The Environmental Law Institute convened a panel discussion last week covering international competitiveness concerns raised by cap-and-trade programs for greenhouse gas (GHG) emissions. Much of the program focused on a proposal by the utility company American Electric Power and labor unions such as the IBEW and the AFL-CIO that addresses concerns over the potential loss of jobs in the United States due to higher energy costs.

The proposal adds provisions to the Lieberman-Warner bill that would authorize an independent commission to determine if other countries are adequately regulating carbon. If a country is not regulating GHG emissions, energy-intensive goods manufactured there would be significantly less expensive than similar goods made in countries with emissions limits. Once it is determined that a country is not taking “comparable action” it will be subject to certain requirements. In order to import specific goods, the foreign manufacturers will have to purchase a special type of international emissions allowance - which is separate from the allowances issued to domestic facilities - and surrender it at the border with the goods being imported. This ensures that imported energy-intensive goods will not be able to unfairly undercut the prices of domestic-produced goods that are required to incorporate a price for GHG emissions.

Steel production is one of the major sectors affected by pricing GHG emissions. One presenter noted that the United States already imports about 25% of its steel. Developing countries like China, India, and Brazil produce a majority of the world’s steel today, and constitute nearly all of the growth in worldwide steel production. Since the European Union established its Emissions Trading System (EU-ETS), there reportedly have been notable harms to the European steel industry. It was argued that, while European mills are not closing down, companies are expanding their production in China and Brazil and importing the finished steel back into Europe. This is a direct result of higher energy costs in Europe, which are exacerbated by the price for carbon established by the EU-ETS.

To avoid the same problem in the US, the proposal would require that countries have “fully implemented, verified and enforced” programs to regulate GHG emissions. Countries that fail that test will be required to purchase the international emissions allowances if they want to sell their goods in the US.

This proposal has the potential to create problems with the World Trade Organization. The WTO has strict rules about member states discriminating against foreign-produced goods. However, the proposal’s drafters are confident that it is designed carefully enough to pass muster before the WTO, if the provision becomes law and the US were to be sued over it.

This proposal is yet another issue to track as the Senate prepares for full floor debate of the Lieberman-Warner bill next month. It is likely to receive significant support from Senators representing industrial Midwestern states, where domestic manufacturers are forced to compete with goods produced in the developing world. Whether support for a provision like this is enough to bring otherwise reluctant Senators around on the idea of a cap-and-trade system for GHG emissions remains to be seen, and is well worth watching over the coming weeks.

For further information about this topic, please contact Akin Gump.