Business, Finance & Economics

A climate change collision course


The draft climate change bill released by the U.S. House Energy and Commerce Committee March 31 is primarily focused on reducing domestic emissions of greenhouse gases. But its progress is bound to be carefully followed by at least one group of international observers.

The reason: U.S. Energy Secretary Steven Chu's comment last month that the U.S. should consider using tariffs against trading partners who don’t implement some sort of emissions reduction program.

“If other countries don’t impose a cost on carbon, then we would be at a disadvantage,” Chu told the House Science and Technology Committee. Import duties, he suggested, could be used to offset any such competitive advantages. “That will help level the playing field,” Chu said.

There was little doubt which country he was referring to. The next day, China’s top climate change negotiator, Xie Zhenhua, blasted Chu’s proposal. "I oppose using climate change as an excuse to practice protectionism on trade," he said.

The opposing views have put the world’s two largest emitters of greenhouse gases on a collision course.

At stake is the question of who should shoulder the cost of cutting emissions for goods produced overseas. In other words, if a product manufactured in China is sold in America, who’s responsible for its carbon footprint?

It’s not a trivial question. Half of the growth in Chinese emissions between 2002 and 2005 was due to export production, primarily for western markets, according to a report to be published in Geophysical Research Letters. In contrast, the country’s household consumption contributed to just 7 percent of the increase. By the end of 2005, exports accounted for one third of China’s greenhouse gas emissions, according to a researcher at Carnegie Mellon.

China’s climate negotiators would like the nations that consume its goods to pick up the cost of emissions — in effect paying the manufacturing giant to cut back its pollution.

The United States and other developed countries, for their part, are wary of implementing carbon reduction policies that would put their companies at a competitive disadvantage.

Energy-intensive industries — such as steel, chemical or paper — that have to pay for their carbon emissions would find their products priced out of the market. As they succumbed to overseas companies with no incentive to cut carbon, not only would the domestic economy suffer, the environment wouldn’t benefit.

“The emissions would still be happening,” said Robert Heilmayr, a climate change analyst at the World Resource Institute, a Washington-based environmental think tank. “You’ve just moved them to another country.”

The solution floated by Chu — and denounced by the Chinese — is to raise a tariff on imports from countries that don’t put a price on carbon, effectively raising the price of competing products as they cross the border.

Such a policy, the thinking goes, would not only level the playing field, but would also nudge countries like China into cooperating in the fight to cut global emissions.

And indeed, the draft climate change bill introduced Tuesday includes language authorizing the U.S. president to levy a charge on goods from countries that haven’t agreed to put a price on emissions.

But the proposed legislation also reflects a new way of thinking, one that maintains that punitive measures like import duties might be less effective than simply protecting the domestic industry from the brunt of the cost of compliance.

“The tariffs are there as a kind of backup,” Heilmayr said.

After all, duties imposed at the border don’t help a company that sells its products overseas. Nor do they protect other companies that source their material domestically. For instance, a car manufacturer would still have to pay a high price for steel. And many question the leverage tariffs would have in pushing the Chinese to the table.

Instead, the draft bill relies primarily on rebates — reductions in the price of carbon for energy-intensive industries exposed to global competition. Companies would receive credit for 85 percent of the industry average, allowing the cleanest among them to avoid paying anything at all for their carbon.

The result is a trade-off. Immediate cuts in carbon are sacrificed in order to preserve a domestic industry as it gradually cleans up.

Reconciling China’s point of view with those of industrialized countries will be one of the major challenges in forging an international accord to combat climate change.

Until then, however, the answer to the question of who pays for the emissions associated with its products will likely remain very simple: nobody.

Stephan Faris is the author of "Forecast: The Consequences of Climate Change, from the Amazon to the Arctic, from Darfur to Napa Valley."

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