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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.”

Posted in Cap and Trade, Climate Change, Green Trade, International | 1 Comment »

Competitiveness under climate policy

Posted by Daniel Hall on February 4, 2008

One of the debates surrounding climate policy in the United States is how to address concerns about international competitiveness — a climate policy here will raise prices for domestic manufacturers, leaving them at a disadvantage relative to producers in countries without comparable policies. (This sometimes gets raised in Washington as the “China problem”; I think in Brussels they may currently refer to this (with justice) as the “America problem.”) This is not only a problem for domestic manufacturers; shifting production and associated emissions overseas to unregulated regions won’t mitigate a global pollutant.

Congressmen John Dingell (D-MI) and Rick Boucher (D-VA) last week released a white paper summarizing this competitiveness issue and proposing policy solutions. They describe three specific approaches: 1. border adjustments, 2. performance standards, and 3. (dis)preferential carbon market access. Their discussion of border adjustments focuses on the idea of a kind of “carbon border tax” as proposed by American Electric Power and the International Brotherhood of Electrical Workers. The second option they discuss is “carbon intensity standards” that would apply to both domestic and imported products. In the discussion the white paper notes that such standards could be either separate from, or in addition to, obligations under a domestic cap-and-trade program. Their third option, carbon market access, is a proposal to either limit or give preferential access to carbon offset markets to developing nations depending on their actions to reduce emissions.

Reading the paper gives the sense that there has been little structured thinking on the Hill about the competitiveness issue. The focus rather is on tossing around whatever policy proposals are already on the table and musing on what is politically feasible.

So to step back and provide a simple framework for competitiveness concerns: the short version is that 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. (This implies that competitiveness concerns loom largest in those industries which are most energy-intensive and internationally competitive.) Fundamentally, policy to address competitiveness must either lower the costs of domestic manufacturers, or raise the cost of imported goods. Further, to lower domestic manufacturing costs, you can either significantly weaken the program requirements for domestic manufacturers, or you can subsidize them directly. Those three broad categories of response — two ways to lower domestic manufacturing costs and the option of raising importers’ prices — can be used to classify any of the various specific proposals.

Border adjustments attempt to raise the price of imported goods. The legitimate concern with such “adjustments” is that they will lead to retaliatory trade policies that will be harmful to the world economy. (See the FT article linked previously for more discussion.) Further, there’s every reason to suspect that they will mainly be used by domestic manufacturers as political cover for protectionist policies in industries that are not so much feeling the pressure of energy prices as wage and health care costs.

Performance (product) standards also raise importers’ prices. Depending on how they are structured and whether they are used for domestic manufacturers in lieu of (rather than in addition to) inclusion in a mandatory economy-wide (e.g., cap-and-trade or tax) program, they may also reduce costs for domestic manufacturers (relative to full inclusion in the larger climate program). Note, however, if such standards are weaker than the economy-wide policy that while domestic manufacturers will not feel as large a pinch, the net social cost will be higher because there will not be as strong an incentive for reducing consumption of GHG-intensive goods among end users.

Limiting other countries’ access to a potential U.S. carbon market is an intriguing idea, but it’s a misguided implement for addressing competitiveness policy. It does not address the prices of either domestic or imported goods, affecting instead the relative prices of carbon offsets, an entirely market. Such a proposal relies on setting the interests of offset generators against those of manufacturers in a developing country, and hoping that internal politics resolves this dispute in favor of offset generators. To me it appears the likeliest outcome of such a proposal will be to create distortions in two markets rather than one — GHG-intensive manufactured goods, and carbon offsets.

