
vulnerable to adverse competitiveness effects as those with: (a) either
energy intensity or greenhouse gas intensity of 5 percent or greater;
and (b) a trade intensity of 15 percent or greater.[Footnote 4] Since
calculation of greenhouse gas intensity requires an emissions price--
not yet determined--and detailed industry data on greenhouse gas
emissions--not currently available--we focus our analysis on industry
energy intensity. However, energy intensity is also an imperfect
measure of potential vulnerability since energy use is not the only
source of industrial greenhouse gas emissions, and an industry's energy
expenditures may rise with to a change in market prices, even if the
industry's greenhouse emissions decline. Additionally, many factors may
determine the vulnerability of any particular firm, including
transportation costs, supply chain relationships, and access to markets
for natural resources, capital, or labor.
Based on industry and expert studies, most industries that meet both
vulnerability criteria are within primary metals, nonmetallic minerals,
paper products, and chemicals.[Footnote 5] Quantitative analysis of the
estimated competitiveness impacts of U.S. greenhouse gas emissions
pricing is relatively limited. We present results for two studies that
separate the international competitiveness effects from U.S. emissions
pricing from the domestic market effects. Estimated results from these
two studies include findings that are broadly consistent with those of
other studies. For example, a study of climate policy impacts on U.S.
industries was commissioned by the National Committee on Energy Policy
and studies of the European Union's climate policies have been
performed for the European Commission and the International Energy
Agency. In each of these studies, the list of vulnerable industries is
generally consistent, as is the finding that estimated impacts could be
greater for energy-intensive industries.
To illustrate variation in economic characteristics among these four
manufacturing industries, we analyzed: (1) energy consumption data from
the U.S. Census Bureau's Annual Survey of Manufacturers; (2) energy use
data from EIA's Manufacturing Energy Consumption Survey; (3)
international trade data from the Department of Commerce's
International Trade Administration; and (4) U.S. and international
production data from the Department of Commerce's Bureau of Economic
Analysis, the U.S. Geological Survey and the United Nations Food and
Agricultural Organization (FAO). For analysis of sub-industries, we
examined data with a Census Bureau North American Industry
Classification System (NAICS) code of 5 to 6 digits, depending on how
the data were reported in each of the databases reviewed and for
consistency of comparison with other studies. For the vulnerable sub-
industry charts, we applied multiple criteria to show variation in
industry characteristics of energy intensity, trade intensity, and
primary trading partners. For example, we selected sub-industries that
met both the energy and trade intensity criteria, examples that met
only one criterion, and examples that met neither, but had significant
imports from non-Annex I countries. We do not identify the complete
list of potentially vulnerable sub-industries, a list that will vary
depending on the level of aggregation in product lines that is
examined. The specific list of example sub-industries we selected,
along with their corresponding NAICS codes can be found in table 5.
Table 5: Sub-Industries Selected as Vulnerable Industry Examples:
Sub-Industry Examples: Primary Metals;
North American Industry Classification System Codes: 331.
Sub-Industry Examples: Iron and steel mills;
North American Industry Classification System Codes: 331111.
Sub-Industry Examples: Electrometallurgical products;
North American Industry Classification System Codes: 331112.
Sub-Industry Examples: Steel manufacturing; 33121,
North American Industry Classification System Codes: 33122.
Sub-Industry Examples: Ferrous metal foundries;
North American Industry Classification System Codes: 33151.
Sub-Industry Examples: Primary aluminum;
North American Industry Classification System Codes: 331312.
Sub-Industry Examples: Aluminum products;
North American Industry Classification System Codes: 331314, 331316.
Sub-Industry Examples: Nonmetallic Minerals;
North American Industry Classification System Codes: 327.
Sub-Industry Examples: Cement;
North American Industry Classification System Codes: 32731.
Sub-Industry Examples: Concrete;
North American Industry Classification System Codes: 32732.
Sub-Industry Examples: Lime and gypsum;
North American Industry Classification System Codes: 3274.
Sub-Industry Examples: Glass;
North American Industry Classification System Codes: 32721.
Sub-Industry Examples: Clay building material;
North American Industry Classification System Codes: 32712.
Sub-Industry Examples: Mineral wool;
North American Industry Classification System Codes: 327993.
