In considering the U.S. policy response to climate change, both at home and abroad, one concern is the potential impact on U.S. competitiveness. Any potential competitiveness risks would be felt most directly by energy-intensive industries whose goods are traded internationally, a relatively small segment of the U.S. economy. (1) Potential concerns include relocation of energy-intensive U.S. industry to countries with no or looser controls, loss of market share to competitors in those countries, or a shift in U.S. investment to those countries.

Past experience with the adoption of new environmental standards shows little evidence of significant competitiveness impacts. One major review—synthesizing dozens of studies assessing the impacts of a range of U.S. regulations across a variety of sectors—concluded that while environmental standards may impose significant costs on regulated industries, they do not appreciably affect patterns of trade. (2) Other studies indicate that when U.S. producers do relocate to developing countries, factors such as wages and access to raw materials and markets are far more decisive than environmental costs. (3)

In gauging the potential impacts of GHG regulation, it is important to distinguish the “competitiveness” effect from the broader economic impact on a given industry or firm. A mandatory climate policy would present costs for U.S. firms regardless of what action is taken by other countries. In the case of energy-intensive industries, one likely impact will be a decline in demand as consumers substitute less GHG-intensive products. The “competitiveness” impact is only that portion of the total impact on a firm resulting from an imbalance between GHG constraints within and outside the United States.

A Pew Center report, The Competitiveness Impacts of Climate Change Mitigation Policies, analyzes the historical relationship between energy prices and production, trade, and employment in order to project the potential competitiveness impacts of mandatory domestic GHG limits, at a price of $15/ton CO2. Looking at paper, iron and steel, aluminum, cement, and bulk glass, the analysis concludes that most of the anticipated decline in production within those sectors (–1.6 percent to –3.4 percent) reflects a decline in consumption. The gap made up by imports, or the “competitiveness” effect, ranges from –0.7 percent to –0.9 percent. (4)

While most research has focused on the potential negative competitiveness impacts of climate policy, less attention has been paid to the opportunity presented by climate and clean energy policy to enhance the competitiveness of U.S. firms by driving innovation in the high-growth industries of the future. Some economists believe that stronger environmental standards in many cases confer a competitive advantage by driving firms to innovate and become more efficient. By fostering markets for new technologies, new standards are at least as likely to create jobs in some sectors as to reduce them in others—though the circumstances under which this is true remain a subject of ongoing debate. (5, 6)

The fact is that clean energy technology markets are already substantial in scope and likely to grow significantly in the coming decades as worldwide demand for lower-carbon technologies increases. Between 2004 and 2009, clean energy investments (including renewables, efficiency technologies, biofuels, CCS, nuclear power, and other low-carbon technologies) grew at an average compound annual growth rate of 39 percent. (7) Thanks in part to government stimulus packages, global clean energy investments will total about $200 billion in 2010, (8) and even under a business-as-usual case that assumes no changes to existing climate change policy by any major emitters, the International Energy Agency estimates that cumulative global investments in clean power generation technologies between 2010 and 2020 will total about $1.58 trillion, and will be even larger in the following decade. (9)

Recognizing the size and potential of these markets, other nations—most notably China—are aggressively expanding their own domestic clean energy markets by taking steps to reduce GHG emissions, become more energy independent, support lead markets for clean energy technologies, and build up their manufacturing capacity to meet expanded domestic and international demand for new technologies such as wind and solar power, advanced batteries, carbon capture and storage, and nuclear energy. In 2009 Europe led the world in clean energy investments with $41 billion and China invested $34.6 billion, while the United States only invested $18.6 billion. (10, 11)

The United States stands to benefit from the development of these markets, but only if it moves quickly to support domestic demand for and production of clean energy technologies.

NEXT STEPS

Mobilizing an effective global response to climate change requires stronger efforts both within and outside the UNFCCC.

For the past 15 years, the primary thrust of negotiations within the UNFCCC has been the establishment, and then the extension, of a legally binding regime to reduce GHG emissions. This should remain the long-term objective. Binding commitments are the ultimate expression of a countries’ will to address an issue of international concern. They provide countries a higher degree of confidence that others will fulfill their obligations. This confidence, in turn, enables each to deliver a stronger level of effort.

The Copenhagen summit, however, demonstrated the difficulty of achieving a new round of binding climate commitments. Most countries with binding targets under the Kyoto Protocol are unwilling to commit to new targets without commensurate commitments from the United States and the major emerging economies. These countries, however, are not yet prepared to assume binding commitments.

Under these circumstances, the best course forward within the UNFCCC may be an evolutionary one. In other international arenas, such as trade, human rights and the law of the sea, multilateral regimes have evolved gradually over time. As initial steps help build parties’ confidence in the regime, and in one another’s performance, they become willing to assume stronger obligations.

