EoW September 2009

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EuroWire – September 2009 22
Transat lant ic Cable
The climate bill
By a narrow seven-vote margin, one house
of the US Congress moves to limit the
emissions blamed for warming of the planet
On 26th June, the House of Representatives approved 219 to 212
the landmark American Clean Energy and Security Act (“ACES”).
Also known as the Waxman-Markley comprehensive energy bill
(after its sponsors), or the “climate bill,” the legislation faces even
tougher sledding in the Senate.
At the heart of the Waxman-Markey global warming reduction
plan is cap-and-trade, a market-based system that limits
emissions but allows companies to buy permits for additional
emissions from others that emit under the maximum.
Presumably a market for these permits will increase the cost of
using carbon-based energy (notably electricity from coal), which
will in turn reduce demand. The number of permits is to be
reduced over time.
President Barack Obama’s commitment to the climate bill
is intense, and his leverage in the Senate has likely been
strengthened by the seating of Al Franken, of Minnesota, a
member of the president’s Democratic Party, after a protracted
dispute over vote counts. Assuming that Mr Obama succeeds
in getting ACES through Congress, over the misgivings of
business-orientated senators, one thing seems clear: the virtuous
results of the legislation will come at a price.
In the course of a broad analysis of Waxman-Markley (“Will the
Global Warming Bill Cool the Global Economy?” Forbes, 2nd July),
Nouriel Roubini, a professor at the Stern Business School of New
York University, considered its probable effect in the United
States. Here, much abbreviated, are his views on the climate bill
in three critical areas: cost estimates, sector-by-sector impact,
and trade concerns.
Cost estimates
Predictions of the total economic costs of the cap-and-trade
programme described in the bill vary widely. According to the
Congressional Budget Office (CBO), the net annual cost of the
programme in 2020 would be $22 billion – or about $175 per
American household. Other estimates put the ultimate cost
much higher. The Heritage Foundation [a Washington-based
conservative think tank] concludes that cap-and-trade would
cost the economy $161 billion by 2020 – or about $1,870
per household. Such estimates do not necessarily account
for changes in the price of energy that would occur naturally
as diminishing investment limits production of fossil fuel-
based energy.
Sector-by-sector impact
Utilities are likely to be the most affected by the new price
of carbon, especially in those regions that derive much
of their power from coal-fired plants. The Midwest, the
country’s manufacturing base and the home of many of its
coal-fired plants, seems particularly vulnerable. (Allowances
in the legislation are intended to find the funds to improve
competitiveness of coal plants.)
The oil and metals sectors may also be vulnerable. Some
analysts worry that emissions standards would encourage
companies to keep inventories low and to import more refined
fuels, contributing to idled capacity in US refineries. However,
it may also encourage the creation of cleaner processes or the
development of carbon-capture technologies, which are as yet
far from being commercial.
Trade concerns
The risk that higher costs might accelerate a decline in the US
manufacturing base, as more production is moved offshore, has
prompted concern that compensatory import taxes might be
placed on carbon-intensive imported goods.
In saluting the passage of the climate bill in the House, President
Obama insisted that the US must not discriminate against
imports: doing so might lead to retaliatory protectionism.
Paul Krugman [winner of the Nobel Prize in economics in
2008] suggested that the expressed view of the World Trade
Organization toward import taxes – that they might be
WTO-compliant in certain circumstances – is in line with its view
of value added taxes.
It has been pointed out elsewhere that administration of the
carbon-cap system could become very complex, with a variety
of different country-specific caps, tariffs, and remedies. Also,
even as developing countries petition for trade restrictions on
carbon-reducing technologies to be lifted, or for technology
transfer, companies that developed the expertise have been
reluctant to cut their prices.
Tucked away in Prof Roubini’s analysis is this encouraging note:
“Overall, businesses have supported establishing a climate
regime, given that clarity over regulatory responses is key to
planning.” However, he said, “There are still many uncertainties
about how such a regime will be implemented.”
Waxman-Markey – if it is enacted – is a start.
In brief . . .
Citing an Obama Administration initiative to close loopholes ❈ ❈
that have allowed American investors to use offshore
tax havens, the Department of the Treasury on 19th June
announced that the US and Switzerland had agreed to
cooperate in the prevention of tax evasion by sharing more
information. At the G-20 Leaders’ Summit held in London,
in April, the US had joined Germany, France, and Britain in
bringing pressure to bear on Switzerland and other countries
whose culture of discretion in banking matters may foster
the improper use of hidden accounts.
The protocol, which Switzerland and the US are expected
to sign within a few months, would revise an existing treaty
to conform with a model income tax convention adopted
by the Paris-based Organisation for Economic Co-operation
and Development. The negotiations over a strengthened
Swiss-US tax treaty took place as American authorities were
still pressing the Swiss bank UBS to hand over the names of
52,000 American clients suspected of tax evasion. The US also
recently concluded tax-information exchange agreements
with Gibraltar and Luxembourg.