Sub-Industry Examples: Paper Products;
North American Industry Classification System Codes: 322.
Sub-Industry Examples: Pulp mills;
North American Industry Classification System Codes: 32211.
Sub-Industry Examples: Paper mills;
North American Industry Classification System Codes: 32212.
Sub-Industry Examples: Paperboard mills;
North American Industry Classification System Codes: 32213.
Sub-Industry Examples: Paperboard containers;
North American Industry Classification System Codes: 32221.
Sub-Industry Examples: Chemicals;
North American Industry Classification System Codes: 325.
Sub-Industry Examples: Alkalies and chlorine;
North American Industry Classification System Codes: 325181.
Sub-Industry Examples: Carbon black;
North American Industry Classification System Codes: 325182.
Sub-Industry Examples: Nitrogenous fertilizers;
North American Industry Classification System Codes: 325311.
Sub-Industry Examples: Industrial gases;
North American Industry Classification System Codes: 32512.
Sub-Industry Examples: Artificial and synthetic fibers;
North American Industry Classification System Codes: 32522.
Source: U.S. Census Bureau, [hyperlink,
http://www.census.gov/eos/www/naics/].
[End of table]
We tested the data we analyzed for internal consistency and for
consistency with other key published studies, interviewed agency and
industry officials regarding appropriate use of the data, and reviewed
source data information regarding the entity's methodology and actions
taken to ensure data reliability. We determined that the data were
sufficiently reliable for our use. We note, however, that industry
characteristics may change over time and may vary for firms within each
sub-industry selected. To supplement our data analysis, we conducted
interviews with industry groups such as steel, aluminum, chemicals, and
the Energy-Intensive Manufacturer's Working Group.
Objective 3:
To identify and compare key features of proposed trade measures, we
reviewed and analyzed selected climate change legislation introduced
between 2007 and 2009, and congressional hearing records. From these
documents we extracted information regarding features of the trade
measures, such as objectives, scope of coverage, effective date for
trade measures, and other key features. To identify how features of
trade measures could address the potential economic and environmental
effects of emissions pricing, we reviewed studies and reports obtained
from our literature review, including past GAO reports on climate
change and studies published by climate change policy institutes such
as Resources for the Future, the Peterson Institute, and the Pew Center
on Global Climate change. We also interviewed subject matter experts
and agency officials from USTR; EPA; the Departments of Commerce,
State, Energy, and Treasury, and CBP, regarding these issues and to
identify the potential implementation and administrative challenges
with using trade measures. In our interviews with agency officials we
discussed steps agencies have taken to anticipate implementation
challenges. To obtain information about climate change policies in
other countries and to learn about the potential impact of U.S. trade
measures on bilateral relations and international negotiations, we also
interviewed officials from the embassies of Australia, Brazil, Canada,
China, European Union, Mexico, and Singapore.
Objective 4:
To assess potential international implications of using trade measures,
we interviewed subject matter experts, agency officials in EPA, CBP,
USTR, EIA, and the Departments of Treasury, State, and Commerce, and
foreign embassy officials. To discuss questions and provisions that may
be relevant in analyzing trade measures and output-based rebates for
consistency with WTO rules, we reviewed WTO documents, obtained
information from our interviews with subject-matter experts and agency
officials, and reviewed information obtained from our literature
review.
USTR provided technical comments on this report.
We conducted our work from October 2008 to July 2009 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions
in this product.
[End of section]
Appendix 2: Notes To Industry Figures:
Notes to Figure 2: Energy intensity is calculated as the value of
purchased fuels and electricity as a share of the value of output.
Trade intensity is calculated as the value of total trade (exports plus
imports) divided by the value of output plus imports. Data for value of
output are from the Bureau of Economic Analysis Gross Domestic Product
(GDP) by industry accounts, shipments by industry in current dollars.
Notes to Figure 3: Due to aggregation in source data, energy intensity
for electrometallurgical products is assumed to be the same as iron and
steel mills. Energy intensity data for primary aluminum is based on
2005 data. Aluminum products include industries characterized by the
North American Industry Classification System (NAICS) with codes 331314
and 331316 and steel manufacturing industries represent codes 33121 and
33122.
