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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.

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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 [website no longer available], 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.

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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

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By Elizabeth M. Lynch, August 4, 2009

In Friday’s Huffington Post, Sen. John Kerry published a timely op-ed piece, “Who Lost the Earth?” on the need for the U.S. and China to reach some kind of an agreement on climate change.  “Who Lost the Earth?” comes at a point when it appears that any agreements reached during  December’s U.N. Conference on Climate Change will likely not include the two biggest emitters of greenhouse gases: the U.S. and China.

In his op-ed, Sen. Kerry correctly commends China for its efforts in already implementing measures to curb greenhouse gases.  It is in fact impressive that China is already experimenting further than the U.S. with some energy efficient technologies.   Furthermore, Sen. Kerry is right to criticize those in the U.S. who say that China “won’t lift a finger.”  While nervous that it could forestall economic development, China still has a sincere interest in solving its impending environmental crisis.  Every year, over 60,000 “mass incidents” (protests often involving thousands of people) in China are spurred by environmental damage.  The Chinese government views these mass incidents as a very real threat to its rule.

But even in light of these factors which propel China forward on the issue of climate change, Sen. Kerry and his Democratic colleagues still need to be realistic about China’s capacity.  Sen. Kerry notes that there needs to be legal commitments on the international stage and that China needs to be held accountable.  All of this is true.  But at the same time, China’s circumstances must be understood.  While moving forward in some areas, China still lacks the technical capacity to implement many energy-saving measures.  Simple things like an energy audit of a building often elude local officials.  Many industries, such as waste-heat recovery, have yet to be developed.

Another impediment is the difficulty for the central government to implement environmental laws on a local level.  Because China is an authoritarian regime, many believe that whatever the Chinese central government wants to achieve, it can easily impose.  But with this authoritarian government comes a layer of inflexibility.  Rule is from the center out; from top down; for the central government to guarantee that laws are implemented on the local level, it must amass all of its power, and oversee the locality, a very time-consuming and exhausting activity.

Unlike the U.S., China does not have a flexible regulatory state where government authority has been delegated to specific agencies that have almost exclusive jurisdiction over a field.  Nor do laws allow for individuals to enforce the law through lawsuits on behalf of the government (i.e. private right of action).  Instead, the Chinese central government must do all in a country as large as the U.S.  Not surprisingly, its ability to control the local level and guarantee that laws are implemented is not as prevalent.

In moving forward, U.S. policy makers must take China’s circumstances into account.  While they need to push China forward to meet greenhouse gas emission targets, these targets must reflect China’s current capabilities.  If Sen. Kerry and the Democrats do not devise a realistic strategy to help China in terms of technology assistance and implementation skills prior to Copenhagen in December 2009, opponents in Congress will use China’s capacity issues as an excuse to reject any agreement arising out of Copenhagen.  This would not just be a defeat for Sen. Kerry and like-minded Democrats; this would be a defeat for the future of this world.