Climate Change: EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications
Congressional research reportApr 12, 2010
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Climate Change: EU and Proposed
U.S. Approaches to Carbon Leakage
and WTO Implications
(name redacted)
Specialist in Energy and Environmental Policy
(name redacted)
Legislative Attorney
April 12, 2010
Congressional Research Service
7-....
www.crs.gov
R40914
CRS Report for Congress
Prepared for Members and Committees of Congress
EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications
Summary
The United States has proposed, and the European Union (EU) developed, policies to mitigate the
potential economic and environmental (i.e., “carbon leakage”) impacts of carbon policies on
energy- or greenhouse gas-intensive, trade-exposed industries. While studies have found little
effect of carbon policies on EU competitiveness in the present, the EU decision to move toward
auctioning of allowances in the future has spurred development of criteria to extend potential
availability of free allowances to exposed industries to 2020. In a December 2009 decision, the
European Commission (EC) listed 164 industrial sectors and subsectors deemed exposed sectors
under appropriate European Parliament and Council directives.
H.R. 2454, which passed the House on June 26, 2009, includes two strategies to address these
concerns: (1) free allocation of allowances (similar to that of the EU), and (2) an international
reserve allowance (IRA) scheme. Studies have suggested that a free allowance scheme appears
effective in mitigating the trade-related impact of the carbon program on energy-intensive, tradeexposed industries. However, production cost for those industries (along with other industries)
could increase because of the potential pass-through of compliance-related costs by upstream
producers of various inputs into their manufacturing processes. Whether these costs would
become significant would depend on the ability of upstream suppliers to pass on the costs, and the
ability of the downstream industries to respond by increasing the efficiency of their operations or
by substituting other, less-costly inputs into their processes. There are questions about whether
the allowances provided by H.R. 2454’s allocation scheme are sufficient. If the Environmental
Protection Agency’s estimates are correct, the allocation would appear sufficient. If industry
estimates are correct, or if individual showings of eligibility prove significant, the pool of
allowances provided by the bill would appear inadequate under the assumptions used here. Also,
the data and administrative resources necessary to implement the program would be substantial.
Although H.R. 2454 as passed would require EPA to establish an IRA program consistent with
U.S. international agreements, questions may be raised as to whether proposed Part IV and its
application would fully comply with U.S. international trade obligations. The distribution of free
allowances may constitute actionable subsidies for purposes of the World Trade Organization
(WTO) Agreement on Subsidies and Countervailing Measures by possibly qualifying as
“foregone revenue” when auctioning of allowances would also be permitted. In addition, the
requirement that importers purchase IRAs to accompany particular imports might be found to
constitute a prohibited import surcharge or, if the product may not otherwise enter the United
States, a prohibited quantitative restriction under the General Agreement on Tariffs and Trade
(GATT) 1994. While the IRA program might be provisionally justified under GATT general
exceptions for health protection or resource conservation, the GATT also requires that it not be
applied “in a manner that would constitute a means of arbitrary or unjustifiable discrimination
between countries where the same conditions prevail, or a disguised restriction on international
trade.” Whether an IRA program can be applied consistently with these requirements may depend
on the type of program that may be crafted by EPA under the proposed legislation—that is, on the
elements that would be required under the bill and the administrative possibilities inherent in its
discretionary authorities. Absent an international consensus on the types of trade-related measures
that may be applied as part of a domestic climate change regime, adversely affected countries
may seek to challenge these measures under WTO dispute settlement provisions. Since neither
the distribution of emission allowances nor border restrictions imposed as part of a domestic
greenhouse gas-reduction program have yet come before WTO dispute settlement panels, WTO
obligations and exceptions remain untested in this complex regulatory environment.
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EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications
Contents
Introduction...................................................................................................................................... 1
Using Free Allocations under the EU-ETS: Results and Lessons Learned ..................................... 2
Background on the European Union’s Emissions Trading Scheme (ETS)................................ 2
European Energy-Intensive, Trade-Exposed Industries............................................................. 4
Background ......................................................................................................................... 4
EC Phase 3 Decision on Eligible Industries........................................................................ 5
Analysis of EU Approach ................................................................................................................ 7
Effectiveness of Phase 1 Free Allowance Allocations............................................................... 7
Current Attitude of Companies under ETS................................................................................ 8
Determining Eligibility for Phase 3: The EC’s List................................................................. 11
Criteria Used for EC Eligibility List ................................................................................. 11
Data Sources Used for EC Eligibility List ........................................................................ 12
U.S Proposals to Address Carbon Leakage: H.R. 2454................................................................. 13
H.R. 2454, Title IV, Subpart 1: Free Allocation of Allowances..................................................... 14
Description of Rebate Program ............................................................................................... 14
Eligible Industries.................................................................................................................... 15
Proposed Funding.................................................................................................................... 18
Analysis ................................................................................................................................... 19
Adequacy of Allocation..................................................................................................... 19
Effectiveness of Free Allowance Scheme ......................................................................... 21
Phase-Out Schedule........................................................................................................... 23
H.R. 2454, Title IV, Subpart 2: International Reserve Allowance Scheme ................................... 23
Description of Program ........................................................................................................... 23
Overview ........................................................................................................................... 23
Initial Action: Section 765................................................................................................. 24
Further Requirements and Criteria: Section 767............................................................... 24
EPA Implementing Regulations: Section 768 ................................................................... 26
Decision-Making Process.................................................................................................. 27
Analysis ................................................................................................................................... 28
Potential Impact................................................................................................................. 28
Data Needs ........................................................................................................................ 29
Presidential Determination to Exclude a Sector................................................................ 31
“Covered Goods” .............................................................................................................. 31
“Manufactured Items for Consumption” (Downstream Items) ......................................... 32
Emphasis on International Action ..................................................................................... 33
Reactions from Other Countries: Defining “Comparable” Actions .................................. 35
Implications for International Trade Obligations........................................................................... 37
Distribution of Free Emission Allowances.............................................................................. 40
General Characteristics of Emission Allowances.............................................................. 40
WTO Agreement on Subsidies and Countervailing Measures (SCM) .............................. 42
Free Emission Allowances Under the SCM Agreement ................................................... 45
International Reserve Allowance (IRA) Program.................................................................... 48
General Agreement on Tariffs and Trade (1994)............................................................... 48
Border IRA Requirements under the GATT 1994............................................................. 51
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EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications
Figures
Figure 1. UK Manufacturing Activities Most Cost-sensitive to CO2 Pricing .................................. 5
Figure 2. How Important Is the Long-Term Carbon Price for New Investments in Your
Industry? ....................................................................................................................................... 9
Figure 3. Companies Response to Carbon Price............................................................................ 10
Figure 4. Carbon Trust Assessment of Exposure to Phase 3 Competitiveness Issues ................... 11
Figure 5. U.S. Manufacturing Exposed to Carbon Leakage Risk.................................................. 16
Figure 6. Presumptively Eligible Energy-Intensive, Trade-Exposed Industries ............................ 17
Figure 7. Direct and Indirect Allowance Allocations to Energy-Intensive, Trade-Exposed
Industries under H.R. 2454......................................................................................................... 18
Figure 8. Projected Allowance Need and Allocation to Eligible Industries................................... 20
Figure 9. Industrial Impacts in the H.R. 2454 Basic Case, 2012-2030.......................................... 22
Figure 10. Decision Tree for IRA Scheme..................................................................................... 28
Tables
Table 1. Direct and Indirect Emissions from Eligible Industries................................................... 19
Table 2. Comparison of Top-20 Greenhouse Gas Emitting Countries........................................... 36
Appendixes
Appendix. EC List of Eligible Industries....................................................................................... 60
Contacts
Author Contact Information........................................................................................................... 67
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EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications
Introduction
Congress is considering legislation to reduce emissions of greenhouse gases that may, depending
on the specifics of the final legislation, affect the competitiveness of energy- or greenhouse gasintensive industries. Competitiveness can be a rather abstract term for which any precise meaning
can be elusive.1 Competitiveness is a continuing phenomenon, with companies becoming more or
less competitive according to a host of factors, including productivity, market demand, resource
costs, labor costs, exchange rates, and the like. As stated by the Australian Government in its
Green Paper on carbon reduction schemes:
Changes in the cost structures of entities and industries are not unusual and occur
continuously in a market-based economy; nor is it unusual for Government policy to change
cost structures. For example, the adoption of high quality occupational health and safety
standards have affected the profitability of Australia’s labour-intensive traded industries,
making it more difficult for them to compete with foreign producers that are subject to lower
standards. Assistance is not usually provided to offset the impact of domestic policies on
traded industries, as those policies reflect the priorities and values of the Government and
community more generally.2
Most industries face a competitive market (sometimes international in scope) both in terms of
producers of the same products and producers of substitute products. Also, in some cases, an
industry may face a fairly elastic demand for its product. Thus, most industries are price sensitive,
and therefore any increase in manufacturing costs—as by a carbon emission reduction
requirement—hurts the competitiveness of a firm. This complex situation is further complicated
for energy-intensive industries as competitors within the same industry may experience different
energy price increases (particularly for electric power), depending on their individual energy
needs and power arrangements. For example, an aluminum plant receiving power from a hydroelectric facility may not be affected the same way as a similar plant whose power contract is with
a coal-fired power supplier.
The addition of a carbon control regime to this competitive dynamic has raised concerns that, in
the absence of similar policies among competing nations, if the United States adopts a carbon
control policy, energy- or greenhouse gas-intensive, trade-exposed industries that must control
their emissions or that find their feedstock or energy bills rising because of costs passed-through
by suppliers may be less competitive and may lose global market share (and jobs) to competitors
in countries lacking comparable carbon policies. In addition, this potential shift in production
could result in some of the U.S. carbon reductions being undercut by increased production in less
regulated countries; this is commonly known as “carbon leakage.”
Greenhouse gas reduction legislation introduced over the last two Congresses has included
provisions to address carbon leakage and to mitigate the effect of carbon policies on U.S.
competitiveness. In general, two strategies have been proposed: (1) providing assistance to
greenhouse gas-intensive, trade-exposed industries; and (2) imposing tariffs on certain
greenhouse gas-intensive goods imported into the country from countries not implementing
1
For a further discussion, see CRS Report R40100, “Carbon Leakage” and Trade: Issues and Approaches, by (name
redacted) and (name redacted).
2
Department of Climate Change, Commonwealth of Australia, Carbon Pollution Reduction Scheme: Green Paper
(July 2008), p. 292.
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comparable carbon policies. Such tariffs are frequently referred to as border measures. H.R. 2454,
as passed by the House, contains both of these strategies.3
This report examines the dynamics of this issue in three parts. First, the European Union (EU) has
been implementing a cap-and-trade program for four years, and has finalized a third reduction
phase that will run from 2013 through 2020.4 This report reviews and analyzes the experience of
the EU in addressing its concerns about energy-intensive, trade-exposed industries, and the
lessons those efforts may have for the United States. Second, the House-passed American Clean
Energy and Security Act of 2009 (H.R. 2454) contains both a free allocation scheme and a border
measure among its provisions to address the concerns of energy-intensive, trade-exposed
industries. This report reviews and analyzes these provisions. Third, these same provisions could
come under scrutiny under various U.S. trade agreements, particularly within the World Trade
Organization (WTO). Concerns have been expressed that the border measure contained in H.R.
2454 would be suspect under various provisos of the WTO. This report analyzes the potential
WTO implications of any attempt to implement a subsidy or a border measure under H.R. 2454.
Using Free Allocations under the EU-ETS: Results
and Lessons Learned
Background on the European Union’s Emissions Trading
Scheme (ETS)
The EU’s Emissions Trading System (ETS) covers more than 10,000 energy-intensive facilities
across the 27 EU Member countries, including oil refineries, powerplants over 20 megawatts
(MW) in capacity, coke ovens, and iron and steel plants, along with cement, glass, lime, brick,
ceramics, and pulp and paper installations. In addition, aviation is currently being phased into the
ETS. These covered entities emit about 40%-45% of the EU’s total greenhouse gas emissions,
and almost two-thirds of them are combustion installations. The trading program does not cover
either carbon dioxide (CO2) emissions from the transportation sector (except aviation), which
account for about 25% of the EU’s total greenhouse gas emissions, or emissions of non-CO2
greenhouse gases, which account for about 20% of the EU’s total greenhouse gas emissions. A
Phase 1 trading period ran between January 1, 2005, and December 31, 2007.5 A Phase 2 trading
period began January 1, 2008, covering the period of the Kyoto Protocol, and a Phase 3 has been
finalized to begin in 2013.6
Under the Kyoto Protocol, the then-existing 15 nations of the EU agreed to reduce their aggregate
annual average emissions for 2008-2012 by 8% from the Protocol’s baseline level (mostly 1990
3
For more information on trade and carbon leakage issues, see CRS Report R40100, “Carbon Leakage” and Trade:
Issues and Approaches, by (name redacted) and (name redacted).
4
For further background on Phase 3 of the ETS, see CRS Report R41049, Climate Change and the EU Emissions
Trading Scheme (ETS): Looking to 2020, by (name redacted)
5
For further background on the ETS, see CRS Report RL34150, Climate Change and the EU Emissions Trading
Scheme (ETS): Kyoto and Beyond, by (name redacted).
6
More information, including relevant directives, on the EU-ETS is available on the European Union’s website at
http://europa.eu.int/scadplus/leg/en/lvb/l28012.htm.
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levels) under a collective arrangement called a “bubble.” In light of the Kyoto Protocol targets,
the EU adopted a directive establishing the EU-ETS that entered into force October 13, 2003.7
One objective of the second phase of the ETS is to achieve 3.3 percentage points of the 8.0%
reduction required by the EU-15 under the Protocol.8
The importance of emissions trading was elevated by the accession of 12 additional central and
eastern European countries to EU membership from May 2004 through January 2007. For the
new EU-27, the overall ETS emissions cap is set at 2.08 billion metric tons of carbon dioxide
(CO2) annually for the Kyoto compliance period (2008-2012).
The second phase Kyoto compliance stage of the ETS is built on the experience the EU gained
from its preliminary Phase 1. The European Commission (EC) believes that the Phase 1 “learning
by doing” exercise prepared the community for the difficult task of achieving the reduction
requirements of the Kyoto Protocol. Several positive results from the Phase 1 experience assisted
the ETS in making the Phase 2 process run smoothly, at least so far. First, Phase 1 established
much of the critical infrastructure necessary for a functional emission market, including
emissions monitoring, registries, and inventories. Much of the publicized difficulties the ETS
experienced early in the first phase can be traced to inadequate emissions data infrastructure.9
Phase 1 significantly improved those critical elements in preparation for Phase 2 implementation.
Second, the ETS helped jump-start the project-based mechanisms—Clean Development
Mechanism (CDM) and Joint Implementation (JI)—created under the Kyoto Protocol.10 As stated
by Ellerman and Buchner:
The access to external credits provided by the Linking Directive has had an invigorating
effect on the CDM and more generally on CO2 reduction projects in developing countries,
especially in China and India, the two major countries that will eventually have to become
part of a global climate regime if there is to be one.11
Third, according to the EC, a key result of Phase 1 was its effect on corporate behavior. An EC
survey of stakeholders indicated that many participants are incorporating the value of allowances
in making decisions, particularly in the electric utility sector, where 70% of firms stated they were
pricing the value of allowances into their daily operations, and 87% into future marginal pricing
decisions. All industries stated that it was a factor in long-term decision-making.12
7
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for
greenhouse gas emissions allowance trading within the Community and amending Council Directive 96/61/EC.