Notes to Figure 4: Energy types characterized as "Renewables and other"
includes residual and distillate fuel oil, liquefied petroleum gases,
natural gas liquids, net steam (the sum of purchases, generation from
renewables, and net transfers), and other energy that respondents
indicated was used to produce heat and power or as feedstock/raw
material inputs. Net electricity is the sum of purchases, transfers in,
and generation from noncombustible renewable resources minus quantities
sold and transferred out. Due to aggregation in source data, "Aluminum"
includes primary aluminum and aluminum products.
Notes to Figure 5: "EU Plus" includes countries from the EU and other
Annex I countries not represented elsewhere. Other than China, the
largest two sources of imports for electrometallurgical products are
the Republic of South Africa (17 percent) and Trinidad and Tobago (10
percent).
Notes to Figure 6: The current value of imports from all countries is
shown in the table below the chart.
Notes to Figure 7: Energy intensity data for clay building materials
are based on 2005 data because 2006 data were not available. Glass
products include industries characterized by the North American
Industry Classification System (NAICS) with codes 32721.
Notes to Figure 8: Energy use by type data for lime products excludes
gypsum. Data on energy use by nonmetallic mineral sub-industry examples
excluded from the chart are not currently reported by the Department of
Energy.
Notes to Figure 9: After Canada and China, the two largest sources of
imports for cement are Korea (9 percent) and Colombia (8 percent).
Notes to Figure 10: The current value of imports from all countries is
shown in the table below the chart.
Notes to Figure 11: Due to aggregation in Bureau of Economic Analysis
value of output data for paper mills with paperboard mills, value of
output data for these two sub-industries are for 2006 and are from the
Census Bureau's Annual Survey of Manufacturers, shipments by industry
in current dollars. Aggregated data for 2006 are consistent between the
two sources.
Notes to Figure 12: Data for coal and coke usage by pulp mills are not
publicly available to avoid disclosure of individual firm information,
such that percentage shares could not be computed. Data on energy use
by paperboard containers is not currently reported by the Department of
Energy.
Notes to Figure 14: The current value of imports from all countries is
shown in the table below the chart.
Notes to Figure 15: Energy intensity data for alkalies and chlorine and
carbon black is based on 2005 data because 2006 data is currently not
available.
Notes to Figure 16: Data for certain energy uses by type for alkalies
and chlorine, industrial gases, and artificial and synthetic fibers is
not publicly available to avoid disclosure of individual firm
information, such that percentage shares could not be computed.
Notes to Figure 17: Other than Canada, the two largest sources of
imports for nitrogenous fertilizers are Trinidad and Tobago (26
percent) and the Middle East (14 percent), with countries in the Middle
East defined by the U.S. Department of State.
Notes to Figure 18: The current value of imports from all countries is
shown in the table below the chart.
Notes to Figure 19: In addition to these bills, Representatives John
Dingell and Rick Boucher released a discussion draft on October 7,
2008. The discussion draft included a cap-and-trade proposal, and
presents four options for allocating allowances under a cap-and-trade
system.
[End of section]
Appendix 3: Works Cited:
Aldy, Joseph E. and Pizer, William A. (May, 2009) "The Competitiveness
Impacts of Climate Change Policies." Pew Center on Global Climate
Change, Arlington, VA.
Fischer, Carolyn, and Fox, Alan K. (February, 2009) "Comparing Policies
to Combat Emissions Leakage: Border Tax Adjustments versus Rebates."
RFF Discussion Paper No. 09-02, Resources for the Future, Washington,
D.C.
GAO, Climate Change: Expert Opinion on the Economics of Policy Options
to Address Climate Change, [hyperlink,
http://www.gao.gov/products/GAO-08-605] (Washington, D.C.: May 9,
2008).
GAO, International Climate Change Programs: Lessons Learned from the
European Union's Emissions Trading Scheme and the Kyoto Protocol's
Clean Development Mechanism, [hyperlink,
http://www.gao.gov/products/GAO-09-151] (Washington, D.C.: November 18,
2008).
Ho, Mun S., Richard Morgenstern, and Jhih-Shyang Shih. (November, 2008)
"Impact of Carbon Price Policies on U.S. Industry." RFF Discussion
Paper No. 08-37, Resources for the Future, Washington, D.C.
