[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEARING ON TRADE ASPECTS OF CLIMATE CHANGE LEGISLATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TRADE
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 24, 2009
__________
Serial No. 111-10
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
51-949 WASHINGTON : 2010
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
COMMITTEE ON WAYS AND MEANS
TRADE SUBCOMMITTEE
SANDER M. LEVIN, Michigan, Chairman
JOHN S. TANNER, Tennessee KEVIN BRADY, Texas, Ranking Member
CHRIS VAN HOLLEN, Maryland GEOFF DAVIS, Kentucky
JIM MCDERMOTT, Washington DAVID G. REICHERT, Washington
RICHARD E. NEAL, Massachusetts WALLY HERGER, California
LLOYD DOGGETT, Texas DEVIN NUNES, California
EARL POMEROY, North Dakota
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
The advisory as of March 17, 2009 announcing the hearing......... 2
WITNESSES
John J. McMackin, The Energy-Intensive Manufacturers' Working
Group on Greenhouse Gas Regulation............................. 7
Leo W. Gerard, International President, United Steelworkers...... 34
Dave Hamilton, Director of Global Warming and Energy Programs,
Sierra Club.................................................... 40
Professor Joost H.B. Pauwelyn, Professor of International Law,
Graduate Institute of International and Development Studies,
Geneva, Switzerland............................................ 50
Robert E. Clay, CEO and Chairman, Board of Directors of Pridgeon
& Clay, Inc.................................................... 72
SUBMISSIONS FOR THE RECORD
Cargo Airline Association, Statement............................. 100
Jennifer Layke, Statement........................................ 103
Terence P. Stewart and Elizabeth J. Drake, Statement............. 109
HEARING ON TRADE ASPECTS OF CLIMATE CHANGE LEGISLATION
----------
TUESDAY, MARCH 24, 2009
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:15 p.m., in
room 1100, Longworth House Office Building, the Honorable
Sander M. Levin (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON TRADE
CONTACT: (202) 225-6649
FOR IMMEDIATE RELEASE
March 17, 2009
TR-1
Chairman Levin Announces Hearing on
Trade Aspects of Climate Change Legislation
House Ways and Means Committee Trade Subcommittee Chairman Sander
M. Levin today announced that the Committee on Ways and Means
Subcommittee on Trade will continue the full Committee's work on
climate change legislation by holding a hearing on the trade aspects of
climate change legislation. The hearing will take place on Tuesday,
March 24, 2009, in 1100 Longworth House Office Building, beginning at
2:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
During the 110th Congress, the Committee on Ways and Means began a
series of hearings on climate change. In the first hearing, the
Committee heard testimony that human greenhouse gas emissions are
having an adverse impact on our planet's climate. In the second
hearing, the Committee heard testimony from numerous witnesses
recommending that Congress implement revenue measures (e.g., auction-
based cap-and-trade proposals or carbon taxes) that would reduce human
greenhouse gas emissions. In connection with the development of these
revenue measures, witnesses at this hearing also encouraged the
Committee to (1) promote a comprehensive global effort to address
climate change and to ensure a level regulatory playing field for U.S.
manufacturers, (2) mitigate higher energy costs borne by consumers, (3)
maximize the impact that climate change legislation will have on
growing the U.S. economy, and (4) maintain the competitiveness of U.S.
businesses, farmers and workers.
During the 111th Congress, the Committee continued this series of
hearings, by holding a hearing on the scientific objectives of climate
change legislation. This hearing provided a scientific discussion of
the goals that climate change legislation should seek to achieve over
both the short term and the long term. In connection with the goals of
climate change legislation, the witnesses suggested different
approaches to meeting those goals (e.g., cap-and-trade, cap-and-invest,
carbon tax) and discussed the need for international cooperation in
order to achieve these goals. In addition, the Subcommittee on Income
Security and Family Support also held a hearing on March 12, 2009, on
protecting low- and moderate-income families while curbing global
warming.
In announcing this hearing, Chairman Levin said, ``Climate change
legislation will be a priority for consideration by the Ways and Means
Committee during the 111th Congress. As the Committee works on
legislation to achieve our environmental goal of reducing carbon
emissions, such legislation must contain provisions to ensure that U.S.
businesses, farmers, and workers remain competitive until a global
climate change agreement comes into effect. Moreover, we need to ensure
that any actions undertaken by the United States are consistent with
our international obligations.''
FOCUS OF THE HEARING:
The hearing will focus on a discussion of the trade aspects of
climate change legislation including how to minimize carbon leakage and
maintain U.S. competitiveness.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``Committee Hearings''. Select the hearing for which you would like to
submit, and click on the link entitled, ``Click here to provide a
submission for the record.'' Once you have followed the online
instructions, complete all informational forms and click ``submit'' on
the final page. ATTACH your submission as a Word or WordPerfect
document, in compliance with the formatting requirements listed below,
by close of business Tuesday, April 7, 2009. Finally, please note that
due to the change in House mail policy, the U.S. Capitol Police will
refuse sealed-package deliveries to all House Office Buildings. For
questions, or if you encounter technical problems, please call (202)
225-1721.
FORMATTING REQUIREMENTS:
The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.
1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. All submissions must include a list of all clients, persons,
and/or organizations on whose behalf the witness appears. A
supplemental sheet must accompany each submission listing the name,
company, address, telephone, and fax numbers of each witness.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
Chairman LEVIN. The Committee will come toward to order.
We have had a chance to have an informal couple of minutes
together and now we will start the formal hearing. I think you
all know the rules. We will put all of your statements into the
record, and we will ask you if you can to summarize your
statement, however you want to handle it, in 5 minutes. The
lights will work presumably, and we will also try to live
within the 5-minute rule. We always want to have some
meaningful back and forth; so I will try to act accordingly in
terms of our questions and answers.
This is the first of what will be, I think, a number of
hearings on this vital issue, both in the Subcommittee and in
the Full Committee. Indeed, there is a Full Committee hearing
that is scheduled in just a few days, on Thursday, and that
hearing will cover a broader swath of issues than we will
today. But this is all a piece of an important and vital
puzzle. In fact, my statement starts off with that strong
thought or at least a thought strongly stated.
The world cannot wait as sceptics ignore science and deny
the existence and the severe economic, social, and
environmental threats of climate change. We can no longer
afford to live in such a state of denial. The problem is real
and the time to act is now. The clear fact is that we can and
must tackle both the environmental and the economic challenges
facing our country and our world today.
We need to find a solution to the climate change problem
that preserves existing jobs while creating new green jobs. We
do not want to pit the job of the steelworker against the job
of the solar panel producer. I want to be able, and I think all
of us do, to ensure that hardworking Americans are able to
compete for both jobs.
While some deny the environmental crisis we face, others
seem to deny our current economic crisis and to deem concerns
that climate change legislation, if not done properly, could
make a bad situation perhaps even worse. I am basically an
internationalist and I know that globalization is here to stay.
Because climate change is an international problem, climate
change legislation must have an international component. It
simply will not work to take action at home to reduce our own
emissions of greenhouse gases while ignoring what is happening
in other countries. If we regulate emissions and other nations
do not, we run the risk that our environmental objectives will
be defeated as polluters and pollution will merely migrate from
the U.S. to countries with less stringent regulations, also
taking U.S. jobs with them. This is the so-called carbon and
job leakage problem. Before Congress would pass legislation, I
think clearly it must address this fundamental issue.
Climate change legislation should not make products
manufactured in the U.S. any more competitive or any less
competitive than they were before the enactment of that
legislation, and I emphasize this, but legislative passivity
will not work. We need some positive mechanisms to address
these problems.
So as I said at the beginning, I hope the hearing will help
us determine what that mechanism might be. Some believe the
best way to address the carbon leakage issue is at the border,
whether through import fees or permits. Others favor
compensating the industries most affected by the increased cost
and most vulnerable to international competition, either
through free emission allowances or tax credits or rebates.
Frankly, I think there is much work to be done before we are
able to identify the right solution, whether it is on the
table, a combination of proposals on the table, or something
yet to be constructed.
So I look forward to this hearing. It is, as I said, one in
a series of hearings. We are here to learn, are we not? We are
here to learn, to inquire, to exchange with you, perhaps to
exchange with each other, but I don't think there is any more
important issue today that faces this particular subcommittee.
So it is my pleasure now to yield to you, Mr. Brady, our
Ranking Member.
Mr. BRADY. Mr. Chairman, thank you. You have commented that
the globe is smaller and more interconnected than ever and I
couldn't agree more. In this era of increased globalization,
the prosperity of American families is intricately linked to
the global market, and therefore, America's prosperity is
intricately linked to international competitiveness. Millions
of American jobs depend upon international trade. Last year
international trade contributed more to U.S. economic growth
than any other factor. Expanded trade cushioned the blow our
economy took from the collapse of the housing and credit
markets. Exports have supported American jobs as domestic
demand has declined. So if we seek a return to prosperity, it
is not enough to merely buy American; we must sell American,
sell American products and services throughout the world. And
because of the importance of international trade to our
economy, we must pursue policies that enhance the international
competitiveness of American workers.
One way to do that is to pass expeditiously the three
pending free trade agreements with Colombia, Panama, and South
Korea. These agreements will add billions of dollars to U.S.
exports and economic growth and support good-paying American
jobs.
Mr. Chairman, I am ready to work with you, Chairman Rangel,
and the Administration to address any concerns about these
agreements and bring them to the floor of the House for a vote.
And as part of that effort, I would encourage you to schedule a
hearing on the three pending trade agreements as soon as
possible. The Trade Subcommittee has not held a hearing on the
free trade agreements in over 2 years, and in contrast the
Foreign Affairs Committee has already held three hearings on
the agreements in this Congress alone.
The topic of today's hearing, the impact of climate change
legislation on U.S. competitiveness, is another issue that has
garnered interest across the Congress. And while there are
genuine and legitimate questions surrounding the science of
global warming, and I urge Congress to consider them in-depth,
for the sake of this hearing we will focus on the trade
implications and impact on American jobs as a result of
imposing a cap-and-trade system.
I am very concerned about the impact the hundreds of
billions of dollars in new energy taxes included in the
President's budget will have on America's international
competitiveness. These energy taxes will raise costs for every
family and business in America. The EPA has estimated that
energy taxes from cap and trade like those proposed by the
President would damage virtually every sector of the American
economy and would be particularly devastating for American
manufacturing. The higher cost imposed on American businesses
would make them uncompetitive with the imports they compete
against here and make American exports uncompetitive in the
international market. The President's new energy taxes would
create the ultimate in an unlevel playing field that would
result in scores, actually millions, of Americans losing their
jobs.
Energy Secretary Chu recently advocated establishing a
carbon tariff against other countries, as have some Members of
Congress. I have several concerns about these proposals. It
appears that these tariffs or other charges on imports would
further increase costs on American families and businesses, are
unlikely to be effective in limiting the damage to import-
competing industries, do nothing to assist U.S. exports, and
could possibly start a global trade war. As proposed, U.S.
trade measures alone would cover only a fraction of global
trade and carbon-intensive goods, have limited impact on
overall industrial carbon dioxide emissions, and fail to
recognize that global demand will see the most growth in
foreign markets in the years ahead.
Moreover, trade measures provide little leverage
internationally given that the U.S. accounts for only 10
percent of global demand in the five carbon-intensive
industries, the important share of which accounts for less than
3 percent, according to the recent report, Leveling the Carbon
Playing Field, produced jointly by the Peterson Institute for
International Economics and the World Resources Institute.
These trade barriers also would conflict with longstanding
American bipartisan policies in regard to developing countries.
Many of the same countries that we provide with access to the
U.S. market through our preference programs could be subject to
the new tariffs. In effect, we would be lowering tariffs on one
hand and raising them right back up on the other, more than
offsetting any preference benefits and leaving workers worse
off in these developing countries.
Mr. Chairman, these are just some of the reasons why I am
very concerned about the impact of climate change policies on
America's international competitiveness. The Ways and Means
Committee, and this Subcommittee in particular, must play a key
role in this debate, and as such, I am anxious to hear from our
witnesses today and to have a frank and honest discussion with
you, Mr. Chairman, and other Members of the Committee because
we must carefully consider the impact of the President's
proposed energy taxes on America's international
competitiveness.
I yield back.
Chairman LEVIN. Well, 5 minutes on the dot, Mr. Brady. You
set an example.
As you can see, this is a lively subject, so let's punch
in. I think what I will do is just a say a word about each of
you and then you will go down the row.
Mr. John McMackin is with the Energy-Intensive
Manufacturers' Working Group on Greenhouse Gas Regulation. Leo
Gerard is the very distinguished International President of the
United Steelworkers of America. David Hamilton is Director of
Global Warming and Energy Programs for the well-known Sierra
Club of this country. Professor Joost Pauwelyn is a Professor
of International Law, the Graduate Institute of International
and Development Studies, Geneva, Switzerland.
When we said hello, I didn't ask if you came especially for
this hearing, but you have come a long way and so therefore if
we might give a special welcome to you, sir.
Robert E. Clay is the CEO and chairman of the board of
Directors of Pridgeon & Clay, Inc., which is in the great State
of Michigan; so if I can put in that plug, and that is the last
time I will do that for this hearing.
So Mr. McMackin, if you will start with yourself and go
down for 5 minutes, and then we will take over and have some
back and forth. Thank you.
STATEMENT OF JOHN J. McMACKIN, THE ENERGY-INTENSIVE
MANUFACTURERS' WORKING GROUP ON GREENHOUSE GAS REGULATION
Mr. MCMACKIN. Thank you, Mr. Chairman, Mr. Brady, Members
of the subcommittee. It is an honor to be here. The Energy-
Intensive Manufacturers' Working Group on Greenhouse Gas
Regulation, on whose behalf I appear today, greatly appreciates
this opportunity to testify on this difficult and critical
issue. I am John McMackin, and in addition to being a partner
in the law firm of Williams & Jensen, I am a director of Owens-
Illinois. O-I, the largest glass container manufacturer in the
world is headquartered in Perrysburg, Ohio, and has facilities
in 11 States.
Our working group was formed early last year for a narrow
but important purpose: to engage constructively with other
stakeholders and Congress to attempt to solve what is often
referred to as the ``carbon leakage problem'' but what is
actually, as the chairman's comments indicated, a problem of
the leakage both of carbon and of jobs.
Leakage is a problem that primarily affects energy-
intensive industries that face foreign competition, the two
factors that define our members. Our group is composed of
companies in the U.S. industries that are widely and correctly
seen as the most vulnerable to leakage: ferrous metals, iron
and steel; nonferrous metals, aluminum and copper; cement,
glass, including fiberglass, ceramics, chemicals, and paper.
The companies include Alcoa, Corning, Dow, Holcim(US), NewPage
Corporation, Nucor, Owens-Corning, Owens-Illinois, PPG, Rio
Tinto, and U.S. Steel.
Of the several solutions that have been advanced so far to
deal with the leakage problem, our group's work is focused
exclusively on one--and it is the one solution that focuses on
the source, the U.S. factory and its costs as opposed to the
border, which is where all of the other mechanisms are focused.
There are various names for this solution, but we have
taken to calling it an output-based rebate, which is the phrase
first used to describe one of the prominent and promising
versions that was featured in the Inslee-Doyle Carbon Leakage
Prevention Act. Mr. Doggett included a version of this kind of
relief in his bill, H.R. 6316, and we are very encouraged to
learn that he is considering including in this year's version
some of the key features of Inslee-Doyle as it has evolved.
What is rebated to energy-intensive, trade-exposed
manufacturers under these proposals is a significant portion of
the cost of unilateral regulation, both the direct costs of
allowances or of a carbon tax or carbon permit, et cetera, as
well as the indirect cost that results from regulation-caused
increases in the electricity that we consume. The rebate then
relates to, reduces the cost of, all production of all
qualifying sectors. It does not rely, that is, only on
regulation of imports or exports.
My principal goal in appearing today is to commend to you
output-based rebates as you construct legislative responses to
climate change. My written testimony addresses key features of
such a provision in some detail. I note that output-based
rebates work as well in a carbon tax or other revenue-type
measure as they do in cap-and-trade bills and that they can fit
well with other forms of relief, such as those focused on the
borders, as Mr. Gerard's excellent testimony explains. Indeed,
many of the bills to date have contained more than one of these
provisions.
The other basic category of relief, as the opening
statements indicated, focuses on the border. It includes the
kind of import measure referred to as ``border equalization''
that resulted from the work of the International Brotherhood of
Electrical Workers and has appeared in many bills. And while
the IBEW provision, like others operating in a cap-and-trade
context, does not include export rebates, the category itself
does, and under export rebates, which, as I understand it, are
WTO compliant in some contexts such as VAT taxes, the cost of
regulation is rebated to manufacturers of energy-intensive
products being exported.
I look forward to discussing with the Subcommittee some of
the ways in which I see that an output-based rebate fills in
some gaps that otherwise exist in border measures.
Finally, I want to mention that another characteristic of
our group's members is that we have union workforces and that
we have worked hard and successfully with our unions over the
last several decades spurred by foreign competition to become
in the main the most productive producers in the world. It is a
pleasure to be sitting on this panel beside Mr. Gerard and to
be working alongside our labor colleagues as well as the
environmental community to find a solution to this very
pressing problem.
[The statement of Mr. McMackin follows:]
[GRAPHIC] [TIFF OMITTED] T1949A.001
[GRAPHIC] [TIFF OMITTED] T1949A.002
[GRAPHIC] [TIFF OMITTED] T1949A.003
[GRAPHIC] [TIFF OMITTED] T1949A.004
[GRAPHIC] [TIFF OMITTED] T1949A.005
[GRAPHIC] [TIFF OMITTED] T1949A.006
[GRAPHIC] [TIFF OMITTED] T1949A.007
[GRAPHIC] [TIFF OMITTED] T1949A.008
[GRAPHIC] [TIFF OMITTED] T1949A.009
[GRAPHIC] [TIFF OMITTED] T1949A.010
[GRAPHIC] [TIFF OMITTED] T1949A.011
[GRAPHIC] [TIFF OMITTED] T1949A.012
[GRAPHIC] [TIFF OMITTED] T1949A.013
[GRAPHIC] [TIFF OMITTED] T1949A.014
[GRAPHIC] [TIFF OMITTED] T1949A.015
[GRAPHIC] [TIFF OMITTED] T1949A.016
[GRAPHIC] [TIFF OMITTED] T1949A.017
[GRAPHIC] [TIFF OMITTED] T1949A.018
[GRAPHIC] [TIFF OMITTED] T1949A.019
[GRAPHIC] [TIFF OMITTED] T1949A.020
[GRAPHIC] [TIFF OMITTED] T1949A.021
[GRAPHIC] [TIFF OMITTED] T1949A.022
[GRAPHIC] [TIFF OMITTED] T1949A.023
[GRAPHIC] [TIFF OMITTED] T1949A.024
[GRAPHIC] [TIFF OMITTED] T1949A.025
Chairman LEVIN. Thank you very much.
Mr. Gerard.
STATEMENT OF LEO W. GERARD, INTERNATIONAL PRESIDENT, UNITED
STEELWORKERS
Mr. GERARD. I thank you, Mr. Chairman. I said he was really
fast. On my watch he took 3\1/2\ minutes. I hope I can get his
1\1/2\ minutes because I am not near that fast.
Let me thank you, Mr. Chairman, for holding in hearing. As
you said, my name is Leo Gerard. I am the International
President of the United Steelworkers Union. We have 850,000
members in North America, and our name actually belies the
members we represent. We are the dominant union in the paper
sector, in box making, in glass, in ceramics, in cement, in
chemicals, aluminum, tires and rubber. We are an important but
not dominant union in auto and auto parts, and obviously we are
the dominant union in the steel industry.
The one thing all these industries have in common is they
are pretty much all energy-intensive industries and that they
all rely on current science to make the best products they can
make. And our concern, and we are here today to express our
concern, and let me say that we are not Johnny-come-latelys to
the global warming debate. We held our first anti-pollution
conferences in the early 1960s. We produced a document in 1990
called Our Children's World, and in 1990 we said the global
climate change was going to be the most important issue facing
our generation. We reissued a newer paper in 1996, called
Securing our Children's World. Both of these are easily
accessible, and we would be happy to provide them to you. And
part of our concern clearly is that we have to address the
issue of global warming, but we have to do it in a way that
will return America's leadership and reassert our leadership on
cutting-edge technology.
We can only do that if we move forward in a way that
creates jobs, doesn't cost us jobs, and we believe that we
can't end up having some kind of a system that doesn't deal
with the issue of carbon leakage, and that system could only be
answered if we have a program that doesn't squander jobs
through the law of unintended but not unforeseen consequences
of having a carbon-costing system that doesn't recognize that
the issue is called global warming. It is not called Michigan
warming or Chicago warming or Pittsburgh warming or Texas
warming; it is global warming.
So to us one of the fundamental issues, if we are going to
be serious about the issue of global warming, is that we have
to first and foremost understand that it is an issue that works
around trade and that we were, as I said, one of the first
unions to support comprehensive climate change. We were one of
the first unions to support comprehensive climate change
legislation with our support of the Bingaman-Specter bill. We
are also founding members of something called the Apollo
Alliance that a lot of you have heard about, and we are
founding members of the Blue-Green Alliance with our friends
from the Sierra Club.
When we formed that alliance, there was Carl Pope and I at
a press conference and no one else showed up. Our alliance has
now grown to represent more than 4 million people from both the
environmental and the labor community, which brings us to a
clear understanding that we have to deal with climate change
and we have to do it in a way that protects jobs and advances
the agenda.
I will be limited to the 5 minutes. So while we are still
undertaking the enormous and critical task of crafting climate
change legislation, it is very clear to us that Congress must
ensure that the desired emissions reductions are achieved in a
structured and responsible way. The legislation must not only
strive to reduce emissions to the level that best science
believes is necessary, but it must also do so in a way that
minimizes costs to businesses and consumers as much as
possible. It must address the need to provide incentives to
build the next generation of clean energy products here in
America and need to ensure that domestic exporters are not
unfairly disadvantaged in the global marketplace.
