New OECD Report on Carbon Tariffs Helpfully Beats a Dead Horse

As we gleefullycautiously discussed last week, Senate leadership has dropped any and all discussion of carbon tariffs in their latest attempt at 2010 energy legislation.  Today, the OECD issued a new report further explaining why opponents of carbon tariffs (like me) were happy with the new Senate bill's big omission:

Concern that unilateral greenhouse gas emission reductions could foster carbon leakage and undermine the international competitiveness of domestic industry has led to growing calls for carbon-based border-tax adjustments (BTAs). This paper uses a global general equilibrium model to assess the economic effects of BTAs and comes to three main conclusions. First, BTAs can reduce carbon leakage if the coalition of countries taking action to reduce emissions is small, because in this case leakage (while typically small) mainly occurs through international trade competitiveness losses rather than through declines in world fossil fuel prices that trigger rising carbon intensities outside the region taking action. Second, the welfare impacts of BTAs are small, and typically slightly negative at the world level. Third, and perhaps more strikingly, BTAs do not necessarily curb the output losses incurred by the domestic energy intensive-industries (EIIs) they are intended to protect in the first place. This is in part because taken as a whole, EIIs in industrialised countries make important use of carbon-intensive intermediate inputs produced by EIIs in other geographical areas. Another, deeper explanation is that EIIs are ultimately more adversely affected by carbon pricing itself, and the associated contraction in market size, than by any international competitiveness losses. These findings are shown to be robust to key model parameters, country coverage and design features of BTAs.

Did you get all that?  No?  Ok, then please allow me to translate that into slightly-less-nerdy prose: where a country has imposed draconian climate change-mitigation policies like cap-and-trade or a carbon tax, carbon tariffs won't protect that country's energy-intensive domestic industries (e.g., steel, aluminum, chemicals, and paper) against foreign competition that isn't burdened with a similar climate change-mitigation system.  The reason: the domestic system will itself cost domestic industries far more than they would lose in business to the unburdened foreign competition.  In short, carbon tariffs can't help save American manufacturers under a cap-and-trade system because the system itself, not foreign competition, will kill those companies.

Yikes.

Now it sure would've been nice to have this study completed before carbon tariffs were pronounced dead in America's 111th Congress, but, hey, better late than never.  Indeed, as I said last week, the threat of carbon tariffs, stemming for example from the EPA's forthcoming greenhouse gas regulations, still roams the earth like a brain-thirsty zombie, so consider the OECD study to be yet another bullet in your sidearm should the nasty carbon tariffs corpse rise from the grave and start looking for fresh meat.

(I know, I know: I took the metaphor too far.  I'll stop now.)

Victory (Sorta): New Senate Energy Bill Ditches Carbon Tariffs

Senate Majority Leader Harry Reid (D-NV) released today the scaled-down version of the Democrats cap-and-trade energy green jobs "oil spill response" bill, and free traders should be pleased.  The bill summary is available here, and as you can see, there's nary a mention of carbon tariffs or any other euphemism (like "border adjustment" or "offset rebate" or "International Reserve Allowance") used to hide the nasty, trade-war-inducing measures in plain sight.  The new bill also lacks provisions on combating "carbon leakage" or "ensuring domestic competitiveness," which are really just backdoor ways of saying "attacking developing country imports."  So all in all, carbon tariffs appear dead in the United States for 2010.  Hooray.

That said - and I hate to be a party-pooper - there are still plenty of reasons for concern going forward.  Here are my top two:

First, the new Senate Bill doles out more federal subsidies for "green manufacturing."  In particular--

- Section 2004 requires the Secretary of Energy to promulgate an interim final rule establishing an infrastructure deployment program and a manufacturing development program. The Secretary of Energy is required to provide:

• Grants of up to $50,000 per unit to qualified refuelers for the installation of natural gas refueling property placed in service between 2011 and 2015; and 

• Grants in amounts determined to be appropriate by the Secretary to qualified manufacturers for research, development, and demonstration projects on engines with reduced emissions, improved performance, and lower cost.

- Section 2005 requires the Secretary of Energy to promulgate an interim final rule establishing a direct loan program to provide loans to qualified manufacturers to pay not more than 80 percent of the cost of reequipping, expanding, or establishing a facility in the United States that will be used for the purpose of producing any new qualified alternative fuel motor vehicle or any eligible component. $200 million would be

As I've discussed a few times (and fiscal insanity aside), tossing around billions of dollars in cheap loans and direct grants to domestic "green manufacturers," combined with intense administration efforts to increase exports of the subsidized green products, is a surefire way to cause trade disputes and eventual remedial tariffs on those goods.  So while the Senate Bill ends one very big source of trade friction (carbon tariffs), it still contains at least two other, admittedly smaller, ones.  Blech.

Second, and as I noted last year, the demise of any near-term legislative attempts to cap domestic carbon emissions and concurrently regulate imports of carbon-intensive products doesn't mean that the Obama administration will just stop trying to impose its green utopia on an increasingly unwilling American electorate.  Instead, the battle now turns to the EPA and its newfound powers to regulate carbon emissions under the Clean Air Act.  As I said back in December after the EPA's "endangerment" ruling was released:

The EPA's endangerment ruling does not authorize, or even contemplate, the imposition of carbon tariffs. It doesn't even establish the EPA's actual regulation of most GHG emissions or production of GHG-intensive goods (although that's certainly a viable ultimate result). Indeed, Monday's EPA ruling really does only two things: (i) deem GHGs to be harmful pollution capable of being regulated by the CAA; and (ii) lay the groundwork for the EPA's regulation of GHG emissions from new motor vehicles. So why should we be "very, very concerned" about the EPA pursuing eco-protectionism and all the nasty fallout that would result from that move?

Several things, actually.

First, EPA documents and rulings clearly indicate that the agency both looking into, and laying the groundwork for, some form of import regulation related to its new endangerment ruling. For example, in the EPA's July 2008 Advanced Notice of Proposed Rulemaking (a necessary precursor to the final endangerment rule), the EPA frequently questioned whether its GHG regulations would cause "emissions leakage" - i.e., the outsourcing of GHG-emissions-intensive industries and jobs to countries that lack GHG regulations. A primary way to combat such leakage, of course, is carbon tariffs. Indeed, in the same document, the Department of Commerce voiced strong opposition to the unilateral imposition of carbon tariffs - another clear indication that the EPA was mulling the idea. (And, of course, that was a much different DOC (and EPA) than we have today.)

The EPA's final endangerment rule includes no discussion of leakage or border measures, but has several pages (see, in particular, pages 142-151 of the document linked above) on how global GHG emissions can affect human health and safety. One of many telling quotes: "The impacts of the air over the United States cannot be assessed separately from the impacts from the global pool, as they occur together and work together to affect the climate." As with the preliminary notice, it's clear that the EPA is well-aware of, and fully contemplating, the global effects of GHG emissions and its potential regulation of their (allegedly) harmful effects in the United States.

Another EPA ruling related to the endangerment finding also is cause for concern about future eco-protectionism stemming from the EPA's GHG regulations. On October 30 of this year, the EPA announced a final rule for GHG emissions under Section 307(d) of the CAA which "require[s] reporting of greenhouse gas emissions from all sectors of the economy." The final rule doesn't regulate GHGs emissions - just reporting, and applies to fossil fuel suppliers and industrial gas suppliers, direct GHGs emitters and manufacturers of heavy-duty and off-road vehicles and engines. Such "suppliers" include importers and exporters of fossil fuels and certain downstream petrochemicals. Again, it's clear from these regulations that the EPA is very much aware of, and concerned about, the international trade implications of its GHG regulations. Moreover, this reporting system could quite easily be expanded to include other products or, more importantly, provide much-needed evidence (a "rational basis," in legalese) to justify the EPA's imposition of border measures on products/processes controlled by any new GHG regulations.

Second, if Congress refuses to act on Cap-and-Trade (quite likely considering how devastating the issue is politically these days), the EPA's endangerment ruling could be used as a surrogate means of controlling US GHG emissions. Indeed, the White House brazenly threatened as much today (so much for Democrat wailing over abuse of executive power, huh?). Well, as I've discussed repeatedly, a primary component of both the House "Waxman-Markey" bill and the Senate "Boxer-Kerry" bill is, you guessed it, carbon tariffs. Thus, if the EPA's emissions regulations are truly meant to be a surrogate of current US climate change legislation, it's certainly plausible that those regulations will contain some form of similar border measure. (It's also plausible that they won't, but that leads us to the next point.)