8
Commission of the European Communities, Communication from the Commission: Progress towards Achieving the
Kyoto Objectives (November 19, 2008).
9
A. Denny Ellerman and Barbara K. Buchner, “The European Union Emissions Trading Scheme: Origins, Allocations,
and Early Results,” Environmental Economics and Policy (Winter 2007), pp. 69-70; and International Emissions
Trading Association, “IETA Position Paper on EU ETS Marking Functioning,” (no date), p. 3.
10
For more on the effect of the ETS on Kyoto mechanisms, see A. Denny Ellerman and Barbara K. Buchner, “The
European Union Emissions Trading Scheme: Origins, Allocations, and Early Results,” Environmental Economics and
Policy (Winter 2007), p. 84; and International Emissions Trading Association, “IETA Position Paper on EU ETS
Market Functioning” (no date), p. 2. For more information on the Kyoto Protocol mechanisms, see CRS Report
RL33826, Climate Change: The Kyoto Protocol, Bali “Action Plan,” and International Actions, by (name redacted).
11
A. Denny Ellerman and Barbara K. Buchner, “The European Union Emissions Trading Scheme: Origins,
Allocations, and Early Results,” Environmental Economics and Policy (Winter 2007), p. 84.
12
European Commission, Directorate General for Environment, Review of EU Emissions Trading Scheme: Survey
Highlights (November 2005), pp. 5-7.
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European Energy-Intensive, Trade-Exposed Industries
Background
Figure 1 below indicates the cost sensitivity of various manufacturing activities in the United
Kingdom as determined by Climate Strategies.13 Cost sensitivity is measured as the percentage of
the activity’s current gross value added at stake from a 20 euro per metric ton carbon price.14 As
indicated by the bold, several of these industries are covered by the ETS, including lime, cement,
basic iron and steel, refined petroleum products, pulp, paper and paperboard, hollow glass, and
flat glass. The figure also indicates the direct and indirect cost components of implementing a
carbon pricing policy. The cost impact of a 20 euro carbon price from a manufacturing process
from direct emissions is indicated by the light blue versus the cost impact of indirect emissions
resulting from higher electricity prices, which is indicated by the dark blue. As shown, the
balance of direct and indirect costs differs substantially among the various sectors.
13
As published in Carbon Trust, EU ETS Impacts on Profitability and Trade (January 2008), p. 3.
The Value at Stake can be defined as the difference in costs between “business as usual” and reduced emissions
scenarios (based both on the impact of increasing energy process and the potential for reducing consumption). This
calculation includes both direct and indirect costs.
14
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Figure 1. UK Manufacturing Activities Most Cost-sensitive to CO2 Pricing
Source: Carbon Trust, EU ETS Impacts on Profitability and Trade (January 2008), Based on data in Climate
Strategies (2007).
Notes: Annex referenced in Figure 1 can be found on page 32 of source report.
EC Phase 3 Decision on Eligible Industries
After nine eastern European Member States threatened to veto an initial proposal to auction 100%
of all allowances, the leaders of the European Union (EU) agreed to provide for some free
allocation of allowances during Phase 3 that will begin in 2013.15 In making changes for Phase 3,
the European Commission has identified three CO2 emitting sectors for inclusion under the ETS:
petrochemicals, ammonia, and aluminum.16 The ETS would also expand beyond CO2 to include
15
See European Commission, Directive 2009/29/EC of the European and of the Council of 23 April 2009 amending
Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the
Community (Brussels, April 23, 2009).
16
European Commission, Directive 2009/29/EC of the European and of the Council of 23 April 2009 amending
Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the
Community (Brussels, April 23, 2009), annex I.
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nitrous oxide (N2O) emissions from nitric, adipic, and glyoxalic acid production, and
perfluorocarbon (PFC) emissions from the aluminum sector. These industries would be added to
those currently covered: oil refineries, powerplants over 20 MW in capacity, coke ovens, and iron
and steel plants, along with cement, glass, lime, brick, ceramics, and pulp and paper installations
(aviation is currently being incorporated into the system).
Most covered industries, except for electric powerplants, will be eligible for some free allocation
of allowances to cover direct emissions under the Phase 3 agreement. For electric powerplants,
most will receive no free allocation of allowances during Phase 3. However, in a concession to
certain eastern European Member States, an optional and temporary derogation from the no-freeallocation requirement for powerplants is provided to countries that meet specific energy and
economic criteria. Under the optional allocation scheme, the Member State can allocate
allowances equal to 70% of the powerplant’s Phase 1 emissions free; this allocation will decline
in the out-years.
The auction schedule for most other covered entities is more gradual with 80% of a sector’s
allocation provided free in 2013, declining linearly to 30% by 2020, and zero by 2027. As stated
in the final EC directive:
For other sectors covered by the Community scheme, a transitional system should be
foreseen for which free allocation in 2013 would be 80% of the amount that corresponded to
the percentage of the overall Community-wide emissions throughout the period 2005 to 2007
that those installations emitted as a proportion of the annual Community-wide total quantity
of allowances. Thereafter, the free allocation should decrease each year by equal amounts
resulting in 30% free allocation in 2020, with a view to reaching no free allocation in 2027.17
For energy-intensive, trade-exposed industries, Phase 3 has provisions to provide assistance to
eligible installations to address the direct and indirect impact of emissions control costs. With
respect to direct emissions costs, the EC published a list of installations exposed to a significant
risk of carbon leakage on December 24, 2009.18 The list is identical to the draft list released in
September 2009.19 The decision lists 164 industrial sectors and subsectors deemed exposed
sectors under the appropriate European Parliament (EP) and Council directives. That list is
provided in the Appendix. Eligible installations will receive allowances sufficient to cover 100%
of their direct emissions, provided they are using the most efficient technology available.
Reflecting the fluid nature of the competitive situation and international negotiations, the EC is to
review its decision by June 30, 2010, and provide the EP and Council with any appropriate
proposals to respond to the situation.
Assistance for the impact of indirect emissions control costs on exposed industries would be
determined by Member States. As stated in the final directive:
17
European Commission, Directive 2009/29/EC of the European and of the Council of 23 April 2009 amending
Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the
Community (Brussels, April 23, 2009), paragraph 21.
18
European Commission, Commission Decision of 24 December 2009 determining, pursuant to Directive 2003/87/EC
of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a
significant risk of carbon leakage (Brussels, 2009).
19
European Commission, Draft Commission Decision of 18 September 2009 determining, pursuant to Directive
2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be
exposed to a significant risk of carbon leakage (Brussels, 2009).
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Member States may deem it necessary to compensate temporarily certain installations which
have been determined to be exposed to a significant risk of carbon leakage related to
greenhouse gas emissions passed on in electricity prices for these costs. Such support should
only be granted where it is necessary and proportionate and should ensure that the
Community scheme incentives to save energy and to stimulate a shift in demand from grey
to green electricity are maintained.20
Analysis of EU Approach
Effectiveness of Phase 1 Free Allowance Allocations
In general, allowances have been allocated free to participating entities under the ETS. During
Phase 1, the EU-ETS Directive allowed countries to auction up to 5% of allowance allocations,
rising to 10% under Phase 2.21 Under Phase 1, only four of 25 countries used auctions at all, and
only Denmark auctioned the full 5%. The political difficulty in instituting significant auctioning
into ETS allowance allocations is the almost universal agreement by covered entities in favor of
free allocation of allowances and opposition to auctions.22 Free allocation of allowances
represents a one-time transfer of wealth to the entities receiving them from the government
issuing them.23 The resulting transfer of wealth has been described by several analysts as
“windfall profits.”24 As summarized by Ellerman and Buchner: “Allocation in the EU-ETS
provides one more example that, notwithstanding the advice of economists, the free allocation of
allowances is not to be easily set aside.”25
Despite concerns about windfall profits and economic distortions resulting from the free
allocation of allowances, there is little change in basic allocation philosophy for Phase 2. No
country proposed auctioning the maximum percentage of allowances allowed (10%). Most do not
include auctions at all.26 The unwillingness of governments to employ auctions as an allocating
mechanism revolves around equity considerations, including (1) the inability of some covered
entities to pass through cost because of regulation or exposure to international competition; (2)
the potential drag on a sector’s economic performance from the up-front cost of auctioned
20
European Commission, Directive 2009/29/EC of the European and of the Council of 23 April 2009 amending
Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the
Community (Brussels, April 23, 2009), paragraph 27.
21
For a further discussion of auctioning and the ETS, see Cameron Hepburn et. al., “Auctioning of EU ETS phase II
allowances: how and why?” Climate Policy (2006), pp. 137-160.
22
A. Denny Ellerman and Barbara K. Buchner, “The European Union Emissions Trading Scheme: Origins,
Allocations, and Early Results,” Environmental Economics and Policy (Winter 2007), p. 73.
23
Joseph Kruger, Wallace E. Oates, and William A. Pizer, “Decentralization in the EU Emissions Trading Scheme and
Lessons for Global Policy,” Environmental Economics and Policy (Winter 2007), p. 114.
24
E.g., Deutsche Bank Research, EU Emission Trading: Allocation Battles Intensifying (March 6, 2007), pp. 2-3; and
Regina Betz and Misato Sato, “Emissions Trading: Lessons Learnt from the 1st Phase of the EU ETS and Prospects for
the 2nd Phase,” 6 Climate Policy (2006), p. 353.
25
A. Denny Ellerman and Barbara K. Buchner, “The European Union Emissions Trading Scheme: Origins,
Allocations, and Early Results,” Environmental Economics and Policy (Winter 2007), p. 85.
26
For a review of proposed NAP 2 auction proposals as of January 12, 2007, see Karsten Neuhoff, EU ETS Auction
Workshop (Cambridge, January 12, 2007), p. 26. NAP refers to the National Allocation Plans member countries
submitted to the European Commission during Phase 1 and Phase 2 to demonstrate how they were going to meet their
emissions target.
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allowances; and (3) the potential that government will not recycle revenues to alleviate
compliance costs, international competitiveness impacts, or other equity concerns, resulting in the
auction costs being the same as a tax.27
Most studies of the competitiveness impacts of the ETS during Phase 1 have found no impact.
The International Energy Agency (IEA) cites several reasons for this situation:
Experience to date with the EU-ETS does not reveal leakage for the sectors concerned—
analysis of steel, cement, aluminum and refineries sectors reveals that no significant changes
in trade flows and production patterns were evident during the first phase (2005-2007) of the
EU-ETS. This is mostly due to the free allocation of allowances, sometimes in generous
quantities, and to the still functioning long-term electricity contracts, which softened the
blow of rising electricity prices. Further, the general boom in prices for most traded products
subject to carbon costs—whether direct or indirect—has blurred any effects of the latter.
Finally, the relatively short time span of these policies does not allow observation of the full
potential effects on industry via changes in investment location decisions.28
This conclusion is echoed by Carbon Trust, which states that currently, free allocation of
emissions allowances offset almost all of the additional costs of the ETS; and it is echoed by The
Climate Group for The German Marshall Fund, which states that companies surveyed found it
difficult to quantify effects on their bottom line in the first phase, or found no effect at all.29
Current Attitude of Companies under ETS
As noted earlier, the EC believes that one of the major positive outcomes of the ETS has been the
incorporation of carbon prices in EU corporate decision-making. A survey of EU-ETS companies
by Point Carbon suggests this assertion is true.30 As indicated in Figure 2, companies are
factoring the long-term price of carbon into their future investment decisions. According to Point
Carbon, it is the power sector and the pulp and paper sectors that appear to consider the carbon
price most decisive in their planning.
27
Martina Priebe, Distributional Effect of Carbon-Allowance Trading (Cambridge, January 12, 2007). Also, see
Eurochambres, Review of the EU Emission Trading System (June 2007), p. 5.
28
Julia Reinaud, Issues Behind Competitiveness and Carbon Leakage: Focus on Heavy Industry (October 2008), p. 6.
29
Carbon Trust, EU ETS Impacts on Profitability and Trade (January 2008), p. 4; and The Climate Group, The Effects
of EU Climate Legislation on Business Competitiveness; A Survey and Analysis (September 2009), p. 8.
30
Point Carbon, Carbon 2009 (2009), p. 10.
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Figure 2. How Important Is the Long-Term Carbon Price for New Investments
in Your Industry?
Source: Point Carbon, Carbon 2009, p. 10.
Notes: Long-term defined as 2020 in the questionnaire. A total of 301 companies affected by the EU-ETS were
surveyed by Point Carbon.
With respect to considering moving production to other countries because of carbon prices, the
Point Carbon survey of EU-ETS companies does not reveal a major trend yet. As indicated in
Figure 3, over 80% of companies surveyed have not considered moving production because of
carbon pricing; however, some of that includes companies, like power producers, that have
limited relocation opportunities. A more detailed look at the figure indicates that 44% of the
respondents in the metals, cement, lime, and glass sectors have at least thought about moving
production. This may be one reason the EU included provisions extending the free allocation of
allowances to such energy-intensive, trade-exposed sectors through Phase 3.
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Figure 3. Companies Response to Carbon Price
Source: Point Carbon, Carbon 2009, p. 12.
Notes: A total of 301 companies affected by the EU-ETS were surveyed by Point Carbon.
These findings by Point Carbon were generally confirmed by the survey and analysis conducted
by The Climate Group for The German Marshall Fund.31 Among that survey’s conclusions were
the following:
•
Although costs for some firms are increasing, there is scant evidence of effects
on competitiveness—but concerns about the future persist, especially as the
number of free allowances decreases and CO2 costs are reflected in electricity
prices. The survey noted that aluminum smelters were particularly sensitive to
electricity costs and that the pass-through of CO2 costs may affect future
production decisions.
•
Companies have not relocated their operations, reduced their workforce, or lost
market share as a result of carbon pricing to date.
•
A market price for carbon has, to date, had a relatively low impact on how top
management runs their businesses. But companies are quick at internalizing the
EU-ETS into their strategic planning. Short-, medium-, and long-term effects of
carbon pricing on strategic planning vary.
31
The Climate Group, The Effects of EU Climate Legislation on Business Competitiveness; A Survey and Analysis
(September 2009).
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Determining Eligibility for Phase 3: The EC’s List
Criteria Used for EC Eligibility List
Analysis indicates that there are industries that could be significantly impacted by the advent of
higher carbon prices under Phase 3. As indicated by Figure 4, the cement, steel, and aluminum
industries are considered by Carbon Trust to be the industries most exposed to higher carbon
prices. As indicated above, the EU policies being developed are to buy time for these industries
with free allowances while negotiating an international response that would level the playing field
for all companies within a sector.
Figure 4. Carbon Trust Assessment of Exposure to Phase 3 Competitiveness Issues
(for the United Kingdom manufacturing sector)
Source: Carbon Trust, EU ETS Impacts on Profitability and Trade (2008), p. 3.
Note: 159 manufacturing activities studied.
The list created by the EC suggests a more comprehensive view of potentially affected industries
than that suggested above. The EC used five different sets of criteria in compiling its list of 164
subsectors and sectors.
1. Paragraph 4: Significant risk of carbon leakage criteria based on a sector’s or
subsector’s ability to pass on the direct and indirect costs of control and
allowance costs into its product’s price without a significant loss of market share
to less carbon efficient installations outside the Community (in accordance with
Article 10a(14) of Directive 2003/87).
