Morgenstern, Richard D.

“Addressing Competitiveness in U.S. Climate Policy”

A variety of mandatory policies to reduce U.S. greenhouse gas emissions—principally cap-and-trade systems, occasionally carbon taxes, and sometimes standards—are now being seriously debated in Congress. A frequent concern raised in these debates concerns the potential for adverse impacts on the competitiveness of U.S. industry, particularly on firms or in sectors that face high energy costs and significant international competition. As Mancur Olson argued more than 40 years ago, the more narrowly focused the adverse impacts of a policy, the more politically difficult it is to sustain that policy. 

This paper explores how production across individual manufacturing industries could be affected by a unilateral policy that establishes a price on carbon dioxide emissions.  After surveying the evidence from economic research on potential competitiveness impacts, the paper then examines possible policy responses to address these impacts.

A range of specific policy options are surveyed, including the use of standards instead of market-based policies for some sectors, different types of free allowance allocation under a cap-and-trade system, and trade-related policies—including some form of border adjustment for energy- or carbon-intensive goods.  The pros and cons of each of the options are considered, with an emphasis on both the efficiency and equity issues involved.