Third, if the EPA's endangerment ruling indeed leads to the imposition of serious GHG regulations on US businesses, domestic industry groups will very likely spend a fortune lobbying for the imposition of some form of anti-leakage measure. For example, the above-linked WSJ article cited concerns about "huge costs" imposed on US industries from, among others, the US Chamber of Commerce and the National Association of Manufacturers, US electricity providers, and oil refiners - costs likely not borne by their (lucky!) foreign competitors. Indeed, the Iron and Steel Institute said that any regulation -- whether through the EPA or Congress -- must "reduce emissions without altering the competitiveness of American steelmakers." Of course, the steelmakers - and the many lawmakers who do their bidding - have demanded carbon tariffs in the Cap-and-Trade legislation to ensure a "level playing field" for their products versus imports, so similar efforts are very, very likely for any surrogate EPA regulation.

In sum, the EPA's controversial endangerment ruling does not explicitly contemplate or authorize eco-protectionism under the CAA, nor will it definitely lead to such nastiness. On the other hand, there is plenty of reason for concern. The EPA is clearly concerned about emissions leakage and believes that emissions regulation extends beyond America's borders. Moreover, the agency has not only contemplated border measures as part of any GHG regulation regime under the CAA, but also established a framework - and potential justification - for the imposition such measures down the road. The case isn't a slam-dunk, but it's certainly something to watch for.

Replace "Boxer-Kerry" with "Kerry-Lieberman" and all of this still applies today.  Indeed, Republican efforts to block the EPA's authority to regulate greenhouse gases failed back in June, so the agency's newfound powers definitely remain alive and well.  Moreover, the next UN Climate Change Conference in Mexico City - the much-awaited follow-up to last year's debacle in Copenhagen - is only a few months away, and do you really think that the Obama administration is going to show up totally empty-handed to the world's next big climate change party?  Highly unlikely.

So rejoice for a moment, folks, but remember: this is only round one.  We've got a long, long way to go.

Center for American Progress, France Blindly Push for Carbon Tariffs

The left-leaning Center for American Progress has issued a new paper calling for the implementation of a US-EU system of carbon tariffs.  The author, CAP's Jake Caldwell, summarizes his case as follows:

Carbon tariffs—which the United States and the European Union could decide to impose on greenhouse-gas-intensive products imported from countries refusing to take action on climate change—have the potential to play an important role in these [climate change] discussions moving forward. Carbon tariffs can be an effective policy tool to reduce global emissions and preventing carbon leakage, or the migration of carbon-intensive industries to countries with more lax regulations.

But we must proceed cautiously. Carbon tariffs may also present significant risks to the multilateral trading system and the Earth’s climate if they are designed and implemented poorly and do not fundamentally reduce global greenhouse gas emissions. That’s why the United States and the European Union should work together to design and implement an open and transparent approach to carbon tariffs as part of an overall effort to reduce global greenhouse gas emissions.

Caldwell goes on to explain, as pleasantly as possible, how and why carbon tariffs should be a part of the United States' and EU's future climate policy plans.  As to the latter issue, Caldwell's two primary reasons for supporting carbon tariffs are (i) to stop "carbon leakage" (i.e., the movement of emissions-intensive production to poorly regulated countries); and (ii) to ensure the competitiveness of the domestic industries being strangledregulated by new climate change schemes.  Unfortunately, Caldwell's discussion includes not a shred of evidence that carbon tariffs would actually, you know, achieve those objectives.  (Seriously, there's not a single link or footnote to anything of the sort.)  On the other hand, Caldwell could have spent two minutes on this blog and found oodles of scholarly evidence (see, e.g., here, here, here and here) showing that they would not.

As for the "how," Caldwell provides a laundry list of ideas about what his ideal system should entail: (i) apply carbon tariffs in an open and transparent manner; (ii) exempt least developed countries from tariffs; (iii) consider countries’ greenhouse gas reduction efforts; (iv) establish a joint US-EU working group to identify the relationship between trade and climate change issues; (v) invoke a joint US-EU agreement to apply a “peace clause” for an initial period of 10 years; (vi) allow national leaders to make a final decision on carbon tariffs; and (vii) consider other policy options to address carbon leakage and competitiveness.

I won't get into all of these issues, but I find (i) and (iv) to be really, really interesting (and not in a good way).  On "transparency and openness," Caldwell doesn't really explain how that would work, but I (and many scholars and developing countries) am rather skeptical that such "transparency" is possible or even helpful for developing a "fair" system.  Indeed, I wonder if he's ever seen or read a 100+-page Department of Commerce decision memorandum in a US trade remedies investigation - one that imposes supposedly "remedial" tariffs of 100% or higher on "unfairly traded" Chinese imports, and requires a Rosetta Stone to even begin to understand (hence, why I'm employed).  And that's just the public memos.  There are always hundreds more pages of proprietary calculation documents.  So knowing how our existing remedial tariffs are calculated and imposed on "unfairly-traded" imports, does Caldwell really think that similarly "remedial" tariffs on "non-green" imports would be calculated and imposed any differently or better?  Oh, and let's also keep in mind who's lobbying for, and drafting, these carbon tariff "transparency" regulations.  (Hint: it ain't developing country governments, their exporters or US consumers.)

On point (iv) (i.e., the "joint US-EU working group to identify the relationship between trade and climate change issues"), I'm just flat confused.  According to Caldwell, his working group would "consider a range of issues including the use of carbon tariffs and... guide the WTO’s approach to these issues."  Well, considering how darn controversial carbon tariffs are for developing countries and that they could literally start a trade war, shouldn't an honest and sound environmental policy first consider and determine the "relationship between trade and climate change" before strongly advocating dangerous systems that include border measures based on that relationship?  And second, does Caldwell actually think that a US-EU working group, which excludes 151 other WTO Members, would be well-received and adopted at the WTO, which relies on consensus-driven decision making?  Or does he think that the WTO's seriously independent Appellate Body would gladly be "guided" by the very developed countries whose carbon tariff measures would no doubt be challenged (by India, China or other Members) before it?  (Quick answer: Not gonna happen, dude.)

And speaking of the WTO, it's a tad, ahem, unfortunate that Caldwell glosses over the very serious legal concerns raised by India and others that carbon tariffs don't comply with WTO rules.  His only legal justification is the now-notorious joint paper by the WTO and the UNEP which, as Caldwell rather coolly admits, only "suggests border adjustment measures may be consistent with WTO rules in certain circumstances." (Waffling emphasis mine.)  Of course, all those qualifiers are totally necessary because Cato's Sallie James and the Indian Government, among others, have both provided ample legal argument that most carbon tariff schemes would not be consistent with global trade rules.

Indeed, it's James' analysis which is most interesting here because one of her paper's main points was that WTO rules necessitate that "[a]ny trade-related measures (such as tariffs on goods from noncapped countries) need to be based strictly on the goal of protecting the environment, rather than an attempt to level the playing field for domestic competitors shackled by climate change regulations. Breaking the link between the trade measure and the goal of protecting the environment is a sure invitation to WTO dispute-settlement proceedings."  Yet, as noted above, one of Caldwell's two big reasons for carbon tariffs is the need to maintain the competitiveness of US and EU manufacturers.  In other words, Caldwell in one breath brushes off WTO concerns over carbon tariffs, yet his primary reasoning for their use is precisely what will trigger a big WTO dispute.

Umm, what!? 

So to recap, Caldwell (i) provides no empirical support for, and ignores the boatloads of evidence against, his main carbon tariffs justifications; (ii) proposes a "system" that is almost certainly impractical; and (iii) ignores carbon tariffs' legal problems under WTO rules.  But other than that........

But hey, all's not lost for Caldwell, as today's other carbon tariffs news shows that he's not alone out there in his support for the controversial measures.  Euractiv reports that the French government, fresh off the collapse of its own national efforts to impose carbon tariffs, is aggressively pushing for them at the EU.  Problem is that most every other European nation (minus Italy) and the EU's Trade Commissioner Karel De Gucht (among others) oppose carbon tariffs because they'd raise prices for consumers and possibly start a trade war.

