Comments on An Environmental Goods Agreement

by BakerHostetler
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INTRODUCTION

The Office of the United States Trade Representative, in the Federal Register of March 28, 2014 on behalf of the Trade Policy Staff Committee, requested comments and issued notice of a public hearing on negotiations for a World Trade Organization Environmental Goods Agreement as proposed by fourteen WTO members in January 2014. The negotiation is framed by a list of fifty-four “environmental goods” endorsed for tariff elimination by APEC leaders in 2012.

The APEC leaders recognize that free trade in environmental goods would accomplish at least two objectives: increase free trade generally, and enhance the global response to the dangers of climate change.  Easier global circulation of environmental goods, as reflected in the list of fifty-four specific items, should translate into greater deployment of goods that would reduce carbon footprints and thereby help arrest climate change.

TARIFF REDUCTIONS NOT ENOUGH

Tariff reduction always increases world trade and inevitably is the first objective of all trade agreements. Unfortunately, tariff reductions will not be nearly enough to make an important difference in the circulation of environmental goods sufficient to advance toward the objective of reducing the threat of climate change.

Recent reports from the United Nations Intergovernmental Panel on Climate Change emphasize three points, that:  to a certainty of 95 percent or greater, humans are the main cause of global warming; it is not too late to arrest climate change, but time is running out; the goal of arresting climate change will not be accomplished without significant innovation, experimentation, and development of information. This last point requires money that is not likely to come in sufficient part from the private sector because it is difficult to carry investment in innovation and experimentation quickly to a corporation’s bottom line.

Most of the identified APEC environmental goods seek to clean up emissions and make energy production, still using hydrocarbons, more efficient. They would not reduce carbon emissions through alternative energy sources, which in the long term is the only way sufficiently significant reductions will be achieved.

ALTERNATIVES TO FOSSIL FUELS MUST BE HELPED TO BE COMPETITIVE

Alternative energy sources must compete in the marketplace with hydrocarbons. Once limited to conventional mining and drilling for coal, oil, and gas, hydrocarbon use has been expanding with the discovery and extraction of oil and gas from shale, which is extending and expanding the use of hydrocarbons at the very moment when renewable energy sources might have been competing with hydrocarbons more effectively.

For more than a century, North American governments have been subsidizing the oil and gas industry for research and development, extraction and sales. According to a 2011 Report of the International Energy Agency, more than 250 mechanisms are used to subsidize fossil fuels in OECD countries, and according to a July 2011 report of the United States Energy Information Administration, $557 billion was spent globally in 2008 to subsidize fossil fuels, compared to $43 billion for renewable energy. According to SourceWatch, most fossil fuel subsidies are written permanently into the U.S. Tax Code, whereas subsidies for renewable energy are time-limited and specific.

Because most of the subsidies to hydrocarbons have been embedded in the tax code for a long time, they continuously are more substantial than assistance for innovation, experimentation, research and development for alternative energy sources. The gap between the cost of energy to consumers produced by hydrocarbons and the cost through alternative energy sources does not close easily, and as long as there is an important gap (and more than a century growing that gap), hydrocarbons will be preferred, notwithstanding consequences for the environment. Grid parity is a holy grail for public utilities, essential for uploading energy from wind or solar or biomass or geothermal, and alternative energy sources will not achieve it without a dramatic new commitment to the alternatives.

As long as the cost of hydrocarbons to produce electricity is less than the cost of alternative energy sources (wind, solar, biomass, geothermal), utilities will rely primarily on hydrocarbons. As shale brings down the hydrocarbon cost, the alternative sources become even less competitive. And as long as hydrocarbons are subsidized, with a century’s head start for research and development, they will be preferred.

STRATEGIES FOR ARRESTING CLIMATE CHANGE

There appear to be four principal strategies for arresting climate change:  controlling and reducing the polluting effects of hydrocarbons, whether through more efficient production or through “scrubbers,” converters and other additional equipment; taxing the use of hydrocarbons, as in “cap and trade” or other policy “innovations” that accept substantial continuing reliance on hydrocarbons but are designed to discourage use; mandating reliance on alternative sources for some percentage of overall energy production, thereby often accepting a higher cost for energy but with reduced use of hydrocarbons; development of new and better alternative energy sources, as in more efficient and cheaper solar panels and wind turbines.