Many will say that our economy is based on exports, but I
remind those that say that that America last year had a $700
billion trade deficit and we have lost close to 4 million jobs
to rotten trade deals and we are carrying a $600 billion export
of our financial resources as we service a $6 trillion
accumulated trade debt. I don't want to stray, but I felt it
was important to make that point.
As I said, we represent energy-intensive industries, and
steel and cement are two examples where the science and the
technology do not exist to remove carbon from that process. If
you are going to make steel or you are going to make cement,
you are going to make carbon. And the reason I raise that is
that we just released a study yesterday with the Alliance for
American Manufacturing, that again is here and we will be glad
to make available to you, that points out that for every ton of
steel that we produce and the same ton of steel produced in
China produces three times as many units of carbon. So that if
we don't deal with the issue of carbon leakage and we don't
deal with the issue of using the best and current science and
we don't deal with the issue of how we can create an
environment with those companies that at this point don't have
the technology or the science to overcome that, what we will do
is cost ourselves both jobs and we will make the climate worse.
In our work with the Sierra Club we are very cognizant that
our objective has to be to tackle the issue of global warming
and that whether that is the issue of illegal logging done by
China so that they can destroy the world's forests that are, in
fact, carbon sinks, yet export their products to America after
not meeting those challenges, those are huge, huge challenges
that we need to take on.
I won't spend a lot of time rehashing the issue of carbon
leakage. I think we are making it real clear. In industries
like steel, glass, chemicals, rubber, and paper, this threat is
particularly acute because they are commodity-based industries
in which even a small difference in energy costs can have a
huge effect. Finding a way to mitigate the competitive
disadvantage that we would have that would be placed on these
industries is an imperative if we are to continue the recovery
from the current recession and achieve a goal of stopping and
reversing climate change.
As I said, this is a global problem. This is a problem that
if we try to do it ourselves, we will end up making the climate
circumstances worse and we will cost more American jobs.
The fact of the matter is that there are a number of
vehicles that are being discussed right now and options to
combating leakage. We are pleased that there appears to be a
growing consensus forming around the idea that something must
be done to address this leakage problem in formulating climate
change policy. A variety of solutions have been proposed, many
of which fall into the broad categories of various allocation
schemes.
The various proposals to address the leakage issue take
different paths to the same goal, which is the elimination of
cost disadvantage that a carbon-costing program will impose on
domestic producers. Many of the programs that focus on reducing
the cost of domestic producers as much as possible usually
accomplish this by providing free allowances or rebates to
manufacturers that are at risk of leakage. Previous climate
efforts such as the 2008 Lieberman-Warner bill have included
provisions that reserve a certain percentage of the total
universe of allowances to be distributed to energy-intensive
industries free of charge.
I think that if I run through all of these options I will
actually run out of time. I will be happy to save that.
Chairman LEVIN. I think there will be some questions. Mr.
McMackin was good enough to yield to you some time. That may be
a first, by the way.
Mr. GERARD. Let me just say that for us this is a very
simple issue. A, we believe that we have to do something about
climate change. B, we have to use the best science available.
C, we have to recognize it is called global climate change. D,
we have to make sure that in doing so we don't create carbon
leakage. E, we have to make absolutely sure that we don't put
another nail in the coffin of America's manufacturing sector.
We view this as a complicated process, and we will
certainly be willing to work with anyone and everyone that is
willing to help us get to that solution. So thanks for your
time, Mr. Chairman.
[The statement of Mr. Gerard follows:]
Statement of Leo W. Gerard, International President, United
Steelworkers
Good afternoon. On behalf of the 850,000 active members of the
United Steelworkers (USW), I would like to thank Chairman Levin for
holding this hearing on the challenges to the competitiveness of
domestic manufacturers and workers posed by the adoption of
comprehensive climate change legislation. I am Leo Gerard, the
International President of the USW. As you know, the members of the
United Steelworkers produce more than just steel. They supply almost
every sector of the economy, including the North American auto
industry, and produce a wide array of products, including paper, glass,
ceramics, cement, chemicals, aluminum, tires and rubber. Our members
produce these energy-intensive products in facilities that are as
efficient as any in the world. They are ready to answer the call to
produce the next generation of clean energy products and parts, and
reassert America's leadership on the cutting edge of new technology.
But they can only answer that call if their jobs are not unnecessarily
squandered to the law of unintended, but not unforeseen, consequences.
Amid this economic collapse, this country cannot afford to lose any
more jobs.
For decades, the USW has been a leader in the labor movement on the
environment. In 1990, we published ``Our Children's World'' stating our
union's environmental policy and the need to address climate change,
and in 2006 we reaffirmed our union's commitment to environmental
responsibility through the publication of ``Securing Our Children's
World.'' \1\ We were one of the first industrial unions to support
comprehensive climate change legislation, with our support for the
Bingaman-Specter bill. That bill proceeded from recommendations made by
the National Commission on Energy Policy, on which I serve as a
commissioner. USW is also a founding member of the Blue-Green Alliance,
which brings together unions and environmental groups to plan a new way
forward for America through the promotion of policy solutions that spur
growth and investment in green technologies and products produced here
in America.
---------------------------------------------------------------------------
\1\ Available on USW's website through the following links; http://
legacy.usw.org/uswa/program/content/1592.php and http://legacy.usw.org/
usw/program/content/Environment-SOCW.php.
---------------------------------------------------------------------------
The Steelworkers are as convinced today as we were in 1990 that
climate change is the most important environmental issue of our
lifetime. It is the challenge of our time to transform the way this
nation operates in order to bring this problem under control before it
is too late. Still, in undertaking the enormous and critical task of
crafting comprehensive climate change legislation, Congress must ensure
that the desired emissions reductions are achieved in a structured,
responsible way. The legislation must not only strive to reduce
emissions to the level that the best science believes is necessary, but
it must do so in a way that minimizes costs to businesses and consumers
as much as possible. In doing so, attention must be paid to the need to
provide incentives to build the next generation of clean energy
products here in America, and the need to ensure that domestic
exporters are not unfairly disadvantaged in the global marketplace. It
must take into account that, for some products like steel and cement,
some emissions are an unavoidable part of the manufacturing process,
and that currently neither science nor technology exists to mitigate
them. And it must ensure, as much as possible, that the jobs that exist
here today in energy-intensive manufacturing are not lost, nor the
production of those products offshored unnecessarily by neglecting the
very real and potentially disastrous problem of carbon leakage. If
leakage is not addressed in the development of a climate change regime,
any policy runs a significant risk of not only costing American jobs
but actually exacerbating, instead of mitigating, the problem of global
warming.
Carbon Leakage
The phenomenon by which emissions reductions in one country lead to
increased emissions in another is known as carbon leakage. The reason
this happens is that if one country puts a price on carbon emissions,
that additional cost provides an incentive to the company to move its
production and, therefore, its emissions, to a country where that
additional cost does not exist. All policy proposals to address climate
change, including cap-and-trade, arise from the idea that if a price is
put on carbon, it will provide an incentive to emit less carbon. This
theory is sound, as long as the cost cannot simply be evaded by
companies moving production overseas or by downstream producers and
consumers avoiding the cost by purchasing imported materials from
nations that do not share the U.S.'s commitment to climate change
abatement.
This threat of leakage is particularly acute among manufacturers of
energy-intensive primary products like the ones made by members of the
Steelworkers. In commodity-based industries like steel, glass,
chemicals, rubber, and paper, even small differences in production
costs can devastate an industry if they are not managed effectively.
Finding a way to mitigate the competitive disadvantage that will be
placed on these industries is not only an imperative, if we are to
continue the recovery from the current recession, but it is an
imperative if we are to actually achieve the goal of stopping climate
change.
Greenhouse gas emissions and the resulting climate change are a
global problem, and it makes no difference whether the emissions occur
here in the U.S. or abroad. In fact, the shifting of these emissions to
countries that do not share our commitment to addressing the problem of
climate change is almost certain to make the overall problem worse. The
reason for this is quite simple: American industry and American workers
are among the best in the world, and they produce energy-intensive
goods with some of the lowest emissions in the world. The same cannot
be said of many of our competitors. The Alliance for American
Manufacturing, a unique labor-management joint venture between the
Steelworkers and several of our major employers, released a report
yesterday on the pollution levels in the Chinese steel industry, and
the findings are quite stark.\2\ For example, while the American steel
industry has become 25 percent less energy intensive over the past 20
years, the Chinese steel industry now emits as much carbon as the rest
of the global steel industry combined. The production of a ton of steel
in China generates more than three times the carbon emissions of a ton
of steel produced in the United States. This is largely because the
domestic industry is increasingly state-of-the-art and efficient, while
the Chinese steel industry has a heavier reliance on older, dirtier
production methods and uses higher-sulfur coal to power those
processes. The Chinese Government looks the other way while this goes
on, and is lax in enforcing the few environmental laws and regulations
it does ostensibly have in place.
---------------------------------------------------------------------------
\2\ Available on Alliance for American Manufacturing's website
through the link http://www.americanmanufacturing.org/assessment-of-
china.
---------------------------------------------------------------------------
Any climate change policy that does not seek to prevent the
unnecessary offshoring of production from state-of-the-art American
industries to less efficient, more carbon-intensive industries overseas
will both cost American jobs and, perversely, will actually make the
problem of global climate change worse.
Options for Combating Leakage
The USW is pleased that a growing consensus is forming around the
idea that something must be done to address the leakage problem in
formulating climate change policy. The question that follows is exactly
what that something should be. A variety of solutions have been
proposed, many of which fall into the broad categories of allocation
schemes and trade mechanisms.
Allocations
Because leakage is caused by the fact that the domestic industry
will be bearing increased costs of production due to the requirement to
pay an imposed cost of carbon, many proposed solutions center around
the concept of mitigating those costs. These ideas are structured as
allocations of allowances to industries that are at risk of leakage,
which means energy-intensive and trade-exposed industries. The European
cap-and-trade program relies exclusively on allocations to combat
leakage.
Previous domestic efforts, such as the 2008 Lieberman-Warner bill,
have included provisions that reserve a certain percentage of the total
universe of allowances to be distributed to energy-intensive industries
free of charge. This structure is less than ideal because the
allocation of no-strings allowances provide little incentive to
companies to avoid offshoring. The potential for a company to take its
free allowances, sell them on the allowance market, and use the
windfall profits to build factories in India, Mexico, Brazil or China
is a serious concern. In addition, even those companies that use the
allocations as intended still face a long-term leakage threat. Most
allocation proposals decrease the percentage of the cap reserved for
allocations over time, which would allow foreign competitors to wait
out their domestic counterparts until the supply of free allowances
runs out. Even those proposals that maintain a consistent percentage of
the cap for allocations face the same problem, as the cap will get
smaller and smaller, as will the total number of available allowances
the consistent percentage represents.
While allocations are critical for the survival of energy-intensive
manufacturers, they must be structured to provide an incentive to
maintain or increase domestic production, and must eliminate the
potential for windfall profits, particularly profits which can be used
to facilitate offshoring.
Trade Mechanisms
Where allocation schemes seek to even out the cost differential
between domestic and international products by reducing the effective
cost to domestic producers, trade mechanisms do the opposite. An
effective trade mechanism would eliminate the cost differential by
requiring that any import that enters our market face the same cost as
domestic counterparts for those emissions not covered by an allocation
scheme.
The most prominent of these proposals is the international reserve
allowance program in the Lieberman-Warner bill. Between the
introduction of the bill and the version improved by Senator Boxer, the
international reserve allowance program was refined and improved a
great deal, but more work needs to be done before it can fully address
leakage concerns. A workable trade mechanism must give consideration to
downstream products and exports. It must require that all products
consumed in the U.S. demonstrate the same commitment to combating
climate change, no matter where they are produced. And it must be put
in place as quickly as possible, to limit the amount of time that
domestic producers face cost disadvantages because of the requirements
of the domestic program. If it is not possible to begin both programs
at the same time, then steps must be taken to prevent unnecessary harm
to domestic industries until such time as the trade mechanism can be
activated.
Access to our consumer market is the most powerful incentive the
U.S. has to encourage other nations to commit to reduce climate change.
It must be used in a strong and effective manner.
Hybrid Approach
The shortcomings of both the allocation approach and the trade
approach are similar. Namely, this is a global economy that faces a
global crisis, and there are limits to what any one country, even the
United States, can do alone. The U.S. should, therefore, attempt to
forge a global solution to the issue of how to deal with energy
intensive manufacturers. This should take the form of global sectoral
agreements within the larger global climate treaty being negotiated by
the U.N. Framework Convention on Climate Change. Only by setting up a
system where all products must bear a carbon cost commensurate with its
carbon emissions, no matter where they are produced, can the playing
field ever be truly leveled and allow us to confront this global
problem.
With that as the long-term goal, the short-term goal should be to
craft a hybrid approach of allocations and trade measures that
increases the potential that such agreements can be reached, while
still addressing the leakage and competitiveness questions and ensuring
that industry has sufficient incentive and confidence to maintain
domestic production here, while continuing to improve its operations,
until such agreements can be reached.
In this hybrid approach, allocations could be awarded to energy
intensive manufacturers commensurate with their output and their carbon
emissions. If allocations diminish over time or are insufficient to
eliminate the leakage problem, they can be combined with appropriate
border adjustments to equalize costs for domestic and foreign goods
consumed in the United States based on their associated emissions. A
phased-in, hybrid approach could provide the space for both the
negotiation of an international agreement--which should start upon
passage of the legislation--and providing sufficient notice to the rest
of the world of the eventual imposition of a meaningful trade
mechanism, while preventing domestic producers from facing unnecessary
competitive pressures during that time. In addition, the hybrid
approach can be designed to address the problems of downstream products
and exports by ensuring that costs to inputs are minimized, and thus
downstream products do not see an additional cost disadvantage.
Similarly, if exported goods do not face a disadvantageous cost
differential abroad, their competitiveness in global markets should not
be harmed.
After the negotiation period is over, a variable border adjustment
will be imposed on imports. This adjustment will be imposed on imports
that enjoy a cost advantage over domestic products because of lack of
action on climate change. It will be based on the carbon intensity of
these products and the net cost borne by domestic manufacturers of
those same products.
It is a simple concept. The right to sell goods to consumers in our
market brings with it the responsibility to confront the costs
associated with addressing climate change.
If the output-based rebates are working as intended and meeting the
competitiveness needs of energy-intensive manufacturers, the border tax
adjustment will lay dormant. Similarly, if sectoral agreements are
forged and work as intended, this will be a tax that no one has to pay.
That is the goal, and the border tax adjustment is envisioned to be a
last resort, put into use only if and when the allocations are
insufficient, or the sectoral agreement is not enforced.
An Alternative Approach
Hybrid approaches, allocation schemes, and trade mechanisms that
could face WTO challenges are all quite complicated ways to address the
questions of leakage and competitiveness. The questions themselves
largely stem from the fact that the architecture of a cap-and-trade
system is focused on the production of goods, but the global economy is
focused on the consumption of goods. An alternative approach for
energy-intensive manufacturers would be to create a separate emissions
regime for these industries in which the inefficient allowance-based
system is replaced with a simpler and more effective system in which
emissions fees are assessed on all carbon-intensive goods consumed in
the U.S. if their associated carbon emissions exceed a determined
industry standard.
The potential benefit of such a system would be that the leakage
problem would be effectively eliminated, because the focus would be
shifted to ensuring that all products consumed in the U.S., regardless
of where they are made, demonstrate the U.S.'s commitment to addressing
climate change. Domestic manufacturers would face incentives to reduce
emissions in order to bring emissions under the standard and avoid the
tax. At the same time, they would not face unnecessary competitiveness
concerns because equivalent costs can be assessed at the border on
imports and rebated on exports, in much the same way as a value-added
tax. In addition, the transparency of these fees would help industry
attract the necessary capital to make improvements, because future
costs could be more easily determined using an established fee rate
than in attempting to divine the price of a volatile market in carbon
allowances.
Conclusion
Addressing the potentially catastrophic issues posed by climate
change is the challenge of our generation, and meeting that challenge
will require the mobilization of everyone in the world behind a common
purpose. America can and must lead this effort, not only by taking a
bold stand to limit greenhouse gas emissions, but by harnessing this
nation's greatest resource, the ingenuity and creativity of the
American people. We must make a national commitment to rebuild America
clean and green with products built here, to develop new forms of
clean, renewable energy and provide incentives to further their
deployment. We must bring our power grid and energy infrastructure into
the 21st century and train the American workforce to use these new
technologies. We must create a revolution in our transportation sector,
rebuilding the American auto industry to produce the best and cleanest
vehicles in the world, and connect America's cities and neighborhoods
with world class transit systems. And, of course, we must limit
greenhouse gas emissions consistent with what the best science tells
us.
In creating a program to achieve these emissions reductions, we
must make the development of manufacturing a centerpiece of that
program. The products made by our members and millions of other hard-
working Americans are quite literally the building blocks of all these
new technologies. If the U.S. is to build windmills, we will need steel
and aluminum. If we are to build solar panels, we will need glass. And
if we are to build the next generation of industrial scrubbers to
filter out these emissions, the ceramics industry cannot be ignored.
When the world transitioned to an industrial economy, America led
the way by developing and producing the best products in the world.
Now, as the world transitions again to a green economy, the time has
come for America to lead again. This change will not come easily, and
it is a heavy load to bear. But I am here to tell you today that
American workers are ready and willing to help bear that burden and
help lead America into a new, green future.
Thank you again, Mr. Chairman, for holding this hearing. The United
Steelworkers and I look forward to working with you and the committee
to renovate our economy to meet these challenges.
Chairman LEVIN. Thank you very much.
Mr. Hamilton, if you will take over.
STATEMENT OF DAVE HAMILTON, DIRECTOR OF GLOBAL WARNING AND
ENERGY PROGRAMS, SIERRA CLUB
Mr. HAMILTON. Thank you very much, Mr. Chairman. My name is
David Hamilton, and I am the Director of Global Warming and
Energy Programs at the Sierra Club, and we thank you for this
opportunity to address this Subcommittee and talk about the
critical issue of carbon leakage and how energy-intensive,
export-driven companies fit into a carbon control program.
I think the one thing that we are all going to stress here
is that a carbon control program that includes a lot of leakage
is not doable politically. It is not going to work. It is not--
you will simply export emissions so you don't reach your
environmental goal, and you will lose jobs so you will lose on
your economic goal.
Mr. Chairman, I would like to acknowledge you for your work
on the May 10 agreement and connecting the importance of
environment and workers in the context of trade agreements. I
want to acknowledge President Gerard and the fact that the
Sierra Club has been working closely with the Steelworkers for
many years now and we formed the Blue-Green Alliance together.
The Sierra Club goes back to working on NAFTA and other trade
issues to really try to break through on the importance of
environmental considerations in the context of trade.
I believe that we are standing at a particularly unique and
difficult moment in history where we have to look over the
landscape of a very difficult economy to solve an incredibly
difficult environmental problem in global warming. We believe
that there is opportunity with this adversity and that we are
headed for--you know, to turn our ship in the direction of a
green economy and new industries and new exports, and that
result is a way that we can, in fact, prosper over the long
haul while really taking on carbon emissions in a way that
allows us to live on the planet for the foreseeable future.
As I said, leakage is an environmental problem if emissions
are simply exported. Any plan that simply moves jobs overseas
is going to fail. We support ambitious targets for reducing
carbon emissions 80 percent by 2050, and any program like that
is likely to result in cost increases for energy-intensive
industries. We have to make sure that those costs are dealt
with in a way that doesn't simply make our manufacturing
landscape increasingly barren.
We believe that the best protection against leakage is a
strong global agreement to reduce carbon emissions under the
United Nations Framework Convention on Climate Change. That
agreement should include sectorial sub-agreements that cover
the various energy-intensive industries. That could be aligning
emissions targets. It could be agreeing to share its standards
or harmonizing policies. We don't believe that we get a global
deal unless the U.S. makes a firm commitment to reducing its
own emissions, and until such a global agreement can be reached
there must be a domestic apparatus to make sure that in the
short term between U.S. commitment and a global deal that we
don't see the kind of leakage that we are trying to avoid here.
A couple--I think we are all going to cover the
alternatives a little bit. I will try to run through some of
the advantages and disadvantages there of both financial
adjustments and potential border correction mechanisms. One
idea under a cap is to give additional free allowances to
energy-intensive manufacturers to try to mitigate the extra
cost that they will be under. We believe this must be
structured to reward retention of domestic employment and to
reward increased energy efficiency and emissions reductions. I
think we view free allowances in this context as the same as
free allowances in other contexts, which is we don't want to
see windfall profits because we don't want to see those free
allowances ultimately fund the next factory in Asia.
There is discussion of output-based rebates. This is a very
fine tool as described by Congressmen Inslee and Doyle in their
legislation last year. This potentially solves a lot of
problems, but it is also potentially very complicated, and the
information that you need from companies is information they
aren't always anxious to be forthcoming with, but we agree that
this is a promising area to work for.
Border mechanisms, you know, people have talked about a tax
on energy-intensive goods that would simply be levied at the
border for goods coming into this country. The advantage is
that it is simple. It is doable. One thing we are apprehensive
about is that you would have to take these industries out from
under the cap and then either compensate the emissions they
were supposed to get with other regulated entities under the
cap or somehow get emissions out of that sector in another way.
And we talked about the IBEW proposal, which is a border
adjustment under the cap where companies trying to sell goods
into this country would have to buy allowances and present
allowances under our carbon cap.
We believe that all of these have the tools to work. They
have the tools to be WTO compliant. But, again, we believe that
a combination is workable but that fundamentally the key to
this problem is a global agreement that has sectorial
agreements for specific energy-intensive industries and we
aren't going to get that deal unless we actually make a
commitment in this country. And if we move forward and show
progress, we think that the possibility is strong for action in
Copenhagen and hope that you will contribute to action in that
direction.
