Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

May 29, 2008

Will Congress Aggravate Global Warming?

Congress is getting serious about global warming but approaches being considered will hasten environmental calamity.

The full Senate is about to take up the Warner-Lieberman Bill. It would limit U.S. greenhouse gas (GHG) emissions in 2012 to 2005 levels, and reduce those by 70 percent in 2050.

Unfortunately, by encouraging U.S. energy-intensive industries to flee to developing countries, it would penalize U.S. businesses that could contribute importantly to reducing GDG emissions and accelerate global warming.

The Kyoto Protocol, implemented in 2005 without the United States, commits virtually all other industrialized countries to reducing GHG emissions to 6 to 8 percent below 1990 levels. Developing countries are generally absolved, and industrialized countries may avoid some emission reductions by sponsoring clean-up and reforestation projects in them.

CO2 emissions account for more than four fifths of U.S. GHG emissions and a larger share of those susceptible to government regulation. CO2 is created by processing and burning fossil fuels, and cutting emissions requires slashing their use.

To reduce emissions, EU governments require fossil fuel producing and using industries to obtain emission allowances. Governments issue limited allowances, and businesses buy and sell these in a private market. Purchasing allowances raises costs for fossil fuel-intensive activities like electrical generation, manufacturing and driving.

Warner-Lieberman would impose a similar cap-and-trade regime in the United States.

Large developing countries like China and India show little inclination to adopt comparable effective strategies, and the EU regime encourages carbon-intensive industries, like steel, aluminum and automobiles, to move to those locations. Warner-Lieberman would encourage a similar exodus of U.S. manufacturers.

Reducing emissions in industrialized countries by moving carbon-intensive manufacturing to developing countries only raises GHG emissions, because China and others use fossil fuels so inefficiently.

China, with GDP less than one-fourth the size, already emits more GHG gases than the United States or the EU. Every two years, Chinese emissions growth adds another country the size of Japan.

It is hard to imagine that two years of China’s growth, which comes to $600 billion, could replace Japan’s $4.5 trillion dollar economy, but present international environmental policy requires such perverse economic accounting.

Without comparable regimes in developed and developing countries, Kyoto will not stop global warming. Moving energy-intensive industries to the Third World only accelerates environmental damage and makes the world poorer in the bargain.

The costs of controlling GHG emissions would be best minimized by regulating fossil fuel use the same everywhere, and encouraging carbon-intensive industries to locate where they can best meet those standards.

Warner-Lieberman fails this test. Foreign producers in countries without comparable GHG emission control policies would have to purchase permits for products sold in the United States. However, that would do little to encourage cleaner industries in large developing countries, because most carbon-intensive manufacturing in countries like China and India is for domestic use and enjoys high tariff protection. The cost of purchase allowances for exports to the United States would be subsidized by domestic sales, whose profits are boosted by high tariffs, and as likely, government aid.

Warner-Lieberman would not encourage more efficient fossil fuel use in China and other large developing countries, but it would encourage U.S. energy-intensive manufacturers to flee to them.

Instead, the United States should negotiate with other countries carbon-emission standards for energy-intensive activities like electrical generation, metals production, and automobile use.

This would be a lengthy and difficult process with cap and trade entrenched in Europe. While seeking international agreements, the United States could impose emission-standards on energy-intensive activities; require imported products to meet similar carbon-use standards; and share its best technologies at low-cost with developing countries.

A standards-based approach would create a huge market for low-carbon technologies in the United States and propel environmentally friendly growth, globally. Technology sharing would make GHG-reducing strategies more affordable for developing countries.

Alternatively, the United States could impose a carbon tax on domestic energy-intensive U.S.-made products and on imports not subject to comparable levies. The tax could be set at levels necessary to hit U.S. emissions goals, and would encourage other nations to adopt comparable policies.

These approaches, in combination or separately, could accomplish reductions in U.S. GHG emissions without encouraging energy-intensive industries to leave for China and other developing countries, and would provide incentives and the means for these countries to do the same.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.