Part 1 of this two-part series discussed provisions of the American Clean Energy and Security Act of 2009 (ACESA) introduced by Representatives Waxman and Markey that would require U.S. importers of fossil fuels to hold emissions allowances for downstream greenhouse gas emissions resulting from combustion of the imported fuels. This post addresses Title IV of ACESA, which would potentially impose a second layer of compliance obligations and costs on U.S. importers. Title IV is intended to safeguard the competitiveness of U.S. manufacturing industries vulnerable to “carbon leakage;” i.e., the potential shift of emissions-intensive manufacturing from the U.S. to foreign jurisdictions with no or less onerous emissions restrictions.

Title IV would establish two mechanisms to safeguard the competitiveness of greenhouse gas emissions-intensive U.S. manufacturing industries in light of carbon leakage. First, Title IV would allocate some emissions allowances to greenhouse gas emissions-intensive and trade-exposed domestic manufacturing industries at no cost. In this way, qualifying U.S. manufacturers would, in principle, maintain their competitive balance vis-à-vis foreign manufacturers even as they are subjected to declining emissions caps. This first mechanism would not impose specific obligations on U.S. importers.

Title IV also provides, however, for a fall-back mechanism, laid out in Sections 411-16, that could restrict imports in the event the free allowance mechanism is found not to adequately safeguard domestic manufacturing industries from carbon leakage. These provisions call for the establishment, after 2017, of an “International Reserve Allowance Program” pursuant to which importers of “covered goods” would be required to surrender, upon importation, “international reserve allowances” in an amount covering the greenhouse gas emissions associated with the manufacture of the imported goods. International reserve allowances would be drawn from an independent allowance pool and could not be used by domestic entities to comply with their domestic cap-and-trade obligations arising under Title III.

As set forth in Section 411, covered goods would include “primary products” such as iron, steel, aluminum, cement, glass, pulp, paper, chemicals, and industrial ceramics, as well as products that generate “a substantial quantity of direct greenhouse gas emissions or indirect greenhouse gas emissions” in the course of their manufacture. Thus, a potentially vast range of imports could be covered by the International Reserve Allowance Program. Under Section 416(a)(1), however, imports originating in least developed countries or in countries accounting for less than 0.5 percent of total greenhouse gas emissions would be exempted from international reserve allowance requirements. Section 415 would prohibit imports unless accompanied by the required number of international reserve allowances. While not specified, U.S. Customs and Border Protection (CBP) would likely have a significant role in the administration of these provisions.

ACESA’s proposed International Reserve Allowance Program is comparable to a series of “border measures” in other proposed climate change bills in that it may be vulnerable to challenge under World Trade Organization (WTO) rules. For example, if implemented, foreign countries whose exporters face reduced U.S. market access due to the burdens of compliance with the International Reserve Allowance Program might allege unlawful discrimination under the WTO’s “national treatment” standard. Similarly, foreign countries whose exporters receive allegedly worse treatment under the U.S. scheme than exporters from other countries might claim unlawful discrimination under the “most favored nation” standard. Certain environmental defenses may be available to the U. S, in the event a WTO dispute settlement panel were to find that the International Reserve Allowance Program violates these non-discrimination principles. To prevail with such a defense, however, the U. S. would have to show that the scheme rationally advances an environmental objective of the law giving rise to the discrimination and does not constitute a veiled form of trade protectionism.

Designing mechanisms that can safeguard the competitiveness of U.S. industries exposed to carbon leakage without running afoul of WTO rules runs presents a difficult challenge for U.S. lawmakers. There is very little chance, however, that any U.S. greenhouse gas emissions cap-and-trade program can be enacted absent robust safeguards for domestic manufacturing industries exposed to carbon leakage. Nevertheless, major foreign exporters to the U. S., including China and India, chafe at the prospect of U.S. border measures, and maintain that their imposition could lead to trade friction and impede agreement on a globally coordinated post-Kyoto Protocol emissions reduction accord.

In the meantime, the continuing debate about the form and timing of possible U.S. border measures spells uncertainty for both U.S. manufacturers of emissions-intensive goods and importers of like goods produced abroad.

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