Funny how Caldwell, while mentioning France and Italy, also fails to mention that stubborn little fact, huh?

(Actually, no it's not.)

Senate Sponsors of New Climate Change Legislation Try - and Hilariously Fail - to Cover Carbon Tariffs' "Competitiveness" Tracks (UPDATED)

Tomorrow, Senators John Kerry (D-MA), Lindsay Graham (R-SC) and Joe Lieberman (I-CT) will unveil their long-awaited legislation to completely re-jigger (technical term) the American energy sector.  The Hill has done some digging and uncovered the confidential internal summaries of the legislation, and it contains pretty much everything that we've expected for a while now: emissions caps, nuclear power, handouts to domestic energy producers and, of course, carbon tariffs.

The Hill links to the bill's long summary here (PDF), and just like the House climate change legislation (aka "Waxman Markey") and the Senate's old version (aka "Boxer-Kerry"), the bill isn't so forthrightbold as to actually call the carbon tariffs, well, "carbon tariffs" (or "border measures" or "border taxes" or anything anyone's ever actually heard of or been publicly concerned about.)  No, instead the legislation follows Waxman-Markey and calls its border measures an "International Reserve Allowance Program."  In particular, the summary states:

Sections 775. International Negotiations. Finds that the purposes of this subtitle can be most effectively achieved through international agreements and states that it is the policy of the United States to work proactively under the UNFCCC and in other forums to establish binding agreements committing all major-emitting countries to contribute equitably to the reduction of global greenhouse gas emissions.

Section 776. Presidential Reports and Determinations. Requires the President to submit a report to Congress no later than January 1, 2019, and every two years thereafter, regarding the effectiveness of the distribution of emission allowance rebates under Subpart I in mitigating the risk of increased greenhouse gas emissions in foreign countries resulting from compliance costs incurred under this bill. 

Requires the President to establish an International Reserve Allowance Program if a multilateral agreement consistent with the statement of policy described in section 775 has not entered into force by January 1, 2020, unless the President determines that such program would not be in the national economic or environmental interest of the U.S.  If the President establishes an International Reserve Allowance Program, this section requires the President to make a determination as soon as possible, but no later than June 30,2023, and every two years thereafter, for each eligible industrial sector, of whether not more than 70 percent of global production with respect to that sector is produced or manufactured in countries that meet specific criteria described in this section.

Section 777.  International Reserve Allowance Program. Directs the Administrator, with the concurrence of the Commissioner of Customs, to promulgate regulations establishing an international reserve allowance program. Includes provisions in addition to the reserve allowance program to mitigate or address carbon leakage by ensuring that eligible sectors may receive additional emission allowance rebates in an amount necessary to address those impacts.

It's much less controversial when completely unintelligible, you see?  But don't be fooled: those are stealth carbon tariffs, my friends. 

However, unlike Waxman-Markey (see Sec. 768) or Boxer-Kerry, it appears that the new Senate climate change legislation has, also as expected, ditched any discussion of how the border measuresinternational reserve allowances are intended to offset any domestic competitiveness concerns, and it instead has couched the carbon tariffs provisions in wholly environmental terms.  This environment-only focus is made abundantly clear in the sections above, and, as we've discussed before, it's part of a recent trend and probably quite intentional:

[T]he Senators' rhetorical shift [from competitiveness to environmental reasoning] is - shocking, I know - a rather ham-handed attempt to keep their cherished carbon tariffs consistent with WTO rules.  As Cato's Sallie James explains:

[T]he almost convincing attempt by these senators to cloak their protectionism in green-speak about the need to ensure that climate legislation is environmentally effective. They will have to keep that up, too, if they are to stay on the right side of WTO law, which says there must be a clear link between a trade measure and an environmental purpose if the measure is to be at least prima facie legitimate.  Imposing border measures to address adverse competitiveness effects of domestic environmental regulations, in other words, probably won’t cut it.

The bill's short summary (available here) also follows this new "green" road-map (and it's also a little more obvious about the bill's inclusion of border measures):

In order to protect the environmental goals of the bill, we phase in a WTO-consistent border adjustment mechanism. In the event that no global agreement on climate change is reached, the bill requires imports from countries that have not taken action to limit emissions to pay a comparable amount at the border to avoid carbon leakage and ensure we are able to achieve our environmental objectives. (Emphasis mine.)

You couldn't shoehorn more "environmental" references into this summary if you tried.  Only one small problem: this strictly "environmental" summary falls clearly under the main heading "Expanding America's Manufacturing Base," and the long summary of Sections 775-777 above comes under the main heading "Subtitle A - Protecting American Manufacturing Jobs and Preventing Carbon Leakage."  So did the Senate drafters really just take all that time purging all of the scary "competitiveness" language from their new bill's carbon tariffs provisions, only to keep them under a legislative subtitle that expressly denotes provisions dealing with domestic industrial competitiveness?

Well, the text of the bill isn't out yet, so we don't really know for sure.  But if so, this has gotta be one of the dumber drafting moves that I've seen since, well, ObamaCare.

Although I'm sure the Indian Government is just psyched.

UPDATE: Sallie James weighs in on the Kerry-Lieberman bill and finds even more proof of  really bad drafting.  Also, the legislation has been released and the headings, etc. are the same as the summaries.  Nice.

Surprising (Almost) No One, Obama Reverses Stance and Announces Support for Carbon Tariffs

National Review's Jim Geraghty has a long-running joke that all promises issued by President Obama come with an implicit expiration date.  Geraghty's well-documented thesis gets another footnote today, as the New York Times reports that the Obama Administration has officially reversed course and now supports the inclusion of carbon tariffs in the soon-to-be-released Senate cap-and-trade energy green jobs legislation:

A top White House adviser confirmed today that President Obama is open to helping energy-intensive industries cope with the costs of climate legislation, including use of controversial border tariffs he had previously warned could spark a global trade war.

Energy and climate adviser Carol Browner said the administration recognizes Congress' interest in using trade language as it works on climate legislation that addresses concerns from some of the country's industries that are most vulnerable to cheap foreign imports, including steel, cement, glass, pulp and paper.

"There's going to have to be mechanisms that recognize they compete in a global market," Browner said during an event hosted by National Journal. "I think it's fair to say a final bill will be very mindful of the needs of these particular sectors of the economy."

Obama prompted an outcry from moderate Senate Democrats last summer after he questioned a section of the House-passed climate bill H.R. 2454 that punishes developing countries with trade sanctions if they don't do enough to curb their greenhouse gas emissions.

"At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there," the president told reporters the day after the House's 218-212 vote.

The Senate climate bill's lead authors have sent signals that they will address the concerns of senators from states with trade-sensitive industries, though details on what John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) will say in their legislation remains unclear. The trio are planning to release their bill Monday.

Ten Senate Democrats, led by Sherrod Brown of Ohio and Debbie Stabenow of Michigan, called last week for a border adjustment that is automatically slapped on imports from countries that do not have greenhouse gas requirements comparable to the U.S. law (E&ENews PM, April 15).

"A border adjustment measure is critical to ensuring that climate change legislation will be trade neutral and environmentally effective," the senators wrote to Kerry, Graham and Lieberman.

But Graham said last week he didn't agree with an automatic trigger for trade sanctions. Instead, he said he supported a provision setting a roughly four-year deadline for conclusion of an international climate agreement; otherwise, Congress would need to revisit the issue.

"We don't need to create a trade war," Graham said. "We need to be WTO-compliant. But let me just say this, on behalf of manufacturing, if we don't have an international agreement covering these countries that can put us at a competitive disadvantage, then we'll have to revisit this thing. My approach has always been that you start off with business-friendly language when it comes to border adjustments that's clearly WTO-compliant, but you'd have a provision in there: If not an international agreement by a certain point in time, Congress has to revisit this."

Senate Finance Committee Chairman Max Baucus (D-Mont.) has also indicated he will weigh in on the trade issue as part of a broader plan spelled out by Majority Leader Harry Reid (D-Nev.) before any climate bill comes to the floor....