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2. Paragraph 5(a): Significant risk of carbon leakage criteria based on whether a
sector’s or subsector’s direct and indirect costs of control and allowance costs
would represent a substantial increase of production costs, calculated as a
proportion of the gross value added, of at least 5% and the intensity of trade with
third countries, defined as the ratio between the total value of exports to third
countries plus the value of imports from third countries and the total market size
for the Community (annual turnover plus total imports from third countries), is
above 10% (in accordance with Article 10a(15) of Directive 2003/87BC).
3. Paragraph 5(b): Significant risk of carbon leakage criteria based on whether a
sector’s or subsector’s direct and indirect costs of control and allowance costs
would represent a particularly high increase of production costs, calculated as a
proportion of the gross value added, of at least 30% (in accordance with Article
10a(16) of Directive 2003).
4. Paragraph 5(c): Significant risk of carbon leakage criteria based on a sector’s or
subsector’s intensity of trade with third countries, defined as the ratio between
the total value of exports to third countries plus the value of imports from third
countries and total market size for the Community (annual turnover plus total
imports from third countries), is above 30% (in accordance with Article 10a(16)
of Directive 2003).
5. Paragraph 14: Significant risk of carbon leakage criteria based on a qualitative
assessment of a sector or subsector; criteria may include increased production
costs, current and projected market characteristics, and profit margins (in
accordance with Article 10a(17) of Directive 2003/87/EC).
A company’s ability to compete under a carbon policy depends on three primary factors: (1) the
greenhouse gas intensity of a company’s products, which influences the company’s profitability
and the products’ cost; (2) the company’s ability to pass on any increased costs to consumers
without losing market share or profitability; and (3) the company’s ability to mitigate carbon
emissions, reducing the impact of the carbon policy on its operations and profitability.32
Interestingly, only the second set of criteria used by the EC seems to incorporate all three factors
in determining eligibility. Indeed, the fourth set of criteria used by the EC is based solely on
trade-exposure: the impact of carbon control is not included in the criteria. The expansive
eligibility requirements under the third and fourth sets of criteria results in 117 of the 164 sectors
and subsectors listed by the EC, and includes everything from the manufacturing of wines to
numerous textiles. While such sectors are trade-exposed, they are not generally considered to be
greenhouse-gas intensive, as indicated by the Carbon Trust analysis cited above.
Data Sources Used for EC Eligibility List
The EC’s inclusion of a qualitative set of eligibility criteria is suggestive of the data difficulties in
setting up a comprehensive program to address carbon leakage. The EC’s discussion of a
qualitative analysis of the “Finishing of textiles” sector (Nomenclature des Activites
Economiques or NACE code 1730) presented in paragraph 17 of the draft decision is illustrative:
32
See CRS Report R40100, “Carbon Leakage” and Trade: Issues and Approaches, by (name redacted) and (name redacted),
and Carbon Trust, The European Emissions Trading Scheme: Implications for Industrial Competitiveness (June 2004),
pp. 6-7.
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A qualitative assessment has been carried out on the sector of “Finishing of textiles” (NACE
code 1730), primarily due to the fact that no official trade data at the Community level is
available to assess trade intensity and that all other textile sectors are highly trade intensive.
The assessment demonstrated increased international competitive pressure, significant drop
in production in the Community over the last years and negative or only very modest profit
margins for the years evaluated, which limit the capacity of installations to invest and reduce
emissions. Based on the combined impacts of those factors, the sector should be deemed as
exposed to a significant risk of carbon leakage. (paragraph 17)
The “Finishing of textiles” sector is not covered by the ETS and, therefore, the EC’s concern
about the sector’s “very modest profit margins” that “limit the capacity of installations to invest
and reduce emissions” seems somewhat irrelevant, at least at the current time. The sector may be
trade-exposed; however, its primary impact from controlling greenhouse gas emissions is the
indirect effects of increased electricity generating costs. As indicated by Figure 1, this sector’s
indirect emissions account for less than 5% of its gross added value at stake. In its analysis of
affected industries, Carbon Trust notes that the UK textiles finishing sector is not trade-exposed;
“By far the most economically significant activities [within the UK textile industry], textiles
finishing (at 230 million pounds GVA) appears in the source data as trading only domestically.
Therefore, no major activities appear subject to significant carbon price impacts.”33
Data difficulties expand beyond determining eligibility of domestic industry sectors or subsectors.
As noted in paragraph 22 of the draft decision, the list is supposed to take into account the extent
to which third countries that represent a “decisive share of global production” in the sectors or
subsectors deemed exposed to carbon leakage (1) “firmly” commit to reducing greenhouse gas
emissions in those sectors or subsectors “to any extent comparable to that of the Community and
within the same time frame,” and (2) have installations located in their countries whose carbon
efficiency is “comparable” to that of the Community. However, with respect to the second factor,
the EC states:
As regards the carbon efficiency, the relevant data necessary for that assessment is not
available due to incomparability of statistical definitions and general lack of global data at
the required level of disaggregation and sectoral detail. Therefore, the criteria set out in
Article 10a(18) of Directive 2003/87/EC had no effect on the list of sectors and subsectors.
(paragraph 22)
U.S Proposals to Address Carbon Leakage: H.R. 2454
Greenhouse gas reduction legislation introduced over the last two Congresses has included
provisions to address carbon leakage. In general, two strategies have been employed: (1) free
allocation of allowances (similar to that of the EU); and (2) an international reserve allowance
(IRA) scheme. H.R. 2454, as passed by the House, contains both of these strategies.34
Title IV of H.R. 2454 would amend the bill’s new Title VII of the Clean Air Act by creating a new
Part F to address carbon leakage. The purpose of the new Part F is both environmental, in terms
of reducing potential carbon leakage resulting from potential shifts of production and investment
33
Carbon Trust, EU ETS Impacts on Profitability and Trade: A sector by sector analysis (2008), p. 29.
For more information on trade and carbon leakage issues, see CRS Report R40100, “Carbon Leakage” and Trade:
Issues and Approaches, by (name redacted) and (name redacted).
34
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from the United States to countries without carbon controls, and economic, in terms of preventing
the associated job loss from such a shift. Specifically, the purposes of Part F as a whole would be
(1) “to promote a strong global effort to significantly reduce greenhouse gas emissions and,
through this global effort, stabilize greenhouse gas concentrations in the atmosphere at a level
that will prevent dangerous anthropogenic interference with the climate system,” and (2) “to
prevent an increase in greenhouse gas emissions in countries other than the United States as a
result of direct and indirect compliance costs incurred under” the new Title VIII.35
The free allocation scheme (subpart 1) would be further aimed at the following: (1) “to provide a
rebate to the owners of and operators of entities in domestic eligible industrial sectors for their
greenhouse gas emissions costs incurred under this title, but not for costs associated with other
related or unrelated market dynamics”; (2) “to design such rebates in a way that will prevent
carbon leakage while also rewarding innovations and facility-level investments in energy
efficiency performance improvements”; and (3) “to eliminate or reduce distribution of emission
allowances under subpart 1 when such distribution is no longer necessary to prevent carbon
leakage from eligible industrial sectors.”36
The IRA scheme (subpart 2) would have these additional purposes: (1) “to induce foreign
countries, and, in particular, fast-growing developing countries, to take substantial action with
respect to their greenhouse gas emissions consistent with the Bali Action Plan developed under
the United Nations Framework Convention on Climate Change” and (2) “to ensure that the
measures described in subpart 2 are designed and implemented consistent with applicable
international agreements to which the United States is a party.”37
H.R. 2454, Title IV, Subpart 1: Free Allocation
of Allowances
Description of Rebate Program
Subpart 1 of the new Part F would create a rebate program directed at energy/greenhouse gasintensive, trade-exposed industries harmed by the direct emissions reduction costs and indirect
increased energy input costs from implementing Title VII (the cap-and-trade provisions of H.R.
2454). The program would begin by requiring EPA to publish a list of eligible industrial sectors
and amount of allowances to be rebated per unit of production for the next two years by June 30,
2011 (revised every four years thereafter). Presumptively eligible industrial sectors would be
determined at the six-digit classification level in Codes 31-33 of the North American Industrial
Classification System of 2002 (NAICS).38 As determined by EPA, presumptively eligible sectors,
based on six-digit NAICS classification, are those that (1) meet energy or greenhouse gas
intensity criteria (specifically, that energy or greenhouse gas costs are at least 5% of the value of
their shipments) and trade exposure criteria (specifically, a trade intensity of at least 15%, based
on the value of a sector’s total imports and exports divided by the value of its shipments and
35
H.R. 2454, as passed, new section 761(a).
H.R. 2454, as passed, new section 761(b).
37
H.R. 2454, as passed, new section 761(c).
38
H.R. 2454, as passed, new section 763(b).
36
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imports); or (2) have very high energy or greenhouse gas intensity (at least 20%). The bill
specifies data sources to be used in these determinations and, specifically, annual average data for
2004-2006, unless unavailable. However, the bill provides that EPA shall determine additional
sectors to be eligible if they (1) meet the greenhouse gas or energy intensity criteria at the time
the rule is promulgated and (2) meet trade intensity criteria based on post-2006 data. The bill also
has provisions allowing individual entities to petition for inclusion of their subsector under the
program (Section 763).39 Potential coverage is focused on primary products, such as iron, steel,
aluminum, and cement. The bill expressly prohibits the petroleum refining sector from being
considered an “eligible industrial sector.”40
Based on the best data available, EPA is to provide the rebate to eligible companies based on a
two-part formula: (1) 100% of the industry’s annual average emissions per unit of output over the
most recent four years multiplied by the company’s annual average output over the preceding two
years (direct emissions); and (2) average emissions per kilowatt-hour of electricity purchased by
the company multiplied by the industry average electricity used per unit of output over the
preceding two years multiplied by an electricity efficiency factor to be determined by EPA
(indirect emissions). Entities not covered by Title VII are eligible for the indirect emissions
rebate. If these formulas result in more allowance needs than provided under the bill, the
allocations to entities would be reduced on a pro rata basis to match the allowances available
(Section 764).
Unless modified by the President, the allowance rebates are phased out over a 10-year period,
beginning in 2026. Facilities that ceased to engage in qualifying activities would lose their
allocations at the point they ceased those activities. As provided in Sec. 767, the President may
modify the phase-out schedule for a sector if 15% or more of U.S. imports for that sector is still
produced in countries with inadequate carbon policies.
Eligible Industries
The designation of six-digit NAICS codes for determining eligibility adds a level of precision to
the program that could make implementation more straightforward than would otherwise be the
case. While there are about 450 manufacturing sectors designated at this level within these three
codes,41 it is likely that less than 50 of these would be deemed presumptively eligible under the
detailed requirements set out in the bills. During deliberations on H.R. 2454, the Energy-Intensive
Manufacturers’ Working Group on Greenhouse Gas Regulation provided detailed testimony on
the energy intensity and trade intensity of the U.S. manufacturing sector.42 These data, based on
analysis done for the Working Group by FTI Consulting, are presented in Figure 5 and Figure 6.
According to the Working Group, 47 sectors are presumptively covered under subpart 1. This
39
The provision also provides that iron and steel made with different processes and metal, soda ash, or phosphate
production classified under more than one NAICS code be treated as different categories under the section; and that
differences in use of combined heat and power technologies be taken into account.
40
H.R. 2454, as passed, new section 763(b)(2)(C).
41
The NAICS codes are updated every five years. H.R. 2454 specifically defines NAICS codes as 2002 NAICS codes.
See 2002 NAICS Definition, 31-33, Manufacturing, at http://www.census.gov/cgi-bin/sssd/naics/naicsrch?chart_code=
31&search=2002%20NAICS%20Search.
42
Testimony of John McMackin for the Energy Intensive Manufacturers’ Working Group on Greenhouse Gas
Regulation before the House Committee on Ways and Means (March 24, 2009), available at
http://waysandmeans.house.gov/media/pdf/111/mcm.pdf.
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number is considerably less than the 164 sectors and subsectors potentially covered under the EC
decision. The primary reason for the difference is that the main set of criteria incorporated in
subpart 1 includes all three of the factors discussed earlier: (1) the greenhouse gas intensity of a
company’s products which influences the company’s profitability and the products’ cost; (2) the
company’s ability to pass on any increased costs to consumers without losing market share or
profitability; and (3) the company’s ability to mitigate carbon emissions, reducing the impact of
the carbon policy on its operations and profitability.43
Figure 5. U.S. Manufacturing Exposed to Carbon Leakage Risk
Source: FTI, Greenhouse Gas Emissions Legislation: Leakage-Exposed Manufacturers: Briefing Book (June 2009).
43
The second set of criteria set up under Subpart 1 only adds one sector, lime manufacturing, to the list of
presumptively covered sectors.
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Figure 6. Presumptively Eligible Energy-Intensive, Trade-Exposed Industries
Source: FTI, Greenhouse Gas Emissions Legislation: Leakage-Exposed Manufacturers: Briefing Book (June 2009)
The EPA has also compiled a list of presumptively covered sectors; a list that is identical to that
above, with two exceptions: paperboard mills (322130) and beet sugar (311313) are not included
in the EPA list due to differences in data sources.44
44
U.S. Environmental Protection Agency, Comparison of FTI and EPA analyses of H.R. 2454, Title IV, Memorandum
to the House Energy and Commerce Committee Staff (June 10, 2009).
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Proposed Funding
Under H.R. 2454, energy-intensive, trade-exposed industries are allocated 2% of available
allowances in 2012 and 2013, 15% of available allowances in 2014, and 13.4% of available
allowances from 2015 through 2025. In addition, H.R. 2454 mandates that energy-intensive,
trade-exposed industries receive their share of allowance value provided local electric distribution
companies (LDCs) for electricity rebates. According to 2006 Bureau of Census data, the eligible
industries purchased between 295 billion (EPA list) and 315 billion (Working Group list)
kilowatt-hours of electricity.45 They represent between 29% and 31% of retail sales to the
industrial sector in 2006, or between 8% and 8.6% of total retail sales. Assuming a pass-through
of allowance value by the LDCs based on 2006 data, this would represent about 2.4% to 2.6% of
available allowances.
The allowances these allocations represent are presented in Figure 7. After 2025, the allocation to
energy-intensive, trade-exposed industries is phased-out over a 10-year period. The allocation to
LDC is phased-out over a five-year period, beginning after 2025.
Figure 7. Direct and Indirect Allowance Allocations to Energy-Intensive, TradeExposed Industries under H.R. 2454
1000
900
allowances (millions)
800
700
600
500
400
300
200
100
Direct
Indirect (EPA List)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
0
Indirect (WG List)
Source: H.R. 2454 and CRS calculations.
Notes: See text.
45
The data for NAICS 212210 and 212234 are for 2007.
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Analysis
Adequacy of Allocation
Both EPA and FTI (for the Working Group) have estimated the required allowances to
compensate eligible industries for their direct and indirect greenhouse gas emissions. According
to EPA, the total is 738 million allowances annually from 2014 through 2025, or 14.5% of
available allowances; for the Working Group, the total is 828 million allowances. The differences
result from higher estimates by the Working Group for paperboard, cement, plastics, iron and
steel processes, and phosphates and soda ash. A breakdown of annual emissions by direct and
indirect sources is provided in Table 1. In addition, the Working Group recommends an
additional 10% be included as a reserve for individual showings of need and for methodological
uncertainty. These contingencies raise the Working Group’s estimate to 910 million allowances
annually, or 16.2% of available allowances.
