Common Tragedies

Thoughts on Environmental Economics

Climate Bill Success Can Equal Treaty Success, Even With Border Measures

Posted by Andrew Stevenson on August 12, 2009

Originally posted at Weathervane, RFF’s climate policy blog.

President Obama and leaders of the U.S. Chamber of Commerce have spoken out against incorporating border adjustment measures in U.S. climate policy. Though there is great uncertainty about the economic and diplomatic value of leveling fees against nations who may not price carbon, 10 conservative Senate Democrats recently told the president such measures will be integral to their support of climate legislation.  The challenge now is walking the fine line between the objective of these senators—not just maintaining, but strengthening the House measures—and respecting the concerns of the administration and Chamber about potential trade wars and international ill-will threatening the success of global climate cooperation.  It will be a delicate balance, but one that can be achieved with a few key modifications. 

The House bill (H.R. 2454) takes a three-fold approach to ensuring the global environmental integrity of U.S. climate policy by preventing emissions leakage. It  exempts vulnerable industries from the first two years of the cap-and-trade program, provides output-based rebates until 2035, and introduces a border adjustment system in 2020 only if a multilateral agreement that meets certain conditions is not in place by 2018 and Congress and the president concur that border adjustments are necessary (with Congress given final authority). 

The border adjustments are also intended to create leverage, by encouraging major-exporting and emitting developing nations to join an international agreement.  Although the adjustments’ primary targets—China and India—have spoken out against this goal, South Korea actually cited it as one reason for being the first non-Annex I Kyoto country to announce a national targetSome have taken an optimistic view of the relationship between these measures and international agreements, while others are more skeptical

While the House bill represents a compromise on border measures that most people could live with despite not being truly satisfied, the Senate is likely to push for making the measures stronger.  In light of this political reality, the following changes could be introduced to both strengthen the measures and ensure they still reinforce, and are reinforced by, international agreements:

Provide incentives for a real negotiation.  Large, developing countries are much more likely to accept the “sticks” (border measures) of U.S. climate legislation if they come with real “carrots” (financing and mitigation commitments) attached.  Funding for adaptation and technology transfer in the House bill is well below what most estimates say is truly needed to solve the global climate problem.  Although it is clearly concerned about upsetting domestic support, increasing recognition of the necessity for a global solution in Congress indicates the administration may be able to push further on these incentives, if they are properly structured and conditioned.

Improve the likelihood of World Trade Organization consistency.  Border adjustments are likely to survive challenge in the WTO if they only enter into force after serious multilateral negotiations have failed, are targeted as clearly as possible at an environmental objective, and/or are backed by an agreement among several nations.  Therefore, providing greater incentives for a real negotiation to take place—as discussed above—would likely improve the prospects in this area.  Ensuring there are no references to specific countries or competitiveness concerns are also essential in the Senate bill.  Finally, support from the nations of the European Union and other developed nations to adopt similar measures would also be helpful when standing before the WTO.  These modifications should be in the interest of both those who want to see the measures implemented and those looking to avoid a trade war.

Make negotiating objectives flexible.  From a global cooperation perspective, the worst thing Congress could do is to provide negotiating instructions that would be impossible to achieve, thereby ensuring a repeat of Kyoto.  This means making them general enough—as the House bill does—that U.S. negotiators have flexibility about how, under what body, and with what conditions they will negotiate an international agreement on trade and climate, as long as it meets certain minimum requirements.  Since the primary thing 100 Senators can agree upon is that they do not like the House bill, it is likely that some will want to make these objectives stronger.  Instead of inserting additional specifics or calling for an explicit deal on border measures in Copenhagen, a more effective approach could be greater conditioning for U.S. financing and technology transfer on participation in an international agreement. 

Adopt a “do no harm” approach on border measures in Copenhagen.  From the perspective of U.S. domestic climate policy and global cooperation, the best possible outcome from Copenhagen on border measures is likely that nations do not condemn or even move to prevent them.  In the unlikely event that a trade and climate agreement is struck within the UNFCCC or the UN, the issue is contentious enough that it will not come until the final stages of negotiations a few years off.  The U.S.’ primary objectives for Copenhagen are likely to be gaining agreement on a long-term global goal, a broad framework for international financing, and potentially a recognition that all major emitters need to take legally binding actions if not now by a date certain.  Throwing border measures into the mix will seriously threaten those already tenuous objectives.

Overall, by strengthening the House bill with more robust incentives, targeted framing, effective negotiating objectives, and realistic expectations the “hammer” of border measures desired by conservative Democrats can be compatible with the prospects for a new global agreement in Copenhagen.

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