An interesting article in the New York Times charting progress on the cap and trade greenhouse gas emissions climate bill explains how consensus has been maintained by the granting of free allowances to emitters to mitigate the cost of implementing the bill’s limits. The caps would gradually tighten over time. But the allowances would allow those parts of the country most reliant on heavy carbon emitting industries to reduce the financial impact ” effectively subsidizing states that rely on coal fired energy at the expense of those blessed with hydro-electric power sources. The gulf is huge. Washington state for example emits 0.15 tons of CO2 per megawatt whereas Indiana emits nearly 1 ton per megawatt.
So as the bill takes one step closer to reality, we thought a closer analysis of how the government would address the fallout for manufacturers would be an appropriate topic for MetalMiner. For make no mistake though we are in favor of the environment, and most would agree that reducing carbon emissions is in the long term interests of all of us, there will be winners and losers from such a massive government intervention in the dynamics of the economy. The whole purpose of cap and trade is to place a financial burden on emitters to force them to change. This means raising prices over time.
The financial implications for CO2 emitters will progressively impact up to 2015 at which point all the allowances will have been given away. The electricity industry would get 35%; local natural gas distributors, 9%; “trade exposed” industries, 14.2%; then oil refiners, automobile manufacturers and energy companies investing in carbon capture and storage split another 6-7%. Trading could result in a price of between $15 and $20/ton of CO2 according to the US EPA, so the sums involved are around $80 to 108 billion per year.
To quote the NY Times article, Oil refiners and manufacturers of chemicals, paper, cement and metals will be vulnerable. So will companies that face tough U.S. or foreign competition that make it hard to pass on higher energy prices. Any industry active in internationally traded goods or products where the price is set on world markets by competitors who are not subject to cap and trade ” think steel, aluminum, copper, nickel, etc etc will feel an impact. Companies facing rising costs due to higher energy and/or costs associated with direct cap and trade penalties will face the greatest competition as foreign suppliers are able to undercut them. In addition they will have the greatest incentive to move manufacturing overseas to locations where CO2 emissions are not taxed. Primary metal production was highlighted by the Holmes Hummel report as one of the four most at risk categories. There are two possible outcomes:
- Manufacturers of basic metal products could move production overseas. The Carbon Leakage Prevention Act seeks to prevent this by compensating companies that face competition from overseas via an output-based rebate program. US based emitters would receive a rebate set around the industry average for every ton of metal they made in the US.
- The other is that a tariff is applied to imported goods from countries that do not operate a CO2 cap and trade system. The drawback is that products made from carbon intensive materials ” automobiles made from steel ” would benefit from this system as domestic automobile makers were forced to pay higher costs for their steel compared to their overseas competitors. The result could be either for those metal consuming manufacturers to move overseas or for lawmakers to impose tariffs on all steel containing products coming into the USA. What a nightmare that would be.
As an article by the Heritage Foundation observed, the introduction of a cap and trade system has the tendency to invoke protectionist policies and is fraught with possibilities for law makers to pad their pet industries or areas with special concessions.
Primary metal producers are much more likely to seek protection or subsidy behind output-based rebate programs or import tariffs. But downstream consumers such as autos, white and capital goods, in fact any US manufacturing firm that consumes metal is likely to be among the biggest losers, particularly if they face international competition or currently enjoy a level of export business. Inevitably taxing CO2 emissions will cost American jobs, may be not as many as some detractors suggest but for some consumers shifting future investment to overseas plants may be the only answer. Cap and trade alone will not be the deciding factor, energy costs, availability of raw materials, and so on will all play a part in plant location. Hopefully, the gradual introduction of the effects will give firms time to adjust and time for the developed world to persuade the developing world of the need to adopt comparable regimes ” thereby keeping the playing field as level as possible.