INSIGHT: Cap-and-trade could cap US refining and exports

08 October 2009 17:55  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS news)--A cap-and-trade mandate meant to cut the nation’s emissions of greenhouse gases (GHG) could instead slap a lid on US exports and increase the country’s dependence on foreign fuels, industry and trade analysts contend.

US climate change legislation pending in Congress also contains trade provisions because senators and representatives from states dependent on coal-fired power and manufacturing jobs are insisting on measures - tariffs on foreign goods - to ensure that their home state industries are protected.

In a 6 August letter sent to President Barack Obama, ten Democrat senators warned that they could not support a climate change bill with a cap-and-trade mandate unless the legislation also contains a strong “border adjustment” provision.

A border adjustment is just another term for a tariff on US imports from other nations, specifically a carbon tax on products imported from those countries that do not impose emissions reductions on their own domestic industries.

Everyone concedes that a cap-and-trade mandate would significantly increase energy costs across the board for US industry and consumers, cost increases that would make most US manufacturers less competitive in the global marketplace against producers in countries lacking emissions reductions requirements.

Although no one really knows how a carbon tax might be calculated, in theory washing machines imported from China (which has stated it will not impose emissions cuts on its industries) would be assessed a carbon tax tariff meant to “level the playing field” for US washing machine manufacturers burdened with higher energy prices due to the climate change mandate.

However, according to a new study by the Cato Institute, “these trade measures are likely to be ineffective at best and harmful to US interests at worst”.

The Cato analysis contends that “First, the key targets of the proposed import barriers, India and China, are relatively minor sources of imports of energy-intensive goods”, such as steel, cement, chemicals, paper and aluminium.

“Most carbon-intensive imports to the US come from other developed countries that have stricter emissions controls than the US and will therefore likely escape import penalties,” the institute argues.

Second, the study contends that such border adjustment carbon taxes could well be illegal under World Trade Organization (WTO) rules and almost certainly would be challenged.

Even if the US carbon tariffs were to prevail in the WTO, “copycat regulations in other countries may be designed in a manner unfavourable to US interests”, the institute contends.  In other words, those foreign countries subject to the US carbon tax likely would retaliate.

Charlie Drevna, president of the National Petrochemical & Refiners Association (NPRA), also contends that a cap-and-trade system would undermine US domestic conventional fuels industries and the nation’s general export trade as well.

“Okay, so Congress puts in a cap-and-trade system and energy costs shoot up, making US manufacturers less competitive,” Drevna said. “So Congress says the solution is a carbon tax on imports.”

“I have two words for you,” he said, “Smoot-Hawley.”

Drevna was referring to the US Tariff Act of 1930, more commonly known as the Smoot-Hawley Act for its two Republican sponsors, Senator Reed Smoot of Utah and Congressman Willis Hawley of Oregon.

The Smoot-Hawley Act raised US tariffs on more than 20,000 imported goods and commodities, raising the import tax on more than 3,000 items to an effective rate of 60%.

In the wake of that protectionist policy, US imports decreased 66%, but exports also plummeted by 61% as other nations levied their own retaliatory tariffs against American goods.

Many historians contend that Smoot-Hawley and its impact on US trade was a major contributor to the Great Depression and greatly extended that economic catastrophe.

The climate change bills pending in Congress and their proponents argue that the carbon-cap costs imposed on US consumption of coal, oil and natural gas will help generate an upsurge in alternative and renewable fuels such as biomass, solar and wind energy - and boost the technical know-how to enable those resources.

But Steven Hayward, an environmental scholar at the American Enterprise Institute (AEI), testified in Congress this week that even with a carbon tax on hydrocarbon fuels, they will remain more economical worldwide than still-costly alternative and renewable technologies.

“Given that roughly 80% of the world’s proven reserves of hydrocarbons are located in less developed nations, and given that even with a global carbon price of $28 [€19] per tonne [a price suggested in pending climate bills in Congress], hydrocarbon energy will still be cheaper at scale than most renewable energy technologies,” Hayward said.

“If the US and Europe place a higher price on carbon while the developing world does not, it will ironically make fossil fuels more attractive for the developing world,” he added.

In addition, while proponents of climate change legislation contend that a carbon cap will spur US development and exports of alternative and renewable energy and related technology, Hayward disagrees.

“If there is a substantial increase in the deployment of wind and solar power in the US over the next decade, it is not automatic that there will be an expansion in manufacturing capacity sufficient to provide a simultaneous increase in exports,” he told the House Committee on Energy and Commerce.

“In other words, to reach some of the ambitious targets set out in recent legislation, we’re going to need every windmill we make right here at home, and more likely we will continue to import wind and solar energy components from abroad,” he said.

We also will be importing even more energy from abroad, according to Drevna.

If the US imposes a cap-and-trade mandate, he said, “there are real questions whether some US refineries will be able to continue in business”.

With a carbon-cap tax value at around $25, Drevna said that many of the 130 or so US hydrocarbon fuels refiners “would have to make very critical decisions” about staying in business.

“A refinery that produces 100,000 barrels a day of gasoline could be facing an annual carbon emissions permit fee or tax of around $140m, which is about ten times the profit that a refinery of that size could make, even in a good year,” he said.

“And the carbon cost to larger refineries would be proportionately bigger,” he added. “A refiner producing 300,000 barrels a day would be facing three times the carbon costs of the 100,000 barrel producer. No refiners make that kind of money.”

The US already relies on foreign suppliers for more than 58% of crude oil - and for 12% of its refined products, chiefly gasoline and diesel fuel.

A carbon-cap tax on domestic refiners would force shutdowns and increasing US dependence on foreign sources for refined products, he said.

“Historically, the thing about Congress is that whenever they enact sweeping legislation like this, there inevitably are major unintended consequences because they don’t delve into the issue far enough,” Drevna said.

“Or they just don’t care to listen,” he added.

 ($1 = €0.68)

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By: Joe Kamalick
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