Table 1. Direct and Indirect Emissions from Eligible Industries
(annually, in million metric tons of CO2 equivalent)
Source
Direct Emissions
from Combustion
Direct Emissions
from Industrial
Processes
Indirect Emissions
from Electricity
Consumption
Total
EPA
383
173
183
738
FTI
413
198
216
828
Source: U.S. Environmental Protection Agency, Comparison of FTI and EPA analyses of H.R. 2454, Title IV,
Memorandum to the House Energy and Commerce Committee Staff (June 10, 2009).
Notes: EPA estimates are based on the average of 2004-2006 emissions, assuming no growth or efficiency
improvements through 2025. FTI estimates are based on 2007 emissions, assuming no growth or efficiency
improvements through 2005. Estimates do not include the reserve for individual showings of need and for
methodological uncertainty included in the Working Group estimate of 910 million metric tons of CO2
equivalent.
As noted above, after providing 15% of available allowances to energy-intensive, trade-exposed
industries in 2014, H.R. 2454 provides 13.4% from 2015 through 2025. This would compensate
between 82% and 92% of the industries projected direct and indirect costs. In addition, according
to H.R. 2454, all industry is eligible for the pass-through of allowance value provided via local
electric distribution companies (LDCs) (Sec. 783(b)(5)(D)). As noted above, based on Census
Bureau and Energy Information Administration (EIA) data, CRS calculates a “ballpark” estimate
of an additional 2.4% to 2.6% of available allowances being directed toward cost relief for
energy-intensive, trade-exposed industries.46 This estimate is considerably lower than the roughly
5% estimate provided to CRS by EPA. However, EPA notes that its numbers are overestimates of
46
This calculation mixes two data sets and, therefore, should be viewed as a ballpark estimate. The data on purchases
of electricity by the eligible sectors is from the U.S. Census Survey for 2006. The data for all retail sales is from the
Energy Information Administration (EIA) for 2006. Based on Census data, the eligible industries purchased between
295 (EPA’s List) and 315 (Working Group list) billion Kwhs in 2006. Based on EIA data, that is equal to about 29%31% of industrial sector retail sales or between 8% and 8.6% of total retail sales in 2006. All else being equal, eligible
energy-intensive industry should get about 2.4% to 2.6% of total available allowances via the LDC pass-through (30%
LDC allocation times 8%-8.6%).
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actual amounts because their model’s (ADAGE) energy-intensive manufacturing sector is “much
larger” than the industries made eligible by the language in H.R. 2454.47
As indicated by Figure 8, H.R. 2454’s allocation scheme would appear to provide sufficient
allowances if EPA’s estimates are correct. If the Working Group’s estimates are correct, or if
individual showings of eligibility prove significant, the pool of allowances provided by the bill
would not be adequate under the assumptions used here.
Figure 8. Projected Allowance Need and Allocation to Eligible Industries
(average annual, 2014-2025)
1000
million allowances annually
900
800
700
600
500
400
300
200
100
0
EPA
WG w/o
contingencies
Allowances Needed
WG w/ contingencies
Allowances Allocated
Source: CRS calculations and U.S. Environmental Protection Agency, Comparison of FTI and EPA analyses of H.R.
2454, Title IV, Memorandum to the House Energy and Commerce Committee Staff (June 10, 2009).
Notes: EPA estimates are based on the average of 2004-2006 emissions, assuming no growth or efficiency
improvements through 2025. FTI estimates are based on 2007 emissions, assuming no growth or efficiency
improvements through 2005. The Working Group w/o contingencies estimates do not include the reserve for
individual showings of need and for methodological uncertainty included in the Working Group w/ contingencies
estimate.
47
Email correspondence from Jared Creason, Ph.D., Climate Economics Branch, U.S. Environmental Protection
Agency (September 30, 2009).
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Whether the individual state public utility commissions (PUCs) (or other responsible body in the
case of publicly owned utilities or cooperatives) would work to ensure that LDCs did return to
industry the share provided it in the bill or would attempt to tilt allocations in favor of residential
consumers is disputed. The language of H.R. 2454 is clear with respect to providing energyintensive, trade-exposed industries with their share of the electricity rebate (Sec. 783(b)(5)), and
each allowance misused by a state would be considered a separate violation of the Clean Air Act.
H.R. 2454 requires a representative sample of LDCs to submit an annual report on
implementation of the electricity rebate; this is to include how they are complying with the
requirement to provide allowance value to energy-intensive, trade-exposed industries. A question
is whether or not this reporting requirement, along with EPA implementation of the enforcement
provision, would sufficiently influence LDC and PUC decision-making.
The Working Group has expressed great skepticism about the states’ public utilities commissions’
willingness to pass through savings to industry instead of favoring residential consumers—a
decision over which Congress would have limited influence. This skepticism may not be
unfounded. In an October 28, 2009, letter to Chairman Boxer and Ranking Member Inhofe of the
Senate Environment and Public Works Committee, the National Association of Regulatory Utility
Commissioners (NARUC) urged the Senate to think carefully before “handcuffing” state
regulators. As stated in the letter:
NARUC understands the need for federal oversight of what will undoubtedly be a significant
amount of money flowing between LDCs and consumers. However, we also believe that
State commissions are far more accountable to ratepayers than distant bureaucracies in
Washington, and are far more efficient at developing innovative and entrepreneurial clean
energy programs. State commissions know their localities and constituents best, and we are
obligated to ensure fair, just and reasonable rates. The Senate should give States more
leeway in distributing allowance proceeds so consumers can truly benefit.48
Effectiveness of Free Allowance Scheme
Both the EPA and the Energy Information Administration (EIA) have explicitly examined the
impact of H.R. 2454’s free allowance allocation to energy-intensive, trade-exposed industries. In
the EPA/ADAGE analysis, energy-intensive manufacturing output is projected to decline by 0.3%
from base case levels in 2015 and by 0.7% in 2020 without H.R. 2454’s free allocation scheme.
With the free allocation scheme, energy intensive manufacturing output is projected to increase
by 0.04% from base case levels in 2015, and then decline by 0.3% from base case levels in
2020.49 The free allocation scheme phases out in the 2020s.
The EIA/NEMS analysis of energy-intensive, trade-exposed industries also indicates that the free
allocation to those industries reduces the impact of H.R. 2454 that they would otherwise bear. As
stated by EIA:
Receiving these permits ameliorates the impact of increased energy prices and therefore
industries face energy prices that are not impacted by the permit values. As a result, when
energy prices increase, the reductions in output of these trade- and energy-vulnerable
48
Frederick F. Butler, President, National Association of Regulatory Utility Commissioners, Letter to Chairman Boxer
and Ranking Member Inhofe (October 28, 2009), p. 2.
49
U.S. Environmental Protection Agency, EPA Analysis of the American Clean Energy and Security Act of 2009: H.R.
2454 in the 111th Congress—Appendix (June 23, 2009), p. 42.
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industries are less than overall manufacturing impacts and mirror the impacts (in terms of
percentage change from the Reference Case) of total industrial shipments. In past EIA
analysis of industrial impacts of energy price increases, these energy-intensive industries
typically experience larger losses compared to overall manufacturing. 50 [footnotes omitted]
The overall effect of the free allocation over time can been seen in Figure 9, from the EIA report.
As indicated, the impact on energy-intensive, trade-exposed industries is comparable to that on
industry as a whole, suggesting that the allowance allocation has a positive effect in alleviating
any disadvantage they may have from being exposed to international competition from countries
without comparable carbon policies.
Although the scheme would appear effective in mitigating the trade-related impact of the program
on energy-intensive, trade-exposed industries, production cost for those industries (along with
other industries) could increase because of the potential pass-through of compliance-related costs
by upstream producers of various inputs into their manufacturing processes (e.g., feedstocks,
petroleum, etc.). Whether these costs would become significant would depend on the ability of
upstream suppliers to pass on those costs, and the ability of the downstream industries to respond
by increasing the efficiency of their operations or by substituting other, less-costly inputs into
their processes.
Figure 9. Industrial Impacts in the H.R. 2454 Basic Case, 2012-2030
(percent change from Reference Case)
Source: EIA, Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of
2009 (August 2009), p. 45.
50
EIA, Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009
(August 2009), p. 44.
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Phase-Out Schedule
H.R. 2454 provides that, unless modified by the President, the allowance rebates are phased out
over a 10-year period, beginning in 2026. In addition, the pass-through of allowance value from
LDCs is also phased-out, but on a shorter schedule (beginning in 2026 and reaching zero in 2030)
As provided in Section 767, the President may modify the phase-out schedule for the direct rebate
for a sector if 15% or more of U.S. imports for that sector are still produced by countries with
inadequate carbon policies.51 There is no such authority for extending the pass-through received
via the LDCs. As suggested by Figure 9, the EIA analysis assumes the phase-out begins on
schedule in 2026 and the result is declining output for energy intensive, trade-exposed industries.
This raises questions about the timing of any phase-out, and the extent to which the possible
modification of the phase-out schedule introduces uncertainty in corporate decision-making.
H.R. 2454, Title IV, Subpart 2: International Reserve
Allowance Scheme
Description of Program
Overview
If implemented, Title IV, subpart 2 of H.R. 2454 would require EPA to establish an international
reserve allowance scheme that would essentially impose a shadow allowance requirement on
importers of greenhouse gas-intensive, trade-exposed products, creating a de facto tariff.
Basically, the scheme would require importers of energy-intensive products from countries with
insufficient carbon policies to submit a prescribed amount of “international reserve allowances,”
or IRAs, for their products to gain entry into the United States. Based on the greenhouse gas
emissions generated in the production process, IRAs would be submitted on a per-unit basis for
each category of covered goods from a covered country. Specifically, Section 768 requires EPA to
promulgate rules establishing an international reserve allowance system for covered goods from
the eligible industrial sector, including allowance trading, banking, pricing, and submission
requirements.
While subpart 1 would limit the distribution of emission allowances to eligible industrial sectors,
Part F’s definition of the term “covered goods,” a term used only in subpart 2, goes beyond goods
produced by eligible industrial sectors to include a “manufactured item for consumption” (i.e.,
51
More specifically, and as discussed later in this report, beginning June 30, 2018, and every four years thereafter, the
President would be required to determine for each eligible industrial sector whether more than 85% of U.S. imports for
that sector is from countries that are either (1) parties to international agreements requiring economy-wide binding
national commitments at least as stringent as those of the United States, (2) have annual energy or greenhouse gas
intensities for the sector comparable or better than the equivalent U.S. sector, or (3) parties to an international or
bilateral emission reduction agreement for that sector. If not, the President would be required, no later than June 30,
2018 (and every four years thereafter), to assess the effectiveness of subpart 1 rebates and the international reserve
allowance program in mitigating or potentially mitigating the carbon leakage in that sector, and respond by (1)
modifying the rebate formula under subpart 1, and (2) implementing (or continuing to implement) an international
reserve allowance program with respect to imports of covered goods from that sector.
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finished goods, which could involve items ranging from aluminum cans to automobiles). 52
Allowances would potentially be required for importation into the United States of goods from a
covered country that correspond to goods produced by U.S. eligible industrial sectors and, in
some cases, for the importation of manufactured items for consumption from such countries.
The program would need to be consistent with U.S. commitments under international agreements,
and in a manner that minimizes the likelihood of carbon leakage resulting from cost differentials
resulting from compliance by U.S. companies with the U.S. reduction program compared with
compliance by foreign companies with their nation’s reduction program. The EPA would be
required to adjust the international reserve allowance requirement based on the value of
allowances allocated free under subpart 1 and under Section 782(a) (electricity providers),
including reducing the requirement to zero. The international reserve allowances issued under this
program may not be used by covered entities to comply with the domestic emissions cap under
Title VII. Also, this program may not apply to imports entering the United States before January
1, 2020.
Initial Action: Section 765
Under Section 765, the President is required as soon as practicable after enactment to notify all
non-exempted countries that the United States (1) seeks international agreements that commit all
major emitting nations to contribute equitably to reducing greenhouse gas emissions; (2) requests
the country take appropriate measures to limit its greenhouse gas emissions; and (3) may apply
the international reserve requirements of this subpart to a covered good beginning on January 1,
2020. Exemptions are provided under section 768(a)(1)(E) for the (1) least developed countries,
(2) countries that emit less than 0.5% of global greenhouse gas emissions and have minimal
export trade with the United States in covered sectoral products, and (3) countries meeting the
comparability criteria of Section 767 (discussed below).
Section 766 states the environmental and economic elements the United States would seek in
negotiating an international greenhouse gas reduction agreement.
Further Requirements and Criteria: Section 767
The President is further required by January 1, 2017 (and biannually thereafter), to submit a
report to Congress on the effectiveness of the emission rebates under Subtitle 1 at mitigating
carbon leakage and recommendations on improving the subtitle’s purposes.53 The report must also
include an assessment, for each industrial sector receiving rebates, as to whether, and by how
much, the per unit cost of production has increased for the sector, taking into account the
provision of the rebates to the sector and the benefit received by the sector from the provision of
free allowances to electricity providers under new section 782(a). In addition, the report must
contain recommendations on improving the purposes of subpart 2, including an assessment of
whether an IRA program for the eligible industrial sector would be feasible and useful. Further, to
the extent that the President determines that an IRA program would not benefit a particular
52
Also, under subpart 2, iron and steel produced by different processes shall be considered as one eligible industrial
sector (Section 769). In contrast, subpart 1 would consider entities using different iron and steelmaking processes to be
in different industrial sectors (Section 764(d)).
53
H.R. 2454, as passed, new section 767(a).
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eligible industrial sector because its exposure to carbon leakage is due to competition in third
country markets (i.e., occurs because of the sector’s export trade), the President would need to
identify alternative actions or programs consistent with the purposes of subpart 2. The President
could also determine in such a case that an IRA program will not apply to the sector, though the
determination must be approved by Congress (see below). Finally, the report must assess the
amount and duration of assistance, including the distribution of free emission allowances, being
provided to industrial sectors in other developed countries to mitigate compliance costs for
domestic greenhouse gas (GHG)-reduction in those countries.
In addition, unless there is a multilateral agreement on reducing greenhouse gases in force for the
United States by January 1, 2018, the President would be required to establish an international
reserve allowance program for all eligible sectors unless the President determines, and the
Congress concurs, that a sector covered under the program, or inclusion of a sector within that
program, would not be in the nation’s economic or environmental interests.54 To become
effective, each such determination would need to be approved by both houses of Congress within
90 days after the President submitted his determination.55 Precisely when such a presidential
determination and congressional concurrence must occur is not explicitly stated; however, a strict
interpretation would suggest it must occur before the President is required to make his next
determination under the bill’s provisions on June 30, 2018.
Beginning June 30, 2018, and every four years thereafter, the President would be required to
determine for each eligible industrial sector whether more than 85% of U.S. imports of “covered
goods” for that sector are produced or manufactured in countries that meet one of these criteria:
(1) the country is party to “an international agreement to which the United States is a party
that includes a nationally enforceable and economy-wide greenhouse gas emissions
reduction commitment for that country that is at least as stringent as that of the United
States”;
(2) the country is a party to a multilateral or bilateral emission reduction agreement for that
sector to which the United States is a party; or
(3) the country has annual energy or GHG intensity for the sector comparable to or less than
the energy or GHG intensity for the sector in the United States for the most recent year for
which data are available.56
The bill does not appear to specify a time period within which the imports used in the calculation
must have entered the United States, nor does it specify whether the quantity of imports is to be
calculated on the basis of the value of the imports or on the basis of output (i.e., units imported).57
54
H.R. 2454, as passed, new section 767(b).
