Fiona Harvey US carbon cap-and-trade – more data on its effects

The Pew Center on Global Climate Change has become the latest organisation to wade into the murky waters of the Waxman-Markey bill, the proposed legislation that would introduce a cap-and-trade system for carbon dioxide in the US.

The Pew Center’s analysis suggests that the impact of a cap-and-trade programme on energy-intensive manufacturers would be small. The analysts based their study on an examination of historical trends among energy-intensive manufacturing industries, using 20 years of data on 400 energy-intensive subsectors.

They found that energy-intensive manufacturing industries would on average lose only 1 per cent of their annual production to imports, if a carbon price of $15 per tonne was assumed, and if there was no carbon price in other countries.

(That $15 figure comes from projections of the carbon price under Waxman-Markey produced by the U.S. Energy Information Administration and Environmental Protection Agency.)

Such a small impact could easily be addressed through policies targeted to energy-intensive sectors, the authors of the report said, including straightforward compensation or more complex border adjustment measures (tariffs) for imported energy-intensive goods.

Eileen Claussen, president of the Pew Center, said the analysis showed the impacts would be “very modest and very manageable”. She said: “The bottom line is that fear of competitive harm should not stand as an obstacle to strong climate policy.”

The report was written by economists Joseph E. Aldy and William A. Pizer, who were affiliated with Resources for the Future, a think tank in Washington, DC, at the time the analysis was undertaken. Both have since taken positions in the federal government.
For US manufacturing as a whole, the Pew Center analysis estimates an average production decline of 1.3 per cent, and a decline in consumption of 0.6 per cent, which the authors say suggests only a 0.7 per cent shift in production overseas. For energy-intensive industries (those with energy costs exceeding 10 per cent of shipment value), output and consumption are projected to decline 4 percent and 3 per cent, respectively, suggesting a 1 per cent shift in production.
The Pew report estimates a “competitiveness” impact of 0.6 per cent for bulk glass; 0.7 per cent for aluminum and cement; 0.8 percent for iron and steel; and 0.9 per cent for paper and industrial chemicals.

Carbon leakage – companies or manufacturing activity moving abroad to avoid a carbon price – is a big fear for legislators looking at cap-and-trade systems. But there is now a large body of work, including work done by the OECD, that suggests the impact is small in reality.