The first two strategies generally confirm continued reliance on hydrocarbons, especially coal, whose use is expanding in the United States as well as in developing countries. The third is inevitably and permanently limited in the absence of grid parity by the limitations on public utilities to raise rates that inescapably would be inflationary and the equivalent of a disproportionately distributed sales tax. Only the fourth promises a long-term solution to climate change caused by hydrocarbons. It requires government subsidies, potentially of the scale supplied to hydrocarbon development. The proposed negotiations appear, at present, to be dominated by the first strategy.

SEIZE THE OPPORTUNITY TO NEGOTIATE MEANINGFULLY

Tariff relief for a host of environmental goods, most of which come within the first strategy, will not be adequate, if only because more efficient use of fossil fuels necessarily means continuing to burn fossil fuels. It is a strategy for slowing down climate change and buying more time for alternative energy sources to catch up, but by itself it will not solve the problem in the long term. The negotiation of an international trade treaty focusing on environmental goods opens an opportunity to address the single most promising strategy that, at present, confronts the greatest challenge from the WTO régime of international trade.

To compete with fossil fuels, alternative energy sources need government help. Innovation, research and development to arrest global warming are public goods worthy of public support. The Business and Industry Advisory Committee to the OECD has recognized this obvious proposition: “[S]ubsidies can help support the shift from traditional to new energy sources which are in early stages of commercialisation and where affordability is a key barrier, or where existing infrastructures make it difficult to introduce new energy sources.” The central problem, however, is that countervailing duty laws discourage and even punish subsidies.

THE TRADE LAW AS A CENTRAL PROBLEM

New green technologies, especially solar and wind, are understood almost universally to be vital for the future of the planet, technologies that electrify the globe without burning fossil fuels. Yet, European and American manufacturers of solar equipment have been waging a trade war against Chinese manufacturers, and the Chinese have retaliated against other solar products from Europe and the United States. The net result of the solar war has been to reduce trade in solar equipment, raise prices, reduce availability of affordable and competitive equipment. Even as governments everywhere have been urged by climate scientists and economists to reduce the consumption of fossil fuels and expand reliance on solar power, governments implementing trade laws have punished other governments trying to expand the use of solar power.

The European Union and China negotiated a settlement of the principal dispute over solar panels in July 2013, setting a floor price for Chinese solar panels sold in Europe that generally raised prices while enabling the Chinese to maintain their significant presence in the European market. Nevertheless, the European Union initiated tariffs on Chinese glass used to make solar panels in April 2014, albeit involving a much smaller market.

In the summer of 2013, the United States was looking for a comprehensive three-way settlement (EU-China-United States) of the solar panel disputes, but U.S. trade law, lacking a public interest clause and dependent on the consent of the petitioning industry, could not deliver and the EU and China proceeded alone. The United States, thus, has been left behind, principally because of the rigidities and pro-petitioner biases of its trade law.

Steel manufacturers of wind towers, upon which sophisticated turbines are erected, have been raising the cost of wind power, offsetting if not exceeding the efficiency gains of wind turbine manufacturers through innovation, research and development. As the turbine manufacturers approach grid parity, the tower manufacturers push them further away, one domestic industry involving little technology innovation and few prospects for export trumping another domestic industry devoted to innovation with substantial prospects for international trade.

Since countervailing and antidumping duties were imposed on wind towers from China and Vietnam in 2012, wind power development effectively has ceased on the coasts and islands (Puerto Rico and Hawaii) of the United States (an offshore project is moving forward in Massachusetts, but is not under construction; small projects are continuing in New York, Connecticut, Maryland and Oregon). The Chinese and Vietnamese towers had supplied these markets because domestic towers could not be transported, neither logistically nor cost-effectively, from their manufacturing sites in the American heartland.  See attached map from the American Wind Energy Association.

The ironies here should not be lost. The manufacture of solar panels is largely robotic and creates few jobs. Installation and maintenance are labor intensive, and the more solar panels mounted, the less fossil fuel is consumed. Yet, domestic panel manufacturers, in Europe and the United States, have complained successfully about subsidies for the development of more, and more efficient, solar panels in China, thereby reducing jobs in the United States and reducing the deployment of solar power.