Sigh.  I have consistently maintained that the chances of any American cap-and-whatever legislation becoming law in 2010 are tiny, and I continue to believe that's the case (especially after Ways & Means Chair Sandy Levin just yesterday said that "this will probably not be the year" for the bill).  However, today's news of Obama's shift on carbon tariffs is still noteworthy for several reasons:

• First, Obama's change of heart is not as drastic as the NYT would have you believe and, quite frankly, was all-but inevitable given the partisan makeup in the Senate and the resolute support for carbon tariffs from a large gaggle of protectionist senators.  Indeed, anyone paying attention saw this change-of-heart coming months ago when the White House first started waffling on the issue.  So maybe this is "big news" for the White House's cheerleaders at the NYT, but it really shouldn't be for the rest of us.

• Second, it appears that the Obama administration and Senator Graham did not get the super-secret memo from Sen. Sherrod Brown that, for WTO-consistency reasons, US politicians and officials had to couch all discussions of carbon tariffs in terms of environmental effects (e.g., preventing "carbon leakage"), as opposed to more obvious concerns over the loss of domestic manufacturing "competitiveness."  As I noted a couple days ago, justifying border measures on competitiveness grounds appears to be a surefire way to violate WTO rules (despite what Paul Krugman would have you believe), so US politicians have uniformly modified their talking points to discuss carbon tariffs solely in terms of saving Mother Gaia.  Thus, the "competitiveness" comments of Czarina Browner and Senator Graham appear to be a major snafu and, like, so 2009.  (You know, with all the advances in modern communications technology, you'd think that America's protectionists would be able to keep their fake-messaging straight.  I'd be willing to bet that China's protectionists don't have this archaic problem.  Alas.) 

• Finally, Obama's change of tune on carbon tariffs is still troubling, despite point #1, because its further proof that he'll sacrifice free trade and the health of the multilateral trading system for whatever domestic priority is next on his plate.  Last year, the White House's concerns over passing health care caused FTAs and WTO negotiations to stall, and numerous US violations of global trade rules to go unresolved.  Now, Obama's openly disregarding ample legal analysis on carbon tariffs' WTO problems - as well as the strong public concerns/threats from India, China and other countries - because he needs to buy Senate votes for his new priority: cap-and-trade.  Indeed, as the NYT notes above, it was these very concerns that caused "2009 Obama" to explicitly oppose carbon tariffs or any other "protectionist signals."  But that was 2009, baby.  "2010 Obama" is now totally open to carbon tariffs because he needs 60 Senate votes for his last-ditch effort to control the American energy sector.  So damn-the-international-obligation-torpedoes!  And speaking of those obligations, how many more times will this President ignore them before his supporters finally drop the whole "new embrace of multilateralism and respect for other nations" nonsense?  I'd say it's about time, wouldn't you?

And with that diatribe complete, it's time to once again update the ol' carbon tariffs scorecard:

Pro carbon tariffs - President Barack Obama, Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); Sen. Mark Warner (D-VA); the US House of Representatives (in Waxman-Markey); France; Italy and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

Senate Fans of Carbon Tariffs May Have Changed Their Tune, but the Song Still Stinks

Given the current partisan makeup of the US Senate, any small group of Senators wields enormous influence over the legislative process.  With this fact in mind comes news that a group of ten Senators, led by Sen. Sherrod Brown (D-OH), have sent a letter to Sens. John Kerry (D-MA), Joe Lieberman (I-CT) and Lindsay Graham (R-SC), setting out their demands for the new Senate climate change energy green jobs legislation, which is set to be unveiled in the next week or so.  And unsurprisingly, one of the Senators' demands is for carbon tariffs:

Apply Border Measures To Prevent Carbon Leakage. An automatically triggered border measure is necessary to promote comparable action from other countries and prevent carbon leakage. To avoid undermining the environmental objective of the climate legislation, a WTO-consistent border adjustment measure, which the WTO has recognized as a usable tool in combating climate change, should apply to imports from countries that do not have in place comparable greenhouse gas emissions reduction requirements to those adopted by the United States. A border adjustment measure is critical to ensuring that climate change legislation will be trade neutral and environmentally effective.

It's already quite certain that the new Senate bill will include some form of "border adjustment measures" (aka carbon tariffs), so this letter isn't really changing anything in that regard.  But its substance is still worth exploring.  As you may recall, this is not the first such letter sent by Sen. Brown and his merry band of protectionists.  An almost identical list of Senators sent a similar letter last August demanding carbon tariffs provisions in the 2009 version of the Senate's cap-and-trade bill.  Last time, however, their sole justification for the measures was to ensure a "level playing field" for American manufacturers who would face significantly higher costs under the energy tax scheme.

Yet now, these rust-belt Senators have dropped their heartfelt concerns about protecting constituent industries and instead want carbon tariffs only to ensure that the law is "environmentally effective" by preventing "carbon leakage" (i.e., the offshoring of dirty, carbon-intensive manufacturing).  How eco-friendly of them.  Now, leaving aside for a moment that there is an increasingly large body of scholarship demonstrating that (a) carbon leakage isn't a significant threat, and (b) border measures actually won't prevent what little carbon leakage will occur, let's focus for a moment on the Senators' abrupt change in reasoning.  What on earth could have caused this conspicuous about-face?

Well, it appears that the Senators' rhetorical shift is - shocking, I know - a rather ham-handed attempt to keep their cherished carbon tariffs consistent with WTO rules.  As Cato's Sallie James explains:

[T]he almost convincing attempt by these senators to cloak their protectionism in green-speak about the need to ensure that climate legislation is environmentally effective. They will have to keep that up, too, if they are to stay on the right side of WTO law, which says there must be a clear link between a trade measure and an environmental purpose if the measure is to be at least prima facie legitimate.  Imposing border measures to address adverse competitiveness effects of domestic environmental regulations, in other words, probably won’t cut it. ([Sallie's paper] “A Harsh Climate” has more on why unilateral border actions may in and of themselves be inconsistent with WTO obligations.)

So last year, Senator Brown and his buddies from Ohio, Michigan, Pennsylvania, West Virginia and elsewhere were focused laser-like on maintaining their heavy-industry constituents' domestic competitiveness through carbon tariffs, but now they're only concerned with carbon leakage and the environment.

How convenient.

Pardon me if I'm not buying this green-change-of-heart from this gaggle of brown-state Senators.  But hey, you gotta give them a little credit: they're sure trying like the dickens to wish away the problems that carbon tariffs have under WTO rules.  Indeed, they've even gone so far as to pretend that the WTO has expressly sanctioned the measures' use.  Of course, as James explains, this is nonsense:

[R]elated to the issue of WTO legitimacy,  is the reference to the WTO “recogniz[ing]” border adjustment measures as “a useable tool in combating climate change.” This is disengenuous and possibly misleading rhetoric from the senators, because the WTO has done no such thing. There has been no formal ruling on this issue from any WTO judicial body, because no such cases have come before it. The WTO members as a group have not issued a proclamation on it, either. I suspect the senators are referring to a joint WTO/United Nations Environment Programme report that came out last year, but as I said in my paper, that report “merely summarizes the relevant provisions, precedents and existing literature on the question on WTO consistency–without reaching any prescriptive conclusion at all.” And the demand that this tool be “automatically triggered” may put it at odds with jurisprudence that says that certain administrative procedures–including the right for a WTO member to review and appeal any decisions made–must be followed (reference for the trade wonks reading this: I am referring to Shrimp-Turtle).

Looks like a serious tsk-tsk is in order here.  But hey, maybe the Senators' weren't being intentionally misleading about that WTO "recognition."  Instead, they may have just been parroting the undoubtedly-intentional fabrications of Paul Krugman, who has repeatedly cited the WTO-UNEP report as somehow providing the trade body's express approval of carbon tariffs.  Krugman has repeated this fiction several times on his blog (see, e.g., here and here) and did it again just two weeks ago in the Sunday New York Times Magazine.  As Sallie points out above, of course, Krugman's statements are both totally wrong and highly misleading, and her great paper on the subject calls carbon tariffs' WTO-legality into serious question.  And as I've noted recently, the Indian government's own analysis has also raised serious WTO concerns about carbon tariffs, and the Indians have openly threatened to challenge any law that includes the controversial measures.

Krugman, of course, fails to mention any of this.  But hey, it's not like he's really all that concerned about veracity these days, so maybe we shouldn't be too surprised by his misleading statements and glaring omissions.

That doesn't mean, however, that we can't update the ol' carbon tariffs scorecard because the new Senate letter included one new protectionist: Sen. Mark Warner (D-VA).  His inclusion here is really a shame.  I thought he had more sense than that.  Alas.