Thanks very much.
[The statement of Mr. Hamilton follows:]
[GRAPHIC] [TIFF OMITTED] T1949A.026
[GRAPHIC] [TIFF OMITTED] T1949A.027
[GRAPHIC] [TIFF OMITTED] T1949A.028
[GRAPHIC] [TIFF OMITTED] T1949A.029
[GRAPHIC] [TIFF OMITTED] T1949A.030
[GRAPHIC] [TIFF OMITTED] T1949A.031
[GRAPHIC] [TIFF OMITTED] T1949A.032
[GRAPHIC] [TIFF OMITTED] T1949A.033
Chairman LEVIN. Thank you very much.
Mr. Pauwelyn.
STATEMENT OF JOOST H.B. PAUWELYN, PROFESSOR OF INTERNATIONAL
LAW, GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENTAL
STUDIES, GENEVA SWITZERLAND
Mr. PAUWELYN. Thank you, Mr. Chairman, Members of the
Subcommittee. I am very pleased to participate in today's
hearing.
I understand that your core question today is this: How can
the U.S. adopt climate change legislation and limit both carbon
and job leakage? What I hope to add to the discussion is how
any of this could be done in line with U.S. obligations under
the World Trade Organization.
As Mr. Chairman said, I am Joost Pauwelyn and I am a
Professor of International Law formerly at Duke Law School and
now in Geneva, Switzerland, and I have worked for the WTO from
1996 to 2002. I am currently also a senior adviser with the law
firm of King & Spalding.
Now, my core message to you today is this: First, the WTO
allows its members to adopt climate change legislation and to
deal with carbon and job leakage. People should stop using the
WTO as an excuse to block climate change legislation.
Second, that WTO rules are flexible enough does not mean
that tackling carbon and job leakage will be easy. It will not.
I would focus on getting the data and economic incentives
right, on cost effectiveness, on technical and administrative
feasibility, and really WTO rules come in at the edges not as
negative make-or-break rules but as positive controls; namely,
to prevent discrimination and economic protectionism, two
wasteful practices that would in any event not help the
environment nor American jobs.
Now, let me try to explain my point at its most basic
level. First, carbon leakage is an environmental concern. The
WTO has an explicit exception that says that the environment
trumps trade. So you have the right to tackle carbon leakage
for as long as you do so to protect the environment, not to
protect U.S. import-competing industries.
Second, job leakage is a fairness issue. It is about carbon
equivalence. American jobs risk shifting overseas if U.S.
companies must pay a carbon cost that imports do not have to
pay. Now, here the WTO has a principle called national
treatment, and this means that the U.S. can impose the national
U.S. treatment of products also on like imported products. So,
again, WTO members have the right to impose a carbon cost on
domestic products, also on imports. The only prohibition is
that you cannot impose a higher cost on imports. You cannot
discriminate.
The following example should make my point of national
treatment clear. If after this hearing I go and buy a few toys
to bring home to my children and these toys happen to be made
in China, would you not find it absolutely normal that these
toys are, first, subject to the same U.S. safety regulations as
applied to U.S.-made toys and, secondly, when I pay at the
counter I will have to pay the same U.S. sales tax for my
Chinese toys that would otherwise apply to U.S. toys? Now, when
it comes to climate legislation and carbon pricing, the same
principle applies. Imports can be made subject to the same
burden that applies to U.S. products. That is what the WTO
says.
Let me say a few words about the different alternatives
available. As most people have said already, clearly the first
best solution is to find an international agreement where all
major emitters cut their carbon emissions, albeit at a variable
scale. We must, however, prepare, and this is not just the U.S.
but also Europe, for the world of second bests; namely, what do
we do if countries like China, India, and Brazil do not cut
their emissions?
Two options are available, in my view. First, the U.S.
could soften the impact of climate change legislation on its
own energy-intensive industries. Second, the U.S. could impose
whatever burden it imposes on domestic carbon-intensive
products, also on imports.
Just a few words on what the WTO would think about this.
First, free allowances, softening the impact on U.S. carbon-
intensive industries, can be designed in line with WTO rules.
They can be designed so that the WTO does not look at them as
subsidies that would somehow distort trade. One can design a
scheme so as to avoid the label of financial contribution as
well as that of benefit, the WTO requirements for there to be a
subsidy in the first place. The contribution is not specific,
and there is very likely no serious prejudice to other WTO
members. All of these are conditions for a subsidy to be
actionable.
Secondly, the second alternative, imposing a burden also on
imports by, for example, obliging imports to buy emission
allowances, again I am convinced one can do this, one can
design this in line with WTO nondiscrimination principles. You
just have to make sure that the same burden applies on the
imports as is imposed on U.S. products and you have to make
sure that the same burden applies on imports from one country
as opposed to imports from another. Very importantly, that does
not mean that you have to impose the same burden on all
imports. If a country is in a different situation, you can
treat it differently. So Europe could come in without credits.
Chinese imports, if they do not cut their emissions, may be
subject to allowance requirements.
So in conclusion, I am convinced that WTO consistent
measures can be designed to address carbon and job leakage. The
WTO is a positive control at the edges. It is not a make-or-
break negative force.
Thank you.
[The statement of Mr. Pauwelyn follows:]
[GRAPHIC] [TIFF OMITTED] T1949A.034
[GRAPHIC] [TIFF OMITTED] T1949A.035
[GRAPHIC] [TIFF OMITTED] T1949A.036
[GRAPHIC] [TIFF OMITTED] T1949A.037
[GRAPHIC] [TIFF OMITTED] T1949A.038
[GRAPHIC] [TIFF OMITTED] T1949A.039
[GRAPHIC] [TIFF OMITTED] T1949A.040
[GRAPHIC] [TIFF OMITTED] T1949A.041
[GRAPHIC] [TIFF OMITTED] T1949A.042
[GRAPHIC] [TIFF OMITTED] T1949A.043
[GRAPHIC] [TIFF OMITTED] T1949A.044
[GRAPHIC] [TIFF OMITTED] T1949A.045
[GRAPHIC] [TIFF OMITTED] T1949A.046
[GRAPHIC] [TIFF OMITTED] T1949A.047
[GRAPHIC] [TIFF OMITTED] T1949A.048
[GRAPHIC] [TIFF OMITTED] T1949A.049
[GRAPHIC] [TIFF OMITTED] T1949A.050
[GRAPHIC] [TIFF OMITTED] T1949A.051
[GRAPHIC] [TIFF OMITTED] T1949A.052
Chairman LEVIN. Thank you very much. And the Director
General of WTO is in town; so I think our hearing is in that
respect very, very timely indeed. Very timely because there is
an effort to continue our negotiations, and this issue may well
be one that wasn't considered--was it 6 years when I was at
Doha? I forget. Long ago.
Mr. Clay.
STATEMENT OF ROBERT E. CLAY, CEO AND CHAIRMAN, BOARD OF
DIRECTORS OF PRIDGEON & CLAY, INC
Mr. CLAY. Thank you, Chairman Levin and Ranking Member
Brady and other Members of the Subcommittee, for inviting me to
testify. My name is Bob Clay, and I am CEO and Chairman of
Pridgeon & Clay, Incorporated. We manufacture metal parts and
assemblies primarily focused on exhaust and chassis systems for
the automotive industry. So this is going to be more of a
ground level look at this issue.
My father started Pridgeon & Clay in a converted garage in
Grand Rapids, Michigan, when he returned from serving in World
War II and built the company over the next four decades before
he retired. My brother and I bought the company in 1990. In
June of 2008, my company employed 700 people in Grand Rapids
and over 150 people in Franklin, Indiana. Due to the current
economic climate in the automotive industry, we have laid off a
combined total of nearly 400 people. While some will return as
our industry recovers, many will not, and it is important that
Congress not take actions that would further threaten our
remaining jobs.
I believe that addressing environmental concerns is
critical to our future, but I am concerned that while the
current climate change proposals are well-intentioned, they
risk jeopardizing the 60 years of hard work that went into
building our company and especially the future of our employees
and their families.
Pridgeon & Clay, like many other companies in the
automotive industry, depends on our ability to supply our
customers internationally. We have thrived because we have
followed our customers to other countries and by doing so we
have created additional jobs in our U.S. facilities.
Over 8 years ago, we opened a facility in Hungary to supply
parts to the European operations of our customers. Last year we
formed a joint venture in Mexico, again to follow our customers
and serve them in markets where their businesses are growing.
Some of our exports will necessarily move to our plant in
Mexico. However, there is a component of our exports that we
can continue to competitively manufacture and ship from our
U.S. plants, and I fear that a cap-and-trade system will
increase our manufacturing and transportation costs to the
point that our remaining export business will be endangered.
Our international expansion has never been an effort to
produce low-cost products in other countries to be exported
back to the U.S. In fact, last year we exported roughly $30
million worth of parts from the U.S. to foreign markets. The
reality is that if our U.S. operations in Michigan and Indiana
are not globally competitive, then it will be difficult to
continue to grow in the U.S.
Pridgeon & Clay is a highly automated, efficient company,
but we are also energy intensive. Our primary input is
stainless steel, which is an energy-intensive product. Our
stamping presses have large electric motors. Many of our parts
are welded and some are heat treated. Even a slight increase in
energy prices could make us vulnerable to competition from
abroad. And the fact that a cap-and-trade system will increase
costs for consumers of energy is beyond dispute. If the U.S. is
not joined in a cap-and-trade system by the rest of the world,
especially low-cost countries like China and India, then more
U.S. manufacturing jobs will be lost. That is bad for U.S.
consumers, bad for U.S. workers and their families, and bad for
the U.S. economy.
Even Energy Secretary Chu recently noted that the concern
about cap and trade in today's economic climate is that a lot
of money might flow to developing countries in a way that might
not be completely politically sellable. Secretary Chu is
speaking about a political issue, and I don't care about the
political aspects of this issue, but I do care very deeply
about the jobs of my employees in Michigan and Indiana, and
those jobs are very clearly threatened by the cap and trade
unless it is universally applied.
I also want to discuss the proposal to impose a tariff or
carbon tax on imported goods from companies that do not have
similar climate change policies. That would seem to make sense,
but this type of proposal could actually make things worse for
companies such as ours because it would increase the cost of
raw materials we use to manufacture our products, costs we
typically cannot pass along.
Steel accounts for 60 percent of our costs, and even though
we purchase virtually all of our steel domestically, placing a
tariff on these imports will increase the price of all steel,
imported and domestic, and will compound our problems under a
cap-and-trade system because we will be paying a higher cost
both for energy and our raw materials. This is a formula that
will drive manufacturing overseas and limit environmental
benefits of a cap-and-trade system because emissions will be
relocated rather than reduced.
We are committed to our employees and to helping Congress
and our country work through the current economic crisis.
However, our ability to continue to manufacture products in the
U.S. is imperiled by policies that increase the cost of energy,
transportation, and delivery and raw materials.
I ask that you keep in mind the millions of manufacturing
jobs lost these past several years and the millions more at
stake.
Once again, thank you for inviting me to testify and for
considering my input on these complex and important matters.
[The statement of Mr. Clay follows:]
Statement of Robert E. Clay, CEO and Chairman,
Board of Directors of Pridgeon & Clay, Inc
I would like to thank Chairman Levin, Ranking Member Brady, and the
other Members of the Subcommittee for inviting me to testify today. My
name is Bob Clay, and I am President and CEO of Pridgeon & Clay, a
middle market independent supplier of metal parts and assemblies,
primarily focused on exhaust systems and catalytic converters for the
automotive and light truck industry. I am here because as the costs of
manufacturing in America continue to increase, my company and employees
become less globally competitive. I am concerned that certain proposals
to address the important issue of climate change will increase our
costs and reduce our ability to compete internationally in an
increasingly difficult economic climate.
My connection to Pridgeon & Clay is more than economic. My father
started the company in a converted garage in Grand Rapids, Michigan in
1948 and built the company over the next four decades, before he
retired. In June of 2008 my company employed over 700 people in Grand
Rapids and over 150 in Franklin, Indiana. Due to the current economic
climate in the automotive industry we have laid off a combined total of
nearly 400 people. While some will return as our industry recovers,
many may not, and it is important that Congress not take actions that
would further threaten our remaining jobs.
I believe that addressing environmental concerns is critical to our
future but would like to clarify that although this hearing is about
the trade aspects of climate change, my company views this as a debate
not just about climate change, but really about jobs and our global
competitiveness. I am concerned that while the current climate change
proposals are well intentioned, they risk jeopardizing the 60 years of
hard work that went into building our company, and especially the
future of our employees in the U.S.
Pridgeon & Clay, like many other companies in the automotive
industry, depends upon our ability to supply our customers
internationally--and to compete on an international basis--in order to
thrive and support our employees. A significant part of our growth has
been because we have followed our customers to other countries, and by
doing so, we have created additional jobs in our U.S. facilities. Over
ten years ago we opened a facility in Hungary to supply parts to the
European operations of our customers. Last year, we formed a joint
venture in Mexico, again to follow our customers and serve them in
foreign markets where their businesses are growing.
Our international expansion has not been an effort to produce low
cost products in other countries to be exported back to the U.S. In
fact, last year we exported roughly $30 million worth of parts from the
U.S. to foreign markets. However, the reality is that if our U.S.
operations in Michigan and Indiana are not globally competitive--
especially due to high regulatory costs in the U.S. that we do not
experience in other countries--then it will be difficult to continue to
grow in the U.S.
Pridgeon & Clay is a highly automated, efficient company, but we
are also energy intensive, so even a slight increase in operating costs
related to energy costs could cause us to lose a contract with a
customer. If our costs increase we are vulnerable to competition from
abroad.
The climate change policy debate is occurring in the middle of an
economic climate that is already pushing U.S. manufacturers to the
breaking point. We currently face an array of tough challenges: tight
consumer spending, difficulty gaining access to credit, the collapse of
car and light truck sales causing problems for automakers and our other
customers, and pro-manufacturing policies being developed by other
countries around the globe who are actively seeking to increase their
own manufacturing base.
The U.S. simply cannot afford to place additional burdens on
companies who are doing everything they can to continue to operate in
the U.S. unless our trading partners, and especially the low cost
manufacturing countries, are prepared do so as well. Many of our
largest customers have moved operations to Mexico. To maintain the
business and continue to serve those customers, companies like ours
have no choice but to follow our customers. There is a component of our
exports that we can continue to competitively manufacture and ship from
our U.S. plants. However, I fear that implementation of a cap and trade
system, and the related tariff that has been proposed on imported goods
from countries who have not implemented a similar cap and trade system,
will increase our manufacturing and transportation costs to the point
that our remaining export business will be vulnerable.
Our first concern about the creation of a cap and trade system for
carbon dioxide is based upon the costs associated with such a program,
and the impact that those costs will have on our company's ability to
compete internationally. The fact that a cap and trade system will
increase costs for consumers of energy is beyond dispute. Even if you
disregard the indirect costs associated with such a system, the $650
billion estimate for revenues from the sale of allowances under the
system are costs that will be passed on to consumers of energy--
especially in energy intensive sectors such as manufacturing.
As I mentioned, Pridgeon & Clay is a fairly energy intensive
business. Our primary input is stainless steel, which is an energy
intensive product. Our stamping presses have large electric motors and
pumps, we have large air compressors, many of our parts are welded,
some are heat treated and most require cleaning to remove oils and
lubricants.
If the U.S. is not joined by the rest of the world--especially by
low cost countries--in a cap and trade system, then additional costs in
the U.S. will require manufacturers in the U.S. to choose between
increasing the costs of their goods, reducing overhead by taking steps
such as laying off employees, or finding alternative locations for
their manufacturing operations. All of these options are bad for U.S.
consumers, bad for U.S. workers, and bad for the U.S. economy.
It is also important for us to discuss the tariff proposal that has
been proposed. This would impose a tariff, or ``carbon tax,'' on
imported goods from countries that do not have climate change policies
similar to the one under consideration in the U.S. This would seem to
make sense, but this type of proposal could actually make things worse
for companies such as ours, because it would increase the cost of the
raw materials we use to manufacture our products--costs we cannot
typically pass along. Our company has found that domestic steel output
is, at times, too low to satisfy overall demand for steel by U.S.
manufacturers, and as a result we sometimes have to import steel from
other countries. Placing a tariff on these inputs, which often amount
to 60 percent of our costs, will compound our problems under a cap and
trade system because we will be paying a higher cost for our energy and
a higher cost for our imported raw materials. This is a formula that
will further drive manufacturing overseas, limit any environmental
benefits of a cap and trade system because emissions will be relocated
rather than reduced, and threaten the ability for our company to remain
economically viable in the U.S.
Products manufactured in the U.S. must be able to compete against
foreign products. If foreign producers are able to avoid the additional
costs associated with a cap and trade system, then we will be
uncompetitive. This concern has even been echoed by supporters of the
cap and trade system, such as the Obama Administration's Secretary of
Energy, Dr. Steven Chu, who recently noted that, ``The concern about
cap-and-trade in today's economic climate--is that a lot of money might
flow to developing countries in a way that might not be completely
politically sellable.'' \1\ Secretary Chu is speaking about a political
issue. I don't care about the political aspects of this issue--but I do
care, very deeply, about the jobs of my employees in Michigan and
Indiana, and those jobs are very clearly threatened by cap and trade
unless it is universally applied throughout the world, especially in
low cost countries.
---------------------------------------------------------------------------
\1\ John Broder and Matthew Wald, Big Science Role Is Seen in
Global Warming
Cure, N.Y. Times, Feb. 11, 2009. Available at: http://www.nytimes.com/
2009/02/12/us/politics/12chu.html?_r=2
---------------------------------------------------------------------------
We are committed to our employees and to helping Congress and our
country work through the current economic crisis. However, our ability
to continue to manufacture products in the U.S. is imperiled by
policies that increase the cost of energy, transportation and delivery,
and our raw materials. We appreciate the need to address pressing
environmental problems, but believe that the cap and trade and tariff
options currently being discussed put at risk what remains of the U.S.
manufacturing sector. I ask that you keep in mind the millions of
manufacturing jobs lost these past several years and the millions more
at stake, especially those of us in Michigan Indiana.
Once again, thank you for inviting me to testify and for
considering our input on these complex and important matters.
Chairman LEVIN. Thank you very, very much.
So let's go. We have a very, very well-attended hearing and
we are all so concerned about this and you can see by the
number of us that are here.
Until we got to Mr. Clay, I think there was rather broad
agreement, perhaps not on the details but on the need to move
and as we move to be sensitive to the impact on American
manufacturing and to find a way either through an international
agreement or, in the lack of an international agreement, to
find a way to handle it domestically.
So, Mr. Clay, I think your concern about manufacturing is
very widely shared. I don't think there is any disagreement on
that. And I do think what we need to do is to look at your
processes and your product and really see if there isn't a way
to both meet the objective of moving on this environmental
issue, which you acknowledge; right? I mean some witnesses, a
few, have come here and denied there is such a thing as global
warming. You don't deny that?
Mr. CLAY. No, I don't.
Chairman LEVIN. Okay. So the question becomes then how do
we put together action with a sensitivity to the work that you
are doing and your employees. Do you export a lot of what you
produce?
Mr. CLAY. It would be about 10 percent of what we produce.
Chairman LEVIN. So the vast majority of what you produce
you don't export, you sell here?
Mr. CLAY. Correct.
Chairman LEVIN. So if a system is derived so that all of
the inputs that you receive from other places are subject to
the same structure, that doesn't then place you at a domestic
disadvantage in terms of domestic competition; right? This is
in terms of inputs.
Mr. CLAY. Not necessarily.
Chairman LEVIN. If they are all treated the same way for
every manufacturer in your position, then you are not at a
disadvantage in terms of your competition with other
manufacturers who compete in the domestic workplace?
Mr. CLAY. This is true. There is one concern that I have,
though, and my concern is not raising our costs as a company
but also not raising the overall cost of the system because if
the overall cost is increased, then that will serve a function
of driving the businesses overseas, people that we supply,
bringing the larger assemblies in.
Chairman LEVIN. But in terms of your overseas production,
do you export any of that back to the U.S.?
Mr. CLAY. No, we do not.
Chairman LEVIN. You don't.
Mr. CLAY. No.
Chairman LEVIN. So what you are saying is that if there is
an increase in cost here, it will make it more difficult for
you to compete. If you don't bring most of it back then your
competition overseas is under the same rules as yours?
Mr. CLAY. We supply companies that make more complex
assemblies. If the overall cost of that assembly increases in
the United States, I believe there is a good chance that could
move to a different part of the world.
Chairman LEVIN. But the competition there would be under
the same rules. If they don't have any particular rules
relating to emissions, and we very much want an international
agreement, still, the playing field in terms of your overseas
operations are more or less the same as everybody else who is
competing in that country who is not bringing the product back
to the United States.
And I will tell you I do this not to challenge as much as
to try to urge that as we talk about this issue that we are
really careful about generalizations and about conclusions
because there is a deep determination here for us to accomplish
both, I think, in this institution. At least most of us. We
can't stand still on global warming. We also want to maintain
the manufacturing base. So, therefore, as we try to put those
two things together, we have to really be careful that we
disaggregate and not draw conclusions that really are not
correct. And if we look at the dynamics of your operations here
and overseas, it seems to me very feasible that you can
accomplish both objectives, and including without your moving
your operations overseas in order to bring it back here.
I have used up my 5 minutes.
Mr. Brady.
Mr. BRADY. Thank you, Mr. Chairman. Thank you for yielding.
I would like to thank the witnesses for appearing here today. I
would like to especially thank Mr. Clay, who is the sole
witness in pursuit of what we hope to create, which is more
American jobs.
I would point out that America is a very open market. We
let a lot of countries sell here, but when we try to sell our
products around the world we often find it stymied. Free trade
agreements have created two-way trade where, for example--where
we sell more products and services. For example, in Central
America we have turned in that trade agreement a $1 billion
deficit into nearly a $7 billion trade surplus in just about 2
years.