Any such joint resolution would be considered under an expedited legislative procedure set out in section 152 of the
Trade Act of 1974, 19 U.S.C. § 2191, providing for automatic discharge of the resolution from committee, a prohibition
on amendments, and limited floor debate in the House and Senate. H.R. 2454, as passed, new section 767 (b)(2)-(3).
56
H.R. 2454, as passed, new section 767(b)(1)(emphasis added). Although H.R. 2454 anticipates Senate or
congressional approval of a multilateral GHG-reduction agreement, it does not appear to indicate how a sectoral
agreement should be treated were such an agreement to be signed by the United States.
57
Note that, for purposes of determining whether an industrial sector is eligible for free allowances, EPA would
determine trade intensity by reference to the value of imports and exports (new section 763(b)(2)(A)(iii)).
See also the definition of “output” at H.R. 2454, as passed, new section 762(7) (“The term ‘output’ means the total
tonnage or other standard unit of production (as determined by the Administrator) produced by an entity in an industrial
(continued...)
55
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If the 85% threshold is not exceeded, the President would be required to assess the effectiveness
of both rebates (including the benefit that the sector receives from the provision of free
allowances to electricity providers) and an IRA program in addressing or mitigating, or
potentially addressing or mitigating, carbon leakage in that sector. The President would then need
to respond by (1) modifying the rebate formula and (2) implementing (or, in the case of future
determinations, continuing to implement) an IRA program for the sector.58 If the threshold is
exceeded, however, the President would be expressly prohibited from applying a sectoral IRA
program.59
Effectively, the international reserve allowance program would be established for all eligible
sectors unless the Congress (or the Senate, in the case of a treaty) approves a multilateral
agreement reducing greenhouse gases and the agreement enters into force for the United States, or
the Congress votes to concur with a presidential determination that including an eligible sector
would not be in the nation’s economic or environmental interest. Further, once the program is
established for a sector, H.R. 2454 would not permit the President to determine, as a result of his
assessments, whether or not the rebate formula should be altered or an IRA program should be
applied. By not providing for this intermediate step, the bill would effectively make these two
actions mandatory once the President had determined that the 85% threshold had not been
exceeded for the sector involved. In the event a program is to be applied, the bill would prohibit
IRAs from being collected on goods imported into the United States before January 1, 2020.60
EPA Implementing Regulations: Section 768
If implemented, section 768 requires that the regulations that EPA issues for an IRA program for
an eligible industrial sector contain specific elements. The regulations must be issued with the
concurrence of U.S. Customs and Border Protection (CBP), which has general statutory
responsibility over the entry of goods into the United States, including the assessment and
collection of duties and fees on imported products. Such regulations must
•
establish an IRA program for the sale, exchange, purchase, transfer, and banking of IRAs for
covered goods with respect to the sector;
•
ensure that the price for purchasing IRAs from the United States on a particular day is
equivalent to the auction clearing price for emissions allowances [under the new cap-andtrade provisions of Title VII] for the most recent emission allowance auction;
•
establish a general methodology for calculating the quantity of IRAs that a U.S. importer of
any covered good must submit;
•
require the submission of appropriate amounts of IRAs for covered goods with respect to the
eligible industrial sector that enter U.S. customs territory;
(...continued)
sector”).
58
H.R. 2454, as passed, new section 767(d).
59
H.R. 2454, as passed, new section 767(d)(2).
60
H.R. 2454, as passed, new section 768(e).
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•
specify the procedures that CBP will apply for the declaration and entry of the sector’s
covered goods into U.S. customs territory;
•
establish procedures that prevent circumvention of the IRA requirement for covered goods
that are manufactured or processed in more than one foreign country. 61
In establishing a general methodology for calculating the required number of IRAs for a covered
good, EPA would be required to include an adjustment based on the value of rebates distributed to
the eligible industrial sector involved as well as the benefit received by the sector from free
allowances received by electricity providers under the bill.62 In applying such an adjustment, EPA
would be permitted to determine that the amount of IRAs for a given product should be zero.
In addition, in administering a sectoral IRA program, EPA would need to exempt goods
originating in three categories of countries from the border IRA requirement: (1) countries
meeting any of the three standards set out in the new Section 767 for determining if a country had
taken adequate action to reduce its GHG emissions for a sector, and ultimately, whether the
corresponding U.S. industrial sector merited further assistance (see below); (2) the least
developed of developing countries (LDDCs); and (3) countries that the United States determines
are de minimis emitters responsible for less than 0.5% of total global greenhouse gas emissions
and for less than 5% of U.S. imports of covered goods for an eligible industrial sector.63
The bill would also require the EPA to establish the IRA program “consistent with international
agreements to which the United States is a party.”64 Absent a limiting definition in the bills, this
requirement would seemingly encompass all U.S. international agreements, including both
environmental agreements and international trade agreements.
Decision-Making Process
Figure 10 is a flow chart that traces the decision-making process of the International Reserve
Allowance scheme created by the Center for Clean Air Policy.65
61
H.R. 2454, as passed, new section 768(a)(1)(A)-(D), (F)-(G).
H.R. 2454, as passed, new section 768(b).
63
H.R. 2454, as passed, new section 768(a)(1)(E).
64
H.R. 2454, as passed, new section 768(a)(2). As noted earlier, H.R. 2454 also sets out as one of the purposes of
subpart 2, “to ensure that the measures described in subpart 2 are designed and implemented in a manner consistent
with applicable international agreements to which the United States is a party.” H.R. 2454, as passed, new section
761(c)(2).
65
Center for Clean Air Policy, Summary of Provisions to Protect the Competitiveness of U.S. Industry in the American
Clean Energy and Security Act (July 23, 2009), p. 24.
62
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Figure 10. Decision Tree for IRA Scheme
Source: Center for Clean Air Policy, Summary of Provisions to Protect the Competitiveness of U.S. Industry in the
American Clean Energy and Security Act (July 23, 2009), p. 24.
Analysis
Potential Impact
No analysis of subpart 2 and its impact on trade has been conducted. Indeed, the only analysis of
an IRA scheme that has been done at all is one conducted by EPA (ADAGE) with respect to Title
VI of S. 2191, introduced in the 110th Congress.66 In that report, EPA’s sensitivity analysis
indicated that if countries without legally binding commitments to reduce greenhouse gases
commit to maintaining their 2015 levels beginning in the year 2025, and to returning their
emissions to 2000 levels by 2050, no international emission leakage occurred. Imports of energyintensive goods were projected to fall under this scenario, while exports expanded as developing
countries coped with their new emission limits.
66
EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14,
2008).
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In a worst case scenario, EPA’s 2008 sensitivity analysis looked at a no-international-actions-to2050 scenario. In this scenario, the International Reserve Allowance provisions of S. 2191 were
assumed to be triggered because of the lack of international action. Emissions from countries
without legally binding commitments were estimated to rise by 350 million metric tons of CO2e
by 2030 and 385 million metric tons by 2050—less than 1% of their base case levels under
ADAGE. It would have been equivalent to U.S. emission leakage rates of approximately 11% in
2030 and 8% in 2050. These emissions compared with increases of 361 million metric tons and
412 million metric tons for 2030 and 2050, respectively, if the IRA provisions were not
implemented. EPA described the impact of the IRA program on leakage as “minimal.”67
The projected impact on imports was more significant. Without the International Reserve
Allowance requirement, imports from countries without legally binding commitments were
projected to increase 5.4% in 2030, rising to 7% in 2050. In contrast, under the IRA provisions,
imports were estimated to increase about 1% in 2030 and decline about 5% in 2050. U.S. exports
declined in both cases as countries used more of their domestic manufacturing capacity.68
If the EPA projections for S. 2191 are transferable to H.R. 2454, the differential effect of IRA
provisions on trade versus emissions leakage could present problems if the scheme is brought
before the World Trade Organization (WTO).
In addition, this analysis does not fully account for the nature of international trade. Trade and
economics involve dynamic processes that can respond to public policy in unanticipated ways.
For example, trade sanctions based on primary goods, such as steel and aluminum, could have
impacts on domestic downstream industries. An increase in the cost of raw steel or aluminum
could drive up the costs of domestically manufactured finished products, such as automobiles,
and encourage foreign countries to export more finished products to the United States. Indeed, a
country could redirect its exports from primary goods to finished goods to avoid the trade
sanctions. For example, South Korea, which exports both raw steel and automobiles, could focus
its industrial policy toward automobile exports and away from raw steel exports. Thus,
downstream companies that use greenhouse gas-intensive goods could have their competitiveness
undermined by attempts to protect greenhouse gas-intensive, trade-exposed industries,
particularly if their goods do not meet the criteria for “items manufactured for consumption”
provided in the bill.
Data Needs
As noted earlier under the discussion of the EC’s list of eligibility, lack of data prevented the EC
from determining the carbon efficiency of installations in foreign countries (and thus their
comparability with installations within the EU) as part of the criteria set out in Article 10a(18) of
Directive 2003/87/EC. Instead, the EC chose to ignore the issue. This is not an option under
subpart 2.
While official emission data in the United States generally take about one to two years to be
collected, quality assured, and published, many other countries do not have the infrastructure to
67
EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14,
2008), p. 84.
68
EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14,
2008), p. 85.
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create emission data on a timely basis. Under the United Nations Framework Convention on
Climate Change (UNFCCC), the Amost recent year@ for emissions data for many countries is
1994. While U.S. emissions data are more reliable, the lack of equally reliable data for foreign
countries may well prevent the United States from adequately determining whether the same
conditions prevail in foreign countries and the United States (i.e., whether foreign GHG-reduction
programs are in fact comparable to the United States). Moreover, the lack of reliable data may
prevent the executive branch from properly determining whether the same conditions prevail in
foreign countries relative to each other, that is, determinations may be made on different
quantitative bases for different countries depending on data availability. The quality of data would
also be a factor in determining which countries are not high emitters and are thus excluded from
the import requirement altogether. Unreliable data may be particularly troublesome in
implementing a statutory cutoff point and countries may fall just above or below the threshold.
For example, China submitted its “Initial National Communication on Climate Change” to the
UNFCCC in October 2004.69 The emission inventory included in that submission was for 1994.
While China notes that its 1994 inventory was prepared in accordance with approved guidelines,
uncertainties remained. It provides two reasons for the uncertainties:
Firstly, as a developing country, China has a relatively weak position with regard to data, and
in particular has many difficulties in obtaining activity data for estimating GHG emissions;
Secondly, though sample surveys and on-the-spot examinations were carried out to some
extent in the energy, industrial processes, agriculture, land-use change and forestry, and
waste treatment sectors to collect the basic data for inventory development, the time span and
specific sample observation points may not be fully representative due to the constraints in
funding, time available and other factors.70
China is not alone. Emission data troubles exist for most Anon-Annex 1@ countries, that is,
countries that are not subject to legally binding emission reductions under the Kyoto Protocol to
the UNFCCC. As stated by the UNFCCC in its 2005 synthesis of initial national communications
from non-Annex 1 countries: “Most Parties [non-Annex 1 countries] reported difficulties in
preparing their GHG inventories, and indicated that their technical and institutional capacities
were inadequate to meet their reporting obligations under the Convention for both the preparation
and updating of national GHG inventories.”71
Other data-related aspects of subpart 2 may also raise implementation issues. For example, as
noted above, the most recent year for which official data on Chinese greenhouse gas emissions is
available is 1994. In contrast, the most recent calendar year for which official data of Chinese
69
The People’s Republic of China, Initial National Communication on Climate Change (Beijing, October 2004).
Id. at 4. Continuing on page 33 of the document, China says specifically with respect to the energy inventory:
“Because existing statistical materials and data could not meet the needs for preparing the inventory, part of the activity
data could only be obtained by adopting the methods of investigation and experts’ judgment. For example, activity data
by device in some important industries such as building material and metallurgy was based on experts judgment; owing
to the lack of the measured data on emission factors from coal combustion by sector and by device, the relevant
potential emission factors and oxidations rates could only be determined through case studies, questionnaires and
partial supplementary measurements; due to the lack of detailed measurement data, methane emissions under different
circumstances from different types of biomass stoves could only be estimated by using the same emissions factors. All
those would affect the accuracy of energy inventory.”
71
United Nations Framework Convention on Climate Change, Subsidiary Body for Implementation, Sixth compilation
and Synthesis of Initial National Communications for Parties not included in Annex I to the Convention: Addendum:
Inventories of anthropogenic emissions by sources and removals by sinks of greenhouse gases,
FCCC/SBI/2005/18/Add.2 (October 25, 2005), p. 10.
70
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production of major industrial goods (e.g., steel, iron, cement, etc.) are available is 2005.72 This
calculation may produce not only an uneven result for a particular country, but the results for
different countries may vary depending on the years for which data are available and thus provide
uneven results between countries. For example, in contrast to China’s 1994 emissions inventory,
the latest submission to the UNFCCC by South Korea provides an emissions inventory for
2001.73 Multiply these differences between countries across affected sectors, subsectors, primary
goods, and “items manufactured for consumption,” and EPA’s ability to create the matrix of data
necessary to implement the scheme becomes problematic, at best.
Presidential Determination to Exclude a Sector
In the absence of a qualifying multilateral GHG-reduction agreement, H.R. 2454 would permit
the President to determine that an IRA program should not be established for an eligible industrial
sector because it would not be in the national economic or environmental interest of the United
States to do so. As evident from possible contents of the President’s initial report to Congress,
legislators would have contemplated that such determinations might involve eligible exportdependent industrial sectors. The bill would not appear, however, to expressly preclude the
President from making such a determination regarding any sector that he saw fit to exclude.
Nevertheless, since Congress would have apparently distinguished between sectors depending on
whether their primary trade exposure from the U.S. cap-and-trade program is on the import or
export side, it may be more difficult to secure congressional approval for excluding a sector
whose primary concern is the adverse effect of imports into the United States from countries that
do not have GHG-reduction programs or have not made commitments to create them. This
outcome may be even more likely given that there does not appear to be authority in the bill for
the President to establish an IRA program for a sector once Congress has approved its exclusion.
Whether Congress would agree with a presidential request to exclude a sector could be a key
question for other countries engaged in negotiations on multilateral GHG-reduction agreements.
“Covered Goods”
An IRA program would apply to “covered goods” for an eligible industrial sector, defined in the
legislation as any good, as identified by EPA, that is produced by the relevant sector, as well as
any “manufactured item for consumption,” that is, a good that “includes in substantial amounts
one or more goods like the goods produced by an eligible industrial sector” (i.e., a downstream
item such as car or refrigerator in the case of steel products).74 Further, the bill appears to intend
that an IRA program be in effect for that eligible industrial sector and that the product or products
included in the downstream item be subject to IRA allowances greater than zero.75 In addition, the
72
National Bureau of Statistics of China, China Statistical YearbookC 2006, p. 14-24, available at
http://www.stats.gov.cn/tjsj/ndsj/2006/indexeh.htm.
73
See the UNFCCC website at http://unfccc.int/di/DetailedByParty/Event.do?event=go.
74
H.R. 2454, as passed, new section 762(2).
75
The definition of “manufactured item for consumption” lists several requirements that must be met for a product to
qualify as such, including that the good be one, “(ii) with respect to which an international reserve allowance program
pursuant to Subpart 2 is in effect with regard to the eligible industrial sector and the quantity of international reserve
allowances is not zero …” While the definition would make item (ii) applicable to the good for which the petition is
filed, it would appear that item (ii) could logically apply only to the goods that are contained in the manufactured item.
