It appears increasingly likely that the U.S. will adopt a system of limited and transferable emission allowances (a cap-and-trade approach) to control greenhouse gas emissions. Robert Stavins, the environmental economist from Harvard's Kennedy School of Government, discusses the issues involved in in this working paper: Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System (AEI-Brookings Joint Center for Regulatory Studies, November 2007):
There is growing impetus for a domestic U.S. climate policy that can provide meaningful reductions in emissions of CO2 and other greenhouse gases. I describe and analyze an up-stream, economy-wide CO2 cap-and-trade system which implements a gradual trajectory of emissions reductions (with inclusion over time of non-CO2 greenhouse gases), and includes mechanisms to reduce cost uncertainty. Initially, half of the allowances are allocated through auction and half through free distribution, with the share being auctioned gradually increasing to 100 percent over 25 years. The system provides for linkage with emission reduction credit projects in other countries, harmonization over time with effective cap-and-trade systems in other countries and regions, and appropriate linkage with actions taken in other countries, in order to establish a level playing field among domestically produced and imported products.
Stavins notes that this sort of program will increase U.S. manufacturing costs, and that there will be concerns about giving firms from foreign countries which have not adopted equivalent programs a competitive advantage:
As part of the cap-and-trade program, imports of specific highly carbon-intensive goods (in terms of their emissions generated during manufacture) from countries which have not taken climate policy actions comparable to those in the United States should be required to hold appropriate quantities of allowances (mirroring the allowance requirements on U.S. sources.
A cap and trade program may be more effective if it can be tied to similar programs in other countries, so that credits can move across borders. Judson Jaffe and Robert Stavins look at the issues this raises in this working paper: Linking a U.S. Cap-and-Trade System for Greenhouse Gas Emissions: Opportunities, Implications, and Challenges (AEI Reg-Markets Center, January 2008).
The long-run cost of a U.S. cap-and-trade system for greenhouse gas (GHG) emissions could be significantly reduced by linking that system with other existing and emerging tradable permit systems for GHG emissions. However, along with the cost savings that it offers, linking carries with it other implications. For example, linking has distributional consequences and, under some circumstances, linked systems collectively will not achieve the same level of emission reductions as they would absent linking. Also, linking can reduce a government’s control over the impacts of its tradable permit system. Thus, in considering linkages, the United States and potential linking partners may have to weigh linking’s implications for potentially competing policy objectives, much as will be required in developing other elements of their respective domestic climate policies.
Because linking’s implications depend on the type of link that is established and the specific characteristics and design of the linked systems, in the near-term, some links will be more attractive and easier to establish than others. Importantly, those links that may be the easiest to establish — links with emission reduction credit systems such as the Clean Development Mechanism — likely can provide much of the near-term cost-saving and risk-diversifying advantages that linking can offer.
Given the implications of links with other cap-and-trade systems, to facilitate such links, it may be necessary to harmonize certain elements of the design of the U.S. system and any system(s) with which it links. In particular, agreement on a unified set of measures to address cost uncertainty likely will be a necessary pre-condition for an unrestricted link with another cap-and-trade system. Also, in order to link with other cap-and-trade systems, it may be necessary to establish broader international agreements governing aspects of the design of the U.S. and linked systems beyond simply mutual recognition of allowances.
If the U.S. raises the costs of domestic industries by requiring them to acquire greenhouse gas credits, there will be demands to impose border barriers to imports from other countries that don't impose similar control costs on their own industries. Simon Lester asks, Can Unilateral Carbon Measures Be Consistent with WTO Rules? (International Economic Law and Policy Blog, February 20, 2008) and points to a an analysis from the law firm Sidney Austin concluding they can be: Testimony of Abraham Breehey... United States Senate Committee on Finance
Gary Hufbauer of the Peterson Institute looks at the issues this raises in testimony to the House Committee on Energy and Commerce: Climate Change: Competitiveness Concerns and Prospects (March 5, 2008).
...any meaningful form of GHG [GHG=greenhouse gas - Ben] controls—whether the limits take the form of a carbon tax, a cap-and-trade system, or performance standards—will impose heavy costs to the US economy. The control systems adopted by various countries will differ in major respects—both as to the severity of limitations and the details of operation. The combination of enormous costs, huge values and systemic differences will generate tremendous lobbying pressure and protectionist forces.
Sauce for the goose is sauce for the gander. Any restriction the United States imposes on imports, citing climate change as justification, can just as easily be imposed by other countries on US exports. Any performance standards that the United States imposes on foreign firms, and any "comparability" tests the United States imposes on foreign GHG control systems, can be turned around and imposed on the United States.
...a US-led effort to agree on international rules would certainly help bring developing countries on board in reducing GHG emissions. Early US efforts will strengthen the US hand when it comes to designing the post-Kyoto Protocol regime. Application of basic World Trade Organization (WTO) rules to foreseeable GHG emissions controls is far from cut and dried. Only a brave or foolish lawyer would give this Committee strong assurance that such-and-such a system of GHG controls is immune from challenge in the WTO.... almost all trade restrictive measures stand a fair chance of being challenged in the WTO.
If the United States enacts its own unique brand of import bans, border taxes, and comparability mechanisms—hoping that measures which flaunt GATT Articles I, III and XI will be saved by the exceptions of GATT Article XX—the probable consequence will be a drawn-out period of trade skirmishes and even trade wars. During these battles, some countries will become more fixated on winning legal cases than fighting the common enemy, climate change. Global cooperation in limiting emissions could be the first casualty of a unilateral approach that ignores the basic GATT articles.
Cross-posted from The Custom House.