I would also point out, I think, the example of Chinese
steel is a great example of how complicated this issue is. If
you look closely below the surface, America relies on many
mills, electric arc furnaces, a lot of recycling. China relies
on integrated mills with blasts and basic oxygen furnaces
because they don't yet have a scrap steel sector. We have a
temporary advantage at best. And those who think we will
leverage China, I think, one, China will argue accurately that
their per capita carbon dioxide emissions are \1/3\ those of
the United States, and they--because so little of Chinese steel
makes it to America, less than 1 percent of what they produce,
and most likely after the economy picks up they will return to
being a net importer of steel. Very unlikely that any trade
barriers we erect here or cost will leverage China into an
international agreement. The point being it will drive up the
cost of steel for Mr. Clay and have no impact overseas against
competitors.
I would like--because it is a complicated issue, I would
like to submit for the record this analysis done by the
Brookings Institute that seriously questions whether the border
measures Mr. Pauwelyn describes could be compliant with our WTO
obligations.
Chairman LEVIN. Without objection.
[The information follows:]
[Not available at the time of printing.]
Mr. BRADY. Maintaining the competitiveness of U.S.
exporters like Mr. Clay and others is critical to promoting
economic growth. We can't just buy American; we have to sell
American.
Last year the EPA estimated how much energy prices could
increase under the Lieberman-Warner cap-and-trade bill, a
proposal that called for less severe emissions cuts than those
outlined in the President's budget. We asked the staff at the
U.S. International Trade Commission to model the impact of
these very conservative energy price hikes on U.S. exports.
This analysis shows that exports of over half a billion dollars
would see a decline of U.S. exports of $162 billion. Included
in these sectors are automotive stampings and imports, products
produced by workers at Mr. Clay's company.
I would like to submit this analysis for the record, Mr.
Chairman.
If Congress moves hastily to impose risky new cap-and-trade
energy taxes, America stands to lose a stunning $162 billion in
export sales. That is a drastic 30-percent loss of American-
made products and services. And despite some proponents' claims
that few industries would be affected, this analysis, based on
data from the EPA, clearly shows that American exporters in
these 52 key economic sectors across the spectrum of
manufacturing, agriculture, and services would experience
severe losses in exports as a result of higher coal, oil, and
natural gas prices, another reason Congress should avoid a rush
to legislation that could significantly damage the U.S. economy
and threaten the jobs of many hardworking Americans.
And I would submit this for the record as well.
Chairman LEVIN. Without objection, it is in the record.
[The information follows:]
[Not available at the time of printing.]
Mr. BRADY. Mr. Clay, let us assume the President's new
energy tax should become law. Congress imposes new trade
restrictions on raw materials like steel and aluminum and other
critical raw materials. You explained this creates a double
whammy because you would have to deal with the energy taxes and
your input costs would increase. Let us further assume that
China does not follow the U.S. lead, does not impose higher
energy taxes on its economy, which is likely.
In such a scenario, what would be the impact on the
competitiveness of your business and your workers?
Mr. CLAY. It would make our business very vulnerable to
shipments from overseas, and it would make our workers
vulnerable to losing their jobs.
Mr. BRADY. Well, I think this analysis is key in that it
shows that at a time when we have a very fragile economy,
considering drastic changes that could cut 30 percent of our
export sales around the world would have a real impact on
businesses like yours, not just in manufacturing but in ag and
services across the spectrum in America. Another reason I think
it is wise, Mr. Chairman, to have hearings like this so we can
explore all of these issues in-depth.
And I would yield back.
Chairman LEVIN. Thank you. So what we will do now is follow
the rule. We will take people as they came in.
Mr. GERARD. Mr. Chairman?
Chairman LEVIN. Yes.
Mr. GERARD. I am very uncomfortable sitting here and
listening to this. I wouldn't want this to go much further
without clearing up the record.
Chairman LEVIN. Let me suggest this, Mr. Gerard. Let me try
to follow the rules, and my guess is somebody will yield to
you.
Mr. GERARD. I am not that good at the rules, but I will
follow them.
Chairman LEVIN. Okay. [3:11 p.m.]
Chairman LEVIN. So we will go with our usual order. Those
who were here at the drop of the gavel will be first. And since
there are, I think, nine or ten Democrats and five Republicans,
we will follow the rule of two for one. We will not do that
when the numbers are basically even.
So now Mr. McDermott is next.
Mr. MCDERMOTT. Mr. Gerard, I will give you 2 minutes to
clear the record.
Mr. GERARD. Thank you.
I just want to make sure that Mr. Brady understands that
America's steel industry is not a mini mill industry. There are
29 blast furnaces. Currently, only nine are working because of
the economic collapse in our sector.
I want you to know that Chinese steel is being dumped into
America in record proportions. And, in fact, on one important
commodity that you might have some familiarity with, oil
country tubular goods, China has put as much steel into our
market in the last 6 months as the whole market can withstand.
So I will give it to you as an example. If there are 5
million tons of demand, China has put 5 million tons into our
market. Since our economic collapse in November of 2008 to now,
China has increased this dumping into our market in almost
every commodity. So that it is not that China is being neutral
about this; and, in fact, what they have done is try to take
over our market.
Mr. BRADY. Who is the largest exporter of steel into
America--excuse me. Of Canada?
Mr. MCDERMOTT. I am reclaiming my time.
Mr. GERARD. You are using my time; and in fact I want to
make sure that you understand that you are inaccurate in your
information. And that if we are going to deal with the issue of
climate change, the fact of the matter is that China produces
three times the unit of carbon for every ton of steel they
produce; and this is called global warming. It is not Chicago
warming or Texas warming. It is global warming. And as long as
we are making it hospitable for China to dump their steel into
our market or as long as we are making it hospitable for China
to move their steel around the world, we are making the issue
of global warming worse, not better.
And the fact of the matter is that global warming is a real
issue. Our union recognized it in 1990; and, in 1990, we said
we had to start doing something about it. And we can do that in
a way that finds real solutions, not solutions to opening up
our market to China so they can keep dumping their unsafe,
environmentally fraudulent products into our market. And I
resent you pretending that is not what they are doing.
So for our members----
Mr. MCDERMOTT. I reclaim my time.
I want to open up another issue, because, obviously, the
question will ultimately be decided, whether or not we do
something. People who don't want to do anything because it is
going to create a problem are for another day.
I want to hear from--Mr. Pauwelyn, how does the United
States go to Copenhagen, having done nothing? Explain to me
what our position will be, pro and con? Maybe it is better to
go with nothing or maybe it is better to have passed a bill. Or
give us our position in the world if we don't deal with this,
including the leakage--people say we can go do that under WTO.
Tell us what happens at Copenhagen with nothing.
Mr. PAUWELYN. Thank you.
As you may know, in Europe, we have been having the very
discussion you are having now for years. And that the issue
was----
Mr. MCDERMOTT. We have had a hiatus of 8 years here.
Mr. PAUWELYN. Yeah. So the problem has been, for Europe,
what do we do with U.S. exports that have not paid any price
for carbon. Of course, now the situation is changing; and the
U.S. seems willing to do something.
Now, when it comes to the alternative of going to
Copenhagen without anything or having legislation in place, my
hope would be that the U.S. would take the lead on this global
issue and lead by example. And my ultimate hope would be that
whatever border measure is in the bill would eventually not
have to be used, would not have to be implemented, and that it
would act as a stick, carrot for China, Brazil to come to the
table and cut their own emissions.
I strongly hope that this will be the case, that we will
never have to use the instrument of trade which is, I admit to
Mr. Brady, that it is a harsh instrument, that we will never
have to use this. But we could use it as a stick in legislation
with the hope that an international deal is made.
Mr. MCDERMOTT. So it is possible that, if we do nothing,
that the Europeans might decide to impose a border tax or
whatever mechanism you want to call it or what word you want to
use it, just say anything coming into Europe pays an additional
$5 or $10 for coal?
Mr. PAUWELYN. The European Commission has made it clear
that they are also looking into carbon leakage, job leakage;
and they will first identify those industries that will get
free allowances allocated. And if the problem persists, they
will also think about border measures. And, yes, that could be
China but also the U.S. if the U.S. does not cut emissions.
Mr. MCDERMOTT. Thank you.
I yield back the balance of my time.
Chairman LEVIN. Mr. Doggett.
Mr. DOGGETT. Thank you, Mr. Chairman.
And thank you for your very constructive comments. They
suggest the challenges that we face in constructing a solution,
but they don't take the approach of just excuses for inaction.
To those who are concerned about a rush to legislate, as I
think the last comments just indicated, we have had 8 years of
the United States being the major obstacle to resolving the
climate change issue; and I am sure it will take the world a
little bit of time to adjust to the notion that we are doing a
complete turnabout and are now willing to provide some
leadership to deal with this critical problem.
I am very pleased that this hearing is focusing on this
issue. I don't believe that the Sierra Club and the
Steelworkers have been very frequent visitors, if ever, before
this Subcommittee. And if we were to build a new trade policy
that recognizes that we must be concerned with the effect of
trade on workers and on the environment, it will be through
collaboration, not by focusing all of our attention on the
leftovers from an outmoded trade policy of the past.
Specifically with reference to climate change and how we
move forward, Mr. McMackin, it seemed to me that the industries
that you represent, if we get it wrong, they are going to be
disadvantaged perhaps more than any other industries in the
industry because you do rely on energy significantly in your
production. And let me just ask you from that perspective, and
I believe your testimony is to this effect, but are you
convinced that, as challenging as it may be to work out the
details, that there is a way to maintain a level playing field
for American industry both for importers and for exporters?
Mr. MCMACKIN. Mr. Doggett, I think that there is. And as an
example of the progress we are making in fashioning that, last
year when this subcommittee had a hearing, the gap in some of
the proposals, that was pointed out where it wouldn't help
export markets.
Since then, there are provisions--for instance, I know
there is one in Mr. McDermott's bill and I think it is in Mr.
Larson's bill--that would aid export markets by providing for
export rebates. Your bill which goes at the fundamental problem
by having what amounts to one of our output-based rebates or
allocation grants would also solve the problem in export
markets by removing the extra cost at the source by in effect
rebating a lot of that cost to the manufacturers. So, yes, I
think we can get there; and we are making good progress.
Mr. DOGGETT. I think this is very helpful testimony to have
an international expert on trade laws. Because, among the many
excuses, the mythology that those who want to be as inactive in
the future as this country has been for the last 8 year, has
been the claim that we cannot do anything to assure the
competitiveness of our industry without violating the WTO. And
you pointed out constructively in your testimony that the same
issues have already been considered in Europe.
I think we can learn from the experience of the European
countries with cap and trade and on these issues; and in that
regard, Mr. Hamilton, I appreciate the fact that you were here
in this room with a majority of the Democrats on this Committee
last year when we introduced the climate matters bill, 1616,
that Mr. McMackin referred to. And is it your belief that we
would be better served by seeking a way of addressing these
competitiveness issues by focusing on an approach other than
just giving away permits to pollute, giving away allowances?
Mr. HAMILTON. Mr. Doggett, as I said in my testimony, I
believe that there are ways to kind of combine and structure
these alternatives so that there are a couple of different ways
you can make it work.
I think I talked about the--what we saw as a drawback of
free allocations, which is you don't know what happens to it
necessarily. If companies are in fact able to raise prices on
the perception that they are now under a regulatory system,
then you run the risk of windfall profits. If they are really
trade challenged and price constricted, that is much less of a
risk. So it really--a lot of these things vary industry to
industry and become very tailored. And I think, you know, an
output-based rebate is a more tailored instrument to deal with
that.
But, you know, again we have been talking about mixing and
matching; and then there are different strengths to different
mechanisms.
Mr. DOGGETT. You also mentioned in your testimony that you
thought the essential solution is a global agreement. But you
would agree that to say no action in the United States until
others act is just a way of giving a veto power to the most
regressive country that refuses to act, someone that would,
say, adopt the policy the United States has followed for the
last 8 years.
Mr. HAMILTON. You know, I really cut out all that bit about
science and all the reasons from the melting of the permafrost
and the acidification of the oceans and all the things that the
Sierra Club usually talks about. But we are really in a race
against time to effectively address climate change.
I think most--both the IPPC and Dr. Hanson and others
emphasize the fact that we don't have a long time to wait for
the stars to be in complete alignment before we do something.
And if we are to actually endeavor to lead on the international
stage, you know, we have some ground to make up.
Mr. DOGGETT. As we lead--since my time is running out, as
we lead, we want to cooperate. We want to avoid ever having to
use the trade tools as you testified. But you believe, do you
not, Mr. Hamilton that we need to have as a part of our new cap
and trade, cap and invest law provisions that will provide
disincentives to countries that do not join us in addressing
this problem of carbon pollution?
Mr. HAMILTON. Yes. We believe very clearly that no action
to prevent leakage should not be an option.
Chairman LEVIN. Thank you so much, Mr. Doggett.
Mr. Davis, you are next. And the clock did not start. It
was totally unintentional when Mr. Doggett--so, Mr. Davis, you
will have an extra 45 seconds, or one of you will. You are
next.
Mr. DAVIS of Kentucky. Thank you, Mr. Chairman.
Since we are talking about manufacturing, I have one
question here. Just raise your hand. How many of you have
actually run a manufacturing business who is in this panel
today?
Were you a plant manager, Mr. Gerard, or the union----
Mr. GERARD. No, I ran the union; 850,000 members in two
countries.
Mr. DAVIS of Kentucky. That wasn't what I asked. I reclaim
my time. Thank you. We are going to operate by our rules while
we are here.
I do find it somewhat ironic when we deal with a
manufacturing trade issue that we only have one manufacturing
executive here. I grew up around the steel and the coal
industry. I understand it, having watched the plant closing.
And I think the obsession with the past 8 years is somewhat
misguided intellectually when we are talking about generational
impacts that go back to the 1950s. Legitimate environmental
questions to ask, legitimate trade questions to ask of how we
maintain competitiveness of jobs. And I think the false
adversarial nature is a mistake.
Our Ohio Valley has four mills. Of those four mills, every
one of them, including bargaining unit members, have told me
that these compliance standards will cause them to probably
lose their jobs. You know, as our Democratic floor leader in
Kentucky says, what are you going to say to the Caterpillar V-8
operator in a mine who just had his job legislated away in the
coal industry? That can't be replaced effectively with
anything.
And millions of jobs depend on trade: 42 percent of jobs in
our country. Twenty percent of our jobs in Kentucky are
dependent on international trade. It is a competitiveness issue
with American workers throughout.
And I am concerned about the impact of these energy taxes.
This is not an investment. This is a fee. When we talk about an
investment, it is where we have the placement actually of money
into the private sector and you have got to have that uniform
playing field.
One thing that I would question is the border measures to
me don't make sense from a simple equilibrium standpoint in
commerce. I am just a simple manufacturing guy by background,
trained as an engineer and was in the Army before that. My
viewing of chemistry and physics is based on an industrial and
a practical level. And we are not here, as the chairman said,
to talk about global warming and the scientific perceptions of
that, which there are certainly many viewpoints.
But, more important, China is the top CO2
producer in the world, followed by India and Brazil. Per capita
is a different ratio. But we only consume 1 percent of their
production. It would seem to me on simple metrics--and plenty
of economists have seen this--it would be cheaper for them not
to comply and pay a tariff for products into the United States
knowing that they could stand one on one with that cost.
Mr. McMackin, you have talked about how the Inslee-Doyle
provision reduces compliance costs faced by some manufacturers.
How significant are the cost increases manufacturers would
continue to face even under Inslee-Doyle provisions?
Mr. MCMACKIN. There will be some, Congressman. At this
point, Inslee-Doyle, for instance, would not cover cost
increases in our nonfuel inputs like soda ash in the glass
business.
The other category that is left out is the increase, for
instance, in natural gas that would be caused by the increase
in the demand for natural gas precisely because it is carbon
efficient. Those are two areas where some increment of the cost
would not be----
Mr. DAVIS of Kentucky. Just reclaiming my time. So you are
saying--but there is going to be a huge impact on the
competitiveness of our workers, because we have also passed
separate legislation to increase tax on American energy
production. Assuming that we try to use some of our resources,
it would seem to me that is going to be counterproductive at
the end of the day.
Mr. MCMACKIN. Congressman, what I am saying is it hangs in
the balance with respect to energy intensive foreign-trade
exposed industries. If we continue to work and design a
provision that gets us to the point where the costs are minimal
of unilateral legislation, then I think we can avoid the job
loss.
Mr. DAVIS of Kentucky. Reclaiming my time. Mr. Hamilton in
fact in his opening statement said that 80-percent reduction
goals would, in fact, have, quote, massive increases in energy
costs. I don't see how you can deal with this just from a
standpoint of working families, working poor, those on fixed
incomes to have what under Warner-Lieberman was estimated a
$1,300 per family unit increase in bottom-line energy costs.
How we can offset that and remain competitive?
But in your testimony you argued that efforts to minimize
the impact of the President's energy taxes should be limited to
5 sectors. Now we have analysis that shows that there is dozens
of sectors that would be impacted.
And I have a question for Mr. Clay. Just in closing, do you
believe it is appropriate for your firm to be excluded from any
assistance in this?
Mr. CLAY. No, I don't think it is appropriate. If there is
going to be rebates and assistance for that, then I think we
should be included. But we currently are not, to my
understanding. I would rather keep the whole situation more
simple and not have to deal with this issue and not have to
deal with the rebates either.
Mr. DAVIS of Kentucky. Okay. Thank you.
Just reclaiming my time, I think the one thing that Mr.
Pauwelyn from Switzerland pointed out, unless everybody plays
on this field, looking at the amount of the connectedness of
the international supply chain, we are going to have a huge
consequence for this. And not many of us in this body have
walked the floors of a factory and actually had to deal with
manufacturing cost, purchasing cost, the integration of
products from across the world. As we continue to explore this,
I think it is important that we maintain balance.
There are legitimate questions to be asked, but the thing
that I would say in closing is we can't rule out the job
impacts on ordinary working people that could be profound in
the heartland of the country.
And, secondly, Mr. Brady's comments are absolutely correct
on the proportions of the imports of steel in the United
States. Canada is first, followed by the EU as major partners.
And when we look at these percentages of consumption, let us
not create something that we actually can't live with and would
legislate more jobs out of the country.
I yield back.
Chairman LEVIN. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman; and let me thank
each of you for being here.
As someone who was involved in manufacturing, buying
materials, all of it was steel, selling it to the finished
consumer, I know a little bit about what it means where you buy
it, what impact it has.
Mr. Gerard, you represent a group of manufacturers whose
management has a great awareness of what this will do, I am
sure. And I think it would affect those industries. I would
like to know how you think it would, because I represent a
State that has a major agribusiness sector, a large
manufacturing base, and a growing high-tech manufacturing base.
So taking a close look----
Let me give you three of those and let me just ask you, if
you would, to give me your thoughts very quickly so I can get
to another question on some of these others.
One of those would be right adjacent to my district really,
the Tarheel slaughtering plant, the largest pork slaughtering
plant in the country, or one of the largest. The other one is
one of the largest tire manufacturing plants in Fayettevile,
North Carolina. The third one would be a number of
pharmaceutical manufacturing facilities, and they are a little
different.
I would be interested in your thinking. Because I think,
given your background, you would have a good understanding of
all three of these industries because you represent people
involved in it.
Mr. GERARD. Thank you very much.
Unfortunately, I don't know very much about slaughtering.
But let me just say that our union has had a position for quite
some time that on this issue we need to have a global
arrangement. And that, as I said in my comments, we represent
primarily but not unilaterally--or not only--but we represent
primarily energy intensive industries and we actually believe
that the right way to that path----
Mr. ETHERIDGE. And these three would be.
Mr. GERARD. These three would be.
And the right path in a global arrangement is to have
sectoral agreements for those energy intensive industries.
Because each one has a different dynamic.
And along the lines of what has already been discussed, we
need to have output-based rebates; and those output-based
rebates need to be backed up with trade mechanisms so that if
people don't live up to the output-based mechanism there is a
trade mechanism to fall back on.
And then, finally, if none of that works, you have a border
adjustment mechanism; and the border adjustment mechanism, as
several have said, is the stick that we use to bring people
into compliance.
And what I am extremely concerned about is that I am going
to be okay, my kids are probably going to be okay, but my
grandkids aren't, and we can't continue to ignore the issue of
global climate change. I am very aggressive about saying that
it is not Texas-based climate change. It is not North Carolina.
It is not Michigan. It is not Pittsburgh or Chicago. It is
global-based climate change.
So we need to be the leaders in the global negotiations,
and we need to set the framework. And the fundamental of that
framework has to be that we don't disadvantage our American
manufacturing in favor of those that are already unfairly
trading with us.
There is no point in me hashing back and forth with our
Republican friends. But I will just remind them that we have
got an accumulated trade debt of $6 trillion and we service it
every year by spending about $400 billion. I would rather use
that on the economy and America. I would rather use that to
solve global warming.
Thank you very much.
Mr. ETHERIDGE. Thank you, sir.
Mr. McMackin, I understand that from your approach in your
testimony in determining the industries that would receive
compensation, whether free admission, allowances or through tax
credits or rebates, that identifies a certain universe of
industries that are both energy intensive and trade sensitive.
What about those trade-sensitive industries that may be less
energy intensive? I would be interested in knowing--aren't they
susceptible also to imports from unregulated producers and the
carbon leakage that comes with that? I would be interested in
your comments.
Mr. MCMACKIN. Congressman, yes, they may. So in the
proposal----
Mr. ETHERIDGE. How we deal with it.
Mr. MCMACKIN. In the proposal we are developing, we have
tried, in addition, to expand the list of industries that would
be eligible for the rebate; and we are up now from the 8 or 12
that always get listed to our study identified 45 sub-
industries. Then I think we ought to have a provision that
says, in addition, any industry should be able on an individual
basis to show that it also is subject to leakage. Even if, as
you say, it is not quite as energy intensive as others, but it
is very trade intensive, then it ought to be eligible for some
of this cost mitigation as well.
Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back.
Chairman LEVIN. Now I think under our procedure Ms. Sanchez
is next, and we will see if some of our colleagues who were
here before come back. If not, we will go to your side anyway.
Ms. SANCHEZ. Mr. Chairman, I believe Mr. Larson was here
before I was.
Chairman LEVIN. But he is not on the Subcommittee. And I
say that a bit painfully because Mr. Larson is a sponsor of
some important legislation.
Ms. SANCHEZ. Yes, he is.
Chairman LEVIN. But we have a rule, and we need to follow
them. And I am not quite sure how we are going to work that
out. So why don't you take your turn.
Ms. SANCHEZ. I will, Mr. Chairman.
Chairman LEVIN. Thank you for your consideration.
Ms. SANCHEZ. I was trying to help a brother out.
Mr. Clay, in your written testimony, you express some very
understandable concerns about the potential pitfalls of
imposing a cap-and-trade system to combat global warming in
what is admittedly a very challenging economy right now; and
you predict that U.S. manufacturers may relocate offshore if
the U.S. puts into place a cap-and-trade system. And I was just
interested in knowing, your company has operations in Hungary
and Poland; is that correct?
Mr. CLAY. That is correct.
Ms. SANCHEZ. Are those operations in Hungary and Poland
subject to the cap-and-trade system that is imposed by the
European Union?
Mr. CLAY. I don't know the answer to that.
Ms. SANCHEZ. Okay. I am just curious to know. Because if,
in fact, they are subject to the cap-and-trade system that the
European Union uses and your argument is that cap and trade
will threaten the viability of manufacturing, I am wondering
how those operations remain in effect if they are following
that system.
Mr. CLAY. We locate in those areas to supply those areas.
So it is not an issue--the same issue that we have here. Back
in Michigan, we have an issue of competing globally and
competing in trying to save our jobs from moving overseas.
Ms. SANCHEZ. I understand that. My concern is that there
sort of seems to have been created this artificial divide
between let us not do anything and let us admit that global
warming is a problem but, you know, heaven forbid we should
really try to address that with some thoughtful proposals
because it may hurt our competitiveness.
And I don't think there is a single Member up here that
isn't concerned about job loss and U.S. competitiveness in a
global economy. But, by the same token, I don't think we can
throw our hands up in the air and say this is too difficult to
tackle and therefore it is easier just to do nothing and we
will remain more competitive if we don't have to deal with
this.
I think globally we need to really look toward being a
leader and working with, you know, other countries in terms of
bringing the standards up, rather than trying to leave the
world without standards or trying to loosen those standards.
Mr. Gerard, I was interested your written testimony because
you explain some of the potential benefits and pitfalls of
output-based rebates, border adjustments and hybrid schemes;
and then you discuss a scenario that would function something
similar to a value-added tax. I was wondering if you could
explain that proposal a little bit more for us.
Mr. GERARD. Well, the process that we are really looking at
from our point of view is trying to develop a series of options
so that as we move into the global negotiations that the United
States takes a lead and has the kinds of options that I just
referred to a minute ago as--for lack of a better word--a
ladder of which America will lead on. So that at the bottom of
that ladder it would be the kind of border adjustment mechanism
that you just referred to that would be like a value-added tax.
And I think the professor would agree that that is allowable
under the WTO.
Ms. SANCHEZ. Professor, do you dispute that assessment?
Mr. PAUWELYN. No, that is correct.
Mr. GERARD. So if you create that kind of a ladder, then
what we can do with that is, A, deal with the issue of global
warming; B, protect American jobs; and, C, force--if that is
the right terminology--other countries to meet the acceptable
global standard.
The one thing that I can tell you that I worry about
substantially is that an unregulated market in carbon credits
will end up creating a bunch of carbon billionaires. We have
already seen what unregulated financial markets have done to
us. So as we move down this path we think having that ladder of
options and America leading the way on that can lead us that
way. And if we end up with what would be the equivalent of
value-added tax as the stick as well as some carrot, then we
believe we can get there and protect American jobs. If we try
to ignore those options, then I think we will get left behind.
If we just say no, as some want to do, then I think we will be
subject to getting penalized by somebody.
Ms. SANCHEZ. Final question, which is for all of the
panelists; and I would like to see this by a show of hands. Do
you believe--any of you believe that the status quo is
acceptable going forward?
No takers.
Okay, with that, I yield back the balance of my time.
Chairman LEVIN. I want to be sure what the order is,
because I made a mistake and Ms. Sanchez was not here at the
drop of the hat. So it is Mr. Reichert, Mr. Herger, Mr. Nunes,
Mr. Van Hollen, Mr. Tanner, Mr. Larson, Mr. Kind, Mr. Davis.
And if someone who was here at the drop of the gavel comes
back, we will change that. Okay. So we all understand.
So, Mr. Reichert, you are next. Thank you.
Mr. REICHERT. Thank you, Mr. Chairman.
I guess I can't help but make a comment or two first about
sort of the tone of this hearing. I was a law enforcement
officer for 33 years, so I feel like I need to bring some peace
to this proceeding.
I am very encouraged by the chairman's comments about a
bipartisan effort. We are all wanting to get answers here, and
this is really why we are here.
Mr. Gerard, we just have--we are all Americans coming at
this very a different place in trying to find common ground
where we can make America successful. I come from Washington
State, the Evergreen State. But we also are very dependent on
trade. One out of every three jobs in Washington State depends
on trade. So both of these issues are very, very important to
us.
I don't think you will find anyone on this panel that is
against protecting, creating, promoting American jobs and
protecting our environment, reducing harmful emissions. And I
remember back in 1962 when I was just in the 7th grade, my
science teacher took us on a little excursion, an affair in the
small town of Kent, put us back in the back of a pickup truck
wearing gas masks. That was about air pollution back then. She
was way ahead of our time.
We have been dealing with this--this didn't just happen in
the last 4 years or the last 8 years or the last 10 years. This
country and the people in it have been dealing with this issue
and trying to figure out what to do for a number of years.
But we have heard a lot about the United States and we know
that we must show some leadership in this international climate
change debate. So we want to get to the bottom of what we
should be doing.
What happens if the United States takes the lead and others
don't follow? That is what we are concerned about. All of us
here are concerned about that; and I know you are, too. Should
there be an economy wide safety valve such that if several
years into this program it's clear that China and India are not
participating, should we reconsider our program?
Mr. GERARD. If you are putting that to me, I think that,
clearly, already China has proven that it is an unreliable
trade partner. The commitments that they made through PNTR to
get into the WTO are--the ones that they have violated or
ignored are too numerous to mention right now. And clearly I
think that the ladder of options that I tried to outline
earlier should be readily available, including we have given
away to China the most valuable thing that we have, and that is
access to our market.
And if they are going to play through currency
manipulation, through lack of already weak environmental laws,
lack of enforcement and other we could go through--we presented
a report not very long ago where they got $27 billion of aid
for the steel industry in China, aid that is not available to
our steel industry, we are told, to compete with. Clearly, if
they don't meet those standards, we have an option of
terminating that agreement.
So I think that the greater the carrots and the greater the
sticks, the greater the chance that America has to bring about
the kind of change that is needed in those countries. And I
appreciate your comments that you are a protectionist as well
and want to protect American jobs. That is important that we
recognize that. And I would be the first to say that I believe
we can do both, help clean up the environment over time while
we protect American jobs.
Mr. REICHERT. And I think that all of us here today believe
that we can do both. We just have to figure out a way to
protect the environment, protect American jobs at the same
time. All of you on the panel have said that, too; and we agree
with that.
Mr. GERARD. I appreciate your comments.
Mr. REICHERT. We do know that if the United States doesn't,
though, get some help and there isn't an international
agreement, we won't reduce global greenhouse gases.
So, Mr. Chairman, I would like to enter into the record a
chart that has been prepared by the EPA that shows the global
emission levels would continue to decline rapidly if the United
States imposes emissions and limits but other major emitters
like China and India do not.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T1949A.053
Mr. REICHERT. Mr. McMackin, you have recommended that the
allowance rebate program remain in place until there is a
successful international agreement. I would like to hear from
the witness, does a successful international agreement require
that China, India, and all other major emitting countries
reduce their emissions? Are there steps we should take to gain
their participation? That is the big question, I think.
Mr. MCMACKIN. Congressman, for my part, the way we
recommend designing the provision, the cost mitigation would
remain in effect until the cost imposed on other countries'
energy intensive, foreign trade intensive goods are the same.
And to the extent the difference narrows, perhaps the aid would
narrow, but it would stay in effect until there is a level
playing field.
Mr. PAUWELYN. I think it is realistic to expect, though,
that there will be a principle of common but differentiated
responsibilities. This is something the U.S. has already agreed
to as a party to the U.N. Climate Change Convention, the idea
being that developing countries will have to commit less than
developed countries. So we have to be realistic at that level.
So it is a question of comparable action, not exactly
necessarily the same by everyone. But, yes, I would think
China, India, Brazil all would have to cut as well.
Mr. REICHERT. Mr. Chairman, thank you.
Chairman LEVIN. Okay. You are next.
Mr. HERGER. Thank you, Mr. Chairman.
Mr. Clay, I was doing a little bit of checking here; and I
believe the reason that you weren't able to answer
Representative Sanchez's question about the impact, the EU cap-
and-trade system on your Hungary and Poland facilities is
because you don't face it there. The EU caps don't cap
emissions on your sector. And since all the allowances are
given away for free, that means there is no climate impact and
no competitiveness impact. So the EU is not a good example of
what the President is proposing.
Mr. McMackin, you have identified 40 sectors in the economy
that you think should qualify for free allowances in cap-and-
tax scheme. We have analysis that shows over 50 sectors will
experience a decline in exports of at least half a billion
dollars each. Many of the companies and workers in these
sectors aren't among the 40 you have identified, such as car
manufacturers, textile products, farm machinery and specialty
crop farmers. What about the workers in these firms? Should
Congress ignore the negative impact the President's energy
taxes will have on these businesses and their workers?
Mr. MCMACKIN. Mr. Herger, I understand. What our proposal
would do is identify those most exposed to leakage, and we
would do it by saying they should presumptively qualify for aid
by virtue of meeting thresholds of energy intensiveness and
foreign competition exposure. But other industries that are
also exposed to leakage should have the ability to go in and
demonstrate that and should also receive cost mitigation
assistance, I believe.
Mr. HERGER. So you would say that would be far more,
obviously, than the 40, since they have already identified 50
and most of them are already ones you didn't even identify. So,
therefore, there is undoubtedly many other sectors out there
that are going to be damaged pretty seriously that you are not
even aware of right now.
Mr. MCMACKIN. Congressman, I honestly don't know the answer
to that. I know that there is some disagreement in the
literature. What we focused on is sort of where the consensus
is of the ones that clearly will be exposed to leakage.
Mr. HERGER. Okay. The concern of many of us is that there
is so much damage that all of this experimental programs that
you are proposing would do, much of which is not done in the
EU, as exemplified by Ms. Sanchez's question that she assumed
this was being affected by Mr. Clay's companies, and it wasn't.
We really don't have a clue of the damage this is going to do
to the American workers, to the American economy, and how many
people it will put out of work with what we are throwing out
here right now.
We hear a lot about the so-called green jobs that are
supposed to replace the millions of jobs that would be lost
because of the President's proposed energy taxes. However, the
union group, Change to Win, recently released a report that
shows that many of these, quote, green jobs aren't nearly as
good as the manufacturing jobs that would be lost.
The report also states that, quote, green jobs are not
automatically good jobs, closed quote.
The report also states that, to make green jobs good jobs,
the Government must intervene in the workplace.
Can the witnesses tell me how much intervention, Government
intervention is necessary and how much that intervention would
cost American taxpayers?
Mr. GERARD. I have never seen the study you are talking
about, so I don't know anything about it.
Mr. HERGER. I can certainly make it available to you.
Mr. GERARD. I would love to see it.
Mr. HERGER. But anyone want to answer my question?
Mr. HAMILTON. Well, the point of the study was to say
that----
Mr. HERGER. You are familiar with the study?
Mr. HAMILTON. Yeah. In fact, we co-released it with Change
to Win. It is basically saying that just because a job is green
doesn't mean that it shouldn't have adequate working
conditions, adequate wages, and a quality of work that, you
know----
Mr. HERGER. That those that it is replacing already have?
Mr. HAMILTON. I think one thing I will say about--I don't
actually know which scenario is from EPA that you are using and
that Mr. Brady was using. But I believe there are 11 of them.
There are a number of scenarios. And as to what the costs will
be. But not all of the EPA scenarios depict the kind of
manufacturing impact that you are talking about.
Mr. HERGER. Not all of them but many of them?
Mr. HAMILTON. Well, they kind of have a range from, you
know, worst case to plausible case. And I think, you know, what
we found in our working with the Energy and Commerce Committee
and others is that EPA has not done a good job at modeling the
positive impacts of energy efficiency improvements on the
economy in the context of a carbon control program.
And, you know, the best safety valve, the best cost control
measure we can work with is lowering energy demand so that
prices are going to come down and all of these impacts are as
low as possible.
Mr. NUNES. Thank you, Mr. Chairman.
Mr. Gerard, the Steel Workers Union--obviously, I think
they do a lot of work or have historically done a lot of work
when it comes to building nuclear reactors, historically. It
takes a lot of steel to build a nuclear reactor.
Mr. GERARD. Sure, it takes a lot of steel and cement and
everything else, yeah.
Mr. NUNES. So as we look--if the Americans here in the U.S.
were to develop a policy that went out to build 200 new nuclear
reactors across the country, would that create a lot of jobs
for the steelworkers?
Mr. GERARD. I think if we create wind farms and solar farms
and we find other ways to do things, we will also create a lot
of jobs. We have a lot of members that work in the nuclear
industry, and we don't attempt to pick one industry over the
other.
Mr. NUNES. Fair enough.
Mr. GERARD. We have--just as a result of attracting a
windmill manufacturer to Pennsylvania, we just created close to
600 jobs in two different plate mills that hadn't been working
at all. We call those green jobs. So we haven't tried----
Mr. NUNES. Aren't nuclear jobs green jobs?
Mr. GERARD. I am not sure they are green jobs. We have the
standards that were just referred to. If they are good, family
supporting jobs and pay decent wages and benefits and have
great working conditions, they would certainly be considered
that way.
Mr. NUNES. So what would take more CO2 out of
the air, building 200 nuclear reactors, building solar panels
and windmills or the cap-and-trade scheme that----
Mr. GERARD. I don't know. I am not technically qualified to
answer that. I don't know that.
Mr. NUNES. Well, I think it is--I would like for you to
look into that at some point and get back to the Committee.
Mr. GERARD. You give me the information you're working
from, I'll be glad to
Mr. NUNES. I will be glad to submit you the question of
what I asked. Thank you, Mr. Gerard.
Mr. GERARD. You are welcome.
Mr. NUNES. Mr. Hamilton, the Sierra Club supports regulated
animal agriculture. And there has been a lot of proposals put
out that have been across the board, but looking at dollars per
cow, dollars per pig, et cetera, et cetera, are you aware that
there is some folks that say that there were more American
bison roaming the plains 300 years ago than there are cattle in
the United States?
Mr. HAMILTON. I am very sorry. I am the Director of Global
Warming and Energy Programs, and I would be happy to----
Mr. NUNES. But you do think that cattle are contributing to
global warming?
Mr. HAMILTON. There are manure management--there are both
methane and carbon emissions from the ag sector, for sure.
Mr. NUNES. That your group wants to regulate?
Mr. HAMILTON. Yeah. I think the reasons that we are talking
about regulating animal agriculture are different than the
climate change reasons.
Mr. NUNES. Well, they all--I guess the--I think you know
the argument I am making here, which is, you know, I would
assume that the Sierra Club thinks it is a bad thing that
perhaps as many as 100 million bison were wiped off the plains
of the United States. Now it is down to just a few thousand
bison.
Mr. HAMILTON. I think so.
Mr. NUNES. You would probably like to see tens of millions
roaming the plains again?
Mr. HAMILTON. The question really hasn't come up. I am
sorry. I don't--you know, we care about wildlife. We care about
pollution. We care about----
Mr. NUNES. If we were to bring back tens of millions of
bison, how would we regulate them?
Mr. HAMILTON. I don't know offhand. I am sorry.
Mr. NUNES. You know why I am asking this is because if you
look at regulating animal agriculture and at the same time you
look at the number of bison that used to roam the plains, you
know, to me it is going to be very difficult to regulate animal
agriculture. And I would hope that the Sierra Club would look
at what is best for the economy, what is best for American
agriculture, and what is best for the environment as we move
forward.
Mr. HAMILTON. Traditionally, our concerns about agriculture
are focused on water pollution and, you know, basically runoff
and other things from farms. But I am happy to hook you up with
the experts in the Sierra Club that deal with that issue.
Mr. NUNES. I appreciate that.
Thank you, Mr. Chairman.
Chairman LEVIN. Mr. Nunes, you have a deal. You two will
get together. Thank you very much.
Mr. Van Hollen.
Mr. VAN HOLLEN. Thank you, Mr. Chairman. I thank all of you
gentlemen for your testimony.
I think and hope that this Committee can work together on a
bipartisan basis to meet the challenge we face, which is to
address the issue of global climate change in a responsible way
that does not put our domestic manufacturers at a competitive
disadvantage either with respect to their exports, because what
we do here will increase the costs of inputs, especially in
energy intensive industries and make it harder in the export
market and also here in the domestic market with respect to
products coming here.
I want to just focus for a minute on the domestic market
and products coming into the United States. Assuming that we
put in place here something that deals with the--provides
rebates for companies so we can deal with the export situation.
Let us assume--I think it we all agree that it would be great
if we could have an international regime where everyone was
playing by the same rules. Then we wouldn't have to worry about
figuring out at the border exactly, you know, what inputs were
put into a particular export coming into the United States. But
let us assume that we don't get there right away, and we need
to move ahead and at the same time protect domestic
manufacturing. Here is my question.
Let us take China, for example. Let us say China was
exporting steel to the United States, and we had a situation
where at the border we are trying to compensate for the
additional costs that U.S.-manufactured steel is incurring.
Would you recommend a system where you sort of figure out the
average cost of steel from China or would we be able, based on
what you know, to take into account what a particular Chinese
manufacturer was doing?
Because, to the extent that you are able to do that, we
could obviously send an incentive for the Chinese manufacturer
to be reducing their use of carbon-based fuels. And, after all,
our objective here, the whole purpose we are talking about here
is to try and reduce global warming, right? It is all one big
roof.
We are trying to reduce carbon emissions whether from China
or the United States. And if we were able to do that on a
company basis, you would be able to essentially send an
incentive to manufacturers, regardless of where they were in
the world, that wanted to export into the U.S. market to use
the least-carbon-intensive inputs in their manufacturing.
My question, is that--given what you know about the
international trade regime, is that a practical thing to do
right now? Or would it require us to put in place a lot more
mechanisms to--this is an open question.
Mr. GERARD. I think that it is a very difficult question,
if I give you a straight-up answer. But China doesn't know how
many steel mills China has. China's steel production in the
last 8 years went from production that was equal to the
production we had in the United States, roughly at about 120 to
125 million tons, that now they are producing close to 500
million tons. As our capacity has been rationalized downward
and imports have forced that downward, China's production has
grown. And just this last week it came out that China is now,
even after this economic global collapse, has now went back and
is almost at the same tons time produced as it was last year at
this time.
One of the problems we have is that China doesn't even know
where all that raw steel is produced. So there is certainly at
this point in time an average--an ability to put an average
cost on products. Because there is a range of products.
You take oil country tubular goods as an example. We can do
that. But then we would have to dig down deeper to see if those
oil country tubular goods are being done with the oldest mills,
whether they are made in the newest mills. So even going to the
average cost would give us a real step in the right direction.
But to say that it would be easy would be disingenuous on my
part, it would be hard.
Mr. MCMACKIN. Mr. Van Hollen, can I just up the ante a
little bit in thinking about the domestic procedures? Within
the provision we have been working on for allocating these free
allowances or rebating allowance value, there is an efficiency
standard; and it is sector averaged such that there would be a
great incentive to try and do better than the average and the
ones below would want to catch up and it continually improves
as you try to press your advantage or try to catch up. I think
it is one of the real advantages of our provision. It creates
that same incentive you are talking about for domestic
producers.
Mr. GERARD. If I can also add, because he has been sitting
here all afternoon, is Representative Larson's bill has a bill
that is an economy wide carbon tax bill. And it is simpler. It
is easier to enforce. It has fewer WTO complications. And it
works similar to a VAT that I think Ms. Sanchez asked me about.
So there are all kinds of options available that we can deal
with this.
Mr. PAUWELYN. If I may just add to this, from a trade law
perspective, what you are saying is absolutely crucial, to
allow individual Chinese manufacturers to show that they have
emitted less than the average; and I have not seen this
possibility in any of the bills on the table so far.
Mr. VAN HOLLEN. Right. And that would be WTO compliance.
Mr. PAUWELYN. Yes. Because the U.S. lost a case involving
gasoline standards just on that issue. It gave individual
baselines to U.S. refineries, but it only gave an average
baseline to foreign refiners. And the WTO was saying this is
discrimination. You have to give them at least the option to
submit individual data.
Mr. VAN HOLLEN. To demonstrate that they were----
Mr. PAUWELYN. Right.
Mr. VAN HOLLEN. Thank you very much. I appreciate it.
Thank you all.
Mr. GERARD. That would be useful. Then they would have to
come clean with us, too.
Chairman LEVIN. It is useful to have this discussion, and
it is getting late.
And as I said, Mr. Lamy is here; and there are negotiations
going on in the WTO. So what now exists can always be changed.
All right. I think the two remaining, most-patient people,
Mr. Larson, Mr. Davis, I think--I thought so. So I thought Mr.
