A U.S. Emissions Tariff: Who'd Get Hurt?

In the early morning of June 26, as Democrats rounded up votes to pass cap-and-trade legislation in the House of Representatives, negotiators settled on a compromise version of an especially controversial section of the bill. Democrats from industrial states demanded a provision allowing tariffs on products from nations with relatively loose standards on greenhouse gas emissions. The idea: If our guys have to spend big money to clean up their U.S. plants, a tariff will level the playing field between them and companies abroad that aren't compelled to spend any money to clean up their mess.

The provision made it to the final bill, which the House passed. Now, Senators John Kerry (D-Mass.) and Lindsey Graham (R-S.C.) are trying to pass a Senate version that includes a tariff. The measure has the backing of utilities such as American Electric Power (AEP); U.S. Steel (X), ArcelorMittal (MT), and other steelmakers; and major cement manufacturers. Many in Congress think the cap-and-trade bill, which would limit overall emissions and create a trading system for pollution credits, won't have the votes to reach President Barack Obama's desk unless it shields U.S. cement, steel, aluminum, and glass factories from unfair competition by dirty plants abroad.

"RECIPE FOR RETALIATION"Yet Graham is the only Republican on the record as supporting the tariff, and it's not clear how many more in the GOP will eventually back the idea. Senator John McCain (R-Ariz.), for instance, opposes the provision. Even the Obama Administration, which wants cap-and-trade, prefers protecting U.S. industry through global climate-change regulation it will push at a climate-change summit in Copenhagen this December. But Kerry and Graham regard a tariff as a necessary component of a compromise bill that would also attract conservative votes by offering incentives for nuclear power and offshore oil drilling.

One of the opposition's fears is that a trade war could result if a tariff is adopted. "The tariff is playing with fire," says Gary C. Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics, a Washington think tank. "It's a recipe for a lot of retaliation." Chinese officials have already argued that the tariff violates trade rules. And the Senate proposal comes just as China-U.S. trade spats are multiplying. In September the U.S. slapped a 35% levy on Chinese tires. Beijing responded with a dumping complaint against U.S. chicken parts. Then the United Steelworkers (USW) and three steelmakers filed an anti-dumping case with the U.S. Commerce Dept. against Chinese makers of coated paper. On Oct. 7, Commerce said it would investigate the possible dumping of Chinese steel pipe. A week later, Beijing announced 37.5% tariffs on a U.S. specialty chemical.

The USW as well as many industry lobbyists and political leaders dismiss the fear that the proposed tariff—which doesn't yet have a specified rate—will escalate trade tensions. "It's bluster," says Senator Sherrod Brown (D-Ohio), who leads a group of 10 Senate Democrats who favor the proposal. Advocates say the tariff's mere existence would likely spur most trading partners to clean up emissions.

COUNTER TARIFFSSome executives worry about more than a trade face-off. Timothy J. Richards, manager for international energy policy at General Electric (GE), points out that a local company could have a state-of-the-art, low-emissions plant but end up being punished because it's located in a high-polluting country whose exports to the U.S. get hit with the tariff. If a provision for a punitive tariff is included in final legislation, it should be targeted so as "not to hit the good actors," Richards says. "Those that have done what a U.S. firm has done, they should not be hit."

Another problem: Other countries could adopt their own tariffs. "China can say, 'We think this turbine from GE exceeds emissions allowances, because we count SUVs workers drive [to the plant],'" says Hufbauer. "You can see how it could escalate."

Ultimately, some economists argue, a carbon emissions tariff may not even provide the leverage its proponents believe it will. Supporters of the tariff cite the need to protect U.S. industry from heavily polluting rivals in India and China. Those two countries are major polluters, but mostly in the production of goods and services consumed locally. Together they accounted for only 13% of 2007 U.S. imports of aluminum, cement, chemicals, paper, and steel, according to U.S. government figures. By contrast, 53% of America's imports of those products came from fairly clean plants in Canada and the European Union. The Europeans, meanwhile, want to play tough, too. In September, French President Nicolas Sarkozy and German Chancellor Angela Merkel called for a similar tariff to aid EU companies.

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