Obama Criticises Border Tax Adjustments in House Climate Bill

1 July 2009

US President Barack Obama is pushing back against provisions in an important energy and climate bill passed by the House of Representatives that would levy extra import charges on goods from countries that fail to cap greenhouse gas emissions.

Obama called the bill, which the House approved by a narrow 219-212 margin on 26 June, "an extraordinary first step," pointing to its framework for a cap-and-trade scheme for emissions, commitment to energy efficiency and renewables, and incentives for research and development in clean-energy technologies.

But he criticised the bill's clauses, added just hours before the vote, for ‘border tax adjustments' - in effect, tariffs - to penalise certain goods from countries that are not actively limiting greenhouse gas emissions.

"At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there," the president told reporters in the Oval Office on Sunday, according to the New York Times.

Obama recognised "a legitimate concern on the part of American businesses that they are not disadvantaged vis-a-vis their global competitors" because of higher energy costs. He noted, however, that the legislation already had various kinds of transitional assistance for energy-intensive industries even before the border tax adjustment provisions were reinserted.

Furthermore, he observed that European industry faced sharper emissions curbs, and that even China - the top target of the proposed tariffs - had been moving towards a "clean energy approach," and had already surpassed the US on fuel efficiency standards.

"I am very mindful of wanting to make sure that there's a level playing field internationally," Obama said. "I think there may be other ways of doing it than with a tariff approach."

Opposition to the proposed unilateral border tax adjustments is the latest sign that Obama, as president, is stepping away from the protectionist rhetoric he sometimes used on the campaign trail last year.

The border measures in the energy bill (called the Waxman-Markey bill after its sponsors) go further than similar policies in an earlier version of the legislation. They would require importers of heavily-traded energy-intensive products to purchase emissions allowances, a measure that is tantamount to a tariff.

Notably, the new provisions appear to make tariff penalties the rule, rather than the exception - a significant shift from the previous version of the bill that allowed the president several options if a sector of domestic industry suffered a measurable decline in competitiveness. To prevent the border measures from kicking in, Congress would have to formally approve a presidential declaration that border measures are not in the "national economic interest."

According to Robert Heilmayr, a research analyst at the World Resources Institute in Washington, the sectors that meet the criteria for energy intensity and trade exposure - making them subject to the tax -  include chemicals, iron and steel, cement, glass, lime, some pulp and paper products, and non-ferrous metals such as aluminum and copper.

The policy specifically aims at large developing country emitters like China, Brazil, and India. Most developed countries have binding emissions reduction commitments, or are expected to agree to them in the context of a successor agreement to the Kyoto Protocol. And exports from the least-developed countries would be excluded from the extra charges, as would those from states accounting for below 0.5 percent of global emissions (as long as they account for less than 5 percent of US imports in the sector in question).

Other circumstances under which the imports would be free from the extra charges include: if the greenhouse gas or energy intensity of the sector in the exporting country is equal to or lower than that of its US competitors, or if 85 percent of US imports of the product come from countries with binding emissions reduction targets (or lower energy intensity).

A rebate provision in the Waxman-Markey bill also presents a potential trade irritant. Under the provision, trade-exposed energy-intensive industries would receive rebates for the costs of complying with the climate change legislation. These rebates, which would be in the form of emissions allowances, would be given to companies based on their output. The problem is that the value of these allowances would be calculated using the average compliance costs for the sector as a whole. As a result, the most efficient plants, those that need the least carbon emissions to produce, say, a tonne of steel, could find themselves over-compensated for their compliance costs. Foreign competitors might argue that such ‘over-allocation' constitutes a subsidy.

These rebates are acknowledged in the bill's rules for border measures: The administrator of the border tax adjustment scheme is required to reduce extra charges on imports - even to zero - to offset the output-based allowances received by competing domestic industry.

The last-minute revisions to the bill also altered the objectives for US negotiators in the ongoing UN climate change talks, requiring them to "address the competitive imbalances that may be created in domestic and export markets" between countries that have and have not taken what are deemed to be adequate climate change measures. Provisions governing border measures would also be sought. Governments will meet in Copenhagen, Denmark at the end of the year to attempt to hammer out a successor to the Kyoto Protocol, which will expire in 2012.

Experts caution against unilateral import tariffs

Influential sections of US industry have lobbied hard for climate legislation to include border measures, citing competitiveness concerns, the need to encourage large developing country emitters to adopt  binding emissions targets, and fears of ‘carbon leakage', in which firms would simply relocate to jurisdictions with fewer carbon restrictions, leaving global emissions unaffected or even increased. (See Bridges Trade BioRes, 20 March 2009, https://www.ictsd.org/bridges-news/biores/news/call-for-tariffs-intensifies-as-cap-and-trade-hits-us-agenda and, 17 April 2009, https://www.ictsd.org/bridges-news/biores/news/kirk-moves-to-quell-concern-over-carbon-border-tax).