First, the producers filing the petition to include the particular “manufactured item for consumption” as a “covered
good” could not have been part of an eligible industrial sector with an IRA program since, if they were, their goods
(continued...)
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industrial sector producing the good must have a trade intensity level of 15% or more and the
producers of the good must demonstrate, and EPA must determine, that applying IRAs to the
good is technically and administratively feasible and appropriate to achieve the purposes of Part
F, taking into account the energy and GHG intensity of the sector producing the good (as
determined under the formula that would be used to determine these levels for purposes of its
qualifying as an “eligible industrial sector”), the ability of these producers to pass on cost
increases, and “other appropriate factors.”
While the bill would require that the sector producing the good meet the same trade intensity
level needed to qualify as an eligible industrial sector, the bill appears to treat energy or GHG
intensity differently, making the producers’ existing levels, whatever they may be, a factor for the
EPA to consider in deciding whether IRAs are feasible and appropriate to apply. In other words,
in order to have their product be included as a “covered good,” petitioning producers may not
necessarily be expected to meet all the requirements for being deemed an “eligible industrial
sector” for purposes of Part F, whether presumptively or by petition.
“Manufactured Items for Consumption” (Downstream Items)
By including manufactured items for consumption, H.R. 2454 would allow a good that otherwise
would not be a product of a sector eligible for an IRA to be treated as if it were and the good
would thus be a covered good that might qualify for the IRA program. As explained earlier, we
are assuming that the legislation intends that an IRA program already be in effect for the eligible
industrial sector producing the “like” input or inputs into the manufactured item and that the IRA
requirement for the input or inputs is greater than zero. It is unclear, however, what the word
“like” means for purposes of this threshold requirement. While it could, but does not necessarily,
mean identical, how dissimilar the imported input or inputs could be from the goods that are
produced domestically is not specified.76
Whether such a manufactured good would qualify for inclusion would depend in part on the trade
intensity of the sector that produces the good. In addition, producers would seemingly need to
provide EPA with a strong factual and analytical basis to allow it to determine that applying IRAs
to the product would be technically and administratively feasible and appropriate in the
circumstances. As noted earlier, however, producers would not appear to be required to meet the
energy and GHG intensity standards needed to qualify as an “eligible industrial sector” in making
their case and, moreover, “other appropriate factors,” unidentified in the bill, could enter into
their argument and EPA’s ultimate determination. Overall, while the rationale for including goods
produced by an eligible industrial sector in an IRA program is clear, the application of an IRA
program to manufactured goods for consumption could be problematic in that it would extend the
benefits of an IRA program to an industry that would not have initially qualified as an eligible
industrial sector and may yet have difficulty doing so.
(...continued)
would already have been at least potentially subject to IRAs. Second, the good for which the petition is filed could not
be one for which the quantity of IRAs is greater than zero, since the good would not yet be included in the sectoral
program.
76
The term “like product” is used in GATT obligations involving most-favored nation and national treatment, which
prohibit WTO Members from discriminating between like products imported from different countries or between like
imported and domestic items. “Likeness” is ordinarily determined by comparing products under four criteria: physical
properties, end-uses, consumer preferences, and tariff classification. See, generally, World Trade Organization, WTO
ANALYTICAL INDEX; GUIDE TO WTO LAW AND PRACTICE 145-48, 163-67 (2d ed. 2007).
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Emphasis on International Action
As noted above, subpart 2 states that its purpose would be best achieved through international
agreements negotiated by the United States and foreign countries and, to this end, states that it is
U.S. policy to “work proactively under the United Nations Framework Convention on Climate
Change, and in other appropriate fora, to establish binding agreements, including sectoral
agreements, committing all major greenhouse gas-emitting nations to contribute equitably to the
reduction of global greenhouse gas emissions.”77 The bill also sets out U.S. negotiating objectives
for the multilateral environmental negotiations contemplated in the bill. These are
to reach an “internationally binding” agreement in which all major GHG-emitting countries
“contribute equitably” to the reduction of global GHG emissions;
to include provisions “that recognize and address the competitive imbalances that lead to
carbon leakage and may be created between parties and non-parties to the agreement in
domestic and export markets” and not to prevent agreement parties from addressing “the
competitive imbalances that lead to carbon leakage and may be created by the agreement
among parties to the agreement in domestic and export markets”; and
to include “agreed remedies” for any agreement party that fails to meet its GHG reduction
obligations under the agreement.78
The bill also states that nothing in the negotiating objective involving competitive imbalances
may be construed to require the United States to alter provisions of new section 764, providing
for the distribution of emission allowance rebates.79
As discussed below, these objectives would be taken into account by the Senate or Congress
when it considers whether to approve any resulting multilateral GHG-reduction agreement.80
Whether the United States is a party to such an agreement by January 1, 2018, would determine
whether the President must initially establish IRA programs for eligible industrial sectors.
Further, if such programs are established, the existence of a multilateral GHG-reduction
agreement would be a factor used by the President in determining whether an IRA program
should be applied with respect to a particular eligible sector for a given four-year period.
As noted above, the President would be required to establish an IRA program for each eligible
industrial sector if, by January 1, 2018, a multilateral GHG-reduction agreement consistent with
the bill’s negotiating objectives has not entered into force for the United States, unless Congress
has approved a presidential determination to exclude a sector.81 H.R. 2454 would utilize the
legislative approval process for the contemplated international agreement as a vehicle for
Congress to indicate whether or not the agreement meets the legislative negotiating objectives
outlined above. Thus, if, in submitting an agreement to the Senate or Congress, the executive
branch indicates that the agreement is consistent with these objectives, the agreement will be
77
H.R. 2454. as passed, new section 765(a)-(b).
H.R. 2454, as passed, new section 766(a).
79
H.R. 2454, as passed, new section 766(b).
80
The bill does not indicate how many countries other than the United States must be a party to the multilateral
agreement for it to be acceptable to the Senate or Congress under these provisions. By definition, a multilateral
agreement qualifies as such so long as it has at least three parties.
81
H.R. 2454, as passed, new section 767(b)(1).
78
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considered to be consistent as of the date that the Senate consents to the agreement or “legislation
is enacted implementing such other agreement.” 82 The Senate or Congress may state in any such
ratification or implementing measure, however, that the agreement should not be treated as
consistent with these objectives for purposes of the requirement to establish IRA programs and
for purposes of new section 768. It is under this section that EPA would issue regulations
implementing an IRA program for each eligible industrial sector in the event that a qualifying
agreement has not entered into force by January 1, 2018. As discussed below, any such
regulations must exclude goods originating in any country that is a party to an international
agreement to which the United States is also a party requiring a binding national GHG-reduction
commitment as stringent as that of the United States.
Even if the multilateral GHG reduction agreement, by virtue of its approval by the Senate as a
treaty or by Congress as a congressional-executive agreement, were deemed to be consistent with
legislative negotiating objectives as of a date that meets the January 1, 2018, deadline, the
agreement would still need to meet the other requirement of new section 767(b)(1), namely, that
the agreement has entered into force for the United States. For this to occur, the agreement itself
would have to have entered into force, a situation that ordinarily occurs when an earlier agreed
upon number of countries have accepted or acceded to it, and the United States would need to
have deposited its instruments of ratification or accession with the entity designated under the
agreement to receive them (i.e., officially accept the treaty or agreement obligations as a matter of
international law and thereby become a party to it). This process raises the question of
implementing legislation since the United States might not accede to a treaty or international
agreement until any legislation needed to enable it to fully perform its treaty or agreement
obligations under domestic law is enacted.83 Thus, even though the bill, with its cap-and-trade
program and other GHG-reduction provisions, would have been enacted into law to arrive at this
point, further legislative action to implement the treaty or agreement could still conceivably be
needed, a requirement that may further delay its entry into force for the United States.84
82
H.R. 2454, as passed, new section 767(b)(4).
See Vienna Convention on the Law of Treaties art. 26 (“Every treaty in force is binding upon the parties to it and
must be performed by them in good faith”); id. art. 27 (“A party may not invoke the provisions of its internal law as
justification for its failure to perform a treaty”); and RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE
UNITED STATES § 111, reporters’ note h (1987).
Note, for example, the history of the multilateral Basel Convention on the Control of the Transboundary Movements of
Hazardous Wastes and their Disposal. When the President submitted the Convention to the Senate in 1991, the
accompanying transmittal notice stated that “[b]efore the United States can deposit its instrument of ratification,
changes in domestic law will be needed.” S. Treaty Doc. 102-5, at X (1991). While the executive branch proposed
implementing legislation to Congress at the time and the Senate gave its consent to the Convention in August 1992, 138
Cong. Rec. 22,861 (1992), implementing legislation has not yet been enacted and the United States has not become a
Convention party. For additional background information on the deposit of instruments of ratification for a treaty or
international agreement, see, generally, Treaties and Other International Agreements: The Role of the United States
Senate; A Study Prepared for the Senate Committee on Foreign Relations by the Congressional Research Service 14750 (January 2001)(S. Prt. 106-71).
Implementing legislation may also address other implementation issues, such as the relationship of the agreement to
federal and state law and whether private rights of action based on the agreement are allowed. See, for example,
Uruguay Round Agreements Act, P.L. 103-465, § 102, 19 U.S.C. § 3512.
84
It is unclear whether the implementing legislation referenced in new section 767(b)(4), the provision setting out how
consistency with U.S. negotiating objectives would be established for a congressional-executive agreement, would also
include provisions implementing the agreement as a matter of domestic law. Cf. Trade Act of 2002, § 2103(b)(3)(B), 19
U.S.C. § 2103(b)(3)(B), distinguishing between legislative provisions approving a trade agreement and provisions
making changes in domestic law to implement the agreement. Moreover, if the multilateral GHG-reduction agreement
is approved as a treaty, separate implementing legislation may still be needed.
83
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Some of these concerns may also arise with respect to the multilateral and bilateral sectoral
agreements whose existence would be a factor in the President’s determination as to whether the
85% import threshold is exceeded for an eligible industrial sector. The United States must be a
party to any such agreement, and thus questions related to approval and implementation may need
to be addressed. At the same time, H.R. 2454 is more lenient with respect to the elements of
sectoral agreements than it is with respect to the multilateral GHG-reduction agreement that
would moot the requirement that IRA programs be established or be taken into account in
determining whether the import threshold was met. H.R. 2454 places no requirements on the
content of a sectoral agreement, and thus the executive branch would seemingly have discretion
to agree to sectoral GHG-reduction commitments that are weaker than some would like. In such
case, increasing the percentage to be applied to the base figure (i.e., U.S. imports) in Housepassed H.R. 2454 may have been a way of making it more difficult to reach the threshold when
goods imported from one or more countries that are party to such sectoral agreements would be
included within the calculation.
Reactions from Other Countries: Defining “Comparable” Actions
There is a high probability of unintended consequences from subpart 2 as other countries react to
the threat of a tariff. One potential consequence of subpart 2 is that foreign countries with more
stringent carbon polices than those proposed in the United States could turn the tables and impose
their own tariffs on U.S. goods exported to them. As discussed earlier, the EU has already agreed
to a more stringent reduction program to the year 2020 than H.R. 2454 entails. Even if subpart 2
programs did not target the EU (because of the “comparable” provisions), it is conceivable that
the EU might target the United States because of the U.S. lack of a reduction target “comparable”
to that of the EU.
The argument about “comparability” could also extend to developing countries who are targeted
by subpart 2. Targeted foreign countries could take the subpart’s concept of comparability and
employ a different metric—a metric more favorable to their situation—than the standard that
subpart 2 would impose. For example, as illustrated in Table 2, developing countries could
attempt to define comparability in terms of per capita greenhouse gas emissions. By that metric,
China’s greenhouse gas emissions are only one-quarter of those of the United States. For India,
the metric is even more favorable; its emissions are only 8% of those of the United States. Based
on this, or some other favorable metric, developing countries, such as China or India, could also
turn the tables on the United States and impose their own tariffs on U.S. goods.
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Table 2. Comparison of Top-20 Greenhouse Gas Emitting Countries
(2005 data)
2005 Rank
Country
Annex 1
2005
GHG Emissions
MMTCE
2005
Per Capita
GHG Emissions
(tons C/person)
1
China
No
1,970
1.5
2
United States
Yes
1,901
6.4
[3]
European Union-27
Yesa
1,378
2.8
3
Russian Federation
Yes
535
3.7
4
India
No
506
0.5
5
Japan
Yes
366
2.9
6
Brazil
No
277
1.5
7
Germany
Yes
267
3.2
8
Canada
Yes
200
6.2
9
United Kingdom
Yes
175
2.9
10
Mexico
No
172
1.7
11
Indonesia
No
162
0.7
12
Iran
No
155
2.2
13
Italy
Yes
154
2.6
14
France
Yes
150
2.5
15
Korea (South)
No
150
3.1
16
Australia
Yes
150
7.3
17
Ukraine
Yes
132
2.8
18
Spain
Yes
120
2.8
19
South Africa
No
115
2.5
20
Turkey
Yes
107
1.5
7,764
Totalb
WORLD
10,569
1.6
Source: Climate Analysis Indicators Tool (CAIT) Version 6.0. (Washington, DC: World Resources Institute,
2008).
a.
The Kyoto Agreement gave explicit authority to the original 15-member European Union to meet its
obligations collectively; the EU has, in effect, expanded that authority as it has incorporated new members.
If the EU-27 were ranked in terms of its 2005 GHG emissions, it would place 3rd.
b.
Totals are of the 20 individual nations; they do not include the European Union.
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Implications for International Trade Obligations85
Both vehicles in Title IV of H.R. 2454 aimed at competitiveness and leakage concerns—the
granting of free emission allowances to domestic firms and the imposition of border measures on
imported products—raise issues involving U.S. obligations under World Trade Organization
(WTO) agreements.86 Legislation providing free emission allowances to carbon/energy-intensive
trade-exposed industries may arguably confer a subsidy for purposes of the WTO Agreement on
Subsidies and Countervailing Measures. Although the bill would require EPA to establish a
border measure (IRA) program consistent with U.S. international agreements, a category that
would include U.S. trade agreements,87 a requirement that importers purchase IRAs to accompany
particular imports might nonetheless be found to constitute a prohibited import surcharge or, if
the product may not otherwise enter the United States, a prohibited quantitative restriction under
the General Agreement on Tariffs and Trade 1994 (GATT).88 If so, the requirement would need to
be justified under a GATT exception to survive a WTO challenge. It is important to emphasize
that while earlier GATT and WTO cases may provide a guide to the types of issues that may
concern a WTO panel applying and interpreting GATT exceptions, measures are judged on a
case-by-case basis. Thus, earlier decisions may not be fully predictive where a Member seeks to
justify a novel and complex measure that affects a broad range of imported products, production
processes, sources of manufacture, and trading partners.
Since the negotiating objectives set out in H.R. 2454 contemplate that a multilateral GHGreduction agreement may include provisions permitting, or at least not prohibiting, individual
parties to address trade-related “competitive imbalances that lead to carbon leakage,” it is
possible that such an agreement could establish a set of principles or rights and obligations among
the parties that address the allocation of emission allowances by WTO Member countries in the
context of WTO subsidy obligations, provide scope for Members to impose border measures, or
both.89 A provision limiting the initiation of disputes for a defined period, a so-called “peace
85
The discussion here is restricted to provisions of H.R. 2454 and does not explicitly address the program developed by
the EU, although there may be some similarities.
