As the debate on climate change legislation moves forward,
Members of Congress are diligently carving out exceptions and
special benefits> for favored groups of voters. Of course, higher
energy costs will hurt all of their constituents, but Members are
working hard to soften the blow for those whose political support
they enjoy or need.
Of singular concern is ensuring that U.S. firms hurt by the
higher energy costs that Congress itself mandates will face minimal
competition from foreign companies not hamstrung by similar
domestic policy constraints. Knowing that the costs associated with
cap and trade will send hard-pressed U.S. consumers and producers
to lower-priced imports, some legislators seem keen on trade
barriers as the easy solution--thereby raising the costs of foreign
products and making them less competitive in the U.S. marketplace.
For these legislators, the potential risks of global warming trump
all other policy concerns, including the long-term prosperity of
Americans. From their point of view, if protectionism in U.S. cap
and trade becomes the standard for other countries to follow--or
ignites a trade war with countries refusing to trade economic
growth for curbs on emissions--all the better.
Lower Economic Growth: A Desirable
Despite the sentiments of certain Member of Congress, the
question remains: Is protectionism via cap and trade truly
For more than six decades, tariffs and non-tariff barriers
against international trade have been falling around the world,
enabling more and more countries to enter global markets, grow, and
prosper. Reversing that progress in an attempt to lower greenhouse
gas emissions will lead to a contraction of international trade
that will leave everyone worse off.
Such a contraction of world economic activity may well be the
key goal of the environmentalist movement, which sometimes measures
progress not in terms of economic growth but rather in its absence.
Unfortunately, fewer opportunities to trade will result in lower
economic growth rates and rising poverty--reversing the development
gains seen in even some of the world's poorest countries.
Some U.S. companies will, of course, welcome barriers against
trade. Businesses whose profitability will have been destroyed by
new climate change regulations will no doubt find it hard to
compete against foreign rivals whose governments have opted against
environmental policy restraints.
The cost of such barriers, unfortunately, will be borne by
America's families and businesses. Trade is a mainstay of the U.S.
economy, accounting for about a third of U.S. GDP and underpinning
about 40 percent of U.S. jobs. Even in the face of global
recession, the U.S. remains the world's top exporter of goods and
services--a position that would be lost as key trade partners adopt
similar trade restrictions against U.S. made goods.
Managing Trade through Climate
For the advocates of climate change legislation, trade-related
measures are considered the best method to counteract the loss of
competitiveness that such environmental regulations would impose on
U.S. businesses. Such protectionist measures would then compel
other countries to adopt similar climate regimes--or so such
In addition to explicit tariffs or quotas on imports from
countries without comparable environmental restrictions, other
policy mechanisms designed to compensate partially for the cost of
carbon controls on U.S. firms could be enacted, such as free or
discounted emissions allowances, tax credits, subsidies, and
government loan guarantees.
All of these measures would raise costs for American consumers
and further hurt the competitiveness of U.S. exporters who depend,
as many do, on imports of raw materials or intermediate goods in
manufacturing their finished products.
The idea that punitive trade measures against carbon-intensive
products would motivate countries to implement carbon restrictions
depends critically 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
More problematic--because production processes, energy sources,
and capital stock vary by country, industry, and even by
product--is the fact that the information needed to accurately tax
imports for carbon content would be very difficult to obtain. The
most likely result is the imposition of a more bureaucratically
feasible one-size-fits-all approach to pricing 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, reducing the
incentive to better internalize the cost of carbon in traded
Moreover, energy standards and regulations may run up against
trade rules that dictate that domestic and foreign firms should be
treated identically. Such rules may also create technical barriers
to trade disallowed under World Trade Organization (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.
Increasing Environmental Risk
The gains from trade include economic growth and rising incomes
in all countries. For developing countries--those that 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 rather than reduce
Historically, as a nation's prosperity increases, the
desire--and more importantly, the resources available--to adopt
environmental protections become stronger, resulting in policies
that accommodate the individual needs of the country. In contrast,
economic contraction drives families, business, and governments
into survival mode, where the value of human life takes precedence
over the luxury of capping emissions. Engaging in freer trade is a
fundamental part of a strategy to better promote the evolution of
sensible environmental regulations by empowering countries with the
economic opportunity to develop and raise living standards.
Climate Legislation Should Not Limit
Trade measures in carbon control legislation may appear
necessary for protecting U.S. competitiveness and promoting broader
international participation in such schemes. However, such measures
will likely only create a more hostile trade environment that costs
U.S. firms access to global markets. Even if countries do not
follow America's lead on limiting trade in their own climate
machinations or file complaints within the WTO or even resort to
outright retaliation against America for raising trade barriers,
protectionism cannot guarantee a cleaner environment.
One part of the real solution to reconciling international trade
and environmental policies--finding a multilateral consensus within
the WTO to lowering trade 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 relying on prohibitive trade measures to mitigate
the cost of cap and trade on the U.S. economy, policymakers 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 the U.S. and around the
Markheim is Jay Van Andel Senior Trade Policy Analyst in
the Center for International Trade and Economics at The Heritage
Trevor Houser et al., Leveling the
Carbon Playing Field: International Competition and U.S. Climate
Policy Design (Washington: Peterson Institute for International
Economics, 2008), p. 34.