Victory (Sorta): New Senate Energy Bill Ditches Carbon Tariffs

Senate Majority Leader Harry Reid (D-NV) released today the scaled-down version of the Democrats cap-and-trade energy green jobs "oil spill response" bill, and free traders should be pleased.  The bill summary is available here, and as you can see, there's nary a mention of carbon tariffs or any other euphemism (like "border adjustment" or "offset rebate" or "International Reserve Allowance") used to hide the nasty, trade-war-inducing measures in plain sight.  The new bill also lacks provisions on combating "carbon leakage" or "ensuring domestic competitiveness," which are really just backdoor ways of saying "attacking developing country imports."  So all in all, carbon tariffs appear dead in the United States for 2010.  Hooray.

That said - and I hate to be a party-pooper - there are still plenty of reasons for concern going forward.  Here are my top two:

First, the new Senate Bill doles out more federal subsidies for "green manufacturing."  In particular--

- Section 2004 requires the Secretary of Energy to promulgate an interim final rule establishing an infrastructure deployment program and a manufacturing development program. The Secretary of Energy is required to provide:

• Grants of up to $50,000 per unit to qualified refuelers for the installation of natural gas refueling property placed in service between 2011 and 2015; and 

• Grants in amounts determined to be appropriate by the Secretary to qualified manufacturers for research, development, and demonstration projects on engines with reduced emissions, improved performance, and lower cost.

- Section 2005 requires the Secretary of Energy to promulgate an interim final rule establishing a direct loan program to provide loans to qualified manufacturers to pay not more than 80 percent of the cost of reequipping, expanding, or establishing a facility in the United States that will be used for the purpose of producing any new qualified alternative fuel motor vehicle or any eligible component. $200 million would be

As I've discussed a few times (and fiscal insanity aside), tossing around billions of dollars in cheap loans and direct grants to domestic "green manufacturers," combined with intense administration efforts to increase exports of the subsidized green products, is a surefire way to cause trade disputes and eventual remedial tariffs on those goods.  So while the Senate Bill ends one very big source of trade friction (carbon tariffs), it still contains at least two other, admittedly smaller, ones.  Blech.

Second, and as I noted last year, the demise of any near-term legislative attempts to cap domestic carbon emissions and concurrently regulate imports of carbon-intensive products doesn't mean that the Obama administration will just stop trying to impose its green utopia on an increasingly unwilling American electorate.  Instead, the battle now turns to the EPA and its newfound powers to regulate carbon emissions under the Clean Air Act.  As I said back in December after the EPA's "endangerment" ruling was released:

The EPA's endangerment ruling does not authorize, or even contemplate, the imposition of carbon tariffs. It doesn't even establish the EPA's actual regulation of most GHG emissions or production of GHG-intensive goods (although that's certainly a viable ultimate result). Indeed, Monday's EPA ruling really does only two things: (i) deem GHGs to be harmful pollution capable of being regulated by the CAA; and (ii) lay the groundwork for the EPA's regulation of GHG emissions from new motor vehicles. So why should we be "very, very concerned" about the EPA pursuing eco-protectionism and all the nasty fallout that would result from that move?

Several things, actually.

First, EPA documents and rulings clearly indicate that the agency both looking into, and laying the groundwork for, some form of import regulation related to its new endangerment ruling. For example, in the EPA's July 2008 Advanced Notice of Proposed Rulemaking (a necessary precursor to the final endangerment rule), the EPA frequently questioned whether its GHG regulations would cause "emissions leakage" - i.e., the outsourcing of GHG-emissions-intensive industries and jobs to countries that lack GHG regulations. A primary way to combat such leakage, of course, is carbon tariffs. Indeed, in the same document, the Department of Commerce voiced strong opposition to the unilateral imposition of carbon tariffs - another clear indication that the EPA was mulling the idea. (And, of course, that was a much different DOC (and EPA) than we have today.)

