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Outside editorial: Cap-and-pay-off: Not the time to ignite a trade war

Posted: Monday, July 06, 2009

President Obama has been about as enthusiastic as one can be supporting the leviathan Waxman-Markey energy bill, which the House just passed, despite the bill's web of mandates, subsidies and regulations. But following the squeaker of a House vote, there was one provision that even Mr. Obama couldn't stomach: a requirement added shortly before the vote that, in 2020, the president begin slapping tariffs on goods from countries that do not limit or price their carbon emissions. He's right to be skeptical.

Not that, once the government begins requiring cuts in domestic greenhouse emissions, the question of how to treat goods from countries that don't is simple. American firms that pay in order to comply with mandatory limits on carbon emissions would be at a disadvantage competing against foreign outfits whose leaders aren't as environmentally conscious.

But this measure is redundant. The bill already provides ample compensation to "trade-vulnerable industries" through at least 2026, devoting as much as a whopping 15 percent of allowances - valuable pollution rights created under the bill's cap-and-trade regime - to shelter firms from foreign competition.

The details of this rebate scheme leave ample room for overpayment. And because rebates are based on firms' historical output, argues Michael Levi of the Council on Foreign Relations, manufacturers might have even an incentive to scale back or close down and simply collect the cash. Better to head off these problems, Mr. Levi argues, by aiming to compensate U.S. firms for 75 percent of their compliance costs instead.

The tariffs, meanwhile, are meant to kick in if the rebates don't level the playing field enough. But they are questionably designed. The bill instructs regulators to apply tariffs to foreign exporters if the emissions per unit of their industrial sector back home are greater than that of the same sector in America. That makes no distinction between the carbon footprint of the goods countries export and those they consume domestically. More efficient exporters could get punished.

More important, though, are the optics. Even talk of tariffs sends exactly the wrong signal to skittish trading partners during a global downturn. Now is not the time to invite a trade war.

Are the tariffs' extra layer of protection worth the risk? It is if you're an American union boss. The rebate-tariff regime looks like yet another Waxman-Markey sop that the bill's backers added to ensure its passage. We hope that the Senate, where the action is now, has the sense to remove the tariff provision, fix its trade compensation scheme and scale back the bill's other excesses.



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