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Trade restrictions in the Waxman-Markey Bill

This post at the East Asia Forum clarified many things for me about the trade implications of the Waxman-Markey Clean Energy Bill.  Very useful.

I will try to set out the main policy rules and comment on them – these are important since they provide a coherent model others will probably emulate. My comments below are ( more than usually) subject to revision.

US exporters will get free carbon allowances – in the form of rebated charges- for 2012-2025 but these rebates will phase out from 2025-2035.  This means that local firms then gain an increased price if they divert their outputs internationally. It is something like an export subsidy in its effect and will– at least if industries are competitive – raise local prices by the full extent of the implied carbon charge.

Under certain conditions US producers of finished goods could also get rebates if producers petition for coverage and EPA determines they meet statutory criteria and should be covered. This seems to open up a can of worms if this includes producers of non-traded goods.

US importers will be subject to an international reserve allowance from 2020. The EPA would create a pool of international reserve allowances separate from the allowances domestic entities must use to comply with their cap-and-trade obligations, and sell the international reserve allowances at the same price at which the domestic allowances are offered for sale. Imports that must purchase such allowances shall be 85% sourced from countries for which it is not true that:

The country has an emissions reduction commitment as stringent as in the US or the country and the US are parties to a sectoral international agreement or the energy or carbon intensity of the sector is less than in the US.

There is an exemption from this provision if the country is listed by the UN as a ‘least developed’ developing country; or the country is responsible for less than 0.5% of global emissions and 5% of imports of covered goods with respect to the eligible sector.

This is an interesting provision. It does not target the specific carbon regulation that a product is subject to but the general level of emissions control in the economy. Incidentally as the US will exempt its own exporters by giving them free carbon allowances – why won’t other countries do the same raising competitiveness concerns in the US?

Quote from the post: “But EPA must adjust to as low as zero the international reserve allowance requirement for a sector to account for the benefit to that sector of free allowances to electricity providers and rebates to industrial sectors”. That doesn’t sound right – if anything you would increase this allowance at least for imports.

The post cites Marty McBroom, an executive of a large US electricity producing firm,  providing testimony to a US House of Representatives Subcommittee on carbon leakages as providing a background to this proposal.

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