Comments (0)

By Elizabeth M. Lynch, December 17, 2009

Sec. of State Hillary Clinton in Copenhagen

Who would have thought that the U.N. Climate Change Conference could tear the world away from the on-going saga of Tiger Woods?  With protests in the streets of Copenhagen that escalate every day (click here for an insider’s perspective on the protests), a mass walk-out by developing nations from the conference, and constant barbs between the world’s two largest emitters of greenhouse gases (GHG), the U.S. and China, the drama is running high in the closing days of Copenhagen and the world is on edge.  Will there be a deal?

As Marcy Nicks Moody noted, a legally binding treaty will not emerge from Copenhagen. However, going into Copenhagen last week, with both the U.S. and China announcing their respective commitments, a strong political agreement seemed possible.  But with the increasingly antagonistic discussion between the U.S. and China delegations, has the world reached an impasse?  Should everyone pack their bags now and head home?

Not quite yet.  There is still reason to have hope.

First, the very fact that there is heated discussion, disagreement and even anger is a good thing.  If Copenhagen was going to be a rubber stamp, a mere sheet of paper that no one was going to pay attention to, there would not be such dissension in the ranks, especially from the U.S. and China.  But countries like China and the U.S. are strategically considering their interests in anticipation of a strong political agreement that will likely provide the framework for a legally binding one in the future.

Second, we are still in the negotiation stages.  Yes, the exchanges between the U.S. and China over financial assistance,

China's Climate Change Ambassador Yu Qingtai at Copenhagen

transparency, and caps have become more hostile, but that could also be because, now with China on a more equal footing in the world, it is able to negotiate harder and play both offense and defense.

Additionally, the climate change talks have proved to be a growing experience for China and its leadership.  Copenhagen is the first international summit of substance that China is a part of in its new status as an emerging global power, forcing its leadership to confront the reality that such a title comes with both advantages and disadvantages.  China’s increased status in the world gives it the negotiating power to better protect its interests in the final document, surely a distinct advantage.   But its increased status also means that China’s interests are no longer completely aligned with the other developing countries’ interests; while China is still the de facto leader of “the Group of 77 plus China” and holds sway over many of the African nations because of trade alliances, there are times when China’s interests are adverse to the developing world’s.  As China’s power continues to grow, such division between it and the developing world will inevitably increase and China will have to become more comfortable with this fact.  Copenhagen is a reflection of these growing pains.

So how do we move forward?

Tomorrow, the leaders of the world will converge on Copenhagen with the goal of producing a clear and strong roadmap to a legally binding treaty.  The biggest issue that could prevent some form of a deliverable is the U.S. and China relationship.  So how do we move forward?

China has demanded international funding for its climate change commitments.  China argues that the western nations, for the past few hundred years, have been able to grow without any restrictions on their development.  Fossil fuels were used without consideration for the climate and lands were deforested with abandon.  China argues that the West’s irresponsible development vis-à-vis the global environment is the cause of the current climate change crisis.  But by asking that all nations partake in a climate change deal, China maintains that the West is unfairly spreading the costs of its own development on all countries.  As a result, China is demanding that if the West wants it to agree to a climate change bill that would require China to pay for past western growth, the West needs to offer some form of payment.

The logic underlying China’s argument cannot be denied.  However, if a deal at Copenhagen is not reached, China will be the cause of the world’s future climate crisis.  By that time, when the “score” between the West’s development and China’s will be equal, it will be too late to broker a deal.  Additionally, China’s demand for some form of climate reparations comes at a financially difficult time.  Politically for the U.S., it’s difficult to justify a blank check to the U.S.’ largest debt holder.

However, the U.S. should not just walk away from China’s demand since the U.S. could benefit from this as well.  China has already stated that without international funding, it will not allow outside international verification of its Copenhagen commitments.  The U.S. has balked at China’s refusal to allow for outside verification, and rightfully so.  While China has made some progress in improving its statistical measurement ability, it is still worlds away from the West and given some of China’s past practice of using measurements that produce falsely positive results, the West is right to be skeptical.

But Copenhagen could serve as an opportunity to help China develop its capacity to measure and verify data as well as implement its commitments on the local level.  And this would not just help with climate change.  China has a horrible record of statistical reporting in every sector – environmental, criminal justice, trade disputes, and economic development.  However, with the assistance from the West, China will not just learn to better measure its own development but will become more comfortable with public reporting.  This could create a more reliable and transparent government, something that both the Chinese people and the outside world could benefit from.

Thus, hopefully in these last few days, the U.S. and China can reach a targeted agreement whereby the U.S. and the West will provide financial assistance to China’s attempts to better measure its data as long as China opens this process to U.S. and Western observation.

Comments (0)

By Elizabeth M. Lynch, December 7, 2009

Our last posting about the upcoming global climate change negotiations was not very positive; in fact very few analysts have been positive.  But the past week has proved interesting, with both the United States and China issuing carbon reduction plans, forcing us to reconsider our previous notion that Copenhagen will produce little results.