Also, there's news out of Europe that France and Italy are demanding carbon tariffs (in what exactly isn't really clear).  Their demands aren't likely to go anywhere, but back on the big list goes France, and Italy joins the protectionist party for the first time.  Bellissima!

Pro carbon tariffs - Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); Sen. Mark Warner (D-VA); the US House of Representatives (in Waxman-Markey); France; Italy and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

Carbon Tariffs Update: EU Meetings Produce Nothing; UN Deadline "Softens"

The latest EU meeting of climate ministers produced no new mandates and demonstrated a logjam over emissions reductions targets and border measures. This turn of events should come as little surprise to those of us used to watching the glacial pace of EU policymaking, but it's still worth noting because the last time we checked in with EU ministers, they were loudly and angrily squawking about the collapse of the UN Climate Conference in Copenhagen. Well, they're still squawking, but so far the ministers' frustrations have not resulted in a new push for carbon tariffs (aka "border adjustment measures") on imports from countries that have less severe climate change mitigation policies. Here's The Economic Times with the "news":

The European Union failed to arrive at a consensus on the quantum of its emission reduction commitment. At the meeting of EU ministers in Spain, there was disagreement over whether the 27-member bloc should commit to cutting its emissions by 30% by 2020 from its 1990 levels.

While Britain, France and Germany have called for scaling up the bloc’s commitment to 30%, the move was opposed by Poland, Hungary and Italy. Ambassadors from EU members will continue discussions on emission target in Brussels on Wednesday.

The reduction of greenhouse gas emissions by 30% is conditional on “comparable” offers made by other rich nations and “economically more advanced developing countries contribute adequately according to their responsibilities and respective capabilities”.

Sidelined at the Copenhagen climate conference held in December, the EU is attempting to regain its influence in the global climate debate. The bloc, which has been the most pro-active, seeks to pressure other nations to increase the level of ambitions by setting a higher target for itself. Those supporting a higher target like the UK have argued that the offer is conditional on other developed countries follow suit. In doing so, the EU hopes to reassert its influence in the climate debate.

There has been some heartburn within the EU over the way the US, which has been rather unambitious in its climate efforts, and the world’s target emitter China took over the Copenhagen summit. Germany, another proponent of a higher conditional commitment, argued that a 20% reduction was no longer ambitious, and that the European economies could afford to take on a 30% reduction. However, in Seville, Poland, Italy and Hungary wanted to omit any reference to the 30% target.

Going by the offers made by developed countries in Copenhagen, the reduction in emissions would be about 13% on average in 2020 from 1990 levels. Given this, it is being argued that a commitment to a deeper cut by the EU cannot be justified. The 20% reduction goal is underpinned by recent legislation that tightens carbon dioxide caps on energy and manufacturing companies in Europe’s emissions-trading system and that requires each EU nation to limit discharges from industries outside the programme. A move towards a deeper cut in emissions would mean a tightening of curbs in the emissions trading programme.

France, which is also pushing for a higher commitment, would like the EU to consider tariffs on imports of manufactured goods from countries with weaker climate-protection rules as a way to protect European industry from unfair competition. France has suggested that the 30% reduction target could require a carbon inclusion mechanism, to protect the European industry.

The northern member states are sceptical about a trade mechanism that included the price of carbon dioxide. However, the failure by other developed countries to match a 30% reduction in emissions by the European Union could once again open the door to considering protecting European industry with measures such as taxes on products imported from nations that block adoption of binding reduction targets.

The EU deadlock continued today, highlighting a growing rift between EU members about what to do on climate change, particularly where it looks increasingly likely that the US won't pass any sort of climate change bill in 2010.

Meanwhile, the UN announced today that the January 31 deadline established in Copenhagen for countries to announce their carbon emissions targets is no longer, well, a real deadline:

The UN has dropped the 31 January deadline by which time all countries were expected to officially state their emission reduction targets or list the actions they planned to take to counter climate change.

Yvo de Boer, UN climate change chief, today changed the original date set at last month's fractious Copenhagen climate summit, saying that it was now a "soft" deadline, which countries could sign up to when they chose. "I do not expect everyone to meet the deadline. Countries are not being asked if they want to adhere… but to indicate if they want to be associated [with the Copenhagen accord].

So far, only 20 of 192 countries have announced their climate change plans. That's not good, and it's far from certain whether 2010 will produce anything tangible on the multilateral front, or whether everything will get punted to Mexico City at the end of the year.

Regardless, I'll certainly be here keeping an eye out for sneaky (likely French) protectionists dressed in pretty green clothing.

A Good Day in the Fight against Green Protectionism

Several positive developments today in our quest against protectionism masquerading in green clothing:

(1) The EU's new trade chief sounds great.  Not only does Karel de Gucht oppose carbon tariffs out of practical and trade war concerns, but he also advocates a multilateral agreement to eliminate barriers to trade in environmental goods.  Of course, de Gucht doesn't really have a say on these issues, but it's still good to hear these things from a high-ranking EU official - particularly when some European leaders (*cough*Sarkozy*cough) are clamoring for green protectionism.

(2) American farmers are unanimously opposed to Cap and Trade and the EPA's regulation of greenhouse gases.  At the American Farm Bureau's annual meeting, delegates voted unanimously to "strongly oppose 'cap and trade proposals before Congress' and strongly support 'any legislative action that would suspend (the Environmental Protection Agency's) authority to regulate greenhouse gases under the Clean Air Act."  As you'll recall, both the House and Senate versions of Cap and Trade include carbon tariffs (aka "border adjustment measures"), and the EPA's new GHG authority hinted at import regulations, so opposition from a powerful group like the AFB is good news.  And for good measure, the AFB announcement even throws in a reference to ClimateGate.  Bravo, farmers. Bravo.

(3) The ITC struck down a ruling that Japanese wind turbines violated GE patents and thus should be banned from the US market.  Normally, I wouldn't get into the nitty-gritty of a case like this, but, as Law360 notes below, it involved billions of dollars in "green" products, a politically-connected plaintiff (GE), and had become highly politicized.  (Even Chuck Schumer makes an appearance!)   Thus, the case ended up smelling a lot more like potential eco-protectionism than your basic trade/IP litigation:

In a reversal of an administrative law judge's ruling, the U.S. International Trade Commission has terminated a Section 337 complaint filed by General Electric Co. against Mitsubishi Heavy Industries Ltd., finding no violation of GE patents by Mitsubishi wind turbine components.

The decision, handed down Friday, puts an end to an ITC dispute over designs for wind turbine technology, in which GE accused Tokyo-based Mitsubishi and subsidiaries Mitsubishi Power Systems Inc. and Mitsubishi Heavy Industries America Inc. of importing turbine parts that infringed three patents....

The ITC opened its investigation in March 2008, based on a complaint filed by GE alleging that Mitsubishi was importing and selling certain variable-speed wind turbines and components that infringed the '039 and '085 patents, as well as a third, U.S. Patent Number 7,321,221.

In August, the ITC ALJ issued a final initial determination affirming two 337 violations on the '039 and '985 patents and recommending limited exclusions barring the allegedly infringing products from entering the U.S.

However, an investigative attorney from the ITC Office of Unfair Import Investigations disputed the ALJ decision, questioning particular infringement findings on patent-specific claims, as well as general concerns about GE's fulfillment of the technical prong of the domestic industry requirements with respect to the U.S. wind turbine market.

Based on the conflicting reports, the full commission announced in October that it would review the ALJ's initial determination...

With a number of green energy stimulus projects under way, Congress has taken a keen interest in the dispute, with lawmakers weighing in heavily for both sides in recent weeks.

Sens. Charles Schumer, D-N.Y., and Kirsten Gillibrand, D-N.Y., along with U.S. Rep. Paul D. Tonko, D-N.Y., sent the ITC commissioners a letter dated Jan. 6 urging them to “consider the importance of the domestic industries and ensure that intellectual property rights are upheld” in the GE-Mitsubishi case.

New York is home to the global headquarters for GE's wind energy business, according to the lawmakers.

Sens. Blanche Lincoln, D-Ark., and Ron Wyden, D-Ore., wrote the ITC in October saying the ALJ decision deserved a second look in light of an expected spike in demand for renewable energy technology.