The EPA's final endangerment rule includes no discussion of leakage or border measures, but has several pages (see, in particular, pages 142-151 of the document linked above) on how global GHG emissions can affect human health and safety. One of many telling quotes: "The impacts of the air over the United States cannot be assessed separately from the impacts from the global pool, as they occur together and work together to affect the climate." As with the preliminary notice, it's clear that the EPA is well-aware of, and fully contemplating, the global effects of GHG emissions and its potential regulation of their (allegedly) harmful effects in the United States.

Another EPA ruling related to the endangerment finding also is cause for concern about future eco-protectionism stemming from the EPA's GHG regulations. On October 30 of this year, the EPA announced a final rule for GHG emissions under Section 307(d) of the CAA which "require[s] reporting of greenhouse gas emissions from all sectors of the economy." The final rule doesn't regulate GHGs emissions - just reporting, and applies to fossil fuel suppliers and industrial gas suppliers, direct GHGs emitters and manufacturers of heavy-duty and off-road vehicles and engines. Such "suppliers" include importers and exporters of fossil fuels and certain downstream petrochemicals. Again, it's clear from these regulations that the EPA is very much aware of, and concerned about, the international trade implications of its GHG regulations. Moreover, this reporting system could quite easily be expanded to include other products or, more importantly, provide much-needed evidence (a "rational basis," in legalese) to justify the EPA's imposition of border measures on products/processes controlled by any new GHG regulations.

Second, if Congress refuses to act on Cap-and-Trade (quite likely considering how devastating the issue is politically these days), the EPA's endangerment ruling could be used as a surrogate means of controlling US GHG emissions. Indeed, the White House brazenly threatened as much today (so much for Democrat wailing over abuse of executive power, huh?). Well, as I've discussed repeatedly, a primary component of both the House "Waxman-Markey" bill and the Senate "Boxer-Kerry" bill is, you guessed it, carbon tariffs. Thus, if the EPA's emissions regulations are truly meant to be a surrogate of current US climate change legislation, it's certainly plausible that those regulations will contain some form of similar border measure. (It's also plausible that they won't, but that leads us to the next point.)

Third, if the EPA's endangerment ruling indeed leads to the imposition of serious GHG regulations on US businesses, domestic industry groups will very likely spend a fortune lobbying for the imposition of some form of anti-leakage measure. For example, the above-linked WSJ article cited concerns about "huge costs" imposed on US industries from, among others, the US Chamber of Commerce and the National Association of Manufacturers, US electricity providers, and oil refiners - costs likely not borne by their (lucky!) foreign competitors. Indeed, the Iron and Steel Institute said that any regulation -- whether through the EPA or Congress -- must "reduce emissions without altering the competitiveness of American steelmakers." Of course, the steelmakers - and the many lawmakers who do their bidding - have demanded carbon tariffs in the Cap-and-Trade legislation to ensure a "level playing field" for their products versus imports, so similar efforts are very, very likely for any surrogate EPA regulation.

In sum, the EPA's controversial endangerment ruling does not explicitly contemplate or authorize eco-protectionism under the CAA, nor will it definitely lead to such nastiness. On the other hand, there is plenty of reason for concern. The EPA is clearly concerned about emissions leakage and believes that emissions regulation extends beyond America's borders. Moreover, the agency has not only contemplated border measures as part of any GHG regulation regime under the CAA, but also established a framework - and potential justification - for the imposition such measures down the road. The case isn't a slam-dunk, but it's certainly something to watch for.

Replace "Boxer-Kerry" with "Kerry-Lieberman" and all of this still applies today.  Indeed, Republican efforts to block the EPA's authority to regulate greenhouse gases failed back in June, so the agency's newfound powers definitely remain alive and well.  Moreover, the next UN Climate Change Conference in Mexico City - the much-awaited follow-up to last year's debacle in Copenhagen - is only a few months away, and do you really think that the Obama administration is going to show up totally empty-handed to the world's next big climate change party?  Highly unlikely.

So rejoice for a moment, folks, but remember: this is only round one.  We've got a long, long way to go.