This brief examines policy options for addressing competitiveness concerns arising from the establishment of a mandatory domestic program to limit greenhouse gas emissions. These concerns center on energy-intensive industries that compete globally and could face higher costs under a domestic climate program while key competitors do not. Studies find little evidence of significant competitiveness impacts on U.S. firms from past environmental regulation, and forecast relatively modest impacts on a narrow set of industries under a U.S. cap-and-trade program with modest emission allowance prices. In the long run, international agreements offer the best recourse against competitiveness concerns. As an interim measure, a domestic climate program could mitigate competitiveness impacts through options such as: excluding trade-exposed firms from regulation; compensating firms for regulatory costs through free allocation of emission allowances; compensating firms, while providing incentive for production and emission reduction, through output-based allocations; and placing taxes or other requirements on goods imported from countries with weaker emission controls. These approaches vary in their effectiveness in reducing competitiveness impacts, in their impact on the environmental integrity and economic efficiency of a domestic climate program, and in their influence on international relations and prospects for an effective international climate framework.
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