Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Energy Cap and Trade Likely to Increase Tariffs

The American Clean Energy and Security Act, H.R. 2454, is awaiting action in the U.S. Senate. Certainly, seeking to clean up the environment is a good and proper goal. But is this bill, as proposed, the way to accomplish that aim? From an international perspective, the stated policy of the bill is: "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 greenhouse gas-emitting nations to contribute equitably to the reduction of global greenhouse gas emissions." Upon enactment, the bill directs the President to notify all trading partners which products are not exempt. The notification is to include a request that a given trading-partner country take appropriate measures to limit greenhouse gases, and to caution that, starting January 2020, international reserve standards take effect for "covered" goods; see below for more details.

The bill makes clear the United States sees the ultimate solution coming from an internationally binding agreement, but also provides that competitive imbalances are to be recognized and addressed, including remedies for noncompliance.

The EPA Administrator, with the concurrence of the Commissioner of Customs and Border Protection, is to issue regulations establishing an international reserve allowance for the sale, exchange, purchase, transfer, and banking of international reserve allowances for covered goods in eligible industrial sectors. Trading is to be governed by the auction clearing price, establishing a methodology an importer is to use to calculate the amount of the international reserve allowance needed for his covered/imported goods, and then tendering the needed international reserve allowances for his covered/imported goods. There are to be exemptions granted for goods originating in a country determined to be in compliance with its greenhouse gas reduction obligations, or from a least developed country, or any foreign country the President has determined to be responsible for less than 0.5% of total greenhouse gas emissions and less than 5% of U.S. imports of covered goods in eligible industries. The EPA Administrator is also to specify the procedures Customs will use at time of entry declaration and establish procedures to prevent and combat circumvention.

The list of eligible industrial sectors is to be published by the EPA Administrator no later than June 30, 2011, and is to include the amount of emission allowance rebate per unit of production. Updated versions of the list are to be published every four (4) years starting February 1, 2013. The list will identify industries based on the 6-digit NAICS (North American Industry Classification System; see

Emission allowances will be distributed yearly on a per-sector basis. Starting in 2026, the total allowances will be 90%, dropping to zero in 2035. These distributions may be altered by Presidential action. Iron, steel, metal, soda, ash, and phosphate are mentioned as being in many different industries and should not be lumped together.

Long-polluting industries, such as power plants, factories, and oil refineries, will have their emissions limited. Fossil fuels will be similarly discouraged through regulations and taxes. Energy-efficient industries, such as geothermal, wind, and solar, will be subsidized. In a nutshell, the government sets a cap on the total carbon that may be emitted, and then companies buy and sell permits to emit CO2. The Congressional Budget Office (CBO) put the cost of such a permit at $28 per ton of carbon, but that was in year 2020 only, the first year, and the restrictions increase over time. The expectation is the per-ton permit fee will rise dramatically as time progresses and the quantities allowed are dramatically reduced. The CBO also acknowledged in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

As the June 26, 2009, online Wall Street Journal put it: "The hit to [gross domestic product] is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result."

 

The bill is now in the Senate, and is being championed by Barbara Boxer, D-CA. Interestingly, the Senate has removed the details related to border measures, replacing it with a place holder – a sentence saying there will be border controls consistent with international obligations. While a good and noble goal, is this the right way to fix the climate problems, especially given the tough economic times we are facing? True, much of the pain of this bill is put off until later years, but that is exactly the point. No one is able to accurately calculate the real costs. Little attention has been given to which states or regions will be the hardest hit. Some have suggested the bill is WTO-compliant as environmental issues are recognized as exempt from national treatment, but is this the right way to proceed? What do you think?

NAICS Home Page for more details) industry coding. Eligible industries will be those that have an energy intensity of at least 5% based on a proscribed formula having to do with purchases of electricity and fuel costs, as well as a greenhouse gas intensity of at least 5% determined by a formula that considers a number of factors, including carbon dioxide equivalents and the value of the shipments in the industry. As shipment values will be derived from the data published by the International Trade Commission, it becomes ever more important that goods be properly declared at time of entry.

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