The U.S. and China Issue their Respective Climate Control Plans

Right before Thanksgiving, President Barack Obama announced that the U.S. will be attending Copenhagen with a promise to cut emissions of greenhouse gases (GHG) by 17% from 2005 levels by 2020.  While it is a step forward that the U.S. will be attending the climate change talks with specific targets, those targets are still very much provisional.  Any targets coming out of the climate change talks will require Congressional approval post-Copenhagen.   While the 17% cuts proposed by the White House are identical to the GHG emission targets found in the House of Representative’s climate change bill passed in June, that bill has been languishing in the Senate, and will likely face an uphill battle once the Senate turns its attention from health care to climate change.   So whether the 17% cuts become a reality remains to be seen.

The day after the U.S. announcement, China issued a “carbon intensity target” reduction of 40-45% by 2020 to bring to Copenhagen.  While this looks huge on paper, in reality, it would allow GHG emissions to increase while China’s economy continues to grow, albeit GHG would grow at a lower rate.  Carbon intensity measures carbon emissions per unit of gross domestic product (GDP), so if your GDP skyrockets ever year, like China’s does at a rate of 8% a year, you can actually increase your absolute greenhouse gas emissions, and still show a 40-45% reduction by 2020.  Julian Wong on the Green Leap Forward also gives a good description of the math behind this.  China expects its GHG emissions to peak around 2035, a time that many experts believe is too late.

Although both the U.S.’ and China’s plans are far from perfect, at this stage, something is better than nothing from the world’s two largest greenhouse gas emitters.  And China has made concerted and sincere efforts thus far to increase its energy efficiency and reduce its greenhouse gas emission rate.

Now that China has set Some Targets Will it Be Able to Measure Them?

China is not known for reliable government statistics and while there has been notable improvements, its ability to

Copenhagen remains a game of Chinese chess

accurately measure and report its greenhouse gas emissions, and thus be held accountable to international commitments, has remained an issue leading up to Copenhagen.  Currently, China lacks the capacity – both technical and institutional – to provide such reliable data.

However, China has recently agreed to some cooperation with international and U.S. bodies to assist with developing its capacity to accurately measure its GHG emissions.  The U.S.’ Environmental Protection Agency (EPA) and its Chinese counterpart, the National Development Reform Commission (NDRC), signed a memorandum of cooperation (which is a step up from a memorandum of understanding) to work on China’s capacity issues concerning its ability to measure its emissions output.

But as Charlie McElwee over on the China Environmental Law blog notes, the EPA-NDRC memorandum currently lacks particulars and will likely go nowhere without being fully fleshed out.  At Copenhagen, the U.S. and the E.U. need to pressure China to work more closely with foreign bodies in developing its capacity.  It is important that Copenhagen does not conclude without a detailed plan to develop China’s capacity.  Additionally, this capacity development, especially in terms of institutional development and the ability of China to enforce its environmental regulations at the local level, could potentially influence the enforcement of regulations in all fields of law, providing for greater rule of law in China.

China though will not make this access easy; China has already begun to use this as a bargaining chip for greater financial assistance from developed countries for its climate change policies.  China’s climate change ambassador, Yu Qingtai, announced recently that China will only allow foreign verification of its GHG emissions if it receives outside financial assistance: “Actions would be measurable, reportable and verifiable if (international) support is measurable, reportable and verifiable.”  China’s stance on this should not be surprising.  It has repeatedly asked for international financial support for its efforts to curb its GHG emissions since the current climate crisis has largely been a result of the developed world’s past actions and not because of China’s development (it’s the future environmental crisis that China will largely play a role in if things remain as is).  China’s argument is understandable and rings true.

Fortunately, the Obama administration remains open to discussing a financial commitment.  China appears ready to bargain – if the U.S. wants the access to assist China with developing its technical and institutional capacity, which is necessary for any agreement out of Copenhagen to truly succeed, it must be ready to bargain as well and provide some financial assistance.

Comments (0)

By Elizabeth M. Lynch, October 7, 2009

The U.N. Climate Change Conference in Copenhagen is exactly two months away but has China and the U.S. made any headway in coming to terms with their differences on the climate change front?  In a new article published in the Tsinghua China Law Review,  senior attorney at the U.S. Environmental Protection Agency (EPA) Steve Wolfson offers a positive outlook on negotiations with recommendations on how the U.S. and China can move forward to reach a meaningful climate change agreement.