86
The WTO-consistency of such measures, particularly border requirements, has been the subject of considerable legal
commentary, including discussion in a 2009 report prepared jointly by the United Nations Environment Program
(UNEP) and the World Trade Organization. See Trade and Climate Change; A report by the United Nations
Environment Programme and the World Trade Organization 90-110 (2009), at http://www.wto.org/english/res_e/
booksp_e/trade_climate_change_e.pdf. A number of these commentaries are referenced in the UNEP/WTO report.
87
The United States is also party to number of bilateral and regional free trade agreements (FTAs), including the North
American Free Trade Agreement (NAFTA) and the Central America-Dominican Republic-United States Free Trade
Agreement (DR-CAFTA), and bilateral agreements with such countries as Australia and Chile. These agreements
incorporate certain GATT rights and obligations, such as national treatment of imported goods, a prohibition on
quantitative restrictions, and general exceptions for measures that are inconsistent with agreement obligations, but also
contain, among other things, their own tariff obligations, rules of origin, and dispute settlement procedures and, for the
NAFTA, a chapter on energy trade. While the requirements of these agreements are not addressed in this report, it is
important to note that two of the largest U.S. trading partners, Canada and Mexico, are parties to the NAFTA. To the
extent that these countries are exporters of the types of products that are likely to be produced by eligible industrial
sectors or later determined to be remediable “manufactured items for consumption,” relevant NAFTA obligations may
also need to be considered by EPA in applying an IRA program to Canadian or Mexican goods.
88
The General Agreement on Tariffs and Trade 1994 (GATT 1994), which consists of the GATT, as originally adopted
in 1947 (GATT 1947) as well as subsequent GATT decisions, waivers, and other provisions, may be accessed at
http://www.wto.org/english/docs_e/legal_e/06-gatt.pdf, and http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf.
89
See, for example, Elements of a Trade and Climate Code, in Gary Clyde Hufbauer, Steve Charnovitz, and Jisun Kim,
GLOBAL WARMING AND THE WORLD TRADING SYSTEM 103-110 (2009). Note also the now-expired Article 8.2(c) of the
(continued...)
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clause,” might also be included.90 Such an agreement might also be negotiated separate from
multilateral climate change negotiations. WTO Members could obtain a WTO waiver for the
provisions of such an agreement, incorporate binding commitments into WTO law by amending
the relevant WTO agreements, or adopt separately negotiated principles or guidelines in a WTO
decision.91 Agreement on a binding WTO-related climate change accord is far from certain,
however,92 and thus, absent such an agreement or broad adherence thereto by WTO Members,93
the WTO dispute settlement process may ultimately serve as the main forum for resolving WTO
legal issues involving problematic trade-related climate change measures.
Disputes arising under WTO agreements are heard under the terms of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding or
DSU).94 Other WTO agreements, such as the WTO Agreement on Subsidies and Countervailing
Measures, while providing for dispute settlement under the DSU rules and procedures, contain
certain special and additional rules, which prevail over those in the DSU in the event of
differences between the two. Dispute settlement is administered by the WTO Dispute Settlement
Body (DSB), consisting of all WTO Members.
WTO dispute settlement may be characterized as a three-stage process, consisting of (1)
consultations; (2) panel and possibly Appellate Body proceedings; and, (3) if a WTO decision is
(...continued)
WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) exempting from WTO challenge
certain “assistance to promote adaptation of existing facilities to new environmental requirements imposed by law
and/or regulations which result in greater constraints and financial burden on firms,” so long as the assistance did not
constitute a prohibited subsidy, in other words, an export subsidy or a subsidy contingent on the use of domestic over
imported products. Assistance was exempted under this provision even though it may have been specific to an industry
or group of industries, a condition that would ordinarily make a non-prohibited subsidy actionable. The SCM
Agreement may be accessed at http://www.wto.org/english/docs_e/legal_e/24-scm.pdf.
90
See, for example, WTO Agreement on Agriculture art. 13 (making certain domestic agricultural support and
agricultural export subsidies exempt from WTO dispute settlement actions for the initial nine years of the Agreement);
Agreement on Trade-Related Aspects of Intellectual Property Rights art. 64.2 (exempting non-violation claims—claims
based only on trade injury and not on violations of the Agreement—from WTO dispute settlement for the initial five
years of the Agreement; moratorium since extended). The Agreement on Agriculture may be accessed at
http://www.wto.org/english/docs_e/legal_e/14-ag.pdf; the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) may be accessed at http://www.wto.org/english/docs_e/legal_e/27-trips.pdf.
91
Note, for example, WTO, Kimberley Process Certification Scheme for Rough Diamonds; Decision of 15 May 2003,
WT/L/518 (May 27, 2003) (WTO waiver through December 31, 2006, for certain actions taken by WTO Members to
control diamond trade pursuant to international agreement); WTO, Kimberley Process Certification Scheme for Rough
Diamonds; Decision of 15 December 2006, WT/L/676 (December 19, 2006) (extension of waiver through December
31, 2012); WTO, Amendment of the TRIPS Agreement; Decision of 6 December 2005, WT/L/641 (December 8, 2005)
(amendment of Agreement on Trade-Related Intellectual Property Rights to permit exporting Members to require
compulsory licensing for the production of pharmaceutical products and to export such products to eligible importing
Members). See also WTO Members Agree to Further Extension of TRIPS/Medicines Ratification Deadline, 26 Int’l
Trade Rep. (BNA) 1497 (November 5, 2009).
92
See, for example, Pascal Lamy, Director-General, WTO, Climate First, Trade Second—GATTzilla is Long Gone,
Address at Carleton University, Ottawa, Canada (November 2, 2009), at http://www.wto.org/english/news_e/sppl_e/
sppl140_e.htm.
93
In the event that not all WTO Members were party to a WTO-related segment of a multilateral GHG agreement or to
a separate international agreement providing for measures to address competitiveness and leakage issues, the legal
situation of non-party WTO Members would need to be addressed.
94
For additional information on WTO dispute settlement, see CRS Report RS20088, Dispute Settlement in the World
Trade Organization (WTO): An Overview, by (name redacted), and the WTO website at http://www.wto.org/
english/tratop_e/dispu_e/dispu_e.htm. The WTO Dispute Settlement Understanding may be accessed at
http://www.wto.org/english/docs_e/legal_e/28-dsu.pdf.
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adverse to the defending Member, implementation. Once the DSB adopts panel and any Appellate
Body reports finding that the defending Member has violated a WTO obligation, the defending
Member would ordinarily be expected to withdraw the violative measure. 95 If the Member could
not comply immediately, it would be given a reasonable period of time to do so. In the event that
the defending Member fails to comply by the end of the established compliance period, the
complaining Member may seek compensation from the defending Member or request
authorization from the WTO to impose countermeasures (i.e., to suspend WTO concessions or
other obligations owed the defending Member, usually, to place additional tariffs on selected
products imported from the Member).96 The DSU treats countermeasures as measures of “last
resort,” however, and permits them to be applied only as long as the measure found to violate
WTO obligations remains in place or until the disputing parties settle their dispute in a mutually
satisfactory way.
Certain actions by the DSB—namely, establishing a dispute settlement panel, adopting panel and
Appellate Body reports, and authorizing a WTO Member to impose countermeasures—are
virtually automatic; that is, the action will be taken unless all Members present at the DSB
meeting agree not to do so (“reverse consensus” rule). The DSU contains an aspirational timeline
of 18 months from the date a panel is established to the date a compliance period is determined.
Complex cases are likely to require additional time, however, particularly at the panel stage.
Dispute settlement is generally Member-driven, so that it is up to the parties to a dispute to decide
whether or not to take particular actions available to them (e.g., to request a panel, to request
authorization to take countermeasures against a non-complying Member, or to apply such
measures even if the WTO has authorized them). While the possibility of paying compensation or
suffering the effects of retaliatory action may exert a degree of pressure on defending Members to
comply with WTO decisions, and while DSU provisions indicate an overall intent that Members
comply, the inclusion of compensation or retaliation as remedies, albeit temporary ones,
recognizes that WTO Members may not always do so. In practice, Members have managed
disputes at the implementation stage in a variety of ways short of taking retaliatory action.
Under GATT and now WTO dispute settlement practice, a WTO Member may challenge a
measure of another Member “as such,” “as applied,” or both.97 An “as such” claim challenges the
measure as violative of a WTO agreement independent of its application in a specific situation
and, as described by the WTO Appellate Body, seeks to prevent the defending Member from
engaging in identified conduct before the fact.98 Panels in past “as such” challenges have used an
95
Under U.S. law, a WTO decision finding that a federal law is inconsistent with a WTO obligation cannot be
implemented unless Congress amends or repeals the statute, as the case may be. WTO decisions faulting a U.S. agency
regulation or practice may be implemented through administrative action under existing authorities, provided that
procedures set out in § 123(g) of the Uruguay Round Agreements Act, 19 U.S.C. § 3533(g), are followed. For further
discussion, see CRS Report RS22154, World Trade Organization (WTO) Decisions and Their Effect in U.S. Law, by
(name redacted), and CRS Report RL32014,
WTO Dispute Settlement: Status of U.S. Compliance in Pending Cases,
by (name redacted).
96
A disputing party may also request that a compliance panel be established to determine whether the defending
Member has complied with a WTO ruling.
97
Appellate Body Report, United States—Anti-dumping Act of 1916, paras. 60-61, WT/DS136/AB/R,
WT/DS162/AB/R (August 28, 2000).
98
Appellate Body Report, United States—Sunset Review of Anti-Dumping Measures on Oil Country Tubular Goods
from Argentina, para. 172, WT/DS268/AB/R (November 29, 2004). The Appellate Body further described “as such”
claims as follows: “By definition, an ‘as such’ claim challenges laws, regulations, or other instruments of a Member
that have general and prospective application, asserting that a Member’s conduct—not only in a particular instance that
(continued...)
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analytical tool known as the “mandatory/discretionary distinction,” under which a law or
regulation was considered not to violate a GATT or WTO obligation if it did not mandate a WTOinconsistent outcome or, in other words, could be applied in a WTO-consistent fashion.99 If found
to be discretionary under this analysis, the measure would need to be challenged “as applied.” At
the same time, the WTO Appellate Body, without examining the role of the distinction in a
comprehensive way, has stated that the distinction should not be applied in a “mechanistic
fashion,”100 and thus the existence of discretionary elements in a statute or regulation may not
necessarily shield it from an “as such” challenge.
Distribution of Free Emission Allowances
General Characteristics of Emission Allowances
An emission allowance may be defined as governmental permission to emit one ton of carbon
dioxide or carbon dioxide-equivalent.101 In a cap and trade system, recipients of emission
allowances would include entities subject to emission caps and possibly other industrial entities
that emit GHG gases directly in production processes and indirectly through the use of carbonintensive fuels, as well as a broader array of entities that may be adversely affected by higher fuel
prices resulting from compliance costs borne by capped fuel producers. The government may
allocate allowances free of charge, require that they be obtained through an auction, or operate a
mixed system incorporating both approaches.
Depending on its individual situation, a capped entity would use all of its allowances to cover
emissions up to its annual cap; purchase additional allowances if it exceeded its cap and did not
hold sufficient allowances to account for these excess emissions; or, in the event its annual
emissions fell below the cap, sell unused allowances to other capped entities that need allowances
to cover emissions that exceed their cap or bank them for future use or sale. Non-capped entities
would either sell their allowances to capped entities or trade them in carbon markets. Thus, the
situation of the recipient may differ depending on whether it is a capped or non-capped entity,
and, if capped, whether the original allocation of allowances is sufficient, insufficient, or overgenerous.
(...continued)
has occurred, but in future situation as well—will necessarily be inconsistent with that Member’s WTO obligations. In
essence, complaining parties bringing ‘as such’ challenges seek to prevent Members ex ante from engaging in certain
conduct. The implications of such challenges are obviously more far-reaching than ‘as applied’ claims.” Id.
99
See cases cited in Panel Report, United States—Laws, Regulations and Methodology for Calculating Dumping
Margins (“Zeroing”), para. 7.55, n.158, WT/DS294.R (October 31, 2005).
100
Appellate Body Report, United States—Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel
Flat Products from Japan, para. 93, WT/DS244/AB/R (December 15, 2003). Note also Panel Report, United States—
Sections 301-310 of the Trade Act of 1974, WTO/DS152/R (December 22, 1999) (legislation granting discretionary
powers may be found to be inconsistent “as such” if it does not create a strong legal basis for WTO-consistent action).
101
An “allowance” is defined in H.R. 2454, as passed, as “a limited authorization to emit, or have attributable
greenhouse gas emissions in an amount of, 1 ton of carbon dioxide equivalent of a greenhouse gas in accordance with
this title. Such term includes an emission allowance …” H.R. 2454, section 321, as passed, adding new section 700(5).
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Emission allowances have been recently characterized by the Congressional Budget Office
(CBO) as “‘cash-like’ in nature” because they may be traded “in a large and liquid secondary
market.”102 Moreover, in assessing the budgetary treatment of distributed allowances in a system
where the government determines the scope of covered emissions and the number of allowances
to be issued, CBO concluded that
the distribution by the federal government would be essentially equivalent to the distribution
of cash grants, so CBO believes that such distributions should be treated as outlays. At the
same time, allowances in a cap-and-trade system would be valuable financial instruments, so
CBO thinks that the creation of allowances by the federal government should be recorded as
revenues.
That logic does not hinge on whether the government sells or, instead, gives away the
allowances. Allowances would have significant value even if given away because the
recipients could sell them, or if they are carbon dioxide emitters, use them to avoid incurring
the cost of purchasing allowances or investing in costly emission mitigation mechanisms.
Therefore, selling allowances and giving entities cash, and giving entities the allowances
themselves and letting the entities realize their value, are essentially the same transaction.
Sound budgeting requires that the budget treat equivalent transactions in the same way. 103
In explaining its approach, CBO considers that the government grant of an allowance to a firm,
business, or other recipient that would sell the allowance to a capped entity is a transaction that is
“equivalent” to the government’s taxing the capped firm or selling it an allowance and
subsequently giving the proceeds from the transaction to the recipient.104
The Joint Committee on Taxation has added that considering emission allowances to be tradable,
and thus “cash-like,” makes them similar to commodities, noting that sulfur dioxide and nitrogen
oxide emission allowances created by the Clean Air Act and various types of carbon credits and
their derivatives are already traded on commodities markets.105 At the same time, the Committee
found that allowances also “bear some resemblance to licenses that the government grants in
other contexts, e.g., television broadcast licenses granted by the Federal Communication
Commission, liquor licenses granted by State and local governments, and certain agricultural
production quotas.”106 As with these licenses, “emission allowances are transferable, intangible
assets, the useful life of which can be limited by statute.”107 The Committee continued:
The application of different analogies can lead to very different answers to the most basic tax
questions presented by cap and trade. For example, whereas allocations of certain licenses by
the government have been deemed to be nonrecognition events (i.e., no tax is imposed at the
time the license is granted), few would argue that a government distribution of a commodity,
such as gold, oil, or pork bellies, should not be taxable to the recipient.108
102
Letter of Douglas W. Elmendorf, Director, Congressional Budget Office, to Hon. Henry A. Waxman, Chairman,
House Committee on Energy and Commerce, May 15, 2009, at [1], at http://www.cbo.gov/ftpdocs/102xx/doc10232/515-WaxmanLetter.pdf (hereinafter, CBO Letter).
103
Id. at [1]-2.
104
Id. at 2.
105
Joint Committee on Taxation, Climate Change Legislation: Tax Considerations, JCX-29-09 (June 12, 2009), at
http://www.jct.gov/publications.html?func=startdown&id=3559.
