Climate Change Trade Measures:

Considerations for U.S. Policy Makers

GAO-09-724R: Published: Jul 8, 2009. Publicly Released: Jul 8, 2009.

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Global climate change is one of the most significant long-term policy challenges facing the United States, and policies to mitigate climate change will have important economic, social, and environmental implications. Members of Congress have introduced several bills to address the problem of climate change, many of which establish domestic emissions pricing by requiring firms that emit greenhouse gases either to pay a tax or to hold emission allowances. Whichever approach is taken, domestic emissions pricing could produce environmental benefits by encouraging U.S. firms to reduce their emissions of greenhouse gases. But such pricing could also harm U.S. firms' competitiveness, especially in energy-intensive industries where firms compete internationally. Additionally, there could be increased emissions abroad if production were to increase in other countries as a result of increased domestic costs of production resulting from a U.S. climate policy (carbon leakage). To help reduce impacts on U.S. firms and prevent carbon leakage, several climate change bills have also included trade measures or output-based rebates. The bills have included trade measures that would require importers to purchase emission allowances or pay a border tax for the greenhouse gas emissions associated with their imports. They have also designed output-based rebates to financially rebate industries for the costs incurred under a domestic emissions pricing system.

Estimating the potential effects of domestic emissions pricing for industries in the United States is complex. If the United States were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both. Estimates of adverse competitiveness effects are generally larger for industries that are both relatively energy and trade intensive. In 2007, these industries accounted for about 4.5 percent of domestic output. Estimates of the effects vary because of key assumptions required by economic models. For example, models generally assume a price for U.S. carbon emissions, but do not assume a similar price by other nations. In addition, the models generally do not incorporate all policy provisions, such as legislative proposals related to trade measures and rebates that are based on levels of production. Proposed legislation suggests that industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity. Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although significant variation exists for product groups (sub-industries) within each industry. Additional variation arises on the basis of the type of energy used and the extent to which foreign competitors' greenhouse gas emissions are regulated. To illustrate variability in characteristics that make industries vulnerable to competitiveness effects, we selected example sub-industries within primary metals, non metallic minerals, paper products, and chemicals based on multiple factors. For example, we selected sub-industries that met both the energy and trade intensity criteria, examples that met only one criterion, and examples that met neither, but had significant imports from countries without greenhouse-gas pricing. Trade measures have been proposed to help address potential industry and environmental effects of a domestic emissions pricing system; however, questions exist about their proposed effectiveness. Supporters argue that trade measures may help prevent a decline in output by U.S. producers, prevent carbon leakage, and create leverage for other countries to reduce emissions. Opponents raise concerns that trade measures may motivate retaliatory actions, undermine efforts to secure multilateral consensus, and generate little leverage. In addition, potential implementation challenges may exist. A unilateral U.S. trade measure could have important international implications on U.S. bilateral and multilateral trade relations. For example, other countries could view U.S. trade measures as trade restrictions or sanctions, which could lead them to implement restrictions against U.S. exports. Attention also has focused on the potential for trade measures or output-based rebates to be challenged under World Trade Organization (WTO) rules. Assessing the international trade implications is difficult for a number of reasons. One is that it depends in part upon how other nations reduce their carbon emissions, and whether they perceive any U.S. measures as likely to affect their exports. In addition, the outcome of any WTO challenge, if any, would be uncertain and may depend on how the measure is implemented.

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