Posted by: David Lungren



Now that cap-and-trade legislation is taking another hiatus, we turn again to significant events in August that fell beneath the radar.  One such was a letter sent to President Obama on August 6 by ten Democratic Senators, representing states heavily reliant on coal for electricity and manufacturing for jobs.  Its contents present serious problems for proponents of cap-and-trade legislation in the Senate.  The letter, signed by Senators Brown (Oh.), Feingold (Wis.), Stabenow (Mich.), Levin (Mich.), Casey (Pa.), Specter (Pa.), Byrd (W. Va.), Rockefeller (W. Va.), Franken (Minn.), and Bayh (Ind.), is a constructive attempt to influence the design of cap-and-trade architecture.  The Senators’ concern, expressed in the letter, for the fate of American manufacturing in a cap-and-trade regime is both warranted and welcome.  What struck us as interesting is the statement from the Senators that they “would find it extremely difficult to support a final measure” without the proposals outlined in the letter.   The proposals, noted below, have sparked the ire of the White House, and could have serious global trade implications.  Beyond that, their inclusion in climate legislation would no doubt further complicate the Senate debate.


We make an attempt to analyze the letter’s contents below:


Protecting Manufacturers


10 Senators: “It is essential that any clean energy legislation not only address the climate crisis, but include strong provisions to ensure the strength and vitality of domestic manufacturing. Further, any climate change legislation must prevent the export of jobs and related greenhouse gas emissions to countries that fail to take actions to combat the threat of global warming comparable to those taken by the United States.”

Policy Beat Analysis: While we may not agree on the extent of the “climate crisis,” we strongly agree with the “do-no-harm” approach to American industries competing in the global marketplace.  Put simply, the Waxman-Markey bill fails that test. According to a recent study by the National Association of Manufacturers (NAM), Waxman-Markey would destroy between 1,790,000 and 2,440,000 jobs by 2030.   Moreover, the bill decimates the manufacturing sector: “by 2030 there are between 580,000 and 740,000 fewer jobs,” according to NAM, “or between a 6 and 7 percent reduction in total manufacturing employment in the U.S compared to the baseline forecast. On average, over the 2012-2030 period, the manufacturing sector absorbs 59 to 66 percent of the overall job losses caused by the Waxman Markey bill.”

WTO Rules and Imposing “Border Adjustments”

10 Senators: “In addition, a longer-term border adjustment mechanism is a vital part of this package to prevent the relocation of carbon emissions and industries if other major carbon emitting countries fail to commit to an international agreement requiring commensurate action on climate change.  We believe that a border adjustment mechanism is critical to ensuring that climate change legislation will be trade neutral and environmentally effective.”

Policy Beat Analysis: Again, we respect the intention to keep American manufacturing on a level playing field in the event the U.S. adopts a cap-and-trade regime.  Yet this approach has both practical and political problems.  First, the political: after praising passage of the Waxman-Markey bill, President Obama called on Congress to strip out the bill’s border adjustment provisions. Second, the practical: how would a border adjustment work?  The questions and issues involved are extremely complex and pose serious obstacles to effective implementation.  In a recent report, scholars at the Congressional Research Service (CRS) raised many of the potential pitfalls:

“How close should ‘comparable’ action be to ‘identical’? If a country achieves the same percentage reduction without any comprehensive program, is that ‘comparable’? What if that program achieves the same results as the United States, but exempts greenhouse gas-intensive, trade-exposed industries? If a country achieves more stringent reduction levels than the United States, does the United States concede the right for them to impose a border adjustment against it? When does a comparable action have to occur? How should country of origin be determined?

“How is ‘similar product’ determined? To what category, sub-category, or product-specific level will determinations be made? How broad should the scope of the program be? How will necessary international trade and carbon data be collected to determine appropriate baskets of covered products? How do WTO requirements affect the basket of covered products?”

“How is ‘embedded carbon’ determined? At what level of aggregation will the determination be made? Can a country have excessive embedded carbon for one product, but not another? Can different companies within a country have different embedded carbon estimates? What about products whose manufacture involves several countries, some with comparable policies and some without? Will products produced by different processes be considered together or separately? What about the same products made with different energy sources? What baselines should be used? How is potential gaming of the system prevented?”

10 Senators: “Recently, the World Trade Organization and the United Nations Environment Program issued a report confirming that WTO rules do not override environmental measures.  This reflects the reality that the international community will look at border adjustment measures in the context of international global warming goals.  Failure to do so would further elevate doubts about the legitimacy of our international trading system.


EPW Policy Beat Analysis: In our view, this may be an overly optimistic reading of how the WTO would handle a border adjustment.  Again, this issue is fraught with legal complexity, so we take no firm position here.  CRS, however, has expressed doubts about the 10 Senators’ view.  As CRS explained, “while GATT Article XX contains an exception for ‘measures relating to the conservation of exhaustible resources,’ provided that domestic production or consumption restrictions are also imposed, such a measure may not be ‘applied in a manner which would constitute arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade.’”  Further, in determining whether “unjustifiable” discrimination exists, the WTO Appellate Body “would probably examine whether the United States had made ‘serious efforts’ to negotiate agreements before imposing an import barrier.  Attempts to impose a trade barrier without such efforts would make the barrier more difficult to justify and thus more likely to be considered a WTO violation.