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4 Key Issues Surrounding Climate Policies, Carbon Markets, and Competitiveness

Even in the absence of an international framework for reducing greenhouse gas emissions, several countries, states, and provinces are developing and implementing climate policies. A growing number of these policies include market-based programs, some of which aim to link to each other through regional and global carbon markets. Countries like the United States can learn a lot from the economic and political experiences of these climate policy “first movers.”

Earlier this week, I sat on a panel at Carbon Forum North America entitled “International Trade and Carbon: It’s a Competitive World.” At this session, we considered current issues and concerns involved with implementing climate policies, especially how pricing carbon pollution can impact economic competitiveness.

4 Key Issues that Came Up During Our Discussion:

  1. Carbon markets are on the rise. According to Jeff Hopkins, a fellow panelist and principal adviser for international energy and climate policy at Rio Tinto, by 2014, roughly 25 percent of global carbon dioxide emissions will be covered under market-based emissions-reduction programs. Hopkins also estimates that by 2014, 75 percent of emissions from Rio Tinto’s operations will occur in jurisdictions that have enacted market-based emissions-reduction policies.
  2. Competitive risks can be avoided. One common issue that policymakers have long wrestled with is the concern that carbon pricing will create competitive risk to manufacturers and other industries if competitors in other countries do not face comparable costs. Potentially vulnerable sectors include energy-intensive manufacturers of heavily traded goods, such as iron and steel, aluminum, cement, basic chemicals, paper, and glass. To deal with this concern, climate policy “first-movers” have almost universally decided to give free pollution permits to these vulnerable sectors. For example, companies that manufacture energy-intensive goods and are subject to carbon costs in Europe, Australia, New Zealand, California, and Quebec are also eligible for free pollution allowances and other government-provided compensation to shield them from competitive risk.

  3. The United States can learn from other countries’ climate policies. When U.S. policymakers return to debating climate change and begin to weigh policy options, the competitiveness issue will likely resurface as a central challenge. Manufacturing has always been a key part of the U.S. economy, and America will remain a consumer culture for the foreseeable future. American politicians should know that climate policies do not need to result in a trade imbalance that favors foreign manufacturers. In fact, we have learned from other country experiences that competitive risk can be handled through initiatives that, while admittedly complex, are entirely manageable.

  4. Patchwork policies pose challenges for global trade. While options are available to help climate policy “first movers” address competitiveness concerns, these solutions inevitably come with complications. Perhaps the biggest lingering question is the extent to which countries may legally enact domestic policies that infringe on international trade. Certainly, any explicit attempts by policymakers to improve the competitive position of their own industries could risk running afoul of global trade agreements. While environmental exceptions may apply to global trade agreements, such provisions have not yet been tested in a climate policy context.

As fellow panelist Nigel Purvis of Climate Advisers noted, the most prominent trade dispute that’s emerged in this global patchwork of climate policies does not involve goods, but services. As of January 1, 2012, all flights in and out of the European Union are required to pay fees to account for the carbon pollution associated with each flight. Though some critics have argued that the European law would create competitive market distortions, Purvis noted that this outcome is very unlikely, given how carefully the law was crafted so as to avoid discrimination or favoritism of one company over another. Panelists agreed that this is an important case to watch. How the current dispute is resolved will set an important precedent, with implications for future international climate agreements, some of which could have substantive implications for global trade and competitiveness.

The Future of Climate Policy and Carbon Markets

We are moving into an increasingly carbon-constrained world. Preventing climate change’s worst impacts will require global action—both in the form of an international climate agreement and through national, regional, and state policies to curb greenhouse gas emissions. Carbon markets and carbon prices are becoming important parts of these policies. As we’re already seeing in places like the EU, Australia, and California, there are ways to mitigate competitive risks posed by carbon pricing. It will undeniably take commitment and creative thinking—but the world can’t afford to let abstract fears of economic implications hinder global climate change action.

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