Competitiveness debate in Congress
Posted by Daniel Hall on March 6, 2008
I’ve written previously about the concern that U.S. climate policy will hurt the competitiveness of domestic manufacturers. (Here’s a reaction to that post from Free Exchange.) I spent most of yesterday at a Congressional hearing on this topic. I’m not going to try to summarize the entire thing — you can listen to the audio file and read the written testimony from each of the witnesses if you are that interested — but I am going to offer a few highlights and thoughts:
1. One of the most interesting ideas that came up was to convince nations like China and India to impose export taxes on their own products. In my previous post I explained the basic rationale for a competitiveness policy:
climate policy raises the price of energy and energy-intensive goods for domestic manufacturers, and thus leads to a input cost gap between domestic and overseas manufacturers. … policy to address competitiveness must either lower the costs of domestic manufacturers, or raise the cost of imported goods.
At the time I noted there were two ways to lower domestic costs — weaker requirements or direct subsidies — but when thinking about raising the price of imported goods I only discussed actions that the U.S. would take domestically to raise the cost of these goods. Indeed, these types of actions are the major focus of the debate about competitiveness, and were on center stage at the hearing. Mike Morris, the CEO of American Electric Power, was there arguing for a type of border adjustment for imported goods (basically, under a cap-and-trade program importers of energy-intensive goods would have to submit allowances to cover the embedded emissions), while former-Congressmen-turned-lobbyist* for the steel industry Jim Slattery plumped for performance standards that would apply to both domestic and imported goods.
Of course, raising the cost of goods manufactured overseas can be done not only by imposing import requirements, but also through export tariffs imposed by exporting nations. I didn’t discuss the idea previously because the U.S. can’t make China or India do so. But in his testimony David Doniger of NRDC pointed out that China already has such tariffs:
To reduce domestic energy use and pollution, China has even established special export tariffs to discourage exports of products such as cement, iron and steel. According to the World Resources Institute, the export tariff on steel equates to $50 per ton.
He argued that China is doing this because while it wants domestic industries to supply it’s own (enormous) domestic demand for these intermediate goods, at the same time it doesn’t want to become the world’s producer of low-value-added, high-pollution, energy-intensive goods.
Would a strategy of encouraging export tariffs among other major emitting developing countries work? I can’t decide what I think. It seems likeliest to work with a small group of industrializing countries who may find it in their interest to try to move up the value chain. And this may be one of China’s objectives: a preliminary draft of a paper from Paul Krugman has spurred discussion in the blogosphere about whether China’s exports are becoming more skill- (rather than labor-) intensive. On the other hand, China may be a unique case, with more desire to exert control over its industrial development, and more ability to do so as well. If they don’t produce the iron and steel, won’t someone else just do it? Still, if the U.S. can negotiate agreements with countries to impose some kind of embedded-carbon export tariffs, these agreements are much likelier to stand up to WTO scrutiny than unilaterally imposed import restrictions.
2. It’s worth remembering that the entire competitiveness discussion is one that is fundamentally about how we are going to raise the total societal cost of reducing emissions. That’s because, as Dick Morgenstern of RFF cogently pointed out during the Q&A time, if we allow some domestic sectors do less to cut emissions — presumably the entire point of a competitiveness policy — then other domestic will have to do more. (Of course, we could also have a competitiveness policy that makes other countries do more to cut emissions — we could make them do as much as domestic manufacturers, for example — but we’ll still bear some costs from that policy, in the form of higher product prices.) There may be good reasons for having a policy — emissions leakage to other countries comes to mind — but we should be clear that we’re increasing the cost of climate policy in doing so.
3. Speaking of emissions leakage, the steel industry guy testified that U.S. steelmakers emit 1.2 tons of GHG emissions per ton of steel. In China the figure is at least 2.5 tons (cited) and possibly 4 or 5 tons (uncited). That’s a big difference, although I would be curious to see these numbers normalized by the type of steel produced.
4. Which industries really get hammered by a climate policy? Generally, energy-intensive and internationally competitive industries. Specifically, according to Dick Morgenstern’s testimony, the industries at the top of the list include metals (aluminum, iron, steel), cement, and chemicals.
5. When I wrote about competitiveness policy previously I argued for using a limited free allocation (or redistribution of auction revenues) as the primary instrument of competitiveness policy. One good argument for this approach that I didn’t previously mention was brought up during Q&A by Dick Morgenstern: proposals that require importers to either submit carbon allowances or conform to carbon-intensity standards will require us to somehow calculate the emissions from producing these imports. Performing this calculation for goods produced in the U.S. — where we probably have the best economic information in the world — is difficult.** Doing it for countries like China or India is almost unfathomable. A targeted free allocation requires only the first calculation; proposals for import requirements just assume that somehow we are going to be able to do the second.
6. Another strike against these import requirements is that there is a lot of concern that unilateral U.S. import rules are going to spark a global trade war. This was largely the point made by two of the witnesses, Gary Hufbauer of the Peterson Institute for International Economics and (particularly) Christopher Wenk of the U.S. Chamber of Commerce. During the Q&A time the subcommittee ranking member Fred Upton (R-MI) read excerpts from and submitted into the record a letter the committee had received from U.S. Trade Rep Susan Schwab expressing “serious concerns” about the import requirements being discussed at the hearing, calling them a “blunt and imprecise instrument of fear.” (Letter source: E&E Daily.)
7. These hearings seem stacked to provide more heat than light: the witnesses who get to talk the most are the ones who are there to advocate for a specific policy; the brief question-and-answer format encourages sound bites over analysis; most legislators are there to promote whatever policy they already prefer and aren’t much interested in new ideas. On the bright side, I get the sense that the written testimony from most of the witnesses is on a somewhat more thoughtful level, and the committee and Congressional staffs are doing a responsible job of digesting this information rather than focusing too much on the spectacle of the hearing itself.
8. And the spectacle is at least occasionally entertaining. People are allowed to go up there and say ridiculous things. Energy and Commerce Committee ranking member Joe Barton (R-TX) used his opening statement to argue that “the probability that mankind’s actions are influencing the temperature of the planet is much closer to 0 than 100%. I would almost say say it’s less than 1%.”*** Am I wrong to call this ridiculous? Well, there is an easy test. Congressman Barton, I have $1,000 I will donate to a charity of your choice if by an agreed-upon future date — 2015? 2020? — there is significant doubt that humans are the major cause of recent warming. If you truly believe the statement you made in yesterday’s hearing, you should be willing to put up $100,000 for charity against me. If you’re not, I’d like you to revise your estimate based on whatever sum you are willing to put up. Contact me anytime to negotiate the details.
*There needs to be some kind of shorthand for this creature. “Lobbyist ex officio” comes to mind, but is just a bit too literal to be truly clever. Reader suggestions are welcome.
**Paul Krugman cleverly reminded us about the fundamental uncertainty associated with all economic statistics when he said, “I like to describe economic data as a peculiarly boring form of science fiction.”
***The IPCC report that came out last year stated, “The understanding of anthropogenic warming and cooling influences on climate has improved since the Third Assessment Report, leading to very high confidence [at least 90% likely] that the global average net effect of human activities since 1750 has been one of warming.”