U.S. Environmental Protection Agency, Office of Atmospheric Programs.
EPA Preliminary Analysis of the Waxman-Markey Discussion Draft, The
American Clean Energy and Security Act of 2009 in the 111th Congress,
Appendix. April 20, 2009.
[End of section]
Appendix 4: Climate Change Bills Cited In Report:
Save Our Climate Act of 2007, H.R. 2069, 110TH Cong., (2007):
America's Energy Security Trust Fund Act of 2007, H.R. 3416, 110TH
Cong., (2007):
Low Carbon Economy Act of 2007, S. 1766, 110TH Cong., (2007):
Lieberman-Warner Climate Security Act of 2008, S. 3036, 110TH Cong.,
(2008):
Investing in Climate Action and Protection Act , H.R. 6186, 110TH
Cong., (2008):
Climate Market, Auction, Trust & Trade Emissions Reduction System Act
of 2008, H.R. 6316, 110TH Cong., (2008):
Carbon Leakage Prevention Act , H.R. 7146, 110TH Cong., (2008):
America's Energy Security Trust Fund Act of 2009, 111TH Cong., (2009):
Emission Migration Prevention with Long-term Output Yields Act , H.R.
1759, 111TH Cong., (2009):
American Clean Energy and Security Act of 2009 , H.R. 2454, 111TH
Cong., (2009):
[End of section]
Appendix 5: Glossary:
Annex I Countries: Parties to the United Nations Framework Convention
on Climate Change (UNFCCC) that are industrialized countries and were
members of the Organization for Economic Cooperation and Development
(OECD) in 1992 plus countries characterized as economies in transition.
Allowances: In the context of a cap-and-trade system, an emissions
allowance is a permit to emit a specific quantity of emissions.
Border allowance requirement: A measure that would require importers to
purchase allowances from the federal government prior to importing
goods into the United States.
Border tax adjustment: A levy on imported goods proportionate to the
imports' embedded carbon content. Generally, the levy on imported goods
would be equivalent to the tax applied to domestic goods under a carbon
tax system. Three legislative bills--H.R. 2069, 110TH Cong. (2007),
H.R. 3416, 110TH Cong. (2007), and H.R. 1337--111TH Cong. (2009),
include provisions for a tax on any taxable carbon substance sold by
the importer. For the purposes of this report, we are using the term
border tax adjustment to refer to this tax described in the bills and
to differentiate it from a carbon tax applied to domestic producers.
Business-as-usual: A scenario in which no action is taken to reduce
greenhouse gas emissions.
Cap-and-trade: An emissions pricing system in which the government
applies an aggregate cap or quota to limit total emissions from
regulated sources, which are required to hold allowances to cover their
emissions. Allowances are allocated by the government and may be
traded. Sources whose allowances exceed their emissions may offer
permits for sale, while sources for which emissions exceed allowances
will need to buy them.
Carbon dioxide equivalent: The quantity of carbon dioxide emissions
that would trap as much heat as a quantity of non-carbon-dioxide gases,
such as methane, sulfur hexafluoride, nitrous oxide, or industrial
gases.
Carbon leakage: The condition when emissions reductions in one country
are replaced by increases in emissions in other countries.
Carbon offsets: Reductions in greenhouse gas emissions from an activity
in one place to compensate for emissions released elsewhere.
Carbon tax system: A system that requires regulated sources to pay a
charge based on the level of their emissions.
Competitiveness: The ability of a U.S. industry to compete successfully
in international markets with foreign competitors.
Cost containment measures: Mechanisms designed to reduce the economic
impact of climate change legislation on certain regulated entities and
provide them with flexibility in managing compliance costs. Examples
include banking and borrowing of allowances, price caps on allowances,
free allocation of allowances, and carbon offsets.
Dispute Settlement Body: The WTO's dispute settlement process is
administered by the Dispute Settlement Body, composed of
representatives from WTO Members, and rules set time limits for each
step in the process.
Downstream regulation: Regulation on sources that emit greenhouse
gases.
Embedded carbon content: Carbon emissions associated with the
production of a product through the entirety of its supply chain.
Emissions pricing: A market-based mechanism, such as a carbon tax or
cap-and-trade system, to encourage reductions in emissions by putting a
price on them. In this report, "emissions pricing" refers to greenhouse
gas emissions pricing, as opposed to pricing systems for other types of
emissions.
