POLICY:

Cap and trade won't push heavy industries overseas -- study

The economic impact of a cap on greenhouse gases will be manageable for industries like aluminum and steel that consume massive amounts of energy, according to a report being released today from a nonpartisan research group.

Climate legislation similar to what is currently being considered in the House would not cause energy-intensive companies to move overseas en masse or lose major market share to foreign competitors operating in countries without global-warming regulations, the study from the Pew Center on Global Climate Change finds.

The greater financial hit for such businesses would come from consumers switching to lower-emission products, but that cost could be cushioned through policies such as direct rebates to heavy industries, according to the study.

“It is clear from this analysis that fear of competitive harm should not stand as an obstacle to strong climate change policy," said Eileen Claussen, president of the Pew Center.

Economists Joseph Aldy and William Pizer performed the assessment on behalf of the Pew Center before leaving the think tank Resources for the Future to serve in the Obama administration. Aldy is now an energy and environment aide to President Obama and Pizer is the deputy assistant secretary for environment and energy at the Treasury Department.

The study comes as lawmakers on the House Energy and Commerce Committee continue to hash out the language of draft climate legislation sponsored by Reps. Henry Waxman (D-Calif) and Edward Markey (D-Mass.).

Yesterday, House Democrats from the committee met with Obama at the White House to discuss sticking points in the plan.

Among the most contentious details to be filled in are how to fully ease any financial pain for heavy manufacturers like cement makers and paper producers, which are already scrambling to control greenhouse gases. The industrial sector accounts for about a third of U.S. carbon dioxide emissions, according to the Pew Center.

"We've reached the theoretical maximum in terms of what our industry can do with energy efficiency," said Kathy Mathers of the Fertilizer Institute about the industry's worries about additional carbon-cutting measures. "At this point, we're limited by the laws of chemistry."

During marathon hearings on the bill in April, several business leaders warned that a bill done the wrong way could shut down factories in the United States only to have them reopen in countries without parallel regulations. That simply would have the effect of transferring emissions from one place to the other, they said.

Some groups want to remedy the situation with a border tax penalizing countries with less stringent rules, but there are concerns that such an approach would create a trade fight with the World Trade Organization.

The Waxman-Markey approach addresses the situation by authorizing rebates to sectors using a lot of energy. Suggested changes to the bill from House Democrats go even further and call for industrial sectors to receive free allowances under a carbon trading system, rather than having to pay for them.

Study assumes regulation would yield a carbon price of $15 a ton

To examine the impact of looming climate regulations on industries like aluminum and steel, Aldy and Pizer examined the historical relationship between energy prices and their subsequent impact on employment, production and consumption in more than 400 manufacturing industries.

The two assumed a carbon allowance price of $15 per ton under a greenhouse gas emissions cap, a figure close to what U.S. EPA has estimated would occur in 2015 with the Waxman-Markey plan.

The authors then calculated the likely declines annually in both manufacturing production and consumer usage of energy-intensive products under such a price scenario. The two numbers were then used to calculate an overall "competitiveness" number for a sector estimating the likelihood of production shifts overseas.

Industrial chemicals, for example, would witness a 2.7 percent decline in production under the $15 per ton situation, and a 1.8 percent drop in consumption. The overall competitiveness number would be 0.9 percent. Paper, glass, iron and bulk glass followed a similar mathematical pattern.

Although the numbers show a downward trend for sectors gobbling a lot of electricity, the economic hits were modest and don't reflect potential subsidies like those present in the House bill, said Elliot Diringer, vice president for international strategies at the Pew Center.

Some industries would still see a move offshore

The Fertilizer Institute's Mathers questioned the validity of the study's findings, however. Unlike some energy-intensive products, there's not an obvious substitute for fertilizer, she said. Farmers need a stable amount, regardless of whether there's a price on carbon.

So most of the hit in that industry under global-warming regulation would come from a switch to imports, rather than from farmers switching to a lower-emission substitute, she said.

"A lot of our factories already have closed and moved offshore," she said.

Diringer acknowledged that there are some limitations to assigning competitiveness figures for multiple sectors across the economy.

The study also limited its findings to the near term of one to "a few years." Overall, though, it found that heavy industries on average would lose 1 percent of their annual production to imports, under the economists' model.

And unknown variables could make things even better than expected for industrial companies, Diringer said.

"If we develop alternative technologies quickly ... then that may lessen the impact significantly," he said.

Want to read more stories like this?

E&E is the leading source for comprehensive, daily coverage of environmental and energy politics and policy.

Click here to start a free trial to E&E -- the best way to track policy and markets.