Press Release: Analysis Projects Modest Competitiveness Impacts Under Cap and Trade

Press Release - May 6, 2009

Contact: Tom Steinfeldt, (703) 516-4146 

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PEW CENTER ANALYSIS PROJECTS MODEST COMPETITIVENESS IMPACTS
UNDER A U.S. GREENHOUSE GAS CAP-AND-TRADE PROGRAM

Report Outlines Policy Options to Ease Potential Impacts
on Energy-Intensive Manufacturers

Washington, DC – A close look at the historical relationship between energy prices and U.S. production and consumption of energy-intensive goods suggests that energy-intensive manufacturers are likely to face only modest “competitiveness” impacts under a U.S. greenhouse gas cap-and-trade program, according to a new analysis released today by the Pew Center on Global Climate Change.

The Pew Center study projects that U.S. energy-intensive manufacturing industries would on average lose 1 percent of their annual production to imports assuming a CO2 price of $15 per ton in the United States and no carbon price in other countries.  Both the U.S. Energy Information Administration (EIA) and the Environmental Protection Agency (EPA) have projected CO2 prices of approximately $15 per ton under cap-and-trade programs proposed in Congress.

The authors conclude that the projected impacts can be addressed through policies targeted to energy-intensive sectors.  They outline a range of policy options, including: compensating energy-intensive sectors covered by a mandatory cap for their regulatory costs; excluding those sectors from the cap-and-trade program; and using border adjustment measures to equalize costs for domestic and imported energy-intensive goods.

“This is one of the most sophisticated efforts ever to quantify the potential competitiveness impacts on energy-intensive industries.  The analysis shows clearly that, at the price level studied, the potential impacts are very modest and very manageable,” said Pew Center President Eileen Claussen.  “Policymakers have a range of policy tools to mitigate the modest economic impacts that may be foreseen.  The bottom line is that fear of competitive harm should not stand as an obstacle to strong climate policy.”

The report is authored by economists Joseph E. Aldy and William A. Pizer, who were affiliated with Resources for the Future, a think tank in Washington, D.C., at the time the analysis was undertaken.  Both have since taken positions in the federal government.

The report, “The Competitiveness Impacts of Climate Change Mitigation Policies,” bases its projections on an econometric analysis of the historical relationship between fluctuations in energy prices and shipments, trade, and employment within energy-intensive manufacturing industries.  The analysis draws on 20 years of data for more than 400 energy-intensive subsectors.

Based on the historical relationships identified, the authors estimate the likely impacts of energy price increases at the levels associated with a CO2 price of $15 per ton.  An EIA analysis cited in the report projects a CO2 allowance price of $16.88 per ton in 2012 under the Lieberman-Warner cap-and-trade proposal considered last year in Congress (S.2191).  A preliminary EPA analysis of the draft Waxman-Markey climate and energy bill released in April projects an allowance price of $13 to $17 in 2015.

In assessing the potential impacts on energy-intensive manufacturers, the analysis distinguishes “competitiveness” impacts – the loss of market share to foreign competitors facing no carbon price – from the broader economic impacts these sectors may face under a mandatory greenhouse gas policy. 

For U.S. manufacturing as a whole, the analysis estimates an average production decline of 1.3 percent, and a decline in consumption of 0.6 percent, suggesting only a 0.7 percent shift in production overseas.  For energy-intensive industries (those with energy costs exceeding 10 percent of shipment value), output and consumption are projected to decline 4 percent and 3 percent, respectively, suggesting a 1 percent shift in production.  The findings indicate that most of the projected economic impact reflects a move towards less emissions-intensive products, rather than an increase in imports or a shift of jobs or production overseas.

Looking at specific sectors, the report estimates a “competitiveness” impact of 0.6 percent for bulk glass; 0.7 percent for aluminum and cement; 0.8 percent for iron and steel; and 0.9 percent for paper and industrial chemicals.  The authors note that the analysis assumes similar behavior among industries with similar energy intensity, and that at any given level of energy intensity, some industries may face impacts higher than the calculated average.

The analysis contributed to a recent Pew Center policy brief, “Addressing Competitiveness in U.S. Climate Change Policy,” which further examines available policy options.  It also was cited by Claussen in recent testimony before the Energy and Environment Subcommittee of the House Energy and Commerce Committee.

Claussen noted that the competitiveness provisions of the Waxman-Markey discussion draft – which would use output-based rebates to compensate energy-intensive manufacturers for increased costs, and resort to border measures only if the President determines the rebates have been ineffective – are largely consistent with earlier Pew Center recommendations. 

“The draft provides a very sound framework for managing what we now know are relatively modest risks,” said Claussen.

The new report, and additional information on global climate change and the Pew Center, are available at www.c2es.org.

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The Pew Center was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.