106
Id. at 6.
107
Id.
108
Id.
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The Committee identified three alternatives for taxing allocated emission allowances, based on
whether and when there would be an accession to wealth: (1) including them in income upon
receipt, (2) including them in income when first available for use, and (3) excluding them from
income.109
It is clear that in providing emission allowances to domestic entities, the federal government
would provide the recipient with a vehicle for the receipt of a monetary benefit, and thus it may
be viewed in a broad sense as providing a subsidy to the recipient entity. As explained below,
however, for the provision of emission allowances to constitute a subsidy in WTO terms, the
government activity or practice must first qualify as a “financial contribution” or “an income or
price support” as those terms are understood under WTO agreements. To date, neither GATT nor
WTO jurisprudence has addressed this type of instrument in light of WTO subsidy obligations.
WTO Agreement on Subsidies and Countervailing Measures (SCM)
The provision of subsidies by WTO Members is governed by the WTO Agreement on Subsidies
and Countervailing Measures (SCM Agreement), which elaborates upon and expands subsidy
obligations contained in Article XVI of the GATT 1994 and contains detailed obligations
involving the imposition of countervailing duties permitted under GATT Article VI. WTO
Members may impose countervailing duties on imported products that are found to be subsidized
by an exporting WTO Member and cause or threaten material injury to (or materially retard the
establishment of) a domestic industry.110 A subsidy meeting the WTO definition may be
challenged in a WTO dispute settlement proceeding or may be remedied by the imposition of
countervailing duties on the subsidized product in an amount that does not exceed the subsidy
conferred. While the GATT 1994 contains general public policy-related exceptions that may be
invoked to justify GATT-inconsistent measures, the SCM Agreement does not contain a separate
set of exceptions that would permit WTO Members to deviate from agreement obligations.111
For purposes of the SCM Agreement, the term subsidy is defined as a “financial contribution by a
government or any public body within the territory of a Member,” or an income or price support
109
Id. at 7-11
GATT 1994 art. VI:5:6(a). The GATT 1994 and the SCM Agreement define a countervailing duty as “a special duty
levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or
export of any merchandise.” GATT art. VI:3; SCM Agreement art. 10, n.36.
111
It is sometimes posited that GATT Article XX exceptions may apply to other WTO agreements on trade in goods,
such as the SCM Agreement. See, e.g., Bradly J. Condon, Climate Change and Unresolved Issues in WTO Law, 12 J.
INT’L ECON. L. 895, 903-906 (2009). In a report issued in December 2009, the WTO Appellate Body found that China
could invoke an exception in GATT Article XX as a defense to claims that certain of its regulatory measures were
inconsistent with its WTO Accession Protocol obligations to grant all enterprises in China the right to import and
export goods. Appellate Body Report, China—Measures Affecting Trading Rights and Distribution Services for
Certain Publications and Audiovisual Entertainment Products, paras. 7.708-7.863, WT/DS363AB/R (December 21,
2009). Because the Appellate Body was construing language in an accession protocol stating that the acceding
country’s trading rights commitments were “[w]ithout prejudice to … [the country’s] right to regulate trade consistent
with the WTO Agreement,” it remains unclear if GATT Article XX would be found to apply with respect to other
WTO agreements. It should be noted that one WTO agreement that specifically incorporates GATT articles states
explicitly that GATT exceptions apply to the agreement’s provisions. Agreement on Trade-Related Investment
Measures art.3; Agreement at http://www.wto.org/english/docs_e/legal_e/18-trims.pdf. Such express language would
seem to give rise to the inference that the absence of such language in a WTO agreement evidences an intent that
GATT Article XX does not apply.
110
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in the sense of Article XVI of the GATT 1994 that confers a benefit.112 A financial contribution
will be found where:
(i) a government practice involves a direct transfer of funds (e.g., grants, loans, and equity
infusion), potential direct transfer of funds or liabilities (e.g., loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g., fiscal
incentives such as tax credits);
(iii) a government provides goods or services other than general infrastructure, or purchases
goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs a private
body to carry out one or more of the functions illustrated in (i) to (iii) above which would
normally be vested in the government and the practice, in no real sense, differs from
practices normally followed by governments.113
While an income or price support may constitute the requisite governmental involvement for
purposes of the SCM Agreement, this provision has not been cited to any great extent in GATT or
WTO jurisprudence.114 With respect to the second prong of the WTO definition, that is, the
conferral of a benefit, a financial contribution will be found to do so if it places the recipient in a
more advantageous situation than would have been the case absent the contribution.115
To be challenged in a WTO dispute settlement proceeding or to be subject to countervailing
duties, the subsidy must be specific to an industry or enterprise or a group of industries or
enterprises.116 Prohibited subsidies, as described below, are considered to be specific per se.117
Subsidies may be specific in law, that is, they may be explicitly limited to certain enterprises and
not be administered under objective criteria or conditions, or they may be specific in fact.118
Regarding the rules under which the program operates, the SCM Agreement provides that
specificity will not exist where legislation, or the granting authority operating under it,
“establishes objective criteria or conditions governing the eligibility for, and the amount of, a
subsidy ... provided that the eligibility is automatic and that such criteria and conditions are
strictly adhered to.”119 Objective criteria or conditions mean those “which are neutral, which do
not favour certain enterprises over others, and which are economic in nature and horizontal in
application, such as number of employees or size of enterprise.”120
The SCM Agreement divides subsidies into two categories: prohibited and actionable. Two types
of subsidies are prohibited: (1) subsidies “contingent, in law or in fact … upon export
112
SCM Agreement art. 1.1(a)(1), (a)(2).
SCM Agreement art. 1.1(a)(1).
114
See, generally, World Trade Organization, GUIDE TO GATT LAW AND PRACTICE; ANALYTICAL INDEX 445-48
(updated 6th ed. 1995).
115
Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, paras. 149-157,
WT/DS70/AB/R (August 2, 1999) (hereinafter, Canada Aircraft AB Report).
116
SCM Agreement arts. 1.2.
117
SCM Agreement art. 2.3.
118
SCM Agreement arts. 21.(a), (c).
119
SCM Agreement art. 2.1(b)(footnote omitted).
120
SCM Agreement. art. 2.1(b), n.2.
113
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performance” and (2) subsidies “contingent ... upon the use of domestic over imported products”
(also referred to as “import substitution” subsidies).121 The mere fact that a subsidy is granted to a
firm that exports is not enough to render it an export subsidy for purposes of the Agreement.122
Subsidies fitting the WTO definition that are not prohibited are considered “actionable,” that is,
they may be challenged in a WTO dispute settlement proceeding if they cause “adverse effects”
to the interests of another WTO Member.123 Under Article 5 of the Agreement, adverse effects
may take any of three forms: (1) injury to the domestic industry of another Member, as this
concept is used in countervailing duty proceedings (a standard that focuses on the effect of the
subsidized goods in the domestic market of the complaining Member); (2) nullification or
impairment of another Member’s WTO benefits, generally tariff concessions on a given product;
and (3) serious prejudice to the Member’s interests.
As set out in Article 6.3 of the SCM Agreement, serious prejudice occurs when the effect of the
subsidy is (1) to displace imports of a like product of the complaining Member into the market of
the subsidizing Member; (2) to displace or impede the exports of a like product of the
complaining Member from a third country market; (3) significant price undercutting by the
subsidized product as compared with the price of a like product of the complaining Member in
the same market, or significant price suppression, price depression, or lost sales in the same
market; and (4) an increase in the world market share of the subsidizing Member in a particular
subsidized primary product or commodity as compared to the average share that the subsidizing
Member had during the previous period three-year period and the increase follows a consistent
trend over a period when subsidies have been granted.124 In any such case, defining the nature of
the “like product” and the affected market would be important components in determining if
serious prejudice exists.125
Under special dispute settlement rules for the SCM Agreement, if the WTO Dispute Settlement
Body adopts a panel or Appellate Body report finding that a subsidy has resulted in adverse
effects to another Member, the subsidizing Member “shall take appropriate steps to remove the
adverse effects or shall withdraw the subsidy.”126 If the Member has not done so within six
months after adoption, and absent an agreement on compensation, the Dispute Settlement Body is
to authorize the complaining Member to take countermeasures, “commensurate with the degree
and nature of the adverse effects determined to exist,” unless the Dispute Settlement Body
121
SCM Agreement art. 3.1(a), (b). The WTO Appellate Body has determined that import substitution subsidies may
be contingent in law or “in fact,” notwithstanding that the prohibition does not contain the quoted language. Appellate
Body Report, Canada—Certain Measures Affecting the Automotive Industry, paras. 137-143, WT/DS139/AB/R,
WT/DS142/AB/R (May 31, 2000) (hereinafter, Canada Autos AB Report).
122
SCM Agreement art 3.1(a), n.4.
123
SCM Agreement art. 5.
124
See Articles 6.4 and 6.5 of the SCM Agreement for further explanation of the terms used in Article 6.3.
125
The SCM Agreement states that, for purposes of the Agreement, the term “like product” means “a product which is
identical, i.e. alike in all respects to the product under consideration [i.e. the subsidized product], or in the absence of
such a product, another product which, although not alike in all respects, has characteristics closely resembling those of
the product under consideration.” SCM Agreement art. 15.1, n.46.
126
SCM Agreement art. 7.8.
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decides by consensus to reject the complaining Member’s request to impose such measures.127
This time period may be extended by mutual agreement of the disputing parties.128
Free Emission Allowances Under the SCM Agreement
For the provision of emission allowances to fit within the SCM Agreement’s definition of a
governmental financial contribution, the action would need to constitute (1) an actual or potential
direct transfer of funds, (2) the foregoing of revenue otherwise due, or (3) the provision of a good
or service other than general infrastructure. Because WTO panels have not had to deal with an
instrument of this type, it is unclear how it would or should be characterized under this definition.
It is also unclear how domestic tax or budgetary treatment of an allowance might affect this
characterization.129 The precise nature of an allowance is elusive for these purposes, and thus a
variety of scenarios can be contemplated. This report addresses some of the more salient subsidy
issues that may arise in this context.
While emissions have been characterized as “cash-like” in nature and would clearly constitute a
valuable instrument from the point of view of the recipient, to the extent that an allowance is
intended to be sold or traded, the allowance would in and of itself constitute a vehicle for a
financial contribution by private parties, that is, the ultimate transfer of funds would be effected
by the purchasers of the emission allowance rather than by the government. In such case, the
transfer may not be the type of “direct transfer” of funds by the government that is generally
contemplated by the first type of financial contribution listed above.130
127
SCM Agreement art. 7.9.
SCM agreement, art. 7.4, n.20.
129
As discussed earlier, CBO has stated that, for budgetary purposes, distributed allowances should be recorded as
outlays and the creation of emission allowances as revenues. CBO Letter, supra note 102, at [1]. Note also that the
WTO Agreement on Agriculture treats “budgetary outlays” as subsidies for purposes of calculating a WTO Member’s
aggregate domestic support for agricultural products, Agreement on Agriculture annex 3, para. 2, and that the SCM
Agreement includes, as the last item in its Illustrative List of Export Subsidies, “[a]ny other charge on the public
account constituting an export subsidy in the sense of Article XVI of GATT 1994.” SCM Agreement annex I, para. (l)
(emphasis added). Discussion of domestic budgetary treatment of emission allowances for purposes of the WTO
subsidy definition is beyond the scope of this report.
130
The role of private payments in a subsidy scheme was addressed in Canada—Measures Affecting the Importation of
Milk and the Exportation of Dairy Products (WT/DS103, WT/DS113), where the WTO Appellate Body upheld a WTO
panel finding that producer-financed payments to support the export of dairy products were covered by commitments to
reduce export subsidies contained in WTO Agreement on Agriculture. Article 9.1(c) of the Agreement provides that
reduction commitments apply to listed export subsidies, including “payments on the export of an agricultural product
that are financed by virtue of governmental action, whether or not a charge on the public account is involved….” The
Appellate Body first upheld the panel’s finding that the provision of milk at discounted prices to processors for export
under the challenged program constituted payments, though in a form other than money, within the meaning of the
Article 9.1(c). Appellate Body Report, Canada—Measures Affecting the Importation of Milk and the Exportation of
Dairy Products, para. 113, WT/DS103/AB/R, WTO/DS113/AB/R (October 13, 1999). The Appellate Body then
upheld the panel’s finding that producer-financed payments fell within the scope of the Article, provided they were
“financed by virtue of governmental action.” In upholding the panel, the Appellate Body stated that it was appropriate
to look at governmental action as a whole in the payment system at issue and found that although the “‘cost of selling
milk at a reduced price for export is not borne by the government’, ‘governmental action’ is, in our view, indispensible
to the transfer of resources that take place at as a result of the operation” of the program. Id. paras. 119-120. The
Appellate Body found that governmental action was involved at every stage of the program and that, in the regulatory
framework involved, “‘government agencies’ stand so completely between the producers of the milk and the processors
or the exporters that we have not doubt that the transfer of resources takes place, by virtue of governmental action.” Id.
para. 120. While the SCM Agreement does not contain language stating that subsidies include “payments … that are
financed by virtue of governmental action, whether or not a charge on the public account is involved,” the existence of
(continued...)
128
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As an emission allowance has also been characterized as a license and a commodity, one might
alternatively argue that the provision of an allowance constitutes the provision of a good. While
the WTO Appellate Body has confirmed that the granting of a government license may constitute
the provision of goods to a recipient, its finding would appear to have limited utility in the current
context. Because the license at issue permitted recipients to harvest standing timber on
government lands, the government grant of a license was thus found to constitute the provision of
timber, a potentially tradable product.131 In contrast, the provision of a free allowance would
represent permission or authority to emit a defined amount of carbon dioxide or a carbon dioxide
equivalent, a substance that would not be a salable good in the same sense as timber was in the
above-cited example. Thus, if a similar analysis is applied to emission allowances, this category
of government financial contribution is not likely to apply.132 Further, unlike commodities that are
in and of themselves tradable goods, the item that is being traded here would essentially be a right
to take a particular action rather than a tangible product.133
A case for a subsidy may be made, however, once emission allowances are subject to government
auction, an event contemplated by H.R. 2454 to begin in 2012. Under the SCM Agreement, the
concept of revenue that is “otherwise due” requires an ascertainable standard against which a tax
or other exemption is measured. As described by the WTO, this portion of the subsidy definition
implies “an understanding that (i) ‘a financial contribution’ does not arise simply because a
government does not raise revenue which it could have raised; and (ii) the term ‘otherwise due’
implies a comparison with a ‘defined normative benchmark.’”134 In such case, the provision of an
allowance without charge to a U.S. firm may arguably constitute the foregoing by the government
of revenue that would otherwise be due, the specifics of the government auction serving as the
applicable norm. It is also possible that the future tax treatment of distributed allowances may
itself result in such foregone revenue. Although WTO jurisprudence on this portion of the subsidy
definition most often focuses on tax measures,135 the provision itself is generally written and is
not limited to the tax area.136
(...continued)
such language in another WTO agreement addressing subsidization may indicate that WTO Members generally
contemplate that the level of governmental involvement in the actual realization of wealth by the beneficiary of a
government program would exceed the mere allocation of an economic instrument to that beneficiary. Note also Panel
Report, Japan—Measures Affecting Consumer Photographic Film and Paper, para. 10.49, WT/DS44/R (March 31,
1998) (“non-binding [governmental] actions, which include su
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