2454 , as passed by the House, contains both of these strategies. The decision lists 164 industrial sectors and subsectors deemed exposed sectors under the appropriate European Parliament (EP) and Council directives. In general, two strategies have been employed: (1) free allocation of allowances (similar to that of the EU); and (2) an international reserve allowance (IRA) scheme. Proposed Funding

Under H.R. In addition, H.R. 2454 's allocation scheme would appear to provide sufficient allowances if EPA's estimates are correct. If the Working Group's estimates are correct, or if individual showings of eligibility prove significant, the pool of allowances provided by the bill would not be adequate under the assumptions used here. 2454 's free allowance allocation to energy-intensive, trade-exposed industries. Although the scheme would appear effective in mitigating the trade-related impact of the program on energy-intensive, trade-exposed industries, production cost for those industries (along with other industries) could increase because of the potential pass-through of compliance-related costs by upstream producers of various inputs into their manufacturing processes (e.g., feedstocks, petroleum, etc.). Whether these costs would become significant would depend on the ability of upstream suppliers to pass on those costs, and the ability of the downstream industries to respond by increasing the efficiency of their operations or by substituting other, less-costly inputs into their processes. Legislation providing free emission allowances to carbon/energy-intensive trade-exposed industries may arguably confer a subsidy for purposes of the WTO Agreement on Subsidies and Countervailing Measures. Although the bill would require EPA to establish a border measure (IRA) program consistent with U.S. international agreements, a category that would include U.S. trade agreements, a requirement that importers purchase IRAs to accompany particular imports might nonetheless be found to constitute a prohibited import surcharge or, if the product may not otherwise enter the United States, a prohibited quantitative restriction under the General Agreement on Tariffs and Trade 1994 (GATT). Dispute settlement is administered by the WTO Dispute Settlement Body (DSB), consisting of all WTO Members. It is also possible that the future tax treatment of distributed allowances may itself result in such foregone revenue. International Reserve Allowance (IRA) Program

H.R. Any law or regulation that is provisionally justified under Article XX(b) or Article XX(g) must also comply with the proviso to Article XX, which requires that the measure not be applied "in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." As noted below, the WTO Appellate Body has implied that health protection may be a goal of a domestic climate change program. Given these cases, were the IRA program found to violate U.S. GATT obligations but the program was found to fall within the scope of a GATT general exception, the United States would seemingly need to address issues such as the following to show that the program was applied consistently with the Article XX proviso: (1) engagement of trading partners for the purpose of negotiating a bilateral or multilateral solution both to the GHG-reduction goal and addressing the use of border measures to remedy the competitiveness concerns that lead to leakage and administrative problems that may arise in implementing the border measure program, particularly in regard to the use of foreign data; (2) use of a flexible regulatory standard under which the Member permits comparability in the effectiveness of foreign programs in achieving the importing Member's policy goal; (3) creation of a regulatory process that gives exporting Members a meaningful opportunity to be heard and to resolve problems and deficiencies in seeking and obtaining access to the importing Member's market; (4) providing an adequate phase-in period before import requirements enter into effect; and (5) permitting the importation of goods that in fact comply with the requirements of the regulatory program, thus avoiding overly broad regulatory categories that may result in penalizing such compliance.
The United States has proposed, and the European Union (EU) developed, policies to mitigate the potential economic and environmental (i.e., "carbon leakage") impacts of carbon policies on energy- or greenhouse gas-intensive, trade-exposed industries. While studies have found little effect of carbon policies on EU competitiveness in the present, the EU decision to move toward auctioning of allowances in the future has spurred development of criteria to extend potential availability of free allowances to exposed industries to 2020. In a December 2009 decision, the European Commission (EC) listed 164 industrial sectors and subsectors deemed exposed sectors under appropriate European Parliament and Council directives.
H.R. 2454, which passed the House on June 26, 2009, includes two strategies to address these concerns: (1) free allocation of allowances (similar to that of the EU), and (2) an international reserve allowance (IRA) scheme. Studies have suggested that a free allowance scheme appears effective in mitigating the trade-related impact of the carbon program on energy-intensive, trade-exposed industries. However, production cost for those industries (along with other industries) could increase because of the potential pass-through of compliance-related costs by upstream producers of various inputs into their manufacturing processes. Whether these costs would become significant would depend on the ability of upstream suppliers to pass on the costs, and the ability of the downstream industries to respond by increasing the efficiency of their operations or by substituting other, less-costly inputs into their processes. There are questions about whether the allowances provided by H.R. 2454's allocation scheme are sufficient. If the Environmental Protection Agency's estimates are correct, the allocation would appear sufficient. If industry estimates are correct, or if individual showings of eligibility prove significant, the pool of allowances provided by the bill would appear inadequate under the assumptions used here. Also, the data and administrative resources necessary to implement the program would be substantial.
Although H.R. 2454 as passed would require EPA to establish an IRA program consistent with U.S. international agreements, questions may be raised as to whether proposed Part IV and its application would fully comply with U.S. international trade obligations. The distribution of free allowances may constitute actionable subsidies for purposes of the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures by possibly qualifying as "foregone revenue" when auctioning of allowances would also be permitted. In addition, the requirement that importers purchase IRAs to accompany particular imports might be found to constitute a prohibited import surcharge or, if the product may not otherwise enter the United States, a prohibited quantitative restriction under the General Agreement on Tariffs and Trade (GATT) 1994. While the IRA program might be provisionally justified under GATT general exceptions for health protection or resource conservation, the GATT also requires that it not be applied "in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." Whether an IRA program can be applied consistently with these requirements may depend on the type of program that may be crafted by EPA under the proposed legislation—that is, on the elements that would be required under the bill and the administrative possibilities inherent in its discretionary authorities. Absent an international consensus on the types of trade-related measures that may be applied as part of a domestic climate change regime, adversely affected countries may seek to challenge these measures under WTO dispute settlement provisions. Since neither the distribution of emission allowances nor border restrictions imposed as part of a domestic greenhouse gas-reduction program have yet come before WTO dispute settlement panels, WTO obligations and exceptions remain untested in this complex regulatory environment.