Ed: When this article was being edited for inclusion in this spring issue of InBrief, the Senate Environment and Public Works Committee had already held marathon hearings and heard from some 50 witnesses to discuss revised drafts of the Kerry-Boxer Bill. It was expected that the Bill would be combined with broader energy legislation for consideration by the full Senate early this year, but, with the election of Republican Senator Scott Brown, it was then expected that the focus would shift to a less ambitious energy bill. In any case, this article serves as an introduction to the substantive issues being considered, notwithstanding that there may be many turns and changes, and, if the more current predictions are accurate, an emasculation of key principles.
In the fall of last year, the U.S. Senate released its version of an energy and climate change bill called the Clean Energy Jobs and American Power Act. This draft legislation, known as the “Kerry-Boxer Bill” (after its Democrat sponsors, Senators John Kerry and Barbara Boxer) creates a cap and trade regime to reduce greenhouse gasses (“GHGs”) and attempts to prevent “carbon leakage.”
Carbon leakage refers to an increase in foreign GHGs that is a result of domestic policy that pushes so-called “dirty businesses” off-shore.
Since current international agreements, such as the Kyoto Protocol, do not obligate such key countries as China, India, Mexico, South Korea and Brazil to reduce GHGs whatsoever, the U.S. seems to be attempting to prevent carbon leakage by potentially implementing carbon tariffs (border measures).
Effectively, a carbon tariff is a border tax that is slapped on imports from countries that do not adhere to consistent/equivalent GHG reduction measures. Carbon tariffs are to protect U.S. industries/jobs from competition by foreign states that do not face similar GHG restrictions.
Section 765 of the Kerry-Boxer Bill states that “[i]t is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.”(Emphasis added).
This single provision in the Kerry-Boxer Bill is causing a rather large amount of consternation amongst major trading partners of the U.S. Raising such a barrier to trade will certainly be challenged at the World Trade Organization (“WTO”) under the General Agreement on Tariffs and Trade (“GATT”) and the North American Free Trade Agreement (“NAFTA”). However, this will not prevent retaliation measures from other countries. Indeed, emerging green industries, such as wind turbines and solar panels, need a vibrant and open economy to prosper.
Moreover, if such carbon tariffs are passed in the U.S., then Canada will be in a precarious position. Challenging carbon tariffs under the WTO and/or NAFTA is a potential long-term solution. However, winning such a case is not a guaranteed outcome, as the U.S. could claim that it can impose carbon tariffs (or subsidies) vis-à-vis Article XX of GATT and similarly under NAFTA provisions. In addition to challenging carbon tariffs under WTO and/or NAFTA, Canada could be forced to adopt a similar carbon tariff system to ensure that Canada would collect carbon tariff revenue that would otherwise have been diverted to the U.S. government. Taxing producers of GHGs, however, is not the simple answer to a complex global concern.
The U.S. remains Canada’s number one trading partner and the U.S. imports more crude oil from Canada than any other country. Canada is an ally, and a stable and safe country to rely on for the importation of oil products. Indeed, Canada is said to have the world’s second largest known oil reserves and, therefore, can be relied on in the long-term by the U.S. Most of these oil reserves are located in the Alberta tar sands. Extracting and refining such a natural resource, however, is an energy-intensive process that releases a large amount of GHGs. A carbon tax of any kind (applied domestically or by the U.S.) on Canadian-produced crude would either curtail development of the oil sands or push the export of Canadian crude to other markets, such as Asia. Either way, it would force the U.S. to rely on other countries, such as Saudi Arabia, Iran, Russia and Venezuela to obtain enough crude to meet its needs. Relying on such foreign countries certainly does not enhance the energy security of the U.S.
If the Kerry-Boxer Bill were to ultimately impose carbon tariffs in a vain attempt to reduce global GHGs, then the Bill’s objective to reduce GHGs might be reached – albeit inadvertently. GHG emissions would certainly drop because global production of goods and services would also decline due to the drop in global trade. George Santayana once observed that “[t]hose who do not remember the past are condemned to repeat it.” In the 1930s, industrialized countries waged massive trade wars. In order to protect domestic industries and jobs in response to the Great Depression, tariffs were implemented and quotas were imposed. The result of such protectionist measures, however, was that other countries kept raising their trade barriers even further, creating a spiralling effect which stifled global trade and consequently deepened and prolonged the ongoing global economic depression. Has the U.S. been trying to create conditions for history to repeat itself?