In “Gathering Momentum for U.S.-China Cooperation on Climate Change”  Wolfson reviews the issues that have plagued climate change negotiations between the U.S. and China and the progress that has been made:

• A Developed Country or a Developing Country? – China puts itself squarely in the developing nation category.  Developing nations were exempt from greenhouse gas emission targets for the Kyoto Protocol and will likely be again for the Copenhagen agreement.  But is China a developing country in the way that Cambodia or Ghana is?  Arguably no and given the fact that China surpassed the U.S. in 2007 for greenhouse gas emissions, the U.S. and other developed countries should push China forward in agreeing to some type of targets.
• Historic Responsibilities of the Western World – China rightfully claims that the planet’s current climate change crisis is a result of the centuries of development in the Western world.  China’s current development over the past 20 years has not caused the current crisis.  But the Western countries argue that, unless it limits its greenhouse gas emissions and works on its energy efficiency, China’s future development is what will make the present crisis into a death sentence for the world.  However, as Wolfson points out, there has been some movement by the U.S.  When Secretary of State Hillary Clinton visited China in February, she acknowledged the special responsibility of the U.S. due to its role as the largest historic emitter of greenhouse gases.  In his speech before the U.N. two weeks ago, President Obama also admitted to the historic differences between the U.S. and China in terms of greenhouse gas emissions.
• China’s Positive Progress on Controlling Carbon Emissions – Wolfson analyzes the various laws that China has passed to curb its greenhouse gas emissions and increase its energy efficiency.  He also takes note of China’s various initiatives to restructure its economy to improve its efficiency and reduce its emissions.

While Wolfson’s article offers much hope for U.S.-China progress on the eve of Copenhagen, he concludes on a slightly somber note, remarking on China’s inability to implement many of its national laws on the local level.  This is a problem that permeates all of Chinese society: the the Sanlu milk powder scandal last year, the recent and wide-spread lead poisoning  of children in villages that boarder factories, the importation of toys laced with lead from China; school buildings that do not withstand an earthquake; these are all examples of a regulatory system that fails on the local level.

China is sincere in its desire to be a leader in clean technology and to clean up its environment.  But its problem now is implementing any agreement that comes out of Copenhagen, and this is not because China does not want to; it is because China does not know how.

We at China Law & Policy have recommended in past posts and continue to recommend that U.S. policy makers seize the opportunity that Copenhagen offers to assist China with its legal development in the regulatory field.  Copenhagen should not just be about agreeing to targets; an agreement from Copenhagen should also include the U.S.’ commitment to provide resources on implementation and governance, knowledge exchanges between U.S. environmental regulators and Chinese environmental regulators, and an open-mindedness that it is going to take China some time to establish an effective regulatory scheme.  By assisting China with its regulatory development, the U.S. will not only make headways in establishing a greater sense of rule of law but could potentially benefit the lives of 1.3 billion people in a very real and tangible way.  Wolfson’s article reminds us of this.

Click here to Read Steve Wolfson’s Gathering Momentum for U.S.-China Cooperation on Climate Change.

Comments (3)

By Elizabeth M. Lynch, September 24, 2009

This past week the U.N. General Assembly in New York was filled with wave after wave of speeches and meetings dedicated to limiting global climate change.  With the December Copenhagen conference less than three months away, the question remains – has there been any progress?

On Tuesday, September 22, both President Barack Obama and President Hu Jintao (pronounced Who Jin-Dao) separately addressed the General Assembly, each discussing their country’s commitment to a global climate change agreement.   Their rhetoric was considerably more conciliatory, signaling that perhaps the two largest polluters of greenhouse gases are finding common ground.  The substance of their speeches though, indicated that there still remains a large division between these two critical countries.

Conciliatory Rhetoric

This past summer saw many important countries digging in their heels on climate change.  In July and August, both China and India adamantly stated that they would not agree to any type of defined targets that would limit their greenhouse gas emissions.  In June, the U.S. House of Representatives narrowly passed a climate change bill which received notable criticism from both sides of the aisle upon its passage, questioning the bill’s ability to pass the Senate.

But on Tuesday, President Barack Obama reinforced his Administration’s commitment to limit greenhouse gases, indicating his willingness to push his Democratic colleagues in the Senate to pass a climate change bill.  In response to the E.U.’s recent promise to assist developing nations both financially and technically in battling climate change, President Obama also committed the U.S. to help.

President Hu Jintao’s speech was heralded as a huge step forward for the Chinese.  President Hu affirmed his country’s

President Hu Jintao speaking to the U.N General Assembly on Tuesday, Sept 22, 2009

promise to tackle climate change and surprisingly mentioned China’s “mandatory national targets for reducing energy intensity and discharge of major pollutants…”

India also seems to be moving in the direction of targets.  In an interview with the Financial Times on Tuesday, India’s environment minister, Jairam Ramesh discussed the possibility that India could adopt legislation increasing its energy efficiency and thus having “implicit targets.”

Divisions That Could Hamper an Agreement in Copenhagen

Target: What is in a Word?
The press has largely been positive to President Hu’s discussion of “mandatory national targets for reducing energy intensity,” heralding such a step as China’s “first commitment to climate change targets” and that China “pledges to lead effort to combat climate change.”