Davis was here right at the beginning. So, Mr. Davis, you are
next. And then, Mr. Larson, you will--without respect to
seniority or other position, you will wrap this up for us.
Mr. Davis, it is a pleasure; and thank you for your
patience.
Mr. DAVIS of Alabama. Thank you, Mr. Chairman, for letting
two non-Subcommittee Members make our way to the dance today;
and I think my caucus chairman for not exerting either
seniority or rank or privilege or any of those wonderful
things.
Let me, if I can, pick up on Mr. Doggett's line of
questions; and I want to pose this first to you, Mr. Gerard,
and then come back to everyone else on the panel.
Mr. Doggett was raising the concern that if the United
States failed to act in a unilateral way in terms of enacting
some kind of cap-and-trade regime or significant carbon
emission standards, carbon tax, what have you, that that would
obviously should not be an excuse, the fact that there is no
successor to Kyoto, the fact that there is no prospect of an
immediate international regime.
Let me maybe test that proposition a little bit. Some have
raised the concern, which sounds plausible to me, that if the
United States were to enact a unilateral regime that could
actually be a disincentive to China, to India, to other
developing countries to create a successor to Kyoto. Would you
comment on that, Mr. Gerard?
Mr. GERARD. My experience and my instincts would tell me
that if we acted unilaterally without the kind of mechanisms we
have talked about today that there would be absolutely no
reason for places like China or India to do anything. They
currently have access to our market, and they currently violate
almost every rule there is.
I think the only way that we can have a meaningful global
arrangement is with the combination of carrots and sticks. I
think we need to negotiate globally. I think we need to have
sectoral arrangements that would be done by an energy intensive
sector. Then I think we need that ladder of tools I talked
about earlier. And I think that way China and India will have
to take action.
I am very, very sensitive that one of the most valuable
things on Earth is access to this market; and when we give it
away for free, we also give away our jobs.
Mr. DAVIS of Alabama. Is there anyone on the panel who has
a different point of view on this issue in terms of what the
incentive would be for us to signal out to the Chinese and the
Indians if the U.S. were to go first and to enact a regime?
Does anyone think that would somehow incentivize the Chinese
and the Indians to come to the table?
Mr. MCMACKIN. Mr. Davis, if I could just emphasize that it
does seem logical to me that if we unilaterally disarm, giving,
say, the Chinese a greater cost advantage than they have, they
may slow down to enjoy that increased advantage. But, as Mr.
Gerard said, if we from the get-go include provisions that deny
them that advantage over our trade-exposed industries, we will
have denied them the incentive to drag their feet.
Mr. DAVIS of Alabama. Does anyone have a different point of
view who is on the panel?
Mr. HAMILTON. I would just add, if you look at the
countries that are participating in the Kyoto Agreement in the
U.N. Framework Convention, add them to the U.S. and I believe
Australia and you have got roughly 80 percent of China's
exports. So I think, even if we act, we are not acting alone,
because the Framework Convention continues to move forward and
that at that point we may need to think about what other
measures are necessary to persuade China that it would be a
good thing to do.
Mr. DAVIS of Alabama. Go ahead, sir.
Mr. PAUWELYN. I think the crucial thing is one of timing.
You are right that China and India would be upset if there is a
border measure in the bill you would adopt. But none of the
bills on the table now would impose that border measure as of
the beginning. It would be phased in after 5 or 10 years even.
And that is exactly what Europe is also considering.
Mr. DAVIS of Alabama. Let me slip in another question since
my time is about to run out.
I haven't heard--and I apologize if I have just missed them
because of other things I have had to do. But I haven't heard a
lot of estimates about job loss, even under the proposals, Mr.
McMackin, you pointed out. Give me some comparisons, if you
will, about potential job loss if we did, as I suppose our
colleagues on the other side of the aisle want to do, which was
virtually nothing in terms of cap and trade.
I guess you have got three scenarios: doing nothing, status
quo, and if we were to have a very aggressive cap-and-trade
regime of the kind, frankly, the Democratic Caucus would
advocate and if we were to have a cap-and-trade regime that has
the kinds of allowances for leakage that you and Mr. Gerard
talk about. Can you compare the last two in terms of potential
job loss?
Mr. MCMACKIN. Just very quickly, that Mr. Morganstern of
Resources for the Future testified last week in Energy and
Commerce that he thought the job loss, the leakage could be as
much as 40 percent for the most exposed industries over the
long term.
I guess the thrust of my group's provision is if we negate
or at least substantially mitigate the cost that would cause
that job loss, we could essentially save all of that leakage.
Mr. DAVIS of Alabama. Mr. Gerard, do you have any follow-up
to that?
Mr. GERARD. The only thing I would add to that is
supporting his argument and combining that with the President's
position on creating renewable energy sector. We could end up
being job positive.
Mr. DAVIS of Alabama. If I can get one final indulgence.
Does anyone on the Committee dispute the numbers about 40
percent job losses for the most leveraged industries under
leakage?
Mr. PAUWELYN. This is actually what could happen to the
cement industry which my firm has been representing. As
Chairman Levin was saying, you need to look industry per
industry. And the numbers are very different. So it means you
have to have a ladder, you have to have a combination, and take
this very seriously. There is no silver bullet here.
Chairman LEVIN. All right. I think, Mr. Davis, your
questions have been so cogent, it is really important that you
were able to be with us and stay.
This is the practice. All the Members of the Committee are
going to be welcome, both Republicans and Democrats, for all of
these hearings.
So our Caucus Chair, you get the last crack at this; and
thank you for finding the time to join us.
Mr. LARSON. Thank you, Mr. Chairman; and I thank the fellow
Members on the Subcommittee. This has been an extraordinary
panel, and I want to thank them for their participation as
well.
It seems to me that the science is pretty clear, and it
seems to me that all the panelists acknowledge that we have an
environmental problem that we face. And depending upon who you
listen to, whether or not we are going to reach a tipping point
that will be catastrophic--and that is everyone from scientists
to our own military leaders--that is not what this hearing is
about.
I am pleased that this hearing is focused on something that
I think everyone can agree on. Is there anyone on the panel who
doesn't believe that a solution--and my colleague from Alabama
I think articulated it very well. We are either going with some
form of cap-and-trade system, some form of carbon tax, or we
are doing nothing. But in all three cases, you are talking
about taxes.
If we do nothing, we are talking about the situation that
we are currently in that is volatile, as we have seen just this
past year. Where we subject ourselves to once again paying the
taxes and seeing the dollars flow overseas to Saudi Arabia, to
the OPEC cartel, to re-emergent Russia and even to our neighbor
in Canada or Venezuela, we are going to be paying taxes, higher
taxes, one way or the other.
Is there anyone on the panel that would disagree that this
issue, if we are to combat it forthrightly and level with the
American people, that it had doesn't concern taxation?
Thank you.
I think some of my colleagues on the other side, they
recognize that this is a tax. But they--you know, that is a
terrible word in governing. So nobody likes to say it and--
because it carries with it incredible consequences.
So the question becomes, in facing global catastrophe and
leveling with the American people, whether or not the Congress
of the United States is going to have the temerity to say up
front, yes, what we are dealing with is a tax. But here is what
we are going to do in terms of making sure from an import/
export position in terms of impacted industries like Mr. Clay's
but also coal miners throughout this country, steelworkers,
that we are going to provide by recognizing that we are going
to tax polluters up front and then pass on the savings, pass on
those taxes in a revenue-neutral manner to those industries,
those individuals, and those communities that are impacted so
that we can both combat climate change and global warming but
also the need for energy independence by making the kind of
investments that both preserve the environment and provide us
an opportunity to make sure we are safeguarding our workforce,
in fact, enhancing their opportunity to perform.
I think it is a matter of leveling with the American people
and getting beyond the nonsense. This is about taxing, and this
is going to be about stepping up to the plate. Call it cap and
trade, call it a carbon tax, call it--we are going to pretend
we are going to do nothing, but we are just going to watch the
taxes go up automatically because of what we are going to have
to pay in terms of what we are currently paying now to other
nations because we don't have a plan that can engage the
country in a meaningful and significant way.
Mr. LARSON [continuing]. So I would ask whether or not the
panelists feel that a marketplace solution or a direct
governmental solution in terms of tax and passing that on is a
better way to go.
Mr. GERARD. I have to admit that in the last 6 or 8 months
I have become very, very apprehensive of the term ``market-
based solutions'' when we see what has happened in the so-
called market.
Let me say that from the point of view of our union and as
both citizens and representatives, I think it is very important
that we don't damage energy-intensive industries or export-
intensive industries as we work our way through this problem.
And I actually believe that if we do the costing of carbon
right and we take the right steps to make sure it doesn't do
damage to our own industries, combined with the President's
campaign on renewable energy, I absolutely believe that over
the next 5, 8, 10, 12, 20 years we can be job positive, and we
need transition programs and we need to make absolutely sure--I
will take two industries that we represent the majority of the
people in those industries: cement and steel. There currently
is no scientific way to make cement or steel without creating
carbon because of the process of making it. If we don't protect
those industries, we will always need steel and cement, and if
we are getting it from China or some other place that doesn't
have the same kind of standards we do, we will end up putting
more nails in our manufacturing coffin and making ourselves
just as reliable or just as reliant, I should say, on those
governments as we are now on Middle East oil.
So I think it is a very, very important process that you
have engaged in and that the chairman has engaged in and that
we are engaged in in finding a way to cost carbon that doesn't
create a domestic disadvantage for our producers, yet at the
same time marrying that to the Administration's effort to
create renewable energy. If we do that, we will be way ahead of
the game, and I applaud you for the work you have done.
Mr. PAUWELYN. Just very quickly, I do see a big difference,
though. Taxes and death are certain but paying the price for
carbon is not a necessity. The whole idea is that if you price
carbon people will move away into greener energy, creating
green jobs. So you can actually avoid the tax and you can
create green jobs without the Government having to spend money,
going back to an earlier question. But, yes, it imposes a cost
but you can avoid it by shifting, producing less carbon.
Mr. LARSON. Do you seriously believe that the companies
that you impose the tax on are not going to pass those on to
the consumer?
Mr. PAUWELYN. Again that will depend on industry by
industry.
Mr. LARSON. That is what I mean about leveling with the
people. They want the truth from their elected representatives
about what will happen, notwithstanding that that would ever
happen in the marketplace that they would pass a cost along
ultimately to the consumer.
Chairman LEVIN. All right. This is so interesting we could
go on.
Mr. BRADY. For hours.
Chairman LEVIN. I won't say thank you. It is our job. But
we have been here for a number of hours. A most illuminating
hearing. There will be more, and thank you to all of you who
came here to testify and be here throughout.
We now stand, I will say, adjourned though it is really
recessed because we will be back at this subject.
Thank you, Mr. Brady. Thank you.
[Whereupon, at 4:17 p.m., the Subcommittee was adjourned.]
[Submissions for the Record follow:]
Statement of Cargo Airline Association
Mr. Chairman and Members of the Subcommittee: My name is Steve
Alterman and I am the president of the Cargo Airline Association (``the
Association''), the nationwide voice of the all-cargo air carrier
industry.\1\ I also have the honor of serving as the current Chairman
of the FAA's Environmental Subcommittee of the Agency's Research,
Engineering and Development Advisory Committee (REDAC). As a key
segment of the air transportation industry, the all-cargo carriers
recognize the growing importance of addressing our industry's
contribution to global climate change. At the same time, especially in
a time of global economic uncertainty, any environmental legislation
must take care not to impair our ability to compete in the worldwide
marketplace.
---------------------------------------------------------------------------
\1\ U.S. air carrier members of the Cargo Airline Association are
ABX Air, Atlas Air, Capital Cargo, FedEx Express, Kalitta Air and UPS
Airlines.
---------------------------------------------------------------------------
Background
The nation's aviation community plays a pivotal role in maintaining
United States leadership in world trade. Indeed, the industry
represents approximately 5.6 percent of the U.S. Gross Domestic Product
(GDP); contributes over $1.2 trillion annually to the U.S. economy and
is responsible for approximately 11 million jobs.\2\ In addition to
these economic facts, the industry has been in the forefront of
addressing environmental issues associated with our operations. To a
large extent, of course, the environmental record of the entire
aviation community is a result of a search for greater fuel efficiency
in an era of generally rising fuel prices. Nevertheless, the
environmental benefits of this quest for fuel efficiency cannot be
overlooked. For example:
---------------------------------------------------------------------------
\2\ FAA, The Economic Impact of Civil Aviation on the U.S. Economy
(October 2008). This
report is available at: http://www.faa.gov/about/office_org/
headquarters_offices/ato/media/2008_
Economic_Impact_Report_web.pdf
Emissions from aircraft now account for less than 3
percent of the total U.S. Greenhouse Gas emissions.\3\
---------------------------------------------------------------------------
\3\ This figure includes all segments of U.S. aviation, including
commercial aviation, general aviation and the military. See, Inventory
of Greenhouse Emissions and Sinks: 1990-2006, U.S. Environmental
Protection Agency (April 15, 2008).
---------------------------------------------------------------------------
Over the past 40 years, fuel efficiency has improved
by over 70 percent \4\ and, compared to 2000, in 2007 the U.S.
commercial airlines consumed 3 percent less fuel while
transporting over 20 percent more passengers and cargo.
---------------------------------------------------------------------------
\4\ International Civil Aviation Organization, Environmental Report
2007, page 107.
Addressing the Future
While these accomplishments are significant, we recognize that more
must be done to meet the environmental challenges of the future. Many
of the necessary improvements will come from advances in technology and
the implementation of FAA airspace modernization initiatives. This
process requires the cooperation of all parties to the aviation
environmental debate--industry, Congress and the Administration.
Accordingly, an FAA Reauthorization bill in this Congress becomes an
environmental imperative. The substantive provisions of all versions of
FAA Reauthorization contain significant environmental initiatives that
require both authorization and funding--including a joint industry/
Government initiative to develop, test and certify alternative aviation
fuels that may well be the most promising way of addressing aviation
emissions in the future. In addition, FAA Reauthorization will help to
advance the move toward the airspace system of the future. This system
will permit more direct flight paths, more efficient landing
trajectories and better use of movements on the airport surface. In
turn, all of these results will save fuel and reduce emissions that
contribute to global warming. In the longer term, a new generation of
aircraft and aircraft engines being developed by industry and NASA will
further help reduce aviation's environmental footprint.
``Cap and Trade'' and its Impact on Trade
How does all this activity impact world trade and the ability of
the U.S. aviation sector to remain competitive? Simply stated, the
entire aviation industry is extremely capital intensive and any move to
impose significant additional costs on an industry already suffering in
today's economy will reduce the industry's ability to make the
investments necessary to service customers around the world.
Unfortunately, some of the initiatives now being advanced for dealing
with global climate change will have this negative effect.
Specifically, elements in both Congress and the Administration have
proposed a cap and trade regime that potentially will have a severe
dampening effect on aviation's global competitiveness. While details in
these proposals may differ slightly, they all appear to impose an
``upstream'' tax on aviation, with the industry forced to buy carbon
credits from fuel producers who will pay the fees directly (or in a
secondary market that will undoubtedly emerge). At least for aviation,
this method of attempting to deal with global climate change is
extremely problematical. Some of the obvious downsides of such a cap
and trade system are:
As noted above, such a system will, in effect, impose
a significant additional tax burden on an already heavily taxed
industry.
These taxes will inhibit the ability of the industry
to make the capital expenditures necessary to take advantage of
a modernized airspace system--a system that will provide
significant environmental benefits.
As we understand the current proposals, they will
potentially funnel monies collected to a variety of programs--
none of which have any relation to aviation or modernization of
the aviation system.
The bureaucracy necessary to administer any cap and
trade program will siphon off a significant portion of any
funds collected.
A cap and trade system is subject to market
manipulation.\5\
---------------------------------------------------------------------------
\5\ See, for example, op ed piece by Rep. Peter DeFazio in the
January 27, 2009, edition of the Oregonian.
Potential Alternatives to ``Cap and Trade''
Faced with these facts and potential pitfalls, is there another way
for aviation to meet its environmental responsibilities, while, at the
same time, remaining competitive in the world marketplace? We believe
that there is. Rather than being subjected to a cap and trade system, a
tailored revenue-neutral carbon tax for the commercial airline industry
appears to make more sense.\6\ Under such a system, the commercial
airline industry could be further directly taxed on its use of aviation
fuel (the source of pollutants contributing to global climate
change),\7\ with these levies offset by a corresponding decrease in the
existing excise taxes paid by the airlines.\8\ Such a scheme would
provide a powerful incentive to modernize aircraft fleets, while, at
the same time, retain the same overall level of industry taxation.\9\
In addition, the funds collected could be used to assist in the effort
to convert the nation's air traffic system into one based upon
satellite technology rather than the existing reliance on decades-old
ground-based radar. And, since such taxes would be collected at the
pump, virtually 100 percent of the proceeds could be used on aviation
programs that benefit the environment.\10\ As noted by the non-partisan
Congressional Budget Office (CBO), ``A tax on emissions would be the
most efficient incentive-based option for reducing emissions and could
be relatively easy to implement.'' \11\
---------------------------------------------------------------------------
\6\ If a cap and trade system is enacted, however, with respect to
aviation it should contain ``safety valve'' provisions to protect
carriers if the price of oil escalates past a predetermined level and
funds collected should be transferred to the Aviation Trust Fund for
use in system modernization.
\7\ Commercial airlines currently pay a fuel tax of 4.3 cents per
gallon.
\8\ The existing excise tax on air cargo is a 6.25 percent airway
bill levy.
\9\ We recognize that variations of the carbon tax possibility set
forth herein have been suggested by various parties to the global
climate change debate. Each of these other proposals should be analyzed
for their merits and their impact on U.S. global competitiveness.
\10\ Other, ancillary, issues that should be included in the
discussion of aviation's place in the global warming debate include (1)
the role of the International Civil Aviation Organization (ICAO) and
its ongoing attempts to establish international standards for aircraft
emissions that r5elate to climate change and (2) the need for any
Federal action in this area to preempt any state and local action that
would result in a patchwork quilt of regulations on an industry that
operates nationwide.
\11\ See, Policy Options for Reducing CO2 Emissions, Congressional
Budget Office, February 2008.
---------------------------------------------------------------------------
Conclusion
The challenge of addressing global warming, while at the same time
remaining competitive in the international marketplace, is perhaps one
of the most difficult balancing acts that commercial airlines currently
face. On the one hand, we must be able to meet the demands of
businesses throughout the world. On the other hand, in planning to meet
the requirements of our customers, there must be an environmental
overlay on all corporate decision-making. On the Government side, we
understand the reasons that legislation is being considered to ensure
that global climate change is addressed--and addressed as expeditiously
as possible. But that legislation must take care not to cripple an
industry that is necessary for economic recovery and that has a long-
standing record of environmental sensitivity. To prevent bad
break deg.
We recognize that the suggestions made herein are broad overviews
and that the details of any final plans to address global climate
change will require difficult negotiations among both industry and
Government representatives. For our part, we stand ready to engage in
this necessary dialogue. If the Subcommittee, or its staff, wants to
discuss these issues further, please do not hesitate to contact us.
Thank you very much.
The Cargo Airline Association
The Voice of the Air Cargo Industry
Identification of Witness:
Stephen A. Alterman
President
Cargo Airline Association
1220 19th Street, NW
Suite 400
Washington, DC 20036
[email protected]
Statement of Jennifer Layke,
World Resources Institute Climate and Energy Program
The World Resources Institute is a non-profit, non-partisan
environmental think tank that goes beyond research to provide practical
solutions to the world's most urgent environment and development
challenges. We work in partnership with scientists, businesses,
governments, and non-governmental organizations in more than fifty
countries to provide information, tools and analysis to address
problems like climate change, the degradation of ecosystems and their
capacity to provide for human well-being.
We welcome the opportunity to provide testimony on climate change
policy and U.S. competitiveness--as well as to highlight that this as a
major opportunity for the United States. In this testimony, we make
three points, each of which will be expanded upon below:
Business as usual is not an attractive option.
Warming is happening more rapidly than expected and the impacts
are becoming more severe. Sustained economic growth will depend
upon an adequate global response to climate change.
The world has changed dramatically from the days of
the Kyoto Protocol. Major developing countries are ready to
take significant action on limiting emissions and the Bali
Action Plan provides a solid foundation for a new international
climate agreement that meets key U.S. interests.
Although the form and stringency of national actions
will differ, U.S. policy design can effectively address the
trade concerns of domestic manufacturers.
The implications of a warming planet
In February 2007, the Intergovernmental Panel on Climate Change
(IPCC--the official science process sanctioned by the world's
governments and participated in by the United States) released its
latest report on climate change science. The report states that it is
``unequivocal'' that Earth's climate is warming, and confirms that the
current atmospheric concentration of carbon dioxide and methane, two
important greenhouse gases (GHGs), ``exceeds by far the natural range
over the last 650,000 years.'' Further, the IPCC concludes that it is
now ``very likely'' (greater than 90 percent probability) that
greenhouse gas emissions from human activities have caused ``most of
the observed increase in globally averaged temperatures since the mid-
20th century.'' \1\
---------------------------------------------------------------------------
\1\ Pachauri, R.K. and Reisinger, A. (Eds.), Climate Change 2007:
Synthesis Report, IPCC, Geneva, Switzerland: 2007.
---------------------------------------------------------------------------
Cheap, plentiful fossil fuels have enabled huge increases in human
productivity and great improvements in human well being over the past
200 years. However, this progress has also resulted in significant
deforestation and created the buildup of carbon dioxide and other
greenhouse gases (GHGs). The impacts of GHG emissions are accelerating,
and unless we act very soon, warming will rise to very dangerous levels
during our children's lifetimes.