At least one of Mitsubishi's 2.4-megawatt variable speed turbines has been installed in Wyden's home state, the senator said.

Congress' interest prompted Georgia Republican Sens. Saxby Chambliss and Johnny Isakson to warn commissioners in a Dec. 23 letter that the case “may have become politicized.”

Since entering the wind energy market in 2002, GE has become one of the largest U.S. suppliers of wind turbines, accounting for 43 percent of the market in 2008, according to the ITC.

Good for the ITC to resist the political posturing of Schumer and his colleagues.  Of course, GE is also a very strong supporter and ally of the President, whose administration recently issued a sketchy ruling raising tariffs on solar panels (which GE also makes).  But I'm sure that there's no connection to any of this.

Totally.

Could the EPA's "Endangerment" Decision Result in Eco-Protectionism?

On Monday, US EPA issued its much-anticipated final ruling that greenhouse gas emissions (GHGs) could be regulated under Section 202(a) of the Clean Air Act because they "endanger public health or welfare." The WSJ reports on the massive implications of the decision:

The so-called "endangerment finding" announced Monday by EPA Administrator Lisa Jackson is necessary to move ahead on new emission standards for cars, while potentially opening up large emitters such as power plants, crude-oil refineries and chemical plants to limits on their output of carbon dioxide and other gases.

"These long overdue findings cement 2009's place in history as the year when the U.S. government began addressing the challenge of greenhouse-gas pollution and seizing the opportunity of clean-energy reform," Ms. Jackson said in a statement....

The EPA action gives President Barack Obama something to show leaders from other nations when he attends the Copenhagen conference on Dec. 18 and tries to persuade them that the U.S. is serious about cutting its contribution to global greenhouse-gas emissions....

An endangerment finding allows the EPA to use the federal Clean Air Act to regulate carbon-dioxide emissions, which are produced whenever fossil fuel is burned. Under that law, the EPA could require emitters of as little as 250 tons of carbon dioxide per year to install new technology to curb their emissions starting as soon as 2012.

The EPA has said it will only require permits from big emitters -- facilities that put out 25,000 tons of carbon dioxide a year. But that effort to tailor the regulations to avoid slamming small businesses with new costs is expected to be challenged in court.

The EPA's final rule is here.  Unsurprisingly, the blogosphere - both liberal and conservative - has erupted over the controversial EPA decision.  Each side views the EPA's decision as a backdoor to regulating CO2 emissions without congressional passage of the currently-comatose Cap-and-Trade legislation, or a way to force Congress to pass that very same legislation (or else!).  These valid concerns are, in my humble (ha!) opinion, quite worthy of the barrels of virtual ink being spilled over them.

However, one thing that I've yet to see in any of the e-chatter is an analysis of whether the EPA's endangerment ruling will empower the agency to impose eco-protectionist measures against imports of fossil fuels or GHG-intensive products (like cement, steel or fertilizer).  Such protectionism would likely come in the form of carbon taxes, tariffs or other "border measures" imposed on imports of targeted products from countries that have not implemented similar emissions limitations in order to offset the competitive disadvantages caused by the EPA's domestic regulations.  As I've discussed previously, carbon tariffs are themselves highly controversial and are opposed by most of the developing world and an increasing share of the developed world for myriad reasons (including the possibility of starting a trade war).  All of this discussion, however, has come via analysis of the US Cap-and-Trade Legislation (which contemplates carbon tariffs) or a multilateral agreement on climate change concluded as part of the UN's Copenhagen Conference.  Never have I contemplated whether a federal agency - the EPA - would impose similar eco-protectionism without Congressional approval.

The short answer: it's still unclear, but we all should be very, very concerned. (Cue ominous music...)

The EPA's endangerment ruling does not authorize, or even contemplate, the imposition of carbon tariffs.  It doesn't even establish the EPA's actual regulation of most GHG emissions or production of GHG-intensive goods (although that's certainly a viable ultimate result). Indeed, Monday's EPA ruling really does only two things: (i) deem GHGs to be harmful pollution capable of being regulated by the CAA; and (ii) lay the groundwork for the EPA's regulation of GHG emissions from new motor vehicles.  So why should we be "very, very concerned" about the EPA pursuing eco-protectionism and all the nasty fallout that would result from that move?

Several things, actually.

First, EPA documents and rulings clearly indicate that the agency both looking into, and laying the groundwork for, some form of import regulation related to its new endangerment ruling. For example, in the EPA's July 2008 Advanced Notice of Proposed Rulemaking (a necessary precursor to the final endangerment rule), the EPA frequently questioned whether its GHG regulations would cause "emissions leakage" - i.e., the outsourcing of GHG-emissions-intensive industries and jobs to countries that lack GHG regulations. A primary way to combat such leakage, of course, is carbon tariffs. Indeed, in the same document, the Department of Commerce voiced strong opposition to the unilateral imposition of carbon tariffs - another clear indication that the EPA was mulling the idea. (And, of course, that was a much different DOC (and EPA) than we have today.)

The EPA's final endangerment rule includes no discussion of leakage or border measures, but has several pages (see, in particular, pages 142-151 of the document linked above) on how global GHG emissions can affect human health and safety. One of many telling quotes: "The impacts of the air over the United States cannot be assessed separately from the impacts from the global pool, as they occur together and work together to affect the climate."  As with the preliminary notice, it's clear that the EPA is well-aware of, and fully contemplating, the global effects of GHG emissions and its potential regulation of their (allegedly) harmful effects in the United States.

Another EPA ruling related to the endangerment finding also is cause for concern about future eco-protectionism stemming from the EPA's GHG regulations.  On October 30 of this year, the EPA announced a final rule for GHG emissions under Section 307(d) of the CAA which "require[s] reporting of greenhouse gas emissions from all sectors of the economy."  The final rule doesn't regulate GHGs emissions - just reporting, and applies to fossil fuel suppliers and industrial gas suppliers, direct GHGs emitters and manufacturers of heavy-duty and off-road vehicles and engines.  Such "suppliers" include importers and exporters of fossil fuels and certain downstream petrochemicals.  Again, it's clear from these regulations that the EPA is very much aware of, and concerned about, the international trade implications of its GHG regulations.  Moreover, this reporting system could quite easily be expanded to include other products or, more importantly, provide much-needed evidence (a "rational basis," in legalese) to justify the EPA's imposition of border measures on products/processes controlled by any new GHG regulations. 

Second, if Congress refuses to act on Cap-and-Trade (quite likely considering how devastating the issue is politically these days), the EPA's endangerment ruling could be used as a surrogate means of controlling US GHG emissions.  Indeed, the White House brazenly threatened as much today (so much for Democrat wailing over abuse of executive power, huh?).  Well, as I've discussed repeatedly, a primary component of both the House "Waxman-Markey" bill and the Senate "Boxer-Kerry" bill is, you guessed it, carbon tariffs.  Thus, if the EPA's emissions regulations are truly meant to be a surrogate of current US climate change legislation, it's certainly plausible that those regulations will contain some form of similar border measure. (It's also plausible that they won't, but that leads us to the next point.)

Third, if the EPA's endangerment ruling indeed leads to the imposition of serious GHG regulations on US businesses, domestic industry groups will very likely spend a fortune lobbying for the imposition of some form of anti-leakage measure.  For example, the above-linked WSJ article cited concerns about "huge costs" imposed on US industries from, among others, the US Chamber of Commerce and the National Association of Manufacturers, US electricity providers, and oil refiners - costs likely not borne by their (lucky!) foreign competitors.  Indeed, the Iron and Steel Institute said that any regulation -- whether through the EPA or Congress -- must "reduce emissions without altering the competitiveness of American steelmakers."  Of course, the steelmakers - and the many lawmakers who do their bidding - have demanded carbon tariffs in the Cap-and-Trade legislation to ensure a "level playing field" for their products versus imports, so similar efforts are very, very likely for any surrogate EPA regulation.

In sum, the EPA's controversial endangerment ruling does not explicitly contemplate or authorize eco-protectionism under the CAA, nor will it definitely lead to such nastiness.  On the other hand, there is plenty of reason for concern.  The EPA is clearly concerned about emissions leakage and believes that emissions regulation extends beyond America's borders.  Moreover, the agency has not only contemplated border measures as part of any GHG regulation regime under the CAA, but also established a framework - and potential justification - for the imposition such measures down the road.  The case isn't a slam-dunk, but it's certainly something to watch for.