While it is true that this is a step forward for the Chinese – never before have they used the word “target” in reference to climate change on the world stage – in no way is this a “carbon emissions target.”  In fact, China has been using “energy efficiency targets” domestically since 2005.  As John Romankiewicz explained on the Green Leap Forward, in China’s 11^th Five Year Plan passed in 2005, the Chinese government established a 20% reduction target in energy intensity from 2006 to 2010.  While this is a laudable goal, it still allows China to increase its carbon emissions since there is no cap – the calculation is relative to the percentage growth of GDP.

China’s goal is to cut energy intensity as a percentage of its GDP.  If GDP rises, a rise in energy use, as long as it is lower than the previous year, can still show a reduction in energy efficiency.  For example, China’s National Development & Reform Commission (NDRC) noted that a 4% rise in energy consumption in 2008, matched with a 9% increase in GDP for that year, resulted in a 4.2% decrease in energy intensity from the previous year (see Green Leap Forward).

Additionally, a focus on energy intensity only marginally impacts carbon emissions, a fact not lost on President Hu in his speech on Tuesday.  After committing China to set targets to reduce its energy intensity, President Hu vaguely addressed carbon emissions by noting that China will “endeavor to cut carbon dioxide emissions [inaudible in original speech but likely “as a percentage of”] GDP by a notable margin by 2020 from the 2005 level.”

China has certainly taken a step forward on approaching some form of targets.  Furthermore, by even mentioning targets, China implicitly commits to making those targets measurable and verifiable as Julian L. Wong from the Center for American Progress noted, something that China in the past was not willing to do.  So there has been progress which China should be rightly commended for.  But at this stage, to limit global warming to the U.N. target of 2º Celsius, the world community needs to push China to agree to carbon emissions targets.

Obama Adverse to China Being Defined as a Developing Nation?
Central to the requirement of carbon targets is the definition of “developing nation” and this was perhaps the greatest divide between the U.S. and China, and could possibly stall progress in Copenhagen.

For purposes of climate change negotiations, China has repeatedly portrayed itself as a developing country.  In his speech on Tuesday, President Hu dedicated around two-thirds of it to discussing the special circumstances of developing countries, implying that China is one such nation.

Under the previous international climate change treaty, the Kyoto Protocol of 1997, China was defined as a developing nation.  China is keen to keep this definition in Copenhagen for two reasons: (1) emission targets are not applicable to developing nations, and (2) developing nations can avail themselves of financial and technical aid provided by developed nations.

It is the second reason that appears to be more important to the Chinese.  In prior climate change negotiation simulations that global power participate in as practice for Copenhagen, the Chinese representatives do not budge unless there is an offer of technical or financial assistance from other countries like the U.S. or the E.U.  President Hu’s speech reiterated the importance of such assistance to the Chinese: “developed countries should take up their responsibility and provide new, additional, adequate and predictable financial support to developing countries…”

President Obama wholeheartedly agreed with President Hu’s sentiment to assist developing nations.  However, he

President Barack Obama before the U.N. General Assembly on Tuesday, Sept. 22, 2009

appeared to disagree with President Hu that China is such a country.  In his speech before the U.N., President Obama put China and the U.S. on the same level in assisting developing countries: “These [developing] nations do not have the same resources to combat climate change as countries like the United States or China do…” (emphasis added).

This division between the two countries regarding the developmental status of China could do one of two things: (a) completely derail any agreement in Copenhagen that includes both the U.S. and China, or (b) provide the compromise necessary to have the two largest emitters of greenhouse gases agree to a climate change agreement.  U.S. policy makers should look to the latter.  Agreeing to provide financial and technical assistance to China might just be the push necessary to get it to agree to carbon emission targets, a necessary goal to limit global climate change.

For a transcript of President Barack Obama’s address to the U.N., click here.

For a transcript of President Hu Jintao’s address to the U.N., click here.

Comments (0)

By Elizabeth M. Lynch, September 11, 2009

France's President, Nicolas Sarkozy

Does France’s president Nicolas Sarkozy read China Law & Policy?  Sure looks that way.  In an effort to promote carbon caps domestically, Sarkozy also called for any international climate change agreement to include a carbon tax on imports into Europe from countries that do not impose carbon emission caps.

In response, many economists argued that Sarkozy’s push for a carbon tax on imports could lead to alienating China from agreeing to any sort of emission caps in Copenhagen.  This is the same criticism lodged against the tariff provisions in the U.S. House of Representatives’ Climate Change Bill.

There is a real risk that these economists are right; China will begin to feel bullied and, for its domestic audience’s consumption, walk away from an international climate change agreement.  Although the Chinese government enjoys one-party rule in an authoritarian state, it is still susceptible to domestic public opinion, especially given the fact that nationalism runs very high.

