Will the House Climate Bill Protect U.S. Competitiveness?

Yes, according to a recent government report examining the impacts of the House-passed climate bill.

An important concern in any climate legislation is the negative impact it might have on domestic energy-intensive producers that compete in global markets.  Climate policy can raise the production costs of U.S. manufacturers relative to their unregulated foreign competitors, and as a result production and emissions could shift overseas.  Responding to a request by five Democratic senators, the Obama administration recently released an interagency report on the competitiveness impacts of the climate bill that passed the House in June.  It finds that most U.S. energy-intensive, trade-exposed industries (EITEs) will experience only small increases in their production costs.  As a result, emissions "leakage" to countries that do not adopt climate policies will be minimal. 

The best way to prevent the movement of production and associated emissions overseas is through an effective international agreement that ensures significant action by all major emitters.  However, there is likely to be a lag between the time that U.S. legislation is enacted and the time that a binding agreement with specific developing country commitments that affect EITEs takes effect.  It is this interim period that is of concern with respect to the issue of U.S. competitiveness.

Previous studies of the competitiveness impacts of U.S. climate policy, including our study released in May, have also shown modest results.  The contribution of the current report is to examine the competitiveness and leakage impacts of proposed U.S. climate legislation both without and with the implementation of policies designed to address these adverse impacts.  These policies primarily concern the use of output-based rebates, which provide free allowance allocations to EITEs for their direct emissions (combustion emissions from fossil fuel use and process-related emissions) and indirect emissions arising from the purchase of electricity.  In addition, EITEs will benefit from the allowance allocation to electricity and natural gas local distribution companies (LDCs) that will take the form of rebates or electricity rate reductions.

For an industry to qualify as energy-intensive and trade-exposed, it must meet the House bill’s eligibility criteria that specify quantitative thresholds for energy, GHG, and trade intensity.  The report’s assessment identified 46 “presumptively eligible” EITEs out of a total 500 manufacturing industries.  Almost all of the EITEs fall within the chemicals, paper, nonmetallic minerals (e.g., cement and glass), and primary metals (e.g., aluminum and steel) sectors.  EITE emissions are significant, accounting for about half of manufacturing GHG emissions and 11% of total U.S. GHG emissions in 2006.  However, they account for only 12% of U.S. manufacturing output and 6% of manufacturing employment (about 780,000 workers).  Overall, they account for less than 2% of U.S. GDP and 0.5% of the total non-farm workforce.  In other words, the vast majority of U.S. industry, even within manufacturing, would not be exposed to competitiveness impacts under mandatory greenhouse gas limits – even if our trading partners have no comparable controls. 

The modeling analysis, which approximates the first decade following enactment of the House bill, assumes that the U.S. and other developed countries adopt, either unilaterally or jointly, climate policy that achieves a $20 per ton CO2 price.  Developing countries are assumed to not take any action.  Without specific policies to counter leakage and protect EITE competitiveness, production costs in the U.S. rise by 0.5% to slightly more than 2.5% across the five EITE model sectors.  Importantly, this estimate captures not just the increase in costs associated with an industry’s direct and indirect emissions, but also the indirect effects on costs that arise from changes in the price of raw materials and fuel inputs.  The increase in U.S. net imports of energy-intensive goods from developing countries that can be attributed to the U.S. adopting climate policy is 0.5% to slightly more than 1%.  As a result, only about 13 MMTCO2e, or 10% of the emissions reduction expected in EITEs in the U.S., “leaks” to non-regulated developing countries. 

The analysis also looks at what happens to these impacts after accounting for mitigating policies in the House bill.  The combination of output-based rebates and LDC allocations almost fully offsets the increase in production costs for three out of the five sectors, and more than fully offsets the increase in costs for the remaining two.  In addition, these policies offset nearly all the increase in net imports from developing countries that can be attributed to U.S. action, and effectively eliminate all of the emissions leakage arising from these imports (see figure below).

Estimated Emissions Reductions and Leakage from U.S. Energy-Intensive
Trade-Exposed Industries Without and With Allocations to
LDCs and "Trade-Vulnerable" Industries
Source: The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-Intensive Trade-Exposed Industries, Figure 17. Available at http://www.epa.gov/climatechange/economics/pdfs/InteragencyReport_Competitiveness&EmissionLeakage.pdf

This report adds to the now growing body of evidence that has examined the extent to which competitiveness concerns are real.  More industry detail would no doubt be helpful in identifying legitimate claims for compensation.  However, the report’s findings that well-designed policies can preserve competitiveness, prevent emissions leakage, and encourage the continuing downward trend in energy and emissions intensity in key sectors are very encouraging.