On climate, parties could take incremental steps to strengthen the multilateral architecture in ways that promote stronger action in the near term, while providing a stronger foundation for future binding commitments. Drawing political guidance from both the Bali Action Plan and the Copenhagen Accord, parties could strengthen existing UNFCCC mechanisms and, where necessary, establish new ones. Of central importance are a financial architecture to deliver strong, sustained support to developing countries, and an improved system of reporting and verifying countries’ actions to ensure transparency and a measure of accountability.

In parallel, countries could pursue other opportunities outside the UNFCCC to address key aspects of the climate challenge on a multilateral, plurilateral or bilateral basis. For instance, the International Maritime Organization and the International Civil Aviation Organization are examining measures to control GHG emissions from international shipping and aviation, respectively. Other possibilities include further steps under the Montreal Protocol to phase out substances contributing to global warming or an agreement within the World Trade Organization to phase out fossil fuel subsidies.

Over time, efforts within and outside the UNFCCC can strengthen countries’ confidence in one another’s actions and in the emerging climate change regime. The success of the international effort will hinge heavily on domestic action by the United States. Stronger U.S. action will be critical both because it will promote stronger action by other countries, and because it will better position the United States to take on the types of binding commitments needed to ensure a sustained and effective global effort.

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The article is an edited, shortened version of an article by the Pew Center on Global Climate Change entitled, Climate Change 101: International Action  at www.pewclimate.org/climate-change-101/international

NOTES:

1.  Energy-intensive industries (those whose energy costs are 4 percent or more of shipped value) consume more than half of the energy used in U.S. manufacturing but generate only 16 percent of production and 20 percent of employment (less than 1 percent of total U.S. employment). Aldy, Joseph E. and William A. Pizer, The Competitiveness Impacts of Climate Change Mitigation Policies, Pew Center on Global Climate Change (forthcoming).

2.  The authors found “relatively little evidence to support the hypothesis that environmental regulations have had a large adverse effect on competitiveness…” Jaffe, A.B., S.R. Peterson, P.R. Portney, and R.N. Stavins. “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature. Vol. XXXIII, March 1995.

3.  Goodstein, Eban. 1994. Jobs and the Environment: The Myth of a National Trade-Off. Island Press. Jeppesen, Tim, John List and Henk Folmer, 2002. Environmental Regulations and New Plant Locations Decisions: Evidence from a Meta-Analysis, 42 J. Regional Science. 19, 36.

4.  Aldy. Joseph E. and William A. Pizer, 2009. “The Competitiveness Impacts of Climate Change Mitigation Policies.” Pew Center on Global Climate Change. May 2009.

5.  See, for example, Greaker, Mads. “Spillovers in the development of new pollution abatement technology: A new look at the Porter-hypothesis,” Journal of Environmental Economics and Management, Vol. 52, 2006; Porter, Michael. “America’s Green Strategy,” Scientific American, 264, 4: 96, 1991; Porter, M. and C. van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship,” Journal of Economic Perspectives 9, 4:97–118, 1995. As discussed in endnote three, this concept remains controversial and has its critics; see Ziesemer, Thomas. “The Porter Hypothesis Revisited: An Overview on Empirical and Theoretical Evidence,” Papers in Global Business Management, Universität Augsburg, December 2007, and Palmer, Oates, and Portney, “Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?” J. of Economic Perspectives, 9(4), 1995.

6.  The Pew Center has compiled a review summarizing several studies on the links between environmental policy and job creation, available here.

7.  Overall clean energy investment growth estimates are derived using data from United Nations Environment Program (UNEP) and New Energy Finance, “Global Trends in Sustainable Energy Investment 2009: Analysis of Trends and Issues in the Financing of Renewable Energy and Energy Efficiency,” 2009 and Pew Charitable Trusts 2010. This figure includes total financial investment (including venture capital, private equity expansion capital, public markets, and asset finance) as well as government research and development (R&D), corporate R&D, and small projects. “Clean Energy Trends 2009,” Clean Edge Inc., March 2009.

8.  Bloomberg New Energy Finance, March 2010 and Pew Charitable Trusts. “Who’s Winning the Clean Energy Race?” Pew Charitable Trusts, 2010.

9.  IEA 2009. Unless otherwise noted, all IEA investment figures are in 2008 dollars. Clean power generation technologies includes renewables, CCS, and nuclear power. Cumulative totals for each of these categories in the decade 2010-2020 are $1.25 trillion, $2 billion, and $297 billion, respectively. As noted, investments in the following decade (2021-2030) are significantly higher; for example, cumulative investment in CCS could be $43 billion in those years.

10.  Bloomberg New Energy Finance. “Clean energy investment    down just 6.5% in 2009; Asia outstrips the Americas,” Press  release, January 7th, 2010 and Pew Charitable Trust 2010.

11.  Pew Charitable Trusts, 2010.