Addressing the Leakage and Competitiveness Risks of Climate Policy

Over the past year, governments across the world have called for more ambitious goals to combat climate change. The European Union, Japan, the United Kingdom, and many other countries have pledged net-zero emission goals by mid-century, with China aiming to do so by 2060. In April, the Biden Administration pledged to cut its emissions in half by 2030 as part of a broader set of aims that includes a carbon-free power sector by 2035 and net-zero emissions economy-wide by 2050.At the same time, a number of governments have raised concerns about how ambitious domestic mitigation policies may impose adverse competitiveness pressures on domestic energy-intensive industries that in turn result in emissions leakage. To address such risks, policymakers have turned their attention to carbon border adjustments, a surcharge on imports from countries that do not have comparable climate policies.Challenges in Implementing Ambitious US Climate GoalsUnder current law, the United States has imperfect tools to deliver on the Biden Administration’s ambitious climate change goals. US climate policy is characterized by a patchwork of energy and environmental tax expenditures, appropriated spending, and regulations at federal, state, and local levels of government. These are subject to legal uncertainty, such as emissions regulatory standards; political uncertainty, such as tax credits with sunset provisions; technological uncertainty, such as on the innovation necessary to decarbonize the economy; and environmental uncertainty, such as the eventual emissions-cutting outcomes of the complicated, overlapping policy patchwork. Crafting an economy-wide, long-term emissions-cutting program requires new legislation. In the interim, making progress in combatting climate change, driving innovation, and leveraging partners around the world necessitate the Biden Administration’s use of all existing authorities as effectively as possible until Congress acts on a credible, durable climate change policy.Applying US Trade Law to Address Competitiveness ConcernsAs a part of this effort, the Biden Administration can explore ways of applying existing trade law to ensure that competitiveness pressures do not result in the leakage of emissions and the shifting of jobs to other jurisdictions with insufficient domestic emissions mitigation policies. Below, I describe briefly the policy principles that could guide this effort to use trade law to mitigate competitiveness risks, before elaborating on how US countervailing duty law could effectively satisfy these principles.