But at least our European allies realize that any international agreement is a give and take; there are carrots and sticks.  On the same day that Sarkozy called for carbon tariffs, the European Union’s (E.U.) environment chief, Stavros Dimas, announced that the European Commission would pledge $3 billion per year to developing countries, including China, to assist with capping emissions and developing clean technologies.

A key issue for China in its lead up to Copenhagen has been financial and technological assistance from developed countries in implementing carbon emission caps or clean technology.  China has repeatedly stated that they will not be able to meet the requirements of an international treaty unless there is assistance from developed countries.

The E.U.’s pledge is the carrot in this situation.  It is agreeing to a term that China has said is necessary for it to consent to any international climate change treaty.   So even in light of Sarkozy’s call for carbon tariffs, the Chinese government can turn to its people and show that it was not bullied.  Instead, China received the one element that it considered indispensible.

The U.S. unfortunately has only been providing sticks.  There is evidence that the tariff provisions provide some leverage against a country like China, but without providing some sort of bargaining chip, China will likely not respond positively to the U.S.’ hard-line tariff provisions.  Instead, the U.S. should learn for the E.U. and look to see where it can find common ground with China.  Without this common ground, it starts to look a lot like bullying.

Comments (1)

By Elizabeth M. Lynch, September 10, 2009

An Expert Weighs In

On Monday, we ran a piece on the international trade implications of the border adjustment measures of the House’s climate change bill.  The article ends with a section questioning the legality of the tariff provision under WTO rules.

China Law & Policy was fortunate to have Henry Gao, Associate Professor of Law at the Singapore Management

Prof. Henry Gao

University and expert on WTO law comment on our analysis.  In his comments below, he questions whether the provisions would in fact violate WTO rules.

If I understand it correctly, this means that the carbon tariff provision is in violation of the national treatment obligation under the WTO. However, this seems to be rather unlikely. The national treatment obligation only applies with regard to domestic taxes and other regulations. The carbon tariff, by definition, is not a domestic tax. Instead, it is a tariff that will be applied before the goods enter the border. Thus, for me, it appears that it’s more accurate to say that this is a violation of the MFN clause (given the assumptions in your article that some foreign firms will qualify while others don’t), or possibly the tariff binding obligation under GATT Article II, assuming that the US might exceed its bound tariff levels by imposing the extra tariff.

Also, legally speaking, while the US will surely have to fight hard to defend its case if the issue is really referred to the WTO, it’s less than certain that the US will win.  Indeed, in the very first case that went before the WTO Appellate Body (AB), the US-Gasoline case, the WTO has, contrary to popular belief, affirmed the right for WTO members to take actions to conserve exhaustible natural resources, which has been explicitly interpreted by the AB to include clean air. Of course, this doesn’t give countries an open license to do whatever they want. They will need to demonstrate first, that are no less trade-restrictive measures; second, that their measures do not constitute arbitrary or unjustifiable discrimination. To sum up, it’s OK to take actions to control climate change, but the legality of the measure would depend on how you structure your package. The devil, as always, is in the details.

Henry Gao
Professor of Law
Singapore Management University
Editor, WTO & China Blog

As Prof. Gao notes, the devil is most certainly in the details.  As of yet, the House bill does not clearly spell out how exactly these tariffs will be applied.  Because of this, experts fall on both sides of this issue.  Paul Krugman of the New York Times expressed the opinion that the tariff provisions would like be okay under WTO rules.  However, attorneys at Akin Gump’s Climate Change practice disagree and offer their assessment that the provisions are a violation of WTO rules.

While there is a call by some moderate Democrats and many Republicans in the Senate to make the provisions stronger, expect at the very least for the provisions to be made a bit clearer.

Comments (0)

By Elizabeth M. Lynch, September 7, 2009

Originally posted on the Huffington Post.

Health care will not be the only derisive issue on the Senate’s calendar when it returns to Congress on September 8.

Rep. Ed Markey Announces Climate Change Passage, June 26, 2009

This past June, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (the “Climate Change Bill”).  Far-reaching in its impact on the U.S. economy and particularly detrimental to certain energy-intensive sectors, debate in the Senate will become increasingly cantankerous as special interests and certain states lobby for protection.

And while the Bill, through a series of complicated cap-and trade equations and a plethora of subsidies to renewable energy, has the potential to completely alter the domestic market, debate thus far has been about its global impact.  With fear that countries like China will not pass legislation to cap their domestic industries’ carbon output, the House added two provisions to protect U.S. industries from companies in countries that are not similarly restrained.  Out of a 1,400 page bill, these two provisions have become the center of the debate, some calling these provisions much needed protection and others calling them tariffs.

But conspicuously absent from these discussions is an analysis of what is really going on here.  How exactly do these provisions work?  Will they have the intended effect of maintaining the competitiveness of U.S. industries or are they attempts by certain industries to protect their profits?  Will these provisions bring countries like China to the table in Copenhagen or will they ultimately produce a tariff war?  Can they withstand a challenge under global trade rules?

