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The U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Energy Security (ACES) Act in 2009. The ACES Act, and a similar bill introduced in the Senate, include cost containment and cost mitigation measures to either directly limit or offset after-the-fact the cost impacts of carbon-pricing to ease the transition for certain segments of the economy. Energy-intensive trade-exposed (EITE) manufacturing industries especially are vulnerable because of their heavy fossil fuel reliance and their sensitivity to foreign competition.
 

This study first focused on examining the output-based rebate measure in the ACES Act, for alternative policy assumptions that directly or indirectly affect the economic impacts of emissions allowances in the economy, i.e. testing the effectiveness of cost containment in the bill.​
 

• a High Cost (HC) case which assumes the costs of nuclear, fossil with carbon capture and storage, and biomass generation would be 50 percent higher than the base case in the ACES Act; and
   

• a No International Offsets (NIO) case that assumes the use of international offsets is severely limited by cost, regulation, and/or slow progress in reaching international agreements on offsets.

 

It then examined the effectiveness of the border adjustment measure (the International Reserve Allowance program) to mitigate EITE industry costs, as the rebates decline and emissions allowance costs grow.

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Overall, the study confirmed that regardless of the policy case or industrial sector, the output-based rebates would be an effective means for mitigating the costs of carbon-pricing for EITE industries, from the short-to-medium term, through 2020-2022. But as the rebates start to phase out after 2020, if low-carbon electric power alternatives (HC case) or international offsets (NIO case) were not readily available—which might be the more realistic assumptions—the economic impacts on EITE industries would be greater, perhaps significantly for some industries, especially after 2025.

 

At the same time, the study’s findings were mixed concerning the effectiveness of the border adjustment (BA) measure in reducing cost impacts after 2020. The results of the modeling of the BA measure reflect uncertainties about how the measure would be designed and applied. Countries that have complied with carbon reduction agreements account for the overwhelming largest share of U.S. imports, the BA measure would not be especially effective in offsetting the rising allowance costs of U.S. EITE manufacturers after the rebates start to fade. On the other hand, the iron and steel industry, whose imports include a large proportion from non- compliant countries compared to the other industries would be the only sector with any observable benefit from the BA measure, assuming no cost-pass through.

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The BA measure could make it less risky for U.S. firms to pass through their emissions costs to their U.S. customers. The prices of compliant country imports would not be affected, however, and they would increasingly replace both U.S. and non-compliant country EITE goods in domestic markets. Eventually the U.S. gains from BAs would diminish as allowance costs grow and compliant country imports increase their inroads in U.S. markets. The BA measure also would not alleviate the higher production costs of U.S. EITE exports sold in international markets, and could force U.S. downstream industrial consumers to bear higher U.S. and non-compliant import prices, putting U.S. manufacturers at a competitive disadvantage with foreign producers of downstream products.

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Given these limitations and potential trade and legal issues that remain unresolved (e.g. WTO compliance), BAs may not be the most effective means for mitigating EITE industry costs from carbon-pricing, and limiting carbon leakage. Instead, a continuation of the output-based rebates—an option available under Presidential discretion—might be an easier, less encumbered and more effective mechanism for offsetting adverse impacts on U.S. EITE industrial competitiveness.

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The only true long-term solution, however, is for U.S. EITE manufacturers to invest in energy-­saving and next generation low-carbon production and process technologies. The rebate and BA measures only buy time for manufacturers, over the short-to-medium term. While the rebates might encourage some companies to make energy-saving investments, these inducements would not be enough on their own to encourage the large scale investments in low-carbon technologies they would need to remain competitive in the face of high emissions costs incurred by 2030.