The Lieberman-Warner Climate Security Act has emerged as the leading legislative vehicle for the creation of a national cap-and-trade system for greenhouse gas (GHG) emissions. Recently described by the Wall Street Journal as “the most extensive government reorganization of the American economy since the 1930s,” the Climate Security Act would, among many other things, require U.S. importers of a wide range of manufactured goods to purchase and surrender emissions allowances representing the GHGs associated with manufacture of the imported goods.

This requirement, intended to ensure that U.S. emissions caps do not diminish the competitiveness of domestic manufacturing industries vis-à-vis their foreign rivals, would only be excused for goods produced in countries that have adopted GHG emissions requirements as stringent as those in effect in the United States. In this way, the Climate Security Act would use U.S. market access to compel foreign exporting nations to limit GHG emissions, and could significantly affect trade flows.

In anticipation of the floor debate scheduled to begin in the Senate next week, Senator Boxer issued a substitute bill (S. 3036) that significantly alters the regulation of imports. One of the principal trade-related changes in the substitute bill is that it would create an International Climate Change Commission (ICCC) that would determine which foreign countries have taken “comparable action” to the United States in curbing GHG emissions. A negative determination would trigger the requirement for importers to provide emissions allowances pursuant to an International Reserve Allowance Program. The ICCC’s duties would also extend to determining the scope of manufactured goods falling under the import provisions, as well as modifying the import emissions allowance requirements as warranted.

Notably, the ICCC would be structured much like the existing International Trade Commission, which determines, for purposes of the U.S. trade remedy laws, whether U.S. industries are injured by imports alleged to be unfairly traded (e.g., through U.S. sales below a deemed fair value or through a foreign government’s provision of subsidies). For example, six ICCC commissioners would vote on “comparable action” decisions. In the event of equally divided votes, the decision would be deemed to be adverse to the exporting country at issue. Further, like the International Trade Commission, no more than three commissioners could be affiliated with the same political party.

The ICCC would also possess significant enforcement powers, including authority to impose penalties on U.S. importers that fail to provide the required number of allowances. It also provides the authority to prohibit U.S. importers from importing covered goods for five years if they fail to pay penalties or provide false or misleading information.

Another significant revision to the bill involves the date on which U.S. importers of covered manufactured goods must begin to provide emissions allowances. The original version of the Climate Security Act provided an eight-year grace period. Under the revised version, this grace period has been eliminated, such that the requirement would enter into effect at roughly the same time as domestic industries are brought under the GHG emissions cap-and-trade regime.

The Climate Security Act generally is believed to have very little chance of becoming law this year, in part due to competing estimates of the costs that the bill would impose on the U.S. economy. However, various aspects of its overall “architecture” - including the import provisions that would safeguard the competitiveness of U.S. manufacturing firms - are viewed as indispensable components of a future national cap-and-trade program.

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