CAP&TRADE, INDUSTRY AND CONGRESS

Cap and trade won't push heavy industries overseas – study
Christa Marshall, May 6, 2009 (NY Times)

SUMMARY
The Competitiveness Impacts of Climate Change Mitigation Policies, a new report from economists Joseph E. Aldy and William A. Pizer for the Pew Center on Global Climate Change, looks at the potential impacts of a U.S. greenhouse gas (GhG) mitigation law on industry.

A principal concern with mandatory, market-based GhG reduction policies is what they might do to output and employment in the more energy-intensive U.S. manufacturing industries. A price on emissions could compromise U.S. "competitiveness" internationally by raising prices to customers and causing a fall off in domestic sales.

This decline may reflect, in part, a shift of economic activity and jobs to where there are no emissions regulations.

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But a U.S. cap&trade system to regulate GhGs might not affect competitiveness as much as assumed. The Aldy/Pizer statistical analysis suggests that a modest CO2 price of $15/ton is not likely to have a significant impact on U.S. manufacturing as a whole, though a subset of energy-intensive industries may face competitive pressures.

Policies targeted at vulnerable sub-sectors and other measures could address such impacts. The Aldy/Pizer analysis quantifies the effect of carbon pricing on U.S. manufacturing industries (excluding refining and mining) to determine if it will cause it to shift overseas. The study uses 20 years of data on 400+ U.S. manufacturing industries’ shipments, trade, and employment, and examines how those factors affect energy prices, especially electricity.

The study then simulates the impacts of a domestic cap&trade policy when major U.S. trading partner nations have no regulations on emissions. It hypothesizes a U.S. carbon price of $15/ton in 2012, coming out of the cap&trade market. (The Lieberman-Warner cap&trade bill estimated a 2012 allowance price of $16.88/ton.)

Based on their energy intensity, cap&trade will cause a 2.7% fall in iron and steel, a 2% fall in aluminum, a 1.6% fall in cement, a 3.4% fall in bulk glass and a 3.3% fall in paper (at a $15/ ton price).

Production shifts overseas are predicted to be 0.7-to-0.9%.

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After doing the study, Aldy and Pizer left Resources for the Future, a think tank, to take positions in the Obama administration. Aldy is now an Obama energy and environment aide. Pizer is the deputy assistant secretary for environment and energy at the Treasury Department.

The House Energy and Commerce Committee, led by Chair Henry Henry Waxman (D-Calif) and Energy Subcommittee Chair Edward Markey (D-Mass.), are working on details of the House climate change bill, which includes a cap&trade proposal, with the White House.

The most debated aspect is how to ease the heavy manufacturers into the system without harming them financially.

Some industries report they would still be forced to relocate to a place without emissions regulations. Example: There's not an efficiency substitute for fertilizer. Farmers need a stable amount, whether or not there is a price on carbon.

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COMMENTARY
The report claims its $15/ton carbon price in 2012 is consistent with other projections and shows the impact on competitiveness would be modest. This is good news in justifying a cap&trade program. It is bad news because such a low carbon price is unlikely to actually mitigate the growth of GhG emissions.

The U.S. industrial sector is growing modestly and becoming significantly more energy—efficient, especially as industry learns to be less heavily dependent on fossil fuels and uses new, more efficient production techniques. Industry’s part of U.S. GhGs fell from 39% to 28% in the last 3-to-4 decades. Energy-intensive industries (steel, aluminum, paper, cement, and glass) are producing more with less but there has been greater growth in other sectors. Manufacturing has, therefore, lost market share and employment and is expected to continue to do so regardless of climate change policies.

The impacts of international competition following environmental regulation have been much studied. Factors that can limit competitiveness impacts to an industry have been detailed and quantified. They include: (1) Capital-intensive firms tend to locate in capital-abundant countries. (2) They avoid relocating to capital-poor countries (except countries with rapidly growing domestic demand or abundant natural resources). (3) Firms whose goods cost a lot to transport locate near their consumers. (4) Some firms co-locate with similar firms to co-fund expenses. (agglomeration economies). (5) In the U.S., manufacturers move from state to state.

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In Europe, there have been only "modest" impacts from the European Union (EU) Emission Trading Scheme (ETS) and the impacts of a U.S. emission mitigation policy are expected to be similar.

The manufacturing industries most vulnerable are energy-intensive. Industries with energy costs higher than 10% of shipment value (metal foundries, cement, and lime) could have 4% output fall-offs and 3% consumption declines. (The 1% difference is due to efforts to improve efficiency and suggests climate policy impacts would come from consumption patterns as consumers move to products that require less energy and produce fewer emissions.)

Climate policy is expected to reduce employment even less than it reduces production but data was inadequate to link an overseas shift with emissions regulation (because though there are “consumed and imported goods” numbers, there are no “consumed or imported jobs” numbers).

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Regarding policy measures that might address the competitiveness impacts: (1) Broad approaches are likely to be inefficient because effects are narrow so the target of policies should be a narrow segment of the most energy-intensive industries. (2) Several vehicles for a targeted approach are possible, involving potential trade-offs between (a) effectiveness in preventing competitiveness impacts, (b) complying with World Trade Organization (WTO) rules, (c) environmental outcomes, (d) effects on other domestic industries, and (e) impacts on the prospects for/design of an international climate change agreement.

Examples of policies that could be expected to decrease the effectiveness of emissions regulations: (1) Direct rebates to heavy industries and (2) free emissions allowances (instead of auctioned allowances) to heavy industries.

Example of a violation of WTO rules: A border tax on goods imported from countries without emissions reduction policies.

Limitations noted to the report include: (1) It only makes projections over the short term (2012 to 2016) and (2) it fails to account for unknown variables.

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QUOTES
- From the report: “We find that higher energy prices, of the sort associated with pricing CO2 at $15 per ton, would lead to an average production decline of 1.3 percent across U.S. manufacturing, but also a 0.6 percent decline in consumption (defined as production plus net imports). This suggests only a 0.7 percent shift in production overseas. There is no statistically discernible effect on employment for the manufacturing sector as a whole.”

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- From the report:” Most of the effect on domestic production is from a shift in consumption away from carbon intensive goods, not a shift in production to unregulated foreign imports. This shift away from carbon-intensive goods is cost-effective emissions reductions that will be foregone—raising the overall cost of the policy—if the price of energy intensive goods does not rise under a cap-and-trade policy. This suggests that any competitiveness remedy be scaled to the competitiveness portion of any production loss.”
- Eileen Claussen, president, Pew Center: “It is clear from this analysis that fear of competitive harm should not stand as an obstacle to strong climate change policy…"
- Kathy Mathers, Fertilizer Institute: "We've reached the theoretical maximum in terms of what our industry can do with energy efficiency…At this point, we're limited by the laws of chemistry… A lot of our factories already have closed and moved offshore…"
- Elliot Diringer, vice president for international strategies, Pew Center: "If we develop alternative technologies quickly ... then that may lessen the impact significantly…"