POLICY:

A plan to ease climate bill's impact on manufacturers

With climate legislation knocking at the door, American factory workers have every right to be shaking in their work boots.

The faltering economy continues to hurt employment in a sector that has already sent millions of jobs overseas. A price on carbon would put even more pressure on manufacturers, some of the biggest energy energy users in the country.

A report released today asserts that the government can deflect that pressure, thereby saving jobs and preventing offshoring, if it gives manufacturers emissions allowances to cope with the higher energy prices a cap-and-trade bill would cause.

"The interest here is, how do we maintain a viable industrial base that provides good, well-paid jobs and benefits while at the same time being competitive?" Joel Yudken, the study's lead author and a former policy analyst for the AFL-CIO, said in an interview.

In the report, entitled "Climate Policy and Energy-Intensive Manufacturing," Yudken and co-author Andrea Bassi forecast how a cap-and-trade bill would affect costs in several U.S. manufacturing industries, including steel, aluminum, paper and chemicals. The study was funded by the National Commission on Energy Policy, a group of industry, union and environmentalist stakeholders known for pursuing climate policies that stretch across party lines.

Free emission permits, for a time

The study's mathematical models found that the climate bill would indeed raise energy prices, saddling the iron and steel industry, for example, with 11 percent higher costs in 2030 than if there had been no carbon price.

With higher costs, manufacturers would become more exposed to the ruthlessness of global competition, which often results in steel and other manufactured goods coming from countries with low production costs. Making less profit for each unit they make in the United States, manufacturers could be tempted to shift production to countries without carbon caps, reducing U.S. employment but simply moving the source of greenhouse gas emissions.

The United States can avoid this path, Yudken and Bassi argue, if it gives the major manufacturing sectors free emissions permits under its cap-and-trade scheme.

Over time, the report said, the number of these free permits could be dialed down. In the meantime, manufacturers could set up efficiency technologies and devise new technologies that could reduce their costs to globally competitive levels -- without cutting wages, benefits or jobs.

These technologies "are something that [manufacturers] can't put in place right away, and therefore you would need to buy time for those industries, if you want them to maintain capacity in the United States," Yudken said.

A void in current legislation

It's unknown whether Congress will see it that way. Currently, the leading climate bill takes no firm stand on whether any industry, let alone manufacturing, will get free emissions permits.

While President Obama has supported a 100 percent auction of these permits -- meaning that no one is exempted from paying for emissions -- the draft bill from Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), the "American Clean Energy and Security Act of 2009," doesn't address the issue in detail.

It says U.S. manufacturers that make energy-intensive, highly tradable goods could get a rebate -- not a free emissions permit -- from the government to get their costs in line with those of international competitors.

Manufacturers have already vied for special attention from the government, not only because a climate bill would raise their energy costs but also because they want to start making low-carbon technologies for home use and export.

The report's authors, too, argued that keeping manufacturing in the United States should be a main goal of climate policy.

While the U.S. economy has been moving away from producing goods, instead trending toward services, Bassi said, the collapse of the financial sector shows that man cannot live on services alone. "You need to have a solid manufacturing base to be more resilient to economic volatility," he said.

Congress has been sympathetic. The Waxman-Markey proposal, like the bill sponsored by now-retired Sen. John Warner (R-Va.) and Sen. Joe Lieberman (I-Conn.) that failed in Congress last summer, includes the possibility of giving free allowances to certain sectors. Both bills also consider a "border tax" that would stick a tariff on goods coming from countries that don't regulate carbon.

In the Waxman-Markey case, the president would be allowed to set up a border tax program if the rebate program doesn't level U.S. manufacturers' costs with those of foreign competitors.

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