Regardless of the scientific merit behind doomsday predictions
of global warming, President Obama and Congress seem intent on
instituting a U.S. policy regime to address the specter of climate
The debate on the most effective way to "green"
America--cap-and-trade, carbon taxes, tough energy standards and
regulations, some hybrid approach, or sticking to open
markets--will be a heated one. With affordable green technologies
still in development, policymakers need to recognize that the
economic cost of limiting U.S. production of greenhouse gases on
U.S. consumers and companies will be high--high enough to question
whether the costs are worth the equally uncertain benefits such
measures would bring.
Costs and Benefits
The projected cost of a climate scheme on the U.S.
economy--evidenced from Europe's problematic climate program and
the Kyoto Protocol's failure to affect emissions in signatory
nations--illustrate how difficult it is for governments to impose
binding climate restrictions without undermining economic growth.
If Congress and the President do embark on such a potentially
treacherous course, households and firms will face much higher
costs for energy and energy-intensive goods, categories that
include virtually every product in our economy. Hard-pressed U.S.
consumers and producers will find no relief from artificially
inflated prices by turning to lower-cost imports, as the climate
change zealots propose to erect trade barriers to raise the costs
of foreign products produced under less severe environmental policy
Some U.S. companies and policymakers may find it fair for the
government to prop up domestic businesses, whose profitability will
have been destroyed by new climate change regulations, against
foreign competitors whose governments have chosen to be less
draconian. America's trade partners are unlikely to agree.
Many such trade restrictions could violate World Trade
Organization (WTO) rules and lead to legal sanctions against the
U.S. Even if some of the proposed measures hold up against legal
scrutiny in the WTO, the potential for nations to retaliate against
U.S. trade measures is very real. Any U.S. restrictions, whether
consistent with WTO agreements or not, would undermine development
in poorer countries and make it more difficult to achieve a
multilateral consensus on the rules of trade that best support
When all these negative effects are taken into account, it is
clear that the adoption of protectionist polices as a part of a
U.S. climate regime does far more harm than good and should be
Climate Legislation and Trade
With little substantive progress in establishing a consensus on
global climate policy and developing countries (especially India
and China) unwilling to adopt greenhouse gas restrictions that will
undermine their economic development, U.S. policymakers are faced
with the possibility that companies facing higher costs under
unilateral climate restrictions will find it much harder to compete
with foreign competitors with lower business costs. Consequently,
American firms may fail or may take their jobs and flee to
countries with less costly business environments.
While such productivity-boosting moves are good for the U.S.
economy in the long run, they can impose short-term costs on
specific firms and individuals and are a political lightening rod.
Unfortunately for those who would attempt to control global
climate, such measures also undermine any impact U.S. greenhouse
gas restrictions might have on reducing global levels of
For the advocates of climate change legislation, trade-related
measures can potentially counteract the loss of competitiveness
that such environmental regulations impose on U.S. businesses and,
in theory, compel other countries to adopt similar climate
Tax credits, subsidies, government loan guarantees, and other
policy mechanisms designed to compensate partially for the cost of
carbon controls on U.S. firms would then work hand in hand with
more explicit tariffs or quotas on imports from countries without
comparable environmental restrictions.
The idea that punitive trade measures against carbon-intensive
products would motivate countries to implement carbon restrictions
depends on the ability to measure carbon intensity in imports and
on the level of trade that would be affected by U.S. policy.
Countries may not export enough carbon-intensive products to the
U.S. for trade measures to drive nations to adopt carbon
restrictions. More problematic, because production processes,
energy sources, and capital stock vary by country, industry, and
even by product, the information needed to accurately tax imports
for carbon content would be very difficult to obtain.
Therefore, the most likely result is the imposition of a more
bureaucratically feasible one-size-fits-all approach to taxing
carbon-intensive products at the border. Unfortunately, such an
approach has the perverse effect of penalizing clean foreign
producers, who may have higher costs, at the expense of dirtier
ones while reducing the incentive to better internalize the cost of
carbon in traded goods.
Moreover, energy standards and regulations may run up against
trade rules that dictate that domestic and foreign firms should be
treated identically and may create technical barriers to trade
disallowed under WTO agreements. Punitive trade measures, direct
subsidies, tax credits, government loans, and other government
support programs could violate WTO rules against subsidies and
countervailing duties. Trade measures that treat countries
differently undermine the non-discriminatory basis for global trade
that has helped promote prosperity around the world.
The gains from trade include economic growth and rising incomes
in all countries. For developing countries--which would likely be
hardest hit by trade restrictions in climate legislation--the
economic stress will be particularly great. This, perversely, will
likely increase the harm done to the environment: Economic growth
increases the ability for developing countries to afford protecting
Historically, as a nation's prosperity increases, its
desire--and more importantly, the resources available--to adopt
environmental protections become stronger and result in policies
that accommodate the individual needs of the country. Engaging in
freer trade can better promote the evolution of good regulations by
empowering countries with the economic opportunity to develop and
raise living standards.
Markets Work, Protectionism
Trade measures in carbon-control legislation may appear
necessary for protecting U.S. competitiveness and promoting broader
international participation in such schemes. However, in reality,
such measures will likely create a more hostile trade environment
that costs U.S. firms access to global markets.
Even if countries do not file complaints within the WTO or
resort to outright retaliation against America for raising trade
barriers, protectionism cannot guarantee a cleaner environment.
Current efforts to find a multilateral consensus within the WTO on
lowering trade and non-tariff barriers against trade in clean
technologies will be more difficult as climate-related trade
disputes rise. Worst of all, the general contraction in trade that
protectionism would induce will only make developing countries
poorer and less willing and able to address environmental
Rather than using trade policy as a weapon, America should keep
markets open. Policymakers--regardless of the shape of any final
climate bill--should maintain the integrity and freedom of global
markets as a means to transfer clean technologies, keep
international investment flowing, and promote economic growth and
prosperity in the U.S. and around the world.
Daniella Markheim is Jay Van Andel
Senior Trade Policy Analyst in the Center for International Trade
and Economics at The Heritage Foundation.
William W. Beach, David W. Kreutzer, Ben
Lieberman, and Nicolas D. Loris, "The Economic Costs of the
Lieberman-Warner Climate Change Legislation," Heritage Foundation
Center for Data Analysis Report No. 08-02, May 12, 2008, at
Environment/cda08-02.cfm; Open Europe, "Europe's Dirty
Secret: Why the EU Emissions Trading Scheme Isn't Working," August
2007, at /static/reportimages/A0CF005351BBA4C48310237F8C64F302.pdf
(April 19, 2009); European Environment Agency, "Greenhouse Gas
Emissions Trends and Projections in Europe 2008," October 2008, at
/eea_report_2008_5 (April 20, 2009).
Trevor Houser, Rob Bradley, Britt Childs, Jacob
Werksman, and Robert Heilmayr, Leveling the Carbon Playing
Field: International Competition and U.S. Climate Policy Design
(Washington, D.C.: Peterson Institute for International Economics,
2008), p. 34.