There are many, many more jobs in the research, development, production, and installation of wind turbines than in the manufacture of wind towers. The largest tower manufacturer in the United States has around 600 employees and has only one major competitor. The third largest turbine manufacturer employs over 1500 to design and build turbines and has many competitors including two that are much larger. Yet, the wind tower manufacturers have succeeded in reducing the deployment of wind power by complaining about Chinese and Vietnamese subsidies to towers, collaterally reducing employment in turbine manufacture. Hence, as the Chinese and Vietnamese Governments may be supporting the development and sale of green technologies, responding to the fourth and most promising of the strategies to combat climate change (by putting money into alternative energy), U.S. domestic manufacturers of competing products have been able to use trade laws to constrain the reduction of fossil fuel dependence and to kill skilled jobs.

Job losses result from the application of countervailing duties in at least two ways. An industry with fewer highly skilled jobs – for example, wind tower manufacturers – may adversely impact wind power development and therefore cost more highly skilled jobs among wind turbine manufacturers. There is, however, a second way that can be even more damaging.  China, for example, has been willing to slow its own production of solar panels in order to retaliate against European and American trade actions.

China does not produce enough solar grade polysilicon to supply fully its production of solar panels. China, consequently, is the world’s leading importer of polysilicon. When the European Union and the United States brought cases against China’s solar panels, China launched investigations into imports of the solar grade polysilicon it uses to make the panels. In January 2014, when the United States expanded investigations into Chinese solar panels, China imposed a permanent tariff of 57 percent on polysilicon from the United States (and 48.7 percent on polysilicon from South Korea). The net result has been to cost American jobs in manufacturing solar grade polysilicon, and in installing and maintaining Chinese solar panels.

The American experience contrasts with Europe, and not only regarding solar panels. China began investigating allegations of dumping against European polysilicon before investigating polysilicon from the United States, but then entered into negotiations, particularly with the largest European producer, Wacker Chemie of Germany. While negotiations ensued, China resisted imposing tariffs. Finally, less than two months after making the tariffs on the American product permanent, in March 2014, China and Wacker agreed to a minimum import price that enables the Europeans to continue, and likely expand, their sales to China, probably soaking up some of the American market share. The American trade remedy actions designed to save American jobs had exactly the opposite effect.

A study for the United Nations by economists at the Peterson Institute, presented April 3-4, 2014 in Geneva, has quantified some of the costs of applying the trade laws to green technologies. On behalf of “Ad hoc Expert Group 2” studying “Trade Remedies in Green Sectors: the Case of Renewables,” Cathleen Cimino and Gary Hufbauer estimated that trade remedy law applications are reducing global trade in renewable energy goods by $14 billion annually which, they calculated, “translates into a global trade loss of approximately $68 billion over 5 years,” with over 91 percent of the global reduction of imports involving cases initiated by the European Union and the United States. Over 70 percent of the reduced trade has been in solar energy and, with many pending solar cases, is growing. Cimino and Hufbauer conclude, “By stifling competition [with “traditional technologies (coal and natural gas)”], trade remedies probably slow the convergence between renewable and conventional electricity costs.” They add, however, that “the main driver of convergence has to be new technology, beyond what is on offer in any country today.” Unspoken is that such new technology requires  government help, at least as traditional technologies benefit still and benefited historically, and that trade remedy laws stand in the way.

A NEW TREATY SHOULD ENABLE PUBLIC INVESTMENT IN GREEN TECHNOLOGY

Our comments are intended to join others identified by Cimino and Hufbauer who have called for adjustments in the application of trade remedy laws to green technologies. Cimino and Hufbauer observe that, “Concerns that environmental disputes will undermine progress toward curbing greenhouse gas emissions underlie the calls to reform laws governing trade remedies and dispute procedures.” They note, and we agree, that “These calls may find resonance in the plurilateral talks announced by a group of 14 countries,” the very talks that occasion these Comments. Cimino and Hufbauer note a call for a “peace clause” from Lester and Watson (2013), subsequent to Feldman’s critique of trade law in this sector in January 2012, followed in December 2012 by his appeal for an international agreement to curtail trade remedies on subsidized green technology. Cimino and Hufbauer review a number of proposals advanced in 2013 to reduce the impact of trade remedies on the development of green technologies.

