GAO Estimates Effects of Climate Change Trade Measures on U.S. Industry, Int'l Trade

(GAO's report states that pending U.S. legislation includes two basic approaches to greenhouse gas emissions pricing: a carbon tax system and a cap-and-trade system. A carbon tax system would impose a fee on emissions of greenhouse gases. Under a cap-and-trade system, the government would cap greenhouse gas (GHG) emissions, limiting the total quantity of emissions from regulated sources under the system.

Several bills to implement emissions pricing in the U.S. have been introduced in the 110th and the 111th Congresses, which have included both cap-and-trade and carbon tax proposals.)

Regulation of GHG Emissions Could Cause Imports to Rise, Exports to Fall

According to GAO, if the U.S. were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both.

GAO adds that the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors.

Unilateral U.S. Action on Climate Change Could be Viewed as Trade Sanctions

GAO also states that a unilateral U.S. trade measure could have important international implications on U.S. bilateral and multilateral trade relations. For example, other countries could view U.S. trade measures as trade restrictions or sanctions, which could lead them to implement restrictions against U.S. exports. Attention also has focused on the potential for trade measures or output-based rebates to be challenged under World Trade Organization rules.

Rebates, Allowances to Domestic Industry Have Been Proposed to Offset Costs

GAO notes that trade measures have been proposed to help address potential industry and environmental effects of a domestic emissions pricing system.

For example, output-based rebates are measures have been proposed to address competitiveness effects, which offset incurred costs to industries due to emissions pricing and can take the form of a per-unit rebate, allocation of allowances or tax credit. However, GAO states that output-based rebates may increase costs for industries that do not receive them, under certain conditions.

Affected Industries Could Include Primary Metals, Chemical, Paper and Minerals

Pending legislation suggests that domestic industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity.

Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although GAO notes that significant variation exists for product groups (sub-industries) within each industry.

(GAO has also has also issued recent testimony entitled "Climate Change Policy: Preliminary Observations on Options for Distributing Emissions Allowances and Revenue under a Cap-and-Trade Program," which is available at http://finance.senate.gov/hearings/testimony/2009test/080409jstest.pdf)

(See ITT's Online Archives or 07/10/09 news, 09071030, for BP summary of a WTO and United Nations Environment Program report on the connection between trade and climate change.

See ITT's Online Archives or 08/03/09 and 08/05/09 news, 09080350 and 09080545, for BP summaries of a Senate Finance Committee hearing on climate change legislation.)

GAO testimony (GAO-09-875T, dated 07/08/09) available at http://www.gao.gov/new.items/d09875t.pdf

GAO report (GAO-09-724R, dated 07/08/09) available at http://www.gao.gov/new.items/d09724r.pdf