The impacts of warming have become increasingly evident even to
non-scientific observers. Sea ice in the Arctic is shrinking, and
Greenland's massive ice sheet is melting--far faster than predicted.\2\
Glaciers are rapidly shrinking from the Rockies to the Alps. Insect
infestations linked to global warming have already had huge economic
impacts on the timber industry.\3\
---------------------------------------------------------------------------
\2\ Geophys. Res. Lett.35, L22502; 2008. and NASA ``Record Arctic
Sea Ice Loss in 2007'' http://earthobservatory.nasa.gov/Newsroom/
NewImages/Images/arctic_ams_2007259.jpg.
\3\ B.C. Ministry of Forests and Range, Forest Analysis and
Inventory Branch. 2007. ``Timber Supply and the Mountain Pine Beetle
Infestation in British Columbia: 2007 Update http://www.for.gov.bc.ca/
hfp/mountain_pine_beetle/Pine_Beetle_Update20070917.pdf
---------------------------------------------------------------------------
It is clear that much of what we thought we knew a few years ago
about the pace of climate change has been superseded. Continuing down
this path will result in climate change impacts with significant
economic challenges that make continued high-carbon growth patterns
more costly than investments in low-carbon technologies. Economic
estimates of the costs of inaction total between 5 and 20 percent of
global GDP by 2100.\4\ In comparison, estimates of the cost of action
seem small.\5\ The science and the economics tell us we have to act
with extraordinary urgency. We must fundamentally re-think our energy
infrastructure, address emissions from land use and forestry, and build
a global platform to reduce GHG emissions.
---------------------------------------------------------------------------
\4\ William R. Cline, ``The Stakes in Limiting Climate Change,''
Remarks at the Symposium on U.S. Climate Action: A Global Economic
Perspective, sponsored by the Center for Global Development, Grantham
Research Institute, Peterson Institute for International Economics, and
the World Resources Institute, Washington, DC, March 3, 2009, available
at www.petersoninstitute.org (accessed on March 9, 2009) or Nicholas
Stern, 2007, The Economics of Climate Change, Cambridge: Cambridge
University Press.
\5\ In ``The economic crisis and the two great challenges of the
21st century'', presented at ``Securing our common future: a conference
on the future of international development'', March 2009, Sir Nicholas
Stern estimates that the global cost of stabilization under 500 ppm
would be between one and two percent of GDP.
---------------------------------------------------------------------------
However, policymakers must respond to this challenge with the most
economically efficient, environmentally effective policy mechanisms.
Market-based regulations such as cap and trade will enable businesses
to meet environmental goals at the lowest possible cost while
guaranteeing the desired environmental outcome. Furthermore, cap and
trade policies create incentives for innovation by providing a long-
term price signal and a market for new, low-carbon technologies and
investments.
Business will respond to a price signal and new markets by creating
new business models that will enable them to compete in emerging low
carbon markets. Domestic manufacturers will benefit from carbon
constraints by creating the most efficient manufacturing facilities,
and by serving domestic markets for clean goods and services.
In the past 15 years, major markets and support for clean
technologies in Japan and Germany have provided their businesses with
needed investment signals. They now lead the world in renewable energy
and efficient vehicle technologies. Their companies profit from strong
regulatory environments at home and build competitive advantage abroad.
In the U.S., loose or uncertain policy structures do not serve
companies well, as other countries will build markets for the products
and services that will be required in a low-carbon world. Such concerns
have led many major companies to call for strong mandatory U.S. climate
policy.
An international response?
The importance of a concerted global effort is illustrated by
Figure 1. China, the United States and Europe are responsible for 50
percent of the worlds greenhouse gas emissions. And although Chinese
emissions surpassed those of the United States in 2008, their per
capita emissions remain at barely a quarter of U.S. emissions per
person.
Almost 80 percent of current global emissions are produced by
fifteen countries (counting the European Union as a single country). Of
these, nine are developing economies and two (Russia and Ukraine) are
post-communist countries still wrestling with economic transition.
Without a viable means of engaging these countries in the effort to cut
emissions we cannot avoid catastrophic climate change.
Figure 1: Aggregate GHG emissions by country, 2005
[GRAPHIC] [TIFF OMITTED] T1949A.054
International climate negotiations begun in 1992 under the United
Nations Framework Convention on Climate Change emphasized that
countries have common but differentiated responsibilities to mitigate
greenhouse gas emissions. In the past, this has meant that their
relative obligations may be staggered--dates and reduction levels may
vary based on development levels and historic and current contributions
to global emissions levels.
For many years, developing countries were clear in their view that
they expect a lead from rich countries before they take action on
emissions. There are sound reasons for this stance. They are far poorer
than developed countries; they have played a far smaller role in
creating the climate problem; and their emissions per person generally
remain much lower than those of developed countries (see Figure 2). In
fact, 1.4 billion people in the development world live on less than
$1.25 a day. Some 2.5 billion people rely on fuelwood, charcoal and
animal dung to cook. This is over 80 percent of the population of Sub-
Saharan Africa and over half of the populations of India and China.
Figure 2: Emissions in tons carbon per person in selected countries
(2005, excludes land use)
[GRAPHIC] [TIFF OMITTED] T1949A.055
Since the Bali Action Plan (BAP) of 2007, however, many countries
have not only focused the timing of their limits, they have also
started to examine the types of ``nationally appropriate measures and
actions'' (NAMAs) they could begin to implement today. With this in
mind, major developing countries have now brought forward climate
plans. A few interesting examples include:
Brazil announced it would reduce its deforestation
rate over 50 percent from recent levels by 2017, avoiding an
estimated 4.8 billion tons of CO2 emissions.
Deforestation accounts for about two thirds of Brazilian GHG
emissions.
China set a target of reducing national energy
intensity (energy use per unit GDP) by 20 percent in the five
years to 2010. It has reduced energy intensity by 1.6 percent
in 2006, 3.7 percent in 2007, and 4.3 percent in 2008. China
looks likely to be approximately on target to meet its goal.
Together, the industrial and building efficiency programs
supporting this goal are expected to yield 550 million metric
tons CO2 in GHG savings. Addition savings are
expected from measures in the transport sector. China also has
ambitious non-fossil plans, including wind, hydro, nuclear and
biomass, all of which are expected to save 640 million metric
tons CO2 by 2010.
Mexico pledged to halve its greenhouse gas emissions
by 2050, employing a ``cap-and-trade'' policy like the one
recently considered by the U.S. Congress.
South Africa has presented a detailed plan to peak
its national emissions by 2020.
The NAMAs structure offers a significant step forward from the
traditional Kyoto Protocol approach. It calls for policies and actions
that can be measured, reported and verified. There is now a significant
global effort to create robust reporting and verification structures
which will help ensure global progress is clear, and that countries can
be held accountable for the implementation of their national plans.
These common metrics can help build trust, align international
commitments with national development goals, and support data
collection and dissemination.
Challenges of differentiated action
Although individual nations are working to develop appropriate
approaches to mitigation, the policies they adopt will vary in form and
stringency. As a result, the costs they impose on manufacturers are
unlikely to be uniform. American manufacturers fear that the imbalances
created by aggressive climate policy in the U.S. could contribute
significantly to the ``offshoring'' of jobs and relocation of industry
to countries with lower standards and production costs.
Individuals concerned with the environmental integrity of American
climate policy have expressed similar concerns. If global supply chains
shift manufacturing from countries with explicit emissions caps to
countries without such policies, global emissions may not be reduced.
This shift in emissions from one location to another is a process
commonly referred to as emissions ``leakage.'' While U.S. climate
policy would reduce domestic emissions, the net environmental
effectiveness of the policy may be undermined if emission sources
simply migrate to countries without absolute caps. In order to prevent
this, environmentalists have frequently supported the international
harmonization of environmental standards and enforcement to minimize
the impact of imbalances in compliance costs across nations.
The degree to which these concerns apply to a particular industry
depends on three variables:
1) Greenhouse gas intensity of production: The impact of
emissions fees and increased costs of energy on a given
industry is determined, in part, by how significant these costs
would be as a share of total production costs. In industries
such as transportation equipment and electronics manufacturing,
energy accounts for less than one percent of total production
costs. For such industries, transnational imbalances in wages,
health care costs and transportation costs dwarf the potential
difference in environmental compliance costs stemming from
climate policy.\6\ For relatively emissions intensive
industries like steel, cement and refining, a $10 allowance
price would imply a short term price increase of 2 to 4 percent
of total costs; nearly 10 times the impact seen by
transportation equipment and electronics manufacturers.\7\ It
is these highly exposed industries where targeted actions may
be required. Since detailed GHG accounting has not been
conducted for all industries, energy intensity of production
can serve as a rough proxy for this variable.
---------------------------------------------------------------------------
\6\ Houser, et. al, Leveling the Carbon Playing Field,
International Competition and U.S. Climate Policy Design, Peterson
Institute for International Economics and World Resources Institute,
Washington, DC: 2008.
\7\ Ho, Mun, et al. Impact of Carbon Price Policies on U.S.
Industry, Resources for the Future, Washington DC, 2008. and EU ETS
impacts on profitability and trade: A sector by sector analysis. Carbon
Trust, London, 2008.
2) Potential for efficiency improvements or fuel switching:
The extent to which increased energy prices translate into
higher overall production costs depends on each industry's
ability to improve GHG efficiency of production through
---------------------------------------------------------------------------
technological improvements or fuel-switching.
3) Product demand elasticity: The demand elasticity of a
given product dictates the ability of its manufacturer to
change prices while maintaining profitability. As a result,
product demand elasticity can indicate the degree to which
industry is able to pass through compliance costs not mitigated
through efficiency improvements or fuel switching. Although
reliable demand elasticity data is difficult to find for all
industries, trade intensity can serve as a proxy by indicating
the availability of substitutes.
Figure 3: Industry exposure to climate costs
[GRAPHIC] [TIFF OMITTED] T1949A.056
At the most aggregate level, these metrics indicate that the most
exposed products would include paper and pulp, chemicals, nonferrous
and ferrous metals and nonmetallic mineral products such as glass and
cement (see Figure 3). Petroleum refining, some mining, and certain
types of textile manufacturing could also be included in the list.
Initial observations in Europe and preliminary modeling of American
policies have come to similar conclusions and indicate that, in the
absence of mechanisms to address compliance costs, these sectors would
face pressure to relocate to nations with less stringent climate
policies.\8\
---------------------------------------------------------------------------
\8\ Ho, Mun, et al. Impact of Carbon Price Policies on U.S.
Industry, Resources for the Future, Washington DC, 2008. and EU ETS
impacts on profitability and trade: A sector by sector analysis. Carbon
Trust, London, 2008.
---------------------------------------------------------------------------
Since these exposed industries are a discrete portion of the
economy, targeted policies hold the potential to offset the impact of
differentiated national approaches to climate policy. WRI's analysis
offers three policy options or scenarios to address U.S.
competitiveness concerns:
1) Cost containment_aims to reduce the pressure on carbon
intensive industries by limiting the cost of complying with
climate legislation. The most direct methods proposed have
sought to use allowance allocations to reimburse exposed
sectors for both the direct and indirect costs of climate
policy.\9\ Although such policies could shield industries from
newfound competitiveness concerns, they must be carefully
structured to maintain incentives for continued production and
emissions mitigation as well as avoid overcompensating firms.
---------------------------------------------------------------------------
\9\ Emission Migration Prevention with Long-term Output Yields Act,
H.R. 1759, introduced by Representatives Inslee and Doyle in the 111th
session of the United States House of Representatives.
2) Trade measures do not limit costs on the covered companies
but seek to indirectly apply similar costs to competing
companies in other countries through the treatment of traded
goods at the border. Although this policy mechanism found
widespread support in legislation during the 110th Congress, it
is unclear whether these policies would provide the necessary
level of protection for all manufacturers.\10\ For example,
border price adjustments of imports of primary goods would
negatively impact downstream manufacturers such as the
automobile industry by increasing costs of raw materials.
Furthermore, these policies would do little to protect
important export markets, as adjustments would only apply to
the U.S. market. Finally, trade measures may damage important
international negotiations to create a multilateral agreement
to address climate change.\11\
---------------------------------------------------------------------------
\10\ ``Lieberman-Warner Climate Security Act'', S. 3036, Introduced
by Senator Boxer in the 110th session of the United States Senate.
\11\ Forsythe, Michael. ``China's Xie Calls U.S. Tariff Threat on
Climate `Protectionism' '', Bloomberg, March 18, 2009.
3) Coordinated international actions seek to reduce the
pressure on carbon-intensive industries by encouraging major
trading partners to impose similar costs or policies. Commonly
cited international mechanisms to address competitiveness and
leakage concerns include sectoral agreements and the successful
negotiation of a global climate agreement under the UNFCCC that
would include mandatory action by developing countries.
Although China's official negotiating position in climate
debates has focused on ensuring that developed countries make
reduction commitments, China's support for the Bali Action
Plan, and its National Climate Change platform indicates that
the Chinese may be willing to make commitments to regulate
specific, heavily polluting industries. Nevertheless, perfect
coordination of national actions is unlikely in the immediate
future, so the U.S. is likely to consider the first two
approaches as China phases in its emissions requirements.\12\
---------------------------------------------------------------------------
\12\ Houser, et. al, Leveling the Carbon Playing Field,
International Competition and U.S. Climate Policy Design, Peterson
Institute for International Economics and World Resources Institute,
Washington, DC: 2008.
---------------------------------------------------------------------------
Figure 4: Leveling mechanisms
[GRAPHIC] [TIFF OMITTED] T1949A.057
Careful application of cost containment mechanisms and trade
measures should enable the domestic policy process to advance in
parallel to international negotiations. This combination of domestic
mechanisms and international coordination will allow the U.S. to pursue
aggressive mitigation targets while protecting domestic employment and
industry.
Statement of Terence P. Stewart and Elizabeth J. Drake
The following comments are submitted in response to the Advisory
from the Committee on Ways and Means, dated March 17, 2009, announcing
an opportunity for the submission of public comments for the record
regarding the trade aspects of climate change legislation, including
how to minimize carbon leakage and maintain U.S. competitiveness. We
attach hereto a paper we have written on criteria for a U.S. climate
change initiative that is designed to meet the scientific objectives of
reducing greenhouse gas emissions while avoiding excessive economic
costs and unnecessary distortions to international trade.
We appreciate the opportunity to provide these comments to the
Committee, and thank the Committee for its attention to this vitally
important issue.
A Consumption-Based Approach to Combating Climate Change
By Terence P. Stewart and Elizabeth J. Drake \1\
---------------------------------------------------------------------------
\1\ The views expressed in these comments are those of the authors,
and do not necessarily reflect the views of any clients of the firm.
---------------------------------------------------------------------------
I. Introduction
Recent debate over climate change policy in the U.S. Congress has
focused primarily on programs that seek to regulate the production of
greenhouse gas (GHG) emissions in the United States. For example,
proposals for a cap-and-trade program to address climate change would
require U.S. entities to obtain permits for the GHG emissions they
produce, and permit such permits to be traded among entities.\2\
Consensus on such an approach remains elusive, as stakeholders debate
the proper scope and ambition of such a program, the administrative
burdens of the program, the costs it would impose and who would bear
those costs, the extent to which producers in other countries would
bear similar costs and how any cost differentials can be best
addressed, the consistency of certain elements of the program with
existing international trade obligations and on-going international
climate negotiations, and whether the program would deliver the
emissions reductions required to reach scientific and environmental
objectives.
---------------------------------------------------------------------------
\2\ See, e.g., Lieberman-Warner Climate Security Act of 2008, S.
2191, 110th Cong.
---------------------------------------------------------------------------
A number of the limitations and difficulties posed by current cap-
and-trade proposals stem from the program's focus on regulating GHG
emissions associated with domestic production. Refocusing regulatory
efforts on the emissions associated with domestic consumption, instead
of production, can avoid many of these pitfalls. This assessment of the
advantages and disadvantages of the different approaches is guided by
three principles.
1) Maximize Environmental Benefits: Regulating the emissions
associated with domestic production captures only a portion of the
nation's carbon footprint. In manufacturing, for example, the U.S. is a
large net importer, and goods purchased from abroad equal nearly 30
percent of all domestic production.\3\ A consumption-based approach
would maximize the environmental impact of a climate change program by
regulating emissions associated with goods consumed in the U.S.,
regardless of their origin. A consumption-based approach further
maximizes environmental benefits by avoiding the creation of incentives
to relocate carbon-intensive production to less-regulated environments.
This will help ensure that domestic climate change policies do not
distort international trade and that emissions regulations do not
inadvertently raise global emissions levels instead of lowering them.
---------------------------------------------------------------------------
\3\ The U.S. imported $1.491 trillion in manufactured goods in
2008. U.S. Census Bureau, U.S. Bureau of Economic Analysis, U.S.
International Trade in Goods and Services: December 2008 (Feb. 11,
2009) at Ex. 15. In 2008, U.S. manufacturers had $5.185 trillion in
shipments. U.S. Census Bureau, Full Report on Manufacturers' Shipments,
Inventories and Orders: December 2008 (Feb. 5, 2009) at Table 1.
Imports were thus equal to 29 percent of domestic production for 2008.
2) Minimize Economic Costs: A production-based approach will impose
a variety of costs on domestic entities, some of which may be volatile
and unpredictable under a cap-and-trade system. Such costs may be
particularly difficult for manufacturers to pass on to their customers
in a recessionary environment, especially so if domestic manufacturers
bear costs that are not borne by foreign producers. A consumption-based
system, by contrast, is designed to increase the price of carbon-
intensive goods consumed in the U.S. in a transparent, predictable and
uniform manner, regardless of the good's origin. This approach sends
the appropriate signals to consumers and creates demand for less
carbon-intensive goods, while avoiding imposing disproportionate costs
---------------------------------------------------------------------------
on U.S. producers.
3) Honor International Trade Rules and Principles: A system that
seeks to impose costs on production may create WTO concerns, because
efforts to impose similar costs on foreign producers (or rebate such
costs for domestic producers or for export production) could be
challenged as trade barriers or subsidies that would have to be
justified under exceptions to WTO rules. In contrast, a system that
regulates domestic consumption treats all domestically-consumed goods
equally, no matter where they are produced, based only on their carbon-
intensity. While it is possible to fashion WTO-consistent approaches
under either approach, there is a higher likelihood of limited or no
conflict from a system that is based on consumption with equal
treatment for domestic and imported goods alike.
Based on the above principles, some of the advantages of targeting
consumption instead of production in a climate change program are
reviewed in more detail below, followed by suggestions for some
possible elements of a consumption-based program.
II. The Advantages of Regulating Consumption Instead of Production
In assessing various proposals for addressing climate change, it is
helpful to understand production-based and consumption-based approaches
that have been used to address other environmental problems. Cap-and-
trade systems regulating the GHG emissions associated with domestic
production are primarily modeled on the acid rain program, which
created tradable permits for domestic entities that emitted sulfur
dioxide.\4\ The primary mechanism for regulating emissions associated
with domestic consumption would be a carbon tax or GHG emissions fee.
There are several precedents for such a fee, including the excise tax
on ozone depleting chemicals (ODCs) and the Superfund tax.\5\ These
precedents are discussed in more detail below.
---------------------------------------------------------------------------
\4\ See, e.g., U.S. Environmental Protection Agency, ``Cap and
Trade: Acid Rain Program Basics,'' available on-line at http://
www.epa.gov/airmarkets/cap-trade/docs/arbasics.pdf.
\5\ The ozone-depleting chemicals tax is codified at 26 U.S.C.
Sec. Sec. 4681-4682. The superfund tax was codified at 26 U.S.C.
Sec. 4661 et seq. See, e.g., J. Andrew Hoerner, The Role of Border Tax
Adjustments in Environmental Taxation: Theory and U.S. Experience,
Working Paper Presented at the International Workshop on Market Based
Instruments and International Trade of the Institute for Environmental
Studies, Amsterdam, the Netherlands (Mar. 19, 1998) at 9-12; Elizabeth
Cook, ed., Ozone Protection in the United States: Elements of Success,
World Resources Institute (Nov. 1996).
---------------------------------------------------------------------------
While there are potentially many advantages to addressing climate
change by regulating consumption of carbon-intensive goods rather than
their production, the focus below is on ten key areas in which a
consumption-based approach better achieves the core goals of maximizing
environmental benefits, minimizing economic costs, and honoring
international trade obligations. Finally, while these comments focus
primarily on the contrast between a production-based cap-and-trade
system and a consumption-based emissions fee system, it is important to
recognize that some sectors with sufficiently special circumstances may
merit alternative approaches, and a multitude of approaches may be
appropriate.
1) Scope: For environmental harms that are localized at the site of
emissions, such as the incidence of acid rain near the site of sulfur
dioxide emissions, a production-based approach to regulating emissions
is likely to achieve the appropriate scope of coverage to produce the
desired environmental results.\6\ By contrast, for environmental harms
that are not so localized and that are instead global in nature, a
consumption-based approach with a broader regulatory scope is more
appropriate. Such an approach is particularly appropriate for nations
that are large consumers of the goods that cause the harmful global
impact of concern. For example, the use of ozone-depleting chemicals
harmed the global environment regardless of where those chemicals were
produced--thus, a consumption-based excise tax in the United States (a
key consuming nation) was appropriately broad in scope. It drastically
curtailed the use of ozone-depleting chemicals and effectively
protected the ozone layer.\7\ Similarly, climate change is a global
phenomenon--a ton of carbon dioxide emissions will do the exact same
harm to the earth's environment regardless of where it is produced.
Thus, a consumption-based approach matches the scope of the
environmental problem to be addressed by regulating emissions
associated with all carbon-intensive goods consumed, no matter where
those goods might have been produced.
---------------------------------------------------------------------------
\6\ For a critique of the applicability of the acid rain model to
climate change, see, e.g., Robert J. Shapiro, Addressing the Risks of
Climate Change: The Environmental Effectiveness and Economic Efficiency
of Emissions Caps and Tradable Permits, Compared to Carbon Taxes (Feb.
2007) at 18-19, available on-line at http://www.sonecon.com/docs/
studies/climate_021407.pdf; Kenneth P. Green, Steven F. Hayward, and
Kevin A. Hassett, ``Climate Change: Cap vs. Taxes,'' Environmental
Policy Outlook, No. 2, American Enterprise Institute (June 2007).
