Bridges Weekly Trade News Digest • Volume 13 • Number 26 • 15th July 2009

Climate Talks in US Senate Expose Divide among Democrats

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Volume 13 Number 26 PDF • 0.19 MB

The American Clean Energy and Security Act of 2009 - known as the ‘Waxman-Markey’ bill after its sponsors in the House - would establish a cap-and-trade scheme for reducing greenhouse gas (GHG) emissions, requiring a 17 percent reduction in 2005-level emissions by 2020. Initially, 85 percent of emissions permits would be distributed for free, but the bill would begin phasing out free allowances in 2026.

The House version of the bill contains a ‘carbon tax adjustment’ provision that would allow the president to place tariffs on goods manufactured in countries that fail to regulate GHGs by 2020. The measure is intended to protect domestic carbon-intensive industries, such as metal and chemical manufacturing; some analysts say it would heavily impact rapidly emerging economies like Brazil, China, and India.

Domestic Pressures

The bill squeaked through the House in a vote of 219-212 at the end of June (see Bridges Weekly, 1 July 2009, http://ictsd.net/i/news/bridgesweekly/49962/), but the Senate remains a foreboding obstacle. Senate Democrats, who now hold a 60-seat majority, are fractured between those who support stronger environmental legislation and those who want to protect their local manufacturing industries. Republicans are largely opposed to the bill.

Proponents argue that the legislation would send an important signal of Congress’ commitment to emission caps before President Barack Obama takes part in international climate negotiations in December. “We won’t get an agreement in Copenhagen, pure and simple, if the United States doesn’t lead,” Democratic Senator John Kerry said at a Senate Finance Committee last week, referring to the upcoming climate meeting. Kerry, who chairs the Foreign Relations Committee, has taken a lead role in building support for the bill.

Other senators, primarily from states with large manufacturing industries, say that they will only support the bill if it includes trade protections, such as the border tariff. “This bill doesn’t pass if it doesn’t take care of manufacturing,” Democratic Senator Sherrod Brown said in an interview. “And I don’t think you can fully take care of manufacturing without some border equalisation.”

“My biggest concern is we keep the border tariffs,” Senator Debbie Stabenow, also a Democrat, told reporters after the Finance Committee hearing on 8 July. Stabenow’s constituents in Michigan rely heavily on the auto industry, which has been hit hard by the global financial crisis.

Brown, Stabenow, and others worry that US manufacturing companies will be disadvantaged if they are forced to compete with goods made in countries without carbon regulations. US companies may face unfair competition and high costs, causing jobs and emissions to move to less-regulated economies, a trend called ‘carbon leakage’, they claim.

But Kerry argues that manufacturing can be protected. Citing a new report from the Government Accountability Office, the Massachusetts senator said that only a ‘narrow set of industries’ would be vulnerable to unfair competition without the tariff provision, but added that those industries could be protected using other means. “I am convinced that within the allowance scheme, let alone other options, there is enormous capacity to address those concerns,” Kerry said.

Research from the Pew Center on Global Climate Change also gives some credence to Kerry’s position. Using a US$15 per ton carbon price on US emissions, the Pew Center calculated that the affected industries might lose about 1 percent of production to imports in the absence of the border tariffs. The impacts “would be fairly modest and readily managed with [various] policy instruments,” Pew Center president Eileen Claussen said at the hearing.

International Concerns

Even if the border tariff provision is included in the final version of the legislation, analysts say it is not clear whether the trade measure would violate world trade rules.

A new report from the WTO and the UN Environment Programme has shed some light on that question. It concluded that carbon tariffs issued in conjunction with a cap-and-trade scheme for climate change regulation may be WTO-legal “under certain conditions” (see Bridges Weekly, 1 July 2009, http://ictsd.net/i/news/bridgesweekly/49959/).

Not all, however, think the report justifies the protectionist measures. “What I take from the WTO/UN press release is that the director general of the WTO is trying to advertise that the WTO is not a hidebound opponent of all carbon border measures,” said Gary Clyde Hufbauer, a trade policy expert at the Peterson Institute for International Economics. “That’s a correct sentiment, but not a slam-dunk pass for Waxman-Markey.”

Even if the provision is legal, others point out that the US could face justified trade retaliation from countries affected by the provision, particularly India and China. “We’ll open ourselves to trade sanctions, and we’ll have hurt our manufacturers twice, once by imposing a cap [on emissions] in the first place and then by compounding the problem by giving other nations license to sanction us,” Republican Senator Charles Grassley said during the Finance Committee hearing.

The border tax provision has drawn criticism from China and India, who will be major players at the Copenhagen conference (see Bridges Weekly, 8 July 2009, http://ictsd.net/i/news/bridgesweekly/50301/).

“India will not accept any emissions targets - period,” India’s environmental minister Jairam Ramesh told reporters. “It is the bottom line; a non-negotiable stand.” Similarly, China’s Ministry of Commerce issued a statement that the tariffs would “seriously hurt the interests of developing countries” and “disrupt the order of international trade.”

But the US is not expected to back down easily. “They gotta be put in the same category as we are; they can’t be listed as a developing country,” Senator Tom Harkin (D-Iowa) said in an interview with Bloomberg. The US never ratified the Kyoto Protocol because the treaty did not require developing countries to curtail emissions.

Regardless of the bill’s fate in the Senate, Washington has its work cut out on climate change for the second half of 2009. A total of 60 senators must vote for the climate bill to ensure it is not blocked by a filibuster. Sixty-seven Senators are required to ratify an international climate treaty, a difficult feat without previously passed climate legislation.

“There’s a fine line here between what the rest of the world is expecting the US to do and what may be politically possible in the Senate,” Duncan Marsh, director of environmental group the Nature Conservancy, told reporters.

ICTSD reporting; “Democrats Try To Walk Fine Line On Tariffs,” NATIONAL JOURNAL, 9 July 2009; “Senate May Pass U.S. Climate Bill, Reject Treaty, Kerry Says,” BLOOMBERG, 2 July 2009.