The border tax adjustment provisions helped secure support for the bill from some industrial state lawmakers anxious about further job losses in the manufacturing sector. Michigan Democrat Sander Levin, who chairs the House subcommittee on trade, supported the tariff penalties, arguing that they were necessary to prevent US industry from being placed at a competitive disadvantage. In the absence of an international agreement, he said, "this legislation ensures that the United States will avoid carbon leakage in its energy intensive and trade sensitive industries."

But many trade experts fear that unilaterally imposed border measures would have minor effects on emissions, but carry the risk of sparking damaging trade wars, ultimately hurting US exports, too.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, told the House subcommittee on energy and air quality in March that in the absence of broad multilateral action, trade measures would have limited success at addressing competitiveness concerns and emissions leakage. Import restrictions imposed by the US in the name of climate change, he warned, would likely elicit comparable retaliation by other countries.

He said that outside a multilateral context, it would be impossible to avoid a plethora of distinct mechanisms for border taxes and comparability, resulting in "drawn out trade skirmishes and even trade wars."

Hufbauer argued that the US should "make an exceptional effort to negotiate agreed international rules before blocking imports or penalising foreign GHG control measures."

According to Hufbauer, an inability to avoid the creation of unique brands of import bans, border taxes, and comparability mechanisms could result in "drawn-out trade skirmishes and even trade wars."

Long road ahead for bill to become law

The narrow House vote presages the struggle ahead for climate legislation to become law.

Not least among the challenges will come when the Senate drafts legislation. A number of Democratic senators remain unconvinced about the merits of a cap-and-trade system. Many Republicans are violently opposed to what they view as a massive tax increase.

The border tax adjustments, too, are divisive. Sherrod Brown, the Ohio senator who is one of the chamber's most vocal trade sceptics, thinks that they do not go far enough to protect domestic industry. Republican Senator Charles Grassley has criticized the bill's potential violation of WTO rules (he would prefer that the Senate wait until there is an international climate agreement before taking any action on climate change, not just on border measures).

Some environmental advocates - as well as some members of Congress - will push for stricter pollution controls in any Senate legislation. They fear that the compromises made to secure the passage of the climate bill in the House would undermine its effectiveness at meeting its stated goal: cutting most emissions to 17 percent below 2005 levels by 2020.

The bill was peppered with exceptions giving free emissions allowances to a swathe of polluting industries, such as coal-reliant power utility companies. President Obama had originally proposed that all allowances should be auctioned off, raising revenue and putting more pressure on businesses to change practices; instead, more than 70 percent of the allowances would be given away for a time period.

Meanwhile, a variety of business groups want pollution restrictions to be relaxed further.

BTAs and the WTO

The WTO compatibility of border measures linked to climate change policies is the subject of heated debate among trade lawyers.

Some argue that appropriately-designed tax adjustments could meet the requirements of multilateral trade rules. A recent joint analytical review of the relationship between trade and climate change by the WTO and the United Nations Environment Programme surveys the various arguments (see related story, this issue).

Articles II and III of the General Agreement on Tariffs and Trade (GATT), for instance, allow WTO members to impose charges on imported products equivalent to internal taxes and "other internal charges." Indeed, border adjustments are commonly used for sales taxes to level the playing field between taxed domestic manufacturers and untaxed foreign competitors. But taxes are easy to quantify, while it is difficult to assess the quantity of carbon emissions resulting from the production of a particular good. Could carbon taxes or higher energy costs linked to a cap-and-trade system qualify for a similar adjustment?

Even if a border measure were inconsistent with core GATT rules, it might still be justifiable under Article XX. This article sets out the conditions under which WTO Members can restrict trade: if doing is necessary to protect human, animal, or plant life or health (XX(b)), or conserve exhaustible natural resources (XX(g)). However, a government would have to be able to demonstrate that its border tax adjustment policy is neither applied in a discriminatory manner nor a "disguised restriction" on international trade. It would also have to show that the measure is being applied squarely to avoid ‘leakage', rather than to offset competitive concerns.

Climate change policies have never been challenged in the WTO dispute settlement system. A WTO case against a country's unilaterally-imposed border tax adjustments would undoubtedly be long and controversial.

Global climate action is the only durable solution to the competitiveness problem, says Michael A. Levi, director of the energy security and climate change programme at the Council on Foreign Relations. As a result, it is important for US lawmakers working on climate policy to take pains not to alienate other countries.

"Progress on the international front will depend mainly on cooperative action," he wrote in a statement on the Council's website. "Congress should make sure that in crafting US climate legislation, its trade measures don't unnecessarily aggravate the external relationships that will be needed to get that done."

ICTSD reporting; "Climate Change: Competitiveness Concerns and Prospects. Testimony before the Subcommittee on Energy and Air Quality, US House of Representatives, Committee on Energy and Commerce," PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, 5 March 2008; "U.S. Climate Change Legislation and the Use of GATT Article XX to Justify a "Competitiveness Provision" in the Wake of Brazil-Tyre," INTERNATIONAL TRADE REVIEW, 2008; "Climate Plan Faces Challenge after Narrow US House Victory," BLOOMBERG, 29 June 2009; "Obama Opposes Trade Sanctions in Climate Bill," NEW YORK TIMES, 28 June 2008.

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