\7\ Elizabeth Cook, ed., Ozone Protection in the United States:
Elements of Success, World Resources Institute (Nov. 1996).
2) Uniformity: A consumption-based approach has the additional
advantage of automatically treating the emissions associated with a
good exactly the same no matter where that good may originate from.
Thus, the same science-based results are achieved, and environmental
damage is prevented or mitigated to the exact same extent, for all
goods subject to the same uniform, consumption-based regulation. A
production-based approach, however, necessarily treats goods
differently depending on where they are produced. This fails to
recognize that, in the case of GHG emissions and climate change, the
location of production is irrelevant from a scientific and
environmental perspective. Attempts to correct for this differential
treatment (by, for example, adding on ``competitiveness'' mechanisms to
a cap-and-trade program) are extremely challenging because they force
policy-makers to assess which other production locations should be
regulated and how. The variety of complications that arise in trying to
design such compensatory mechanisms only underscores how ill-suited an
approach that differentiates treatment based on the site of production
---------------------------------------------------------------------------
is to addressing the global problem of climate change.
3) Equal Treatment: With a consumption-based approach, emissions
are regulated for all goods consumed domestically, and goods not
consumed domestically are not subject to the domestic regulation. For
example, the Superfund tax and the ODC excise tax were assessed on the
same basis for domestic goods sold in the U.S. and for imported goods
sold in the U.S.\8\ In addition, the taxes were rebated on exports.\9\
Because all goods were taxed upon consumption, no additional mechanisms
were needed to ensure equal treatment of domestic and foreign goods--
all domestic and foreign goods consumed domestically were taxed
equally; all domestic and foreign goods not consumed domestically were
equally exempt from the tax. A production-based approach, however,
makes it much more difficult to achieve equal treatment. While some
compensatory charges may be assessed on imported goods based on their
own site of production, ensuring those charges treat domestic and
foreign goods equally based on the environmental harm associated with
that good's production has proven challenging.\10\ Rebating the costs
of domestic regulation on exports is also problematic, and not only
because of problems with WTO consistency. Because the costs imposed on
production provide the only incentive to meet environmental goals under
such an approach, eliminating those costs necessarily reduces the
desired environmental impact.
---------------------------------------------------------------------------
\8\ 26 U.S.C. Sec. Sec. 4661(a) (Superfund); 26 U.S.C. Sec. 4681(a)
(ODCs).
\9\ 26 U.S.C. Sec. Sec. 4662(e) (Superfund); 26 U.S.C.
Sec. 4682(d)(3)(A) (ODCs).
\10\ See, e.g., the international reserve allowance program
contained in the Lieberman-Warner Climate Security Act of 2008, S.
2191, 110th Cong. Sec. 6006.
4) Coverage: Even if regulation of some upstream products can be
roughly equalized under a production-based program, downstream
producers are likely to suffer differential treatment based on their
location. For example, even if foreign and domestic steel are regulated
on a somewhat equivalent basis under a production-based approach,
domestic automakers will bear more costs in purchasing that steel than
will foreign automakers who can source steel produced under unregulated
conditions. Thus, the differential treatment, and the failure to
uniformly address environmental impacts, is simply pushed further down
the production chain. A consumption-based approach can avoid this
unfortunate result by covering all goods that entail harmful emissions.
For example, the Superfund tax and ODC excise tax, in addition to
taxing upstream products consumed domestically regardless of their
origin, also taxed imports of downstream goods that used more than a de
minimis amount of such upstream goods in their production process.\11\
The Superfund tax and ODC excise tax were not only assessed on imports
that incorporated regulated chemicals chemicals, but it was also
assessed on imports that entailed the use of such chemicals in their
production process.\12\ The amount of regulated chemicals consumed in
the production process was evaluated based on foreign manufacturer
certifications or the predominant method of manufacture for the product
in question.\13\
---------------------------------------------------------------------------
\11\ 26 U.S.C. Sec. 4672(a) (Superfund); 26 U.S.C. Sec. 4682(c)
(ODCs).
\12\ 26 U.S.C. Sec. 4671(b) (Superfund); 26 U.S.C. Sec. 4681(b)(2)
(ODCs).
\13\ Id. See also 26 C.F.R. Sec. 52.4682-3(e) (ODCs).
5) Efficiency: A consumption-based approach can also be
significantly more efficient than production-based approaches. For
example, the Congressional Budget Office estimates that a tax on the
consumption of carbon could achieve the same GHG emissions reductions
as a cap-and-trade program, and that the net economic benefits of the
tax could be up to five times greater than the net benefits of a
cap.\14\ Many economists agree that a carbon tax or emissions tax is
significantly more efficient than a cap-and-trade program and would
create much less of a drag on economic growth.\15\ In part this is due
to the advantages of transparency and predictability discussed below.
In addition, the United States already has a tried and true system for
assessing and collecting taxes, whereas the creation of a cap-and-trade
program would require the establishment of a new bureaucracy to oversee
the distribution of emissions permits, a new trading market, and new
rules and regulators to ensure the adequate functioning of that market.
---------------------------------------------------------------------------
\14\ Congressional Budget Office, Policy Options for Reducing
CO2 Emissions (Feb. 2008) at ix.
\15\ See, e.g., Robert Shapiro, Nam Pham and Arun Malik, Addressing
Climate Change Without Impairing the U.S. Economy: The Economics and
Environmental Science of Combining a Carbon-Based Tax and Tax Relief,
The U.S. Climate Taskforce (June 2008); William D. Nordhaus, To Tax or
Not to Tax: Alternative Approaches to Slowing Global Warming, 1 Review
of Environmental Economics and Policy 26 (2007); Kenneth P. Green,
Steven F. Hayward, and Kevin A. Hassett, ``Climate Change: Cap vs.
Taxes,'' Environmental Policy Outlook, No. 2, American Enterprise
Institute (June 2007); Gilbert E. Metcalf, ``A Green Employment Tax
Swap: Using a Carbon Tax to Finance Payroll Tax Relief,'' Tax Reform,
Energy and the Environment Policy Brief, Brookings Institution and
World Resources Institute (June 2007); Richard N. Cooper, The Kyoto
Protocol: A Flawed Concept, in Trade and Environment: Theory and Policy
in the Context of EU Enlargement (John Maxwell and Rafael Reuveny,
eds., 2005).
6 Transparency: The goal of a consumption-based approach is to
increase the price of carbon-intensive goods, thus sending a clear
signal to consumers and driving up demand for less carbon-intensive
goods. Thus, the premium is on transparency. A consumption tax, for
example, is set at a known level that clearly relays the same market
signals to consumers, producers, and investors alike. The cost of GHG
emissions--in terms of the environmental damage such emissions cause--
is no longer hidden, but is openly represented in the additional tax
levied on goods that produce such emissions. A production-based
approach lacks such transparency. Because the focus is on imposing
costs on producers, the extent to which such costs may be passed on to
consumers is unknown and will likely vary based on the market
conditions such producers face and other regulations they may be
subject to.\16\
---------------------------------------------------------------------------
\16\ For example, observers of the EU's Emissions Trading Scheme
have noted that the regulatory environment for utilities enabled them
to raise rates while emissions allowances were being allocated at no
cost. See A. Denny Ellerman and Paul L. Joskow, The European Union's
Emissions Trading System in Perspective, Pew Center on Global Climate
Change (May 2008) at 24-31.
7 Predictability: Closely related to the greater transparency of
consumption-based systems is the increased predictability they provide
to market participants. For example, when a tax rate is set--either
legislatively or administratively--it is public knowledge how much each
excess ton of GHG emissions will cost, when that cost will be imposed,
and, if the tax increases over time, when and how those costs will
rise. Advance knowledge of these costs is extremely valuable in
industries such as capital-intensive manufacturing, where firms must
plan production schedules and solicit capital from investors to make
that production possible. In addition, public certainty regarding the
cost of excessive GHG emissions both now and in the future will
stimulate entrepreneurs and investors to develop new abatement
technologies and new energy sources as quickly as possible.\17\ By
contrast, a production-based system that lacks a transparent cost
structure introduces significant uncertainty that makes it difficult
for capital-intensive industries to raise funds and plan production
strategies. Such uncertainty also provides little initial incentive to
ramp up development of new technologies and alternative fuel sources.
The problem is particularly acute with a cap-and-trade system, where
the price of excess emissions is set by a trading market open to
speculators and financiers. Past experience demonstrates that allowance
prices in such markets can be extremely volatile from month to month or
even day to day.\18\
---------------------------------------------------------------------------
\17\ The ODC excise tax was considered to be a very successful
means of spurring industry to develop and use alternative chemicals and
technologies. See Elizabeth Cook, ed., Ozone Protection in the United
States: Elements of Success, World Resources Institute (Nov. 1996) at
50.
\18\ Allowance prices have been highly volatile in the European
Emissions Trading Scheme, the Acid Rain program, and other cap-and-
trade initiatives. See Gilbert E. Metcalf, Designing a Carbon Tax to
Reduce U.S. Greenhouse Gas Emissions, NBER Working Paper 14375 (Oct.
2008) at 25-28.
8 Flexibility: A consumption-based system provides flexibility in
two ways. First, by putting a price on emissions instead of a cap, the
system allows producers to make technology improvements when it is most
cost-effective to do so, instead of when the declining cap makes it
cost-prohibitive not to do so.\19\ Second, the level at which a
consumption-based tax is set can be adjusted as necessary to ensure
that environmental and economic goals are being met and to allow
policy-makers to adapt to advancements in scientific and environmental
knowledge. In a tax system, such adjustments only require a re-setting
of the rate--they do not require a complicated re-balancing of trade-
offs among sectors and producers.\20\ Once stakeholders have signed on
to a production-based system, however, and received certain quantities
of allowances relative to other actors with similar expectations for
the future, adjusting the system to reflect economic developments,
advancing scientific knowledge, or new environmental realities could be
extremely difficult both as a practical matter and a political one.
---------------------------------------------------------------------------
\19\ See Congressional Budget Office, Policy Options for Reducing
CO2 Emissions (Feb. 2008) at viii-ix.
\20\ Taxes were raised as needed under the ODC program to ensure
environmental goals were being met. See Elizabeth Cook, ed., Ozone
Protection in the United States: Elements of Success, World Resources
Institute (Nov. 1996) at 42-43.
9) Development: One of the thorniest issues in designing a
production-based system for addressing climate change is how to
regulate emissions produced in developing countries. International
negotiations under the UN Framework Convention on Climate Change
(UNFCCC) are based on the principle of common but differentiated
responsibilities for developing countries, in recognition of the fact
that such countries will need to achieve significant economic growth to
emerge from poverty and that such growth will likely entail rising
emissions levels rather than declining ones.\21\ Industries in
developed countries who face competition from developing country
producers are, however, justifiably concerned that such differentiated
levels of emissions regulations will put them at a competitive
disadvantage, leading to efforts to either mitigate the costs of
developed country regulations or impose similar costs on developing
country producers. A consumption-based approach avoids this dilemma by
regulating goods based on their site of consumption, not their site of
production. Thus, developing countries will be free to set their own
national emissions reductions targets and design their own programs to
meet those targets, consistent with their internationally-agreed rights
and obligations. Only the goods such countries produce that are
consumed in the U.S. would be subject to further regulation, and those
goods would be treated like all other carbon-intensive goods consumed
in the U.S. A consumption-based approach thus recognizes the need for
wealthy nations to take full responsibility for their higher
consumption levels and the emissions associated with that consumption,
while providing the policy space for poorer countries to meet domestic
emissions targets that reflect their development needs.
---------------------------------------------------------------------------
\21\ Bali Action Plan, Decision 1/CP.13, FCCC/CP/2007/6/Add.1*
(Dec. 2007) at para. 1(a).
10) WTO Consistency: Another important advantage of a consumption-
based approach is that it is more likely to be viewed internationally
as consistent with international trade rules and principles. For
example, GATT and WTO rules have long allowed indirect taxes (such as
VAT taxes) to be adjusted at the border. Such taxes may be assessed on
imports to the same extent they are charged on domestic goods without
violating national treatment or other obligations, and such taxes may
be rebated on exports without constituting a prohibited export
subsidy.\22\ To the extent any refinements to WTO rules or the
conclusion of a stand-alone agreement under the auspices of the UNFCCC
is needed to provide greater certainty that similar charges can be
assessed based on a good's carbon intensity, such adjustments are not
likely to be major and would be consistent with long-standing WTO
principles. By contrast, attempts to patch ``competitiveness''
mechanisms on to a production-based system are likely to draw more
scrutiny under international trade rules. While there are likely to be
WTO-consistent approaches to a cap-and-trade system which is structured
to minimize ``leakage,'' many have written that such approaches could
be challenged as disguised barriers to trade and/or export
subsidies.\23\ Absent modification to the WTO rules to specifically
authorize the types of leakage prevention approaches being considered,
the disadvantage of a cap-and-trade system with leakage mechanisms is
the uncertainty that will surround U.S. policy until a final WTO
decision is rendered and the U.S. considers how to respond if the
decision is negative. While countries can always agree to amend WTO
rules or reach other international agreement to permit such
competitiveness mechanisms, the more significantly these
competitiveness mechanisms depart from current trade rules the more
difficult it may be to reach consensus regarding needed changes to
those rules.
---------------------------------------------------------------------------
\22\ See GATT Art. III:2 and Ad Note Art. XVI. For an example of
the application of these principles to permit the border adjustability
of an environmental tax, see GATT Panel Report, United States--Taxes on
Petroleum and Certain Imported Substances, BISD 34S/136, adopted on
June 17, 1987.
\23\ See, e.g., Gary Clyde Hufbauer, Steve Charnovitz, and Jisun
Kim, Global Warming and the World Trading System, Peterson Institute
for International Economics (Mar. 2009).
III. Elements of a Consumption-Based Approach
Two elements of a consumption-based approach are discussed below:
1) A fee on excess emissions associated with goods consumed in the
United States; and 2) A program to spur consumer demand for more
efficient vehicles. As noted above, the varying needs of different
sectors may justify a variety of approaches for addressing climate
change. These comments are intended to suggest some elements of a
program, and not to exclude other approaches.
1) Excess Emissions Fee
A key element of a consumption-based approach would be the
imposition of a fee on each ton of excess emissions associated with
goods consumed in the U.S., whether those goods are of domestic or
foreign origin. There are strong arguments for imposing a uniform
emissions fee that would apply to excess emissions from all sectors in
the economy, including electricity generation. The fee would operate in
a manner similar to value-added taxes, putting a price on excess
emissions at each stage of the production process. The amount of those
fees borne by manufactured goods could be adjusted at the border by
rebating them on exports and assessing them on imports. This would
ensure that manufacturers' costs related to both their direct and
indirect emissions do not create a competitive disadvantage.
However, an emissions fee could also be targeted specifically to
manufacturing, while implementing a broader cap-and-trade program for
other large emissions sources such as electricity generators and fuel
suppliers. A separate program could be carved out specifically for
manufacturing that would assess border-adjustable fees on industrial
emissions, and manufacturers subject to the fees would be exempt from
the requirements of the cap-and-trade program.\24\
---------------------------------------------------------------------------
\24\ Under such an approach, manufacturers may still bear
additional costs in the form of higher energy prices that are not
reflected in the tax. Additional steps would then need to be taken to
alleviate any disadvantage imposed on manufacturers due to higher
energy costs. Such steps may include credits for manufacturers to
compensate for higher energy costs and/or a system that includes a
proxy for costs associated with such indirect emissions in the import
assessments described above.
---------------------------------------------------------------------------
An emissions fee would be assessed on manufacturers based on the
tons of greenhouse gases they emit each year. By creating a cost for
excess emissions, the fee would incentivize firms to adopt the most
cost-effective emissions abatement technologies. An administratively
determined fee rate would also provide more cost predictability to
producers than a volatile market for emissions allowances, allowing
producers in capital-intensive industries to plan ahead more
effectively for investments in technology upgrades and emissions
reductions. Any such fee should be structured to minimize costs to
industry and maximize emissions reductions.
First, producers emitting below a certain threshold
each year would be exempt from the fee. The threshold could be
set to only cover producers that account for a significant
portion of emissions.
Second, the fee could apply only to emissions that
exceed a set quantity, and this level can decline over time. A
floor below which no fees are assessed could be structured in a
manner similar to a cap on emissions in a cap-and-trade
program. Thus, producers who maintain emissions at current
levels initially and gradually reduce them within the
prescribed timeline would pay no fees.
Third, the base rate of the fee per ton of excess
emissions can rise gradually over time to increase the economic
incentive to reduce emissions. Even if the fee rate needs to be
adjusted later in time to ensure emissions targets are being
met or to respond to new scientific or environmental
developments, the fee still provides more predictability to
manufacturers than a trading market for allowances.
Fourth, proceeds from the fees can be recycled back
to the industry in the form of tax credits or other assistance
to reward firms that reduce emissions more quickly and/or to
help finance the acquisition of emissions abatement technology,
worker training, and other transition costs.
A major advantage of the emissions fee is that it can apply equally
to both domestically-produced and imported goods. The fee could also be
rebated on exports, eliminating the competitive disadvantage U.S. goods
would face abroad. To rebate the emissions fee on exports, producers
that have any fee liability at the end of the year can report the
portion of their emissions that were generated by production for export
and deduct a proportional amount from the fees owed. Any such export
deductions would be subject to verification. There are several methods
that could be used to assess an emissions fee on imports.
First, the fee would be assessed on all imports
regardless of origin and based solely on the emissions
associated with the imported good. The emissions fee would
apply to any import that generates emissions above a de minimis
level, including downstream products.
Second, the base rate of the fee per ton of emissions
associated with imports would be equal to the base rate of the
fee per ton of domestic emissions. Thus, the amount of the fee
would increase over time to strengthen the incentive for
emissions reductions.
Third, adjustments to the import assessment can be
made to account for the fact that the fee is only assessed on
U.S. emissions that exceed a certain level.
Fourth, to determine the amount of emissions
generated by imported products, regulators could establish a
greenhouse gas intensity rate for foreign industries. The
intensity rate could be further refined down to a product-
specific basis depending on the sector and on administrative
feasibility.\25\
---------------------------------------------------------------------------
\25\ As noted above, the import tax on ODCs is assessed on a ten-
digit HTS level according to a standard ODC weight for the product
determined on the basis of the predominant method of manufacturing for
that product. See 26 C.F.R. Sec. 52.4682-3(f)(6).
---------------------------------------------------------------------------
Finally, a process could be created whereby an
importer could apply to demonstrate that the emissions
generated by specific merchandise are lower than the standard
intensity rate for the country of origin (resulting in a lower
assessment).\26\ Similarly, other interested domestic parties
should have the ability to apply to demonstrate that the actual
emissions generated by specific merchandise are higher than the
standard rate for the country of origin (resulting in a higher
assessment).
---------------------------------------------------------------------------
\26\ This process could incorporate elements of the foreign
manufacturer letters that importers are required to present in order to
be exempt from taxes on imports of ODCs. See 26 C.F.R. Sec. 52.4682-
3(e).
2) Creating Demand for More Efficient Vehicles
Another element of a consumption-based approach would be a program
to stimulate demand for new, more fuel-efficient cars or for the
retrofitting of existing vehicles to make them more fuel efficient.
Transportation is a significant source of GHG emissions in the United
States.\27\ As of 2001, there were 20 million cars and 15 million
trucks on the road that were 15 years old or older.\28\ While there are
numerous ways to incentivize the production of more fuel-efficient
cars, one way to do so would be to retrofit older and less efficient
vehicles from the road and stimulate consumer demand for more efficient
cars.
---------------------------------------------------------------------------
\27\ U.S. Department of Energy, Transportation Energy Data Book,
Edition 27 (2008) at Table 11.5.
\28\ Id. at Tables 3.7 and 3.8.
---------------------------------------------------------------------------
There are several approaches that could contribute to this goal.
First, consistent with the emissions fee proposed above, a tax on
gasoline that reflects carbon content and increases over time would
lead consumers to demand more fuel-efficient cars. Second, vehicles
themselves could be subject to a consumption or use tax based on their
gas mileage. For existing cars already on the road, application of such
a tax would encourage drivers to invest in retrofitting older cars or
turning them in for more efficient vehicles. Third, current state-level
exceptions to emissions testing requirements for older cars could be
phased out over time to require all vehicles on the road to meet
emissions standards. Finally, any of the approaches above could be
combined with targeted assistance for drivers who lack the means to
upgrade or exchange their current vehicles. Together, policies to
stimulate and support demand for more efficient vehicles could
dramatically alter the emissions profile of the transportation sector
in the United States.
IV. Conclusion
The crisis of climate change demands solutions that address the
global nature of the problem. Policies that focus on regulating the
consumption of carbon-intensive goods rather than their production are
much more likely to fulfill scientific objectives, improve
environmental outcomes, maximize incentives for new technology
development, and minimize economic costs, while honoring international
trade rules and principles. Such consumption-based approaches have been
used successfully in the past to address other global environmental
challenges, such as the depletion of the ozone layer.
Regulating consumption by putting a price on GHG emissions has
numerous advantages over regulating production by capping the quantity
of GHG emissions. A consumption-based approach would cover more of the
U.S. carbon footprint, treat all goods uniformly based solely on their
associated emissions, ensure equal treatment of domestic and foreign
goods, and cover downstream products made with carbon-intensive inputs.
In addition, consumption-based approaches are likely to be more
efficient, transparent, predictable, and flexible, providing
significant economic and environmental benefits. Finally, a
consumption-based approach will permit developing countries to pursue
common but differentiated emissions reduction commitments without
putting developed country industries at an unfair disadvantage, all
while honoring international trade rules and principles.
Elements of a consumption-based approach to combating climate
change could include a fee on excess emissions associated with goods
consumed in the United States and programs to stimulate consumer demand
for more efficient technologies and products.