	Background

Countries can take varying approaches to reducing greenhouse gas  emissions. Since energy use is a significant source of greenhouse gas  emissions, policies designed to increase energy efficiency or induce a  switch to less greenhouse-gas-intensive fuels, such as from coal to natural  gas, can reduce emissions in the short term. In the long term, however,  major technology changes will be needed to establish a less carbon- intensive energy infrastructure. To that end, a U.S. policy to mitigate  climate change may require facilities to achieve specified reductions or  employ a market-based mechanism, such as establishing a price on  emissions. Several bills to implement emissions pricing in the United  States have been introduced in the 110th and 111th Congresses. These bills  have included both cap-and-trade and carbon tax proposals. Some of the  proposed legislation also include measures intended to limit potentially  adverse impacts on the international competitiveness of domestic firms. Estimating Competitiveness Effects

Estimating the effects of domestic emissions pricing for industries in the  United States is complex. For example, if the United States were to  regulate greenhouse gas emissions, production costs could rise for many  industries and could cause output, profits, or employment to fall. However, the magnitude of these potential effects is likely to depend on  the greenhouse gas intensity of industry output and on the domestic  emissions price, which is not yet known, among other factors. Within these industries, adverse  competitiveness effects could arise through an increase in imports, a  decrease in exports, or both. For example,  the U.S. emissions price and the emissions price in other countries are key  variables that will help to determine the impact of emissions pricing on  domestic industries. Potentially Vulnerable Industries

Two key indicators of potential vulnerability to adverse competitiveness  effects are an industry’s energy intensity and trade intensity. Proposed  U.S. legislation specifies that (1) either an energy intensity or greenhouse  gas intensity of 5 percent or greater; and (2) a trade intensity of 15 percent  or greater be used as criteria to identify industries for which trade  measures or rebates would apply. Most of the industries that meet these criteria fall under 4 industry  categories: primary metals, nonmetallic minerals, paper, and chemicals. However, there is significant variation in specified vulnerability  characteristics among different product groups (“sub-industries”). The energy and trade intensity for all primary metal products is  denoted by the “x” in figure 1. Among the primary metals sub-industry examples shown in figure 2, the  types of energy used also vary.
Why GAO Did This Study

Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon-intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms.

What GAO Found

Estimating the potential effects of domestic emissions pricing for industries in the United States is complex. If the United States were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Estimates of adverse competitiveness effects are generally larger for industries that are both relatively energy- and trade-intensive. In 2007, these industries accounted for about 4.5 percent of domestic output. Estimates of the effects vary because of key assumptions required by economic models. For example, models generally assume a price for U.S. carbon emissions, but do not assume a similar price by other nations. In addition, the models generally do not incorporate all policy provisions, such as legislative proposals related to trade measures and rebates that are based on levels of production. Proposed legislation suggests that industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity. Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although significant variation exists for product groups (sub-industries) within each industry. Additional variation arises on the basis of the type of energy used and the extent to which foreign competitors' greenhouse gas emissions are regulated. To illustrate variability in characteristics that make industries vulnerable to competitiveness effects, we include illustrations of sub-industries within primary metals that meet both the energy and trade intensity criteria; examples that met only one criterion; and examples that met neither, but had significant imports from countries without greenhouse gas pricing.