Policymakers have many questions relating to the economic opportunities and costs of climate legislation like the American Power Act, proposed last month by Senators Kerry and Lieberman. What are the concrete economic benefits of a climate bill? Where would new “green” jobs be created? What would the bill mean for the competitiveness of U.S industry? How can domestic legislation contain “emissions leakage,” which could occur if industries relocate to countries with weaker greenhouse gas regulations and as a result, simply shift global emissions instead of reducing them?
Three years ago, WRI and the Peterson Institute for International Economics (PIIE) formed a research partnership to help answer these questions. To continue the discussion, they convened a roundtable of key players – including congressional staffers, administration officials, and representatives of industry, organized labor, think tanks and NGOs – on May 7th.
The takeaways from this event were clear: the United States is falling behind in the clean energy revolution. Workshop participants agreed that the country needs a price on greenhouse gas emissions and that a bill must combine environmental protection with support for vulnerable industries. Without comprehensive climate policy, the country stands to lose green jobs and long-term competitive advantages that would come from increased energy efficiency and a strong domestic market for clean energy technologies. The following reflects the discussion at the workshop, much of which centered on what a transition to a low carbon economy would look like.
The Path to Clean Energy, Good Jobs, Economic Growth:
Any analysis of the economic impacts of climate and energy legislation must consider the opportunities for job and competitiveness gains for the economy overall. Under a climate bill, job growth would occur primarily in the energy efficiency and renewable energy sectors, but there are additional benefits that would touch almost all Americans. Analysis (PDF) by the American Council for an Energy-Efficient Economy of the House-passed Waxman-Markey bill found cost savings from economy-wide energy efficiency would lead to an average net energy spending reduction of $354 per household and an increase of nearly 425,000 jobs by 2030.
Renewable energy technologies also have the potential to create good jobs in the U.S., but American industry currently lacks the incentives to invest in these areas. Recent WRI and Peterson Institute working papers found that both the wind and solar industries have grown in recent years in countries where there is predictable, long-term policy support. A Center for American Progress report (PDF) also found that China, Germany and Spain have been able to take the lead in clean energy through a comprehensive policy approach.
While government support is a main driver of renewable energy deployment, “Buy American” provisions for clean energy projects are not always beneficial for domestic job growth. For example, leading wind industry executives have pointed out that requiring all locally manufactured components could lead to slower growth of local clean technology industries and fewer US jobs.
According to recent research by WRI and PIIE, even without local content requirements, the majority of jobs in these industries are created locally and not easily moved overseas. This phenomenon is most prevalent in the wind industry because its infrastructure is difficult to transport, encouraging the creation of regional production hubs. For example, state policies that require electric utilities to develop renewable electricity sources have attracted international turbine manufacturers and other suppliers to locate facilities in Colorado and Pennsylvania to serve the growing U.S. wind market. And while the solar industry has a more globalized value chain, most jobs along this chain are in system design, planning, installation and operations – activities that inherently happen close to the installation site.
The Waxman-Markey bill and pending Senate legislation include several provisions based on what states like Colorado and Pennsylvania have done to attract investment in the clean energy sector. American job growth in this area depends on a thriving clean technology industry. Climate legislation can achieve this by creating local market demand through setting national standards for new buildings and appliances, providing financing for R&D and strengthening the infrastructure necessary for a clean energy revolution. Most importantly, a cap-and-trade system for domestic emissions like that in Waxman-Markey and Kerry-Lieberman will put in place a long-term price signal on the cost of carbon pollution. This will give U.S. industry the incentive to heavily invest in clean energy, realize economies of scale and efficiency gains, and create thousands of new “green” jobs.
Easing the Transition to a Low Carbon Economy:
The first step towards addressing concerns about the competitiveness of energy-intensive industries and the risk of emissions leakage question is understanding the scale of the problem. In 2008 WRI and PIIE published Leveling the Carbon Playing Field, a report that assessed which sectors of the economy would be at a significant international competitive disadvantage under a cap-and-trade system and how that could lead to declining market share, industry relocation and leakage. The report demonstrated that negative impacts are limited to a discrete set of energy intensive industries that are also heavily traded internationally (like producers of steel, glass, basic chemicals, pulp and paper), known as emissions-intensive, trade-exposed (EITE) industries. These industries account for 3 percent of the country’s economic output and less than 2 percent of nationwide employment.
Because competitiveness and leakage concerns are limited to a small, specific set of sectors, targeted measures to ease the burden on these sectors can effectively address the problem. For example, these vulnerable EITE sectors could receive a rebate in the form of free emission allowances to offset the cost increase. This strategy to reduce the threat of leakage was included in the Waxman-Markey legislation that the House passed in June, 2009 and garnered support from several industrial manufacturers, organized labor and environmental NGOs. The Kerry-Lieberman proposal and the European Union’s cap-and-trade system take the same approach.
The U.S. Interagency Report (PDF), released by the Obama Administration in December 2009, found that the House rebate provisions would effectively encourage industry to become more efficient while ensuring that eligible EITE industrial sectors would face no significant risk of emissions leakage. Furthermore, allowance provisions would likely be sufficient to eliminate leakage risks for at least the first 10 years of the program, and potentially well past 2030. Kerry-Lieberman sets aside even more allowances to provide rebates for the same purpose.
Trade Measures to Maintain Competitiveness and Reduce Leakage:
Another method of addressing leakage, proposed in both Waxman-Markey and Kerry-Lieberman, is to levy a duty at the border on EITE imports from countries that lack comparable emissions reductions requirements. Though it has been divisive among policymakers and industry, labor union representatives have championed a border tax (PDF) as necessary to protect against the loss of domestic jobs. As a result, such measures are seen by those involved in crafting U.S. climate legislation as part of the price of passage, though not necessarily as the optimal solution.
A multilateral, harmonized solution to competitiveness and leakage would be preferable to unilaterally imposed trade measures. Ideally, negotiations would lead to an international agreement on specified levels of emissions reductions for each country and provisions to explicitly minimize leakage. In the lead-up to last year’s climate conference in Copenhagen, all major economies announced significant commitments to reduce emissions. This illustrates that attention has shifted toward national governments developing their own climate action plans, making analysis sector by sector and country by country necessary until an international agreement is struck.
Pending federal legislation includes border measures as a fall-back option after 2020, in case no multilateral agreements are in place as transitional allowance rebates phase down. Still, policymakers face the difficult challenge of designing policy that effectively prevents emissions leakage and protects US jobs without being overtly protectionist, and targets certain countries without being discriminatory. Ultimately, many observers (PDF) caution against border taxes – because they are perceived as unfair by developing countries, have created conflict in the ongoing international climate talks and are also potentially illegal under WTO rules.
While supporters of a climate and energy bill argue that it would create American jobs and benefit the overall economy, detractors cite competitiveness and leakage concerns as a reason not to implement domestic legislation. In fact, government and independent studies indicate that well-crafted, targeted policy can address both the potential risks and gains from legislation. Both Waxman-Markey and Kerry-Lieberman contain provisions to mitigate the negative impacts to a discrete set of actors while fostering job creation, efficiency gains and long-term certainty. The sooner Congress passes comprehensive climate policy, the sooner U.S. industry and government can begin building the road to a cleaner environment and stronger economy.