INTRODUCTION

Mandatory policies to reduce US greenhouse gas (GHG) emissions without full global participation – principally cap-and-trade systems, occasionally carbon taxes, and sometimes standards – are being seriously debated in the US Congress. However, even efficient market-based policies that effectively attach a price to GHG emissions will likely increase production costs for some domestic producers and give rise to competitiveness concerns where those producers compete against foreign suppliers operating in countries where emissions do not carry similar costs. These concerns are likely to be most acute in energy-intensive, trade-exposed manufacturing industries. While the impacts can be mitigated to some extent by the use of offsets or other flexibility mechanisms, it would be virtually impossible to eliminate the disproportionate burdens placed on certain sectors without undermining both the effectiveness and the cost-effectiveness of the policy. As Olson has eloquently argued, the more narrowly focused the adverse impacts of a policy, the more politically difficult it is to sustain.

One of the key questions being asked is this: Why should US firms be disadvantaged relative to overseas competitors to address a global problem? The difficulty, moreover, is not just political: if, in response to a mandatory policy, US production simply shifts abroad to unregulated foreign firms, the resulting emissions “leakage” could vitiate some of the environmental benefits expected from domestic action. As is widely recognized, limiting emissions from the USA and other developed countries will not prevent dangerous interference with the climate system unless key developing countries also control their emissions.