Energy intensity: The industry's cost of purchased electricity and fuel
costs, or energy expenditures, divided by the value of shipments
(output) of the industry, as defined in H.R. 2454.
Free allowance allocation: Emission allowances given by the government
for free. Under a cap-and-trade program governments can either give
allowances to regulated entities for free or they can sell allowances
through an auction. Allocating allowances for free represents a
transfer of wealth from the government to the entities receiving the
allowances, while auctioning allowances enables the government to
decide how to use the revenue.
Greenhouse gas intensity: Twenty times the quantity of carbon dioxide
equivalent emissions from a sector, divided by the value of shipments
(output) for the sector, as defined in H.R. 2454.
Greenhouse gases: Gases such as carbon dioxide, methane, nitrous oxide,
and other substances that increase temperatures by trapping heat that
would otherwise escape the earth's atmosphere.
Intergovernmental Panel on Climate Change (IPCC): A scientific
intergovernmental body set up by the World Meteorological Organization
(WMO) and by the United Nations Environment Program (UNEP). The IPCC
was established to provide decision makers and others interested in
climate change with an objective source of information about climate
change.
International reserve allowance: Under a cap-and-trade system, the
United States could require importers to acquire emissions allowances
corresponding to the level of greenhouse gases emitted during
production.
Output-based rebates: Rebates based on actual, recent measures of
production that are given to regulated sources in a cap-and-trade
system for allowances they have purchased to cover their emissions.
Trade intensity: The ratio of the sum of the value of imports and
exports within an industry to the sum of the value of shipments
(output) and imports within an industry, as defined in H.R. 2454.
Trade measures: Cost equalization measures at the border that impose a
cost or other requirement on energy-intensive imports from countries
with weaker climate policies. Depending on the type of domestic carbon
mitigation system in place, trade measures can take several forms. For
example, trade measures can be proposed as part of a cap-and-trade
system (allowance requirement at the border) or a carbon tax system
(border tax).
Upstream regulation: Greenhouse gas regulation focused on the sale of
fuels that produce greenhouse gases when they are used.
WTO Appellate Body: A body within the WTO's that reviews a WTO panel's
legal findings during a dispute resolution process. The Appellate Body
and the Appellate Body's report is to be accepted by parties in the
dispute unless the Dispute Settlement Body decides by consensus not to
adopt the report.
[End of section]
Footnotes:
[1] A cap-and-trade system is an emissions pricing system in which the
government applies an aggregate cap or quota to limit total emissions
from regulated sources, which are required to hold allowances to cover
their emissions. Allowances are allocated by the government and may be
traded. Sources whose allowances exceed their emissions may offer
permits for sale, while sources for which emissions exceed allowances
will need to buy them.
[2] Under a carbon tax system, regulated sources pay a charge based on
the level of their emissions.
[3] You also asked GAO to examine revenue measures under consideration
as part of climate change legislation. GAO plans to issue this product
later in 2009.
[4] For example, H.R. 2454 (111th Cong.), and H.R. 1759 (111th
Congress) include these criteria. HR 2454 also identifies industries
with an energy intensity of 20 percent or greater as vulnerable to
adverse competitiveness effects irrespective of trade intensity;
however, none of the examples we discuss in our analysis would be
identified as vulnerable under these criteria.
[5] A study commissioned by energy-intensive industries identifies 41
manufacturing sub-industries as meeting these vulnerability criteria in
at least one year between 2004 and 2006, of which 34 sub-industries are
within primary metals, nonmetallic minerals, paper products, and
chemicals. We did not conduct sensitivity analysis to determine how
many additional sub-industries would be identified as vulnerable if the
criteria were defined more broadly. According to another expert, the
list of potentially vulnerable sub-industries is greater if using the
proposed energy-intensive criteria compared with carbon-intensity
criteria using a per ton carbon price of $20 or $30. Further,
eliminating the trade-intensity criteria would mean that roughly an
additional 10 sub-industries would be identified as vulnerable, whereas
eliminating the energy-intensity criteria would yield over 150 sub-
industries that would be identified as vulnerable to competitiveness
effects.
[End of section]
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