So stay tuned....

Carbon Tariffs Update: The US Senate v. The Developing World

Developments over the last few days highlight what appears to be an expanding rift between the United States and the rest of the world (minus France) on the issue of "carbon tariffs." To keep everyone up to speed, carbon tariffs (aka "border measures" or "border adjustments" or "offset measures" or... you get the idea) are measures intended to offset the competitive disadvantages that climate change mitigation policies have on domestic manufacturers by imposing at the border a "charge" (or "tax" or "tariff" or "adjustment" or...) on imports of like products from countries that have chosen not to burden their manufacturers with such regulations.

As I've noted repeatedly, much of the developed and developing world has publicly opposed the unilateral use of carbon tariffs due to fears that such measures are utterly unmanageable, could easily devolve into "green protectionism" (i.e., a "green" excuse to keep imports out, regardless of the actual climate change facts), and/or spark a global trade war. And lots of studies support their views.  The Chinese have been one of the most vocal opponents and, as Reuters reports, just yesterday reiterated their stance against carbon tariffs and (again) issued a harsh warning to other nations contemplating their use:

China's official news agency has denounced proposals for "carbon tariffs" on goods from big greenhouse gas emitting countries, saying on Friday that the idea could trigger trade battles with poor countries....

China, the world's biggest emitter of greenhouse gases and an exporting giant, has denounced the idea before, and its Xinhua news agency pressed that opposition in a commentary issued before key climate change negotiations open in Copenhagen on Monday.

"The carbon tariffs proposed by some developed countries are quite likely to trigger a trade war and spark boycotts from developing countries," said the Xinhua commentary, adding that rich nations had failed to act on their own vows to cut emissions and give more help to poor countries to fight global warming.

"Some developed countries have made a wrong decision. They are practicing trade protectionism under a disguised pretext," said Pan Jiahua, a climate policy expert who has advised the Chinese government, according to the commentary....

The Xinhua commentary underscored China's fears that the United States, European Union and other rich economies could slow the flow of goods from it and other developing countries in the name of environmental protection....

The Xinhua commentary said such measures would violate World Trade Organization rules. Experts have said some border adjustment measures would be permissible under WTO rules.

"The true motive of developed countries' carbon tariffs proposal is to protect domestic industries, which have suffered during the global financial crisis," said Xinhua.

As the article mentions, China's stance is nothing new, and the timing of this latest warning is obviously intended to remove any doubt about the country's position on the controversial issue during next week's Copenhagen talks. And you can't really blame the Chinese - whose products are routinely hit by supposedly "remedial" tariffs under US trade laws that can approach 100%(!) - for worrying that remedial carbon tariffs would be dictated by domestic politics and in no way reflect the actual "remedy" (a leveling of cost-competitiveness) intended by any US climate change law.  Other countries have similar fears, and rightly so: the lobbying in the US and EU has already begun, and we don't even have a law yet!

Speaking of other countries, we also saw this week that India has again rejected a hard cap on carbon emissions. This isn't actually "news," as it's been India's position all along.  But I wonder if it will end up being important in the context of carbon tariffs. For example, would anyone be surprised to see certain protectionist elements use India's and other developing countries' refusal to cap their emissions as the perfect excuse to demand carbon tariffs, regardless of the countries' other commitments? I sure wouldn't.

Unfortunately, it seems that a growing bloc of the US Senate is unconcerned with what the "rest of the world" thinks. As BNA (subscription) reported yesterday:

Nine Senate Democrats from industrial and agricultural states wrote President Obama Dec. 3 in advance of his trip to the international climate negotiations in Copenhagen, calling for an agreement that uses “border adjustments” or tariffs to enforce emissions reductions.

In the letter, the senators also endorsed negotiating “effective bilateral and multilateral agreements” to reduce emissions in specific trade- and energy-intensive economic sectors.

These agreements should include border adjustments “on imports from nations that have not yet adopted sufficient emission control measures,” the letter said.

The lead author of the letter was Sen. Arlen Specter (D-Pa.). He was joined by Sens. Carl Levin (D-Mich.), Tim Johnson (D-S.D.), Debbie Stabenow (D-Mich.), Sherrod Brown (D-Ohio), Claire McCaskill (D-Mo.), Amy Klobuchar (D-Minn.), Kay Hagan (D-N.C.), and Mark Begich (D-Alaska).

The senators called climate change “a serious and growing threat to the United States and the world” but said “poorly designed climate policies could also jeopardize U.S. national interests by imposing burdens on U.S. consumers, companies and workers without solving the climate challenge.”

“The United States cannot stop climate change alone—success depends on marshaling an effective global response,” the letter said. “Engaging developing nations will be especially important as they represent half of global emissions today and are expected to account for nearly all of the growth in future emissions.”

The full letter is available (PDF) on Sen. Specter's website.  As you'll recall, ten protectionist Senators - Sherrod Brown, Debbie Stabenow, Russell Feingold, Carl Levin, Evan Bayh, Robert Casey, Robert Byrd, Arlen Specter, John D. Rockefeller, and Al Franken - sent a similar letter to the President in August, and there's a lot of overlap between the two letters' signatories.  Only Klobuchar, McCaskill, Hagan, Begich and Johnson are new, but that's unfortunately five more Democrats that have joined the growing list of carbon tariffs supporters in the Senate. (By my count, that makes 18 Dems and one GOPer (Lindsay Graham) who have publicly announced their support - see full list at bottom.)

On the bright side, three important facts argue against utter despondency.  First, Cap-and-Trade is dead in the Senate for this year, and considering Climategate, the 2010 midterm elections and the fragile state of the US economy, there's almost no chance that any climate bill becomes law before November 2010 (at the absolute earliest).  Second, the fact that Sherrod Brown and his merry band of anti-traders could only scrounge up nine Senators to sign a pre-Copenhagen letter is a somewhat heartening sign of Senate opposition or ambivalence re: carbon tariffs.  Third, a quick review of Cato's Free Trade Scorecard indicates that McCaskill, Klobuchar and Johnson have strong protectionist records, and Senate freshmen Hagan, Franken and Begich have been quickly earning their anti-trade wings since taking office in January. Thus, Senate support for carbon tariffs still remains mostly isolated to the hardcore (or aspiring) protectionists, with only three "trade moderates" - Baucus, Cardin and Kerry - publicly on board.

But still, this is an unwelcome trend. Given the partisan divide on the climate change issue, almost every Democrat vote will be needed if a bill is ever to make it out of the Senate. Thus, 18 Senate Democrats - almost 1/3 of their caucus - intensely supportive of carbon tariffs can almost certainly ensure that any Senate climate change legislation contains carbon tariff provisions - only a strict and public demand by the President could quash such an effort, and that seems rather unlikely.  So if climate change legislation ever does return to the top of the Senate's docket next year, it seems pretty likely that it will contain eco-protectionist provisions.  (Considering current pro-GOP trends for 2010, however, all bets are off in 2011.)

Fortunately, and as discussed above, renewed Senate consideration of Cap-and-Trade seems highly unlikely.  For now at least.

Now let's update the ol' carbon tariffs scorecard:

Pro carbon tariffs - Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); the US House of Representatives (in Waxman-Markey), France, and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

Finally, the good folks at FreedomToTrade have circulated an online petition in opposition to carbon tariffs and other forms of eco-protectionism.  I've signed on to this worthwhile effort and ask that you do the same.  Go ahead, you know you want to.

Did the US Chamber of Commerce Just Signal Support for Carbon Tariffs? (UPDATE: No)

In a November 3 public letter to Senators Barbara Boxer (D-CA) and James Inhofe (R-OK) - Chair and Ranking Member, respectively, of the Senate Environment & Public Works Committee - the United States Chamber of Commerce indicated its support for bipartisan legislation that addresses climate change in a manner that "recognizes regional differences, the state of the technology, and the compelling need for a solution that minimizes overall economic impact."