To answer these questions, China Law & Policy sat down with Jake Caldwell, director of Policy for Agriculture, Trade & Energy at the Center for American Progress.  Click here to listen to the interview with Jake Caldwell.

The Trade Provisions

Applicable Only to Energy-Intensive and Trade-Sensitive Industries
In our interview, Jake stressed that the two trade provisions in the Climate Change Bill will only apply to those U.S. industries that are both energy-intensive and trade-sensitive, making these provisions applicable in fact to only about five U.S. industries: ferrous metals (iron and steel), nonferrous metals (aluminum and copper), non-metal minerals (cement and glass), paper and pulp, and basic chemicals (World Resources Institute (WRI) report, p. xvi).

Under the Bill, these industries will initially be given a two-year waiver from compliance to the Bill’s cap-and-trade regulations.  However, after the two years, these industries can seek protection from foreign competition through the following two trade provisions.

Provision 1: Recovery of Some Cost of Compliance
The first of these provisions is less controversial.  Found in Title IV, Part F, subpart 1 of the Bill, it establishes an emissions allowance rebate program.  As Jake explained, this will allow companies in energy-intensive, trade-sensitive manufacturing industries to be compensated in other ways for the cost of complying with the Bill’s cap-and-trade program.  The rebate program will reduce the threat that these companies will lose business to companies from countries that do not impose equally as rigorous caps on greenhouse gas emissions. The rebate program will be phased

Click on image for a PDF of the Trade Provisions in the Climate Change Bill

out by 2035.

Provision 2: Border Adjustment Measures (a.k.a. Tariffs)
It is the second trade provision, found in Title VI, Part F, subpart 2, that is the most contentious; this is the provision that establishes unilateral border adjustment measures – a.k.a. tariffs –  on imports from countries that do not have similar emissions reduction policies.  Under this provision, if by 2018 there is no international climate change treaty in force, the President, starting in 2020, is required to impose a border adjustment measure on imports from sectors in countries that have not capped their emissions or reduced their energy-intensity to comparable levels.  The U.S. importer of the competing foreign product will have to purchase an “international reserve allowance” through a carbon market.  This in effect establishes a tariff on imports from that foreign country.

As Jake pointed out, the President can grant a waiver to certain countries if he or she deems that there is an important national economic or environmental reason that takes precedence.  But the Presidential waiver is subject to Congressional approval through a joint resolution of Congress. In effect, Congress has to “second” the President’s decision, making for a cumbersome procedure.   If either house of Congress does not agree with the President’s reasoning, the waiver is denied.  Given the already politically-sensitive as well as politically-expedient nature of the U.S.-China relationship, it is difficult to imagine that any waiver to a Chinese industry could make its way through Congress without a fight.

Effectiveness of the Trade Provisions

As Jake explained in our interview, the trade provisions were adopted for three reasons: (1) to prevent carbon leakage (the transfer of production and jobs from industries in the U.S. subject to cap-and-trade rules to companies in foreign countries that do not have such rules in place), (2) to keep U.S. manufacturing industries competitive in a potentially unequal carbon-restricted world, and (3) to be used as leverage against other countries that have yet to set emission reduction targets.  But will these provisions achieve their stated goals?  Or are they protectionist responses to pressure from a few select industries?

Carbon Leakage
If a goal is to prevent carbon leakage and promote emission caps in other countries, the trade provisions, especially the border adjustment provisions, are not tailored narrowly enough to achieve these goals.  Congress was largely targeting China with the trade provisions.  However, out of the five U.S. industries that would be able to use the tariff provisions (steel, aluminum, chemicals, paper and cement), only one industry imports more than 10% of its product from China: the cement sector (WRI report, p. xviii).  For the other industries, the majority of foreign imports are from Canada and other developed nations, many of which already have emissions standards that surpass the U.S’.  While there will inevitably be some carbon leakage, it’s questionable just how dramatic it will be.  Currently, the majority of U.S. imports in these sectors come from countries with less-carbon intense production methods than China or even the U.S.  Just because U.S. companies will bare the cost of meeting more rigorous emission standards does not necessarily mean that production will be shifted to countries with less rigorous standards.  Currently, China’s production of aluminum is carbon-intensive and uses a tremendous amount of energy.  However, China’s production is more expensive than Canada’s or the U.S.’ and can barely remain competitive in the global market.  Thus, lower carbon emissions and greater energy efficiency do not always equate with higher costs.

Furthermore, if the goal is to prevent carbon leakage, the trade provisions offer no recourse to individual companies from foreign, carbon-heavy countries that are meeting their own private emission caps.  For example, Baosteel, China’s largest steel producer, is relatively energy-efficient (WRI report, p. 35).  However, under the current Climate Change Bill, even though Baosteel may voluntarily subject itself to carbon targets similar to those that will be imposed on steelmakers in the U.S., Baosteel will still be penalized.  The Bill’s trade provisions evaluate imports on a sector-wide basis and not an individual company one.  Arguably, if the goal is to prevent carbon leakage, the U.S. has a better chance of influencing a Chinese company’s behavior than an entire sector in China.  Thus, the trade provisions should establish a secondary track where certain companies, if they are able to show that they are compliant with U.S. standards, are exempted from the border provisions applied to their country and sector.

