The U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 to address climate change issues by establishing a carbon emissions cap and trade program. It includes international trade provisions to avoid “carbon leakage” that would occur if U.S. manufacturing activities move to other countries with lower carbon reduction standards. The debate has been begun on whether the program would be WTO legal. President Obama is likely to get some friendly guidance on the issue at the Group of 8 leaders meeting next week.

The purposes of this part of the legislation as explained in the bill are to:

  • Promote a strong global effort to reduce greenhouse gas (GHG) emissions,
  • Provide a rebate to eligible industrial sectors for their GHG emission, and
  • Implement the program in a manner consistent with international agreements to which the U.S. is a party.

Industries automatically eligible under the international reserve allowance program would have an energy intensity of at least 5 percent calculated by dividing the cost of electricity and fuel (not including fuel used as a feedstock) by the value of the shipments for the industry or a GHG intensity of at least 5 percent calculated by multiplying the tons of CO2 equivalent emissions by 20 and dividing the product by the value of shipments. Industries would also qualify with a trade intensity of at least 15 percent calculated by dividing the value of total imports and exports by the value of shipments plus imports. Other industries may petition to be included.

Emissions allowance rebates for a firm in an eligible industry would be based on the direct carbon factor – the two-year average output for the firm multiplied by the tons of CO2 equivalent per unit of output for the industry – and the indirect carbon – the electricity emissions intensity factor per unit of output multiplied by the units of output. Each year when the allowances are calculated the energy efficiencies in the calculations cannot be lower than any previous year.

The legislation includes a Statement of Policy, “It is the policy of the United States to work proactively under the United Nations Framework Convention on Climate Change, and in other appropriate fora, to establish binding agreements, including sectoral agreements, committing all major GHG-emitting nations to contribute equitably to the reduction of global GHG emissions.” The President is required to notify other countries of the statement of policy, request countries to limit GHG emissions and explain that beginning in 2020 international reserve allowance requirements may be applied to products imported into the U.S.

No later than January 1, 2017 and every two years after that the President must submit to Congress a report on the effectiveness of the emissions allowance rebates in mitigating carbon leakage and assess by industry how much the per unit cost of production has increased because of the CO2 cap and trade program. The report is to include a description of what other countries are doing to mitigate GHG reduction compliance costs. If the President believes the international reserve allowance requirement created in the bill will not be effective in controlling carbon leakage, he has to explain what alternative he would implement. If by January 1, 2018 a multilateral international agreement consistent with U.S. objectives has not entered into force, the President would be required to implement the international reserve allowance program unless he certifies it is not in the economic or environmental interests of the U.S. to do so and the House and the Senate agree within 90 days.

If the international reserve allowance program is implemented in early 2018, the President would be required to determine by June 30, 2018 and every four years thereafter by industry whether or not more than 85 percent of U.S. imports come from countries that are party to an international agreement of which the U.S. is a party, are party to an industry sector agreement of which the U.S. is a party or the GHG intensity for the industry is equal to or less than the GHG intensity in the U.S. If more than 85 percent of imports come from compliant countries, the program for that industry would be phased out. If the compliance on imports is below 85 percent for an industry, the President would continue the international reserve allowance program and make adjustments in the domestic allowance program.

The international reserve allowance program would provide for the sale, exchange, purchase, transfer, and banking of international reserve allowances by industry. The program operators would ensure that the price for purchasing international reserve allowances from the U.S. each day is equivalent to the price for emissions allowances under the U.S. cap and trade program. A general methodology would be established for calculating the quantity of international reserve allowances that a U.S. importer of any covered product would submit upon products entering the U.S. Products would be exempt from this requirement from countries that meet the requirements in the above paragraph, were classified by the UN as least developed countries or the country accounted for less than 0.5 percent of total global GHG emissions and less than 5 percent of U.S. imports for the industry.

While this program was set up to reduce carbon leakage, its political purpose is to prevent manufacturing jobs from moving to other countries as the cost of emissions allowances escalates. That is why the tariff is to be the same as the price of emission allowances in the U.S. The cap and trade program would have no chance of approval in the U.S. without some type of border barrier unless an international agreement on carbon limits is in place including developing countries as well as developed ones. The program would be run by the U.S. Environmental Protection Agency as part of the overall carbon cap and trade program.

The program as passed by the House is not the end of the debate. President Obama has been quoted as being concerned about sending protectionist trade messages and is looking for someway other than a tariff to deal with the political issue. Comments will likely come from countries after they study the details of the legislation. The Senate Environment and Public Works Committee will take up the bill this summer with the full Senate likely addressing the issue in late September.