The letter explicitly takes its lead from an October 10 op-ed in the New York Times by Senators John Kerry (D-MA) and Lindsey Graham (R-SC) setting forth a "framework for climate legislation to pass Congress and the blueprint for a clean-energy future that will revitalize our economy, protect current jobs and create new ones, safeguard our national security and reduce pollution."  Metaphorical orgy aside, I described the Senators' plan as "merg[ing] the GOP's drilling/nuclear/clean-coal proposals with the Democrats' emissions-caps/wind/solar proposals."  And it also included carbon tariffs - measures intended to offset the competitive disadvantages that climate change policies have on domestic manufacturers by imposing at the border a "charge" (or "tax" or "tariff" or "adjustment") on imports of like products from countries that have chosen not to burden their manufacturers with such regulations.

As I've noted repeatedly, carbon tariffs are highly controversial - questionable under WTO rules and opposed by both developing and developed countries alike because they can easily devolve into "green protectionism."  But they are included in the House climate change legislation ("Waxman-Markey") and have some support by Senate protectionists (and Paul Krugman).

The Chamber, however, is a longstanding and vocal supporter of free trade that openly opposed carbon tariffs only a few months ago (see below), so for it to support the measures would be a pretty big shock.  That said, their letter glowingly advocates the Kerry-Graham "framework," a key component of which is carbon tariffs, and it contains some very suspicious "code language" that seems to signal Chamber support for the "border measures."

First, the key passages of the Chamber letter (emphasis mine):

The Chamber agrees with a great deal of the principles set forth by Senators Kerry and Graham, in particular that legislation should: minimize the impact on major emitters; reduce price volatility for consumers; protect global competitiveness; invest in renewable energy sources; take advantage of nuclear power; streamline the permit system; make us the "Saudi Arabia of clean coal" by fostering carbon capture and sequestration technology; commit to increased environmentally responsible onshore and offshore oil and gas exploration; contain consumer and intellectual property protections; protect against agency regulation under existing laws not written for greenhouse gases; strengthen the hand of our international negotiators; and increase our own energy security and energy efficiency....

Shaping a bill the Chamber, the broader business community, and a bipartisan majority in the House and Senate approve of will take significant effort. The Chamber will continue to oppose bad policies that resemble the failed climate proposals of the past, such as bills that jeopardize American jobs, create trade inequalities, leave open the Clean Air Act, open the door to CO2-based mass tort litigation, and further hamper the permitting process for clean energy.

Now, the Kerry-Graham op-ed (again, emphasis mine):

Fourth, we cannot sacrifice another job to competitors overseas. China and India are among the many countries investing heavily in clean-energy technologies that will produce millions of jobs. There is no reason we should surrender our marketplace to countries that do not accept environmental standards. For this reason, we should consider a border tax on items produced in countries that avoid these standards. This is consistent with our obligations under the World Trade Organization and creates strong incentives for other countries to adopt tough environmental protections.

I don't think I'm crazy when I say that the bolded language in the Chamber's letter is strikingly similar to the bolded language in the Kerry-Graham op-ed.  And while the Chamber isn't dumb enough to come out and vocally advocate eco-protectionism (especially considering their pro-trade stance), the new letter's support for "protecting global competitiveness" and "strengthening the hand of our international negotiators," as well as its opposition to bills that "create trade inequalities," seems to make it pretty clear that the Chamber not only condones, but actually insists upon, final US climate change legislation that includes carbon tariffs.  And, of course, their letter never expressly rejects carbon tariffs either.

For the time being, however, I will not (yet) update my running "carbon tariffs scorecard" to include the Chamber as a "supporter" of carbon tariffs for three reasons: (i) the Chamber's letter does not expressly advocate carbon tariffs; (ii) because of the Chamber's free trade positions, I'll tepidly give it the benefit of the doubt (for now); and (iii) such advocacy would directly contradict earlier Chamber opposition to carbon tariffs.  For example, a recent Chamber statement on Waxman-Markey notes: "We opposed this specific legislation because it would not reduce the global level of greenhouse gases in the atmosphere. It is neither comprehensive nor international, and it falls short on moving renewable and alternative technologies into the marketplace and enabling our transition to a lower carbon future. It would also impose carbon tariffs on goods imported into the U.S., a move that would almost certainly spur retaliation from global trading partners."  That can't really get any clearer, can it?

So what's going on here? Am I nuts, or did the US Chamber of Commerce just completely - albeit quietly - switch its position on carbon tariffs from one of blatant opposition to tacit support?  If so, this does not bode well for free trade advocates, or our trading partners, who have vocally pushed for the exclusion of eco-protectionism from any current or future climate change legislation.  I sure hope I'm nuts.

Stay tuned (and cross your fingers).

UPDATE:  John Murphy from the Chamber has sent me the following email.  I'm happy to report that the Chamber still opposes carbon tariffs in any current or future climate change bill.  Good.  [Note: the Dow Jones story mentioned is linked below, instead of attached as John says.]

From: "Murphy, John" XXX@USChamber.com
To: xxxxx
Date: Fri, 6 Nov 2009 11:56:29 -0500

Scott,

I hope this finds you well. Regarding your recent blog post, I am pleased to set the record straight. The Chamber letter of November 3 that you cite notes that we agree with “a great deal” of what Senators Kerry and Graham presented in a recent op-ed, and we “commend” them for writing it. However, it would be an over-interpretation of the letter to conclude we agree with them on every point they make.

The attached Dow Jones story, which reports on the letter but also an interview with the Chamber’s Bruce Josten, concludes with this paragraph: “The one concept the Chamber objected to in the Kerry-Graham editorial was a proposed tariff on emission-intensive imports, a measure they say could provoke major trade retaliations. It's also a provision the Obama Administration has criticized for the same reason.”

For a full account of the Chamber’s position on the trade aspects of climate change legislation, please see the attached coalition letter issued in July (drafted and spearheaded by Chamber staff), from which our position has not changed at all. Also, I attach one of our International Policy Backgrounders on the topic.

Best regards,

John

John Murphy
Vice President, International Affairs
U.S. Chamber of Commerce
http://www.uschamber.com/
www.chamberpost.com/john_murphy

UPDATE2: Here's the Chamber's new blog entry on the issue.  Again, good for them (and us).  And I forgot to say earlier that the lesson, as always, is: I'm nuts.

Carbon Tariffs Update: China's Timely Reminder

Reuters reports on a wholly unsurprising development out of China:

Proposals to impose "carbon tariffs" on countries that do not make efforts to reduce their CO2 emissions are unworkable and counterproductive, a Chinese trade representative said on Thursday.

Zhang Xiangchen, one of China's permanent representatives at the World Trade Organisation in Geneva, said "all countries should firmly oppose" the proposals, which have been raised by both the European Union and the United States.

"It is very difficult to have a unified standard for levying carbon tariffs and the starting point (for the proposals) is to restrict competition from China," he said on the sidelines of a conference.

"Frankly, if tariffs are being implemented unilaterally, they cannot be objective and cannot be non-discriminatory."...

The new U.S. climate bill now being deliberated by Congress includes a set of provisions that allow future administrations to impose "border adjustment measures" on imported goods, thereby restoring the competitive balance....

But China's Ministry of Commerce has already voiced its opposition to carbon tariffs, which it has described as "trade protectionism disguised as environmental protectionism".

"Up to now, whether it is the proposals in the U.S. climate bill or the comments by French President Sarkozy, the carbon tariffs are just a kind of deterrent used by developed countries to put pressure on developing countries, breaking the principle of 'common but differentiated responsibilities' and making them commit to their own emission cuts," Zhang told the conference.

He said retaliation would also be inevitable.

"The United States per capita emission rate is four times as big as China's. Does that mean we can impose 400 percent tax rates on all imported American goods? If so, the result is a global trade war that is good for no one and no use at all in the fight against climate change."

As the Reuters article indicates, Zhang's comments reiterate earlier statements from China that it opposes carbon tariffs in any form, and that the United States' unilateral imposition of such "border measures" would start a trade war.  But the statement remains noteworthy because of its timing: on the very same day that Zhang publicly repeated China's stance, the Senate's Environment and Public Works Committee was holding its second day of hearings on Cap and Trade legislation (aka "Boxer-Kerry") that includes a placeholder for the imposition of carbon tariffs.  And as CEI's Iain Murray points out, most of the hearing's participants were all too eager to embrace eco-protectionism as part of the Senate's final climate change legislation. 

So is it merely a coincidence that Zhang's strong reminder of China's opposition fell on the same day as the inaugural Senate hearings on Boxer-Kerry? 

I'm gonna go out on a limb here and say "no."