Finally, the question remains – how do you measure the carbon footprint of an imported product?  These provisions rely heavily upon the assumptions that monitoring and reporting of greenhouse gas emissions from the country of origin is (a) an easy task and (b) accurate.  While these assumptions might hold true in countries like Canada or Japan, for China, where implementation and enforcement on the local level is a perpetual struggle, any form of data collection is a challenge and results are often less than reliable.  Thus, in a world where carbon measurement is problematic, the actual ability to implement the trade provisions remains questionable.

Competitiveness
As mentioned above, imports from China in the energy-intensive, trade-sensitive industries are very small (14% of cement, 7 % of steel, 3% of aluminum, 4% of paper, and less than 1% of chemicals).  These five industries also make up a small portion of the U.S. economy, accounting for 3% of economic output and less than 2% of U.S. employment.  While these industries will inevitability be negatively affected by the Climate Change Bill, the impact on the greater U.S. economy is relatively small.  Additionally, over-protection of these industries loses sight of the broader U.S. economy and the other goal of the Climate Change Bill: to shift production and jobs to energy-efficient or renewable energy industries.

Furthermore, while the border adjustment measures protect these raw material industries, it potentially could hurt those industries that use the raw materials for production of “downstream” products.  For example, the border adjustment measures are only applicable to the importation of sheet steel, and not to products that are made out of steel, like cars or appliances (WRI report, p. 52).  U.S. car makers will still have to compete against foreign car manufacturers whose products could contain steel from countries without carbon regulations.  Without the benefit of border adjustment measures on cars, U.S. car makers would become less competitive.

Similarly, U.S. chemical manufacturing companies are fairly competitive globally.  These companies refine the carbon-intensive, raw material chemicals to make downstream, specialty concoctions (WRI report, p. 52).  However, by imposing a border adjustment measure on the raw material chemicals, any of these chemical manufacturing companies who import raw materials, would experience an increase in the cost of production, making their products less competitive abroad.  While the border adjustment measures will protect the five energy-intensive, trade-sensitive industries’ profits, they could likely hinder the competitiveness of industries that use these raw materials to manufacture downstream products.

Leverage
The jury is still out on whether border adjustment provisions do in fact bring countries to the table to discuss climate change.  The general assumption is that tariff threats rarely cause countries to act, especially countries as large as China.  However, after the U.S. backed out of the Kyoto Protocol, the European countries threatened similar types of tariffs, targeted precisely at energy-intensive U.S. industries.  Perhaps a mere coincidence, but it’s interesting to note that today, the U.S. is now close to passing climate change legislation.  Recently, South Korea voluntarily set a 2020 emissions reduction target; the South Korean government cited the fear of border tariffs as a reason to set targets.

But it is still questionable how far the threat of tariffs can go.  China has certainly taken notice of the border adjustment provisions in the U.S. Climate Change Bill, but that does not mean it will agree to carbon caps.  China’s exports to the U.S. that would likely be subject to the tariff provisions accounted for less than 0.2% of economic output in 2005, thus making the U.S.’ tariff threats of little consequence to China (WRI report, p. 57).  However, of greater consequence to the U.S. and to the rest of the world is if China, the largest emitter of greenhouse gases, walks away from climate change negotiations because it feels as though it needs to “act tough” for its domestic audience.  In looking at the current border adjustment provisions in the Bill and the tepid success they have had thus far, the Senate might want to ask itself if the risk is worth it.

Legality of the Trade Provisions

As Jake mentioned, World Trade Organization (WTO) rules require that countries pass nondiscriminatory trade provisions – that the provisions do not discriminate against foreign products in favor of domestic ones.  Arguably, the current Bill does discriminate.  As discussed earlier, individual companies that could be meeting similar carbon caps will be discriminated against if their home country has not agreed to carbon caps.  Without some sort of procedure that exempts foreign firms which individually meet carbon caps from the border tariffs, the current trade provisions may not withstand a WTO challenge.

There will certainly be a Senate showdown over the Climate Change Bill.  Already ten Democratic Senators have stated that the trade provisions need to be stronger.  But do they really?  If your singular goal is to protect 3% of the nation’s economic output and 2% of its jobs, then yes, the trade provisions will maintain the status quo, at least for the time being.  But if your goal is to increase innovation in new sectors like renewable energy, create clean jobs and limit global climate change, then the trade provisions, as they stand now do not achieve that goal.  There is a need to maintain U.S. competitiveness in the five effected industries, but in the current tariff provision, what is being maintained are corporate profits in a few select, and powerful, industries.  The Senate needs to take a good hard look at the current trade provisions and question if it is worth it.  Perhaps it is time to move away from defensive measures against China and begin to better engage China in agreeing to a climate change treaty.  Without China’s agreement, any legislation the Senate passes will have negligible effect in limiting climate change.

