Leveling the Carbon Playing Field

How can the U.S. maintain a competitive international playing field for carbon-intensive industries under U.S. global warming regulation?

As Congress takes up legislation to address climate change, there is growing concern about the effect the regulations would have on particular economic sectors. Concern is strongest for industries that are especially carbon- or energy-intense, and that face competition from overseas, including from countries that may not have climate change regulations of their own. The U.S. industries that fit that bill are iron, steel, copper, aluminum, cement, glass, paper, and basic chemicals. (Electric utilities are also carbon intense, but international trade is not as large a factor).

A new report from WRI and the Peterson Institute for International Economics (PIIE), Leveling the Carbon Playing Field: Competitiveness and International Climate Policy, examines how to address the issue of international competition in these sectors. The report is the first in a series of joint analyses to explore the connection between trade and efforts to mitigate greenhouse gas emissions. Together, the Peterson Institute and WRI will help policy makers better understand the options before them, and identify policies to both reduce greenhouse gas emissions and maintain dynamic global trade.

What kinds of solutions should policymakers consider?

U.S. industries vary in their exposure to trade and the costs of climate change regulation. For starters, U.S. industries vary in their exposure to trade and the costs of climate change regulation. There is no doubt that there will be winners and losers under climate change regulations; that is, some industries will face increased costs and international competition. However, the report finds that the industries listed above represent a small percentage of the U.S. economy: 3 percent of GDP and 2 percent of total employment. These sectors are obviously important in and of themselves; however, efforts to address competitiveness must be targeted specifically at these industries, and not broadly at the entire economy. In particular, measures must not compromise the environmental goals of climate policy, either by weakening emissions targets or moving emissions overseas.

Second, unilateral efforts like trade measures that attempt to impose comparable costs on carbon-intensive imports may not have the desired effects, and could threaten international cooperation on climate change. Many of the trade-specific measures are intended to bring China to the climate negotiating table. However, China’s exports of carbon-intense goods to the U.S. are relatively small. Therefore, trade measures aimed at leveraging China to adopt stricter emissions regulations domestically would, in fact, provide little incentive and could sour the prospects for international cooperation.

A truly level playing field will depend on international cooperation to encourage countries to impose costs on their industries domestically. To achieve necessary emission reductions, nations will need to leverage international trade to provide positive incentives for action as well as mechanisms for delivery of necessary technologies. Above all, U.S. climate change legislation should make sure that it creates opportunities not barriers for international cooperation.

UPDATE: The Economist covered Leveling the Playing Field in their June 19 edition. Click here to read the article.