A close review of the historical relationship between energy prices and U.S. production and consumption of energy-intensive goods suggests that energy-intensive manufacturers are likely to face only modest competitiveness impacts under a cap-and-trade proposal to reduce greenhouse gas emissions, according to a study released by the Pew Center on global climate change Wednesday.

The study projects that U.S. energy-intensive manufacturing industries would on average lose 1% of their annual production to imports assuming a carbon dioxide (CO2) price of $15/ton in the United States and no carbon prices in other countries. Both the Energy Information Administration and the Environmental Protection Agency have projected CO2 prices of approximately $15/ton under cap-and-trade programs proposed in Congress, it noted.

The study’s authors concluded that the projected impacts can be addressed through policies targeted to energy-intensive sectors. The range of policy options include 1) compensating energy-intensive sectors covered by a mandatory cap for their regulatory costs; 2) excluding these sectors from the cap-and-trade program; or 3) use of border-adjustment measures to equalize costs for domestic and imported energy-intensive goods.

“The analysis shows clearly that, at the price level studied, the potential impacts are very modest and very manageable,” said Pew Center President Eileen Claussen. “Policymakers have a range of policy tools to mitigate the modest economic impacts that may be foreseen. The bottom line is that fear of competitive harm should not stand as an obstacle to strong climate policy.”

The study was written by economists Joseph E. Aldy and William A. Pizer, who were affiliated with Resources for the Future, a think tank in Washington, DC, at the time of the analysis. Both have since taken positions in the federal government.

The centerpiece of the climate change bill in the House is the proposed cap-and-trade program, which would cap carbon emissions and allow emitting industries to trade emission credits in the event they exceed the cap. The dispute holding up the draft legislation in the House Energy and Commerce Committee is whether the emission credits should be allocated for free or auctioned to raise revenues to finance renewable fuels and new technologies. Democrats representing industries in the Rust Belt states (steel and metals) and the southern states (oil and gas), as well as the electric utility industry, are pushing for free emission allocations (see Daily GPI, May 6).

Martin Edwards, vice president of legislative affairs for the Interstate Natural Gas Association of America (INGAA), believes that Congress will compromise on “some kind of hybrid” system that would include free emission credit allocations and an auction. There probably will be “free allocations for some period and then it will transition to a straight auction,” he said.

Edwards said he believes climate change legislation this year will be a “long shot.” It’s already facing resistance in the House, and will likely confront even more opposition in the Senate.

The draft bill sets “extremely ambitious [carbon] reduction targets that ultimately will affect” interstate natural gas pipelines, which INGAA represents, and a number of other industries, he said. “It’s a major game-changer.”

The broad-based energy bill in the Senate has a “decent chance” of getting out of Congress this year, Edwards said. He noted that INGAA is keeping a close eye on the legislation, even though there are no pipeline-related issues in it. “We’re in the do-no-harm mode.”

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