May 20, 2009
How Will Climate Change Legislation Affect US Competitiveness?
by Robert Kropp
Report from the Pew Center on Global Climate Change finds that a flexible cap-and-trade program can
reduce emissions while protecting vulnerable industries from foreign competition. First of a
What will happen if the United States implements a cap-and-trade program for greenhouse gas (GHG)
emissions, and developing economies in countries like China and India do not? Will the
competitiveness of the US economy suffer as a result, with an increase in competitive pressures
from abroad and a decline in employment? A new report from the Pew Center on Global Climate Change, authored by economists
Joseph Aldy and William Pizer of Resources for the
Future (RFF), addresses theses questions and provides some answers via much-needed quantitative
The report, entitled The Competitiveness
Impacts of Climate Change Mitigation Policies, draws on 20 years of data to analyze the
historical relationships between energy prices and shipments, trade, and employment within
energy-intensive manufacturing industries.
"Thus far, the debate over competitiveness has
occurred in the absence of good, hard data," said Eileen Claussen, President of the Pew Center.
"This report suggests that the effect of climate change policies can be modest and manageable."
According to the report, "By pricing carbon dioxide (CO2) emissions associated with fossil
energy, domestic production costs rise, eventually raising prices to customers and causing a
decline in domestic sales. This production decline may reflect, in part, a shift of economic
activity, jobs, and emissions overseas to key trading partners, if they do not face comparable
Expectations are that the Obama administration will encourage passage of
cap-and-trade legislation, under which GHG emissions are controlled and eventually reversed by
means of financial incentives to invest in energy-efficient technologies and to switch to
lower-carbon fuels. The proposed American Clean Energy and Security Act would establish "a
market-based program for reducing global warming pollution from electric utilities, oil companies,
large industrial sources, and other entities that collectively are responsible for 85% of US global
Already in place is the Regional Greenhouse Gas Initiative (RGGI), a cooperative effort by
ten Northeast and Mid-Atlantic states. The initiative caps CO2 emissions from the power sector, and
requires a 10% reduction in emissions by 2018.
Other states, including California—which
produces 6.2% of GHG emissions in the US—are expected to follow suit, through such initiatives as
the Western Climate Initiative
(WCI), a collaboration of seven US governors and four Canadian Premiers.
the impact of such legislation include the loss of domestic market share to foreign companies
located in countries in which they are not subject to such regulation, and the relocation of
manufacturing activities to unregulated countries. Such effects could lead to "emissions leakage,"
in which GHG emissions reductions in the US are offset by increased emissions elsewhere.
The report focuses on such potential adverse impacts on competitiveness under a US
cap-and-trade program. Its analysis reveals that energy-intensive industries in the US are better
positioned to withstand adverse impacts today, because by 2006 their use of fossil fuels had
declined to 80% of peak levels of usage recorded in 1979. As a result, the industrial sector now
comprises 28% of US CO2 emissions, compared to 39% in 1979.
In addressing the question of
whether manufacturing in the US is likely to lose market share as a result of climate change
legislation, the report finds a number of mitigating factors that should reduce such an impact.
First, "the availability of relevant factors of production, such as appropriately skilled labor,
natural resources, and capital, can play a more significant role than pollution control costs."
High transportation costs are also likely to discourage relocation.
Allowing for an
estimated price of $15 per ton of CO2 in 2012, the report projects an increase in the cost of
electricity in the industrial sector by about 8%. As a result, the average effect on manufacturing
in the US of the price of CO2 is expected to decrease production by about 2%. The energy-intensive
industries are likely to bear a more substantial decline in production, of about 4%.
"These declines in production could reflect increasing market share by foreign competitors
and/or lower domestic consumption of these manufactured goods," according to the report. The report
projects declines in consumption in energy-intensive sectors of up to 3%, which "clearly shows that
the bulk of the estimated change in production is arising from changes in consumption, and not from
net imports or presumed competitiveness effects."
The results of the analysis suggests
that consumers of energy-intensive goods do not respond to higher energy prices by consuming more
imports, but by economizing on their usage. According to Elliot Diringer, Vice President for
International Strategies at the Pew Center, "This analysis projects a competitiveness effect of
less than 1% in most energy-intensive sectors, which are modest impacts that can be readily managed
by good policy practices."
The report concludes that climate change legislation in the US
will not have a significant economic impact on manufacturing as a whole, or even on most
energy-intensive industries. However, there does remain the possibility of more significant impacts
on narrowly defined industries. In response to such potential impacts, the report considers three
possible regulatory solutions.
The US could condition climate change legislation on a
broad-based agreement among all nations, which would mitigate the potential effect on domestic
manufacturing. Vulnerable industries could be excluded from a cap-and-trade program. Finally,
efforts to mitigate effects on vulnerable industries could be accomplished within a cap-and-trade
program by such practices as allocating emission allowances in a manner that subsidizes production.
Because only the third approach addresses both the necessity of effective climate change
legislation and the potential competitiveness impact, it is the approach strongly favored by the
authors of the report.
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