Click here to listen to the interview with Jake Caldwell

Click here to open a PDF of the transcript of the Jake Caldwell interview

Comments (0)

By Elizabeth M. Lynch, August 14, 2009

Last week, Taliesin Thomas, in her review of Song Dong’s current exhibit at the MoMA, observed that “[f]or all that we can posses in this life, in the end we leave the entire corporeal world behind, entrusting someone else to manage the

Trash in the Yangtze River

articles of our former existence.”

But where does all this “stuff” go?  For Song Dong’s mother, it sits in a museum.  For the billions of other Chinese people, their “stuff” and trash ends up in landfills; and China is becoming overwhelmed by the amount of trash that its population increasingly produces.

China’s Legal Daily, in an article published yesterday, provided some sobering numbers.  Every year, China’s cities produce 150 million tons of trash, with a litter growth rate of over 10% per year.  The Legal Times estimates that the amount of trash sitting in Chinese cities’ landfills has reached 7 billion tons.

Beijing alone produces 18,400 tons of trash per day, 6.7 million tons per year, quickly filling Beijing’s 23 landfills.  By 2010, the Legal Daily estimates that 10 of these landfills will be filled to capacity and closed.  Experts hypothesize that with the increasing growth in Beijing, all of its landfills will reach capacity within five years.

For China, this is more than just a space problem; it is also a health hazard.  As the NY Times reported this week in an interesting article about trash in China, as trash decays, it emits large amounts of methane, a greenhouse gas that is more effective in trapping heat in the atmosphere than even carbon dioxide.

As a result of this trash problem, China has begun to look to incineration of trash as a solution, creating a global hazard if strict limits on emissions are not enforced.  As the NY Times points out, such limits differ widely from city to city in China, and even within cities.  In general, communities of the affluent and well educated impose stricter limits similar to those in Europe and the U.S. while across town,  incinerators barely meet the loose requirements imposed by the national government.

China’s national government has allowed slack restrictions imposed years ago on incineration emissions to remain in place due to a power play amongst the various agencies that have overlapping jurisdiction on the matter.  Currently, national emission standards allow for 10 times the level of emissions allowed in Europe or the U.S.

China’s trash is not merely a domestic problem but impacts the world.  Pollutants from trash incinerators in China, like mercury and dioxide, have made their way to the Pacific coast of North America.  As China seeks to increase the number of incinerators, with the currently slack limit on emissions, the U.S. will suffer.  But China has made progress.  Its growing middle class will no longer tolerate such environmental hazards, as evidenced by the incinerators in these neighborhoods that emit almost zero pollutants.

U.S. policymakers need to see this as progress and instead of walking away from the table in Copenhagen, look to continue this progress and work with China to develop the capacity to institute limits that benefit not just the wealthy in China, but even the poor.  China is a big country and this will take time.  But if ever there was a more dire sign that the U.S. needs to reach an agreement with China in Copenhagen, their trash is it.

Comments (0)

By Elizabeth M. Lynch, August 5, 2009

In a recent interview with the Council on Foreign Relations (CFR), CFR Senior Fellow and China environmental expert

Dr. Elizabeth C. Economy

Elizabeth C. Economy analyzes the recent Strategic & Economic Dialogue with China and the U.S.’ changing relation with the emerging global power. While noting that serious differences remain, Dr. Economy stresses the importance of the U.S. and China to work together on a myriad of global issues.

She also pontificates on the changing dynamic in our relationship with China due to the weakened economic might of the U.S. vis-à-vis China and the increase of differing opinions on issues from the Chinese leadership.

But for us at China Law & Policy, where our focus is on the interplay of legal development in China and U.S. policy toward the country, most exciting part of the interview was Dr. Economy’s powerful insistence that the U.S. make rule of law development a priority in its policy toward China.

CFR: What issues should the United States prioritize in its talks with China?
Economy: Off the top of my head, I would say climate change because it is potentially game changing for the entire world in an overwhelmingly negative way. However, my second thought would be the rule of law. The rule of law underpins virtually every other issue. Whether we’re talking about food and product safety, or environmental implementation of anything China might agree to when it comes to global climate change, or trade and investment barriers and intellectual property rights protection, all of them hinge on China having an effective rule of law. Without that, the relationship will continue to founder, because even though we have high-level agreement that we want to work on these issues, if China can’t ensure that it will live up to its obligations, then we’re going to continue to have serious conflict. From my perspective, the most important thing we can do is help them develop the rule of law; it is at the root of most of our conflicts. (emphasis added)

Read Entire Interview Here.

We at China Law & Policy say “You go Liz Economy!”