Addressing the Leakage/Competitiveness Issue In Climate Change Policy Proposals

We will likely see increasing efforts to minimize leakage of carbon to non-participating countries and to address concerns on behalf of the competitiveness of carbon-intensive industry. Environmentalists on one side and free traders on the other side fear that border measures such as tariffs or permit-requirements against imports of carbon-intensive products will collide with the WTO. There need not necessarily be a conflict, if the measures are designed sensibly. There are precedents -- the shrimp turtle case and the Montreal Protocol -- that could justify border measures to avoid undermining the Kyoto Protocol or its successors. But import penalties should follow principles such as the following: • Measures should follow guidelines multilaterally-agreed by countries participating in the emission targets of the Kyoto Protocol and/or its successors, against countries that are not doing so, rather than being applied unilaterally or by non-participants. • Measures to address leakage to non-members can take the form of either tariffs or permit-requirements on carbon-intensive imports; they should not take the form of subsidies to domestic sectors that are considered to have been put at a competitive disadvantage. • Independent panels of experts, not politicians, should be responsible for judgments as to findings of fact -- what countries are complying or not, what industries are involved and what is their carbon content, what countries are entitled to respond with border measures, or the nature of the response. • Import penalties should target fossil fuels and a half dozen or so of the most energy-intensive major industries -- aluminum, cement, steel, paper, glass, and perhaps iron and chemicals -- rather than penalizing industries that are further removed from the carbon-intensive activity, such as firms that use inputs produced in an energy-intensive process.