Surprisingly, the white paper fails to address one of the more likely possibilities for addressing competitiveness: using allowance allocation within a cap-and-trade system to subsidize domestic manufacturers. (The paper acknowledges in a footnote that this could be done but leaves any discussion for a later white paper.) While most entities regulated under a cap-and-trade program will be able to pass cost increases through and thus do not need to receive free allowances (just ask Europe about how embarrassing it is to explain those windfall profits for electric utilities which got free permits), giving away allowances to a limited number of domestic manufacturers in internationally competitive industries may make sense. While domestic manufacturers would still have increased costs (of fuel, electricity, inputs, etc.), they could use the free allowances to subsidize product prices and thus remain competitive in international markets in the near-term. Further, most current proposals gradually phase out free allocation in favor of auctions. This gives the U.S. further time to encourage developing countries to gradually come alongside and join international climate policy, while providing manufacturers time to adjust and prepare for the end of free allowances. Further, while some political observers will hold their nose at the political horse-trading that must be done to eventually pass a bill, I would argue that it’s preferable to include domestic manufacturers, thus reducing the distortions that would be created by giving exemptions to certain industries, and have to worry instead only about the distributional consequences of giving away some of the allowances.

Here is Dick Morgenstern (and others) at RFF with some analysis attempting to quantify cost increases for manufacturers under climate policy. Here is Dick with a longer discussion of policy options for competitiveness. Here is Ray Kopp at RFF discussing allowance allocation more generally.

Update: One of the Free Exchange bloggers seems to think I have given up the game by providing a sheen of economic respectability to what amounts to unnecessary market interventions.  I don’t think the differences between us are quite as large as they initially appear, however.  Perhaps I didn’t make it sufficiently clear in the post, but I assume that some type of competitiveness policy will be a political prerequisite to the passage of a climate bill.  The question then becomes, “What is the best (or least bad) competitiveness policy we can feasibly achieve?”  I freely admit that some may find this a depressingly low hurdle.

Posted in Climate Change, Green Trade, International | 2 Comments »

Regulating from abroad and the EKC

Posted by Evan Herrnstadt on December 12, 2007

The New York Times reported today that China has agreed to increase American oversight of food safety procedures:

The safety accord, part of several aimed at easing economic tensions with China on a number of divisive subjects, would impose new registration and inspection requirements by Chinese food exporters for 10 specific products, with the United States government maintaining a public list of the exporters’ records.

Interestingly, HHS Secretary Michael Leavitt is optimistic that U.S. FDA officials will eventually be embedded in Chinese bureaucracy to help expedite the development of good practices.

Let’s join Leavitt in his optimism for a second and suppose this limited development takes hold and expands, thus revolutionizing food safety oversight in China. If this occurs, it is a good example of the U.S. using its trade and economic power to encourage regulatory progress in a developing nation. I was intrigued by this development — many have claimed that importer outrage is one avenue by which trade can raise standards across the developing world. So why do we not see such substantial, public developments occurring in the arenas of labor and environmental standards? Read the rest of this entry »

Posted in Green Trade, Pollution | Leave a Comment »

The Economist weighs in on green protectionism and Reggie

Posted by Rich Sweeney on November 17, 2007

Here’s the first link. Unsurprisingly the magazine opposes any sort of green trade restriction. As I said earlier on this page, I’m pretty skeptical as well. My opposition was further solidified by all the anti-free trade rhetoric at this week’s Democratic debate. Not sure what happened to the Democrats over the past 7 years, but it sounded like most of the candidates on stage in Nevada would gladly levy us back to the Hawley-Smoot days. No need to give them more ammo on this front.

Also in this week’s Economist is a short piece on the Regional Greenhouse Gas Initiative (RGGI). The main point is that RGGI is going auction all its permits (good), but that there may be too many of them (bad). On the former point, I actually don’t know if this is settled in all ten states. On the latter, this is something PointCarbon published two months ago. Given that electricity usage is so dependent on the weather and emissions are so dependent on fuel prices, pegging reduction targets to a baseline year will always lead to some over- or under- allocation. Yet banking should mitigate the damage of this over time. Of course none of this would even matter if Congress ever got around to passing a reasonable climate bill. RGGI’s initial cap isn’t that strict, so a more ambitious national policy would probably prove binding, and the price of RGGI permits would go to zero.

Posted in 2008 Elections, Green Trade | Leave a Comment »