Not all trade remedy laws are alike, and not all are susceptible to or in need of international agreement. International treaty negotiations will not lead to a public interest clause that would enable the United States to settle disputes the way the European Union has been settling solar disputes with China. Nor should there be an effort to change restrictions on local content requirements.

The United States has accused India of applying local content requirements to solar development. Local content requirements retard research and development because they exclude lessons from other countries. To the extent they exist, the United States is right to challenge them. But investment in research and development of knowledge and products that will reduce the use of fossil fuels, regardless where those investments are made and notwithstanding that they may help local enterprises before reaching those further away, can, and should be, regarded as a service to a global public. Climate change is everyone’s problem and everyone should be investing (a more useful and appropriate term than “subsidizing”) in solving the climate change problem.

Countervailing duties and antidumping are both designed as remedies for unfair trade, but they address different challenges. Antidumping concerns prices, which are set by companies; countervailing duties concern financial contributions from governments. The United States has entered into numerous agreements encouraging foreign governments to invest in green technologies. It makes no sense to encourage or induce such investments and then turn against the results through trade remedy proceedings.

The idea advanced here concerns only countervailing duties because the concern here is to stop asking governments to invest in the cause of alternative energy, on the one hand, while inhibiting, on the other hand, the export of goods resulting from those investments. There is no good reason for a company with a subsidized product then to dump it, selling it for less than it costs to make it, or selling it abroad for less than the price it would charge at home. The investments promote science and technology; dumping promotes unfair competition.

There are complications arising with state-owned enterprises (“SOE”) and non-market economies (“NME”) because there can be difficulty in distinguishing between state investment through financial contributions and unfair competitive advantage through price management. However, the United States Department of Commerce purports to measure separately subsidies and dumped prices. Consequently, the Department of Commerce already claims a methodology that would enable it to identify financial contributions and exempt them from trade remedy actions.

As Cimino and Hufbauer point out, several scholars have offered a range of trade remedy law modifications, from a complete “peace clause” to limiting tests that might reduce the number of cases or shrink their impact. Cimino and Hufbauer cautiously dismiss the complete peace clause as “ambitious” and “not politically feasible at this juncture,” but the present is not necessarily the juncture of an international agreement, and as President Obama has recognized, there is nothing more urgent, warranting “bold ambitious goals”, than arresting climate change.

The United States wants to assert global leadership to save the planet. What may seem “politically feasible at this juncture” should not define such leadership. There is no greater paradox in President Obama’s desire to “lead the world in a coordinated assault on a changing planet” than for the United States, repeatedly and systematically, to keep out of world trade green technologies developed and produced, in some part, by the actions of governments to help achieve the universal goal of saving the planet.

A common objection to subsidies is that they distort markets, but fossil fuels have been advantaged by accumulating more than a century of government investments that now distort competition for access to the electricity grid.  One solution is to remove those advantages, but that approach would require turning back the clock and rewriting the tax code, which would be impractical and surely not enough. The United States’ existing fossil fuel infrastructure is here to stay, but green technologies need to be given the opportunities to develop so that their environmental benefits and commercial viability can be evaluated prudently in relation to the existing system of energy supply. Consequently, the second solution is inescapable, providing the financial support necessary to accelerate invention, innovation, and technological change.

A further common objection is that investments in developing new products may give unfair advantage to the products of one country over another. Yet, if Americans could buy more and cheaper solar panels, it would mean more and better jobs overall for Americans. Innovative or creative Americans could still compete with the Chinese product, by improving upon it or even replacing it with something else. Achievement of the collective goals – reducing hydrocarbon use and expanding recourse to alternative energy production – would be much closer than it could ever become under current laws, policies, and practices.

Improvement in the technologies and in the accessibility and affordability of alternative energy sources is not a zero sum game. It should matter little which country accelerates an improvement that, by getting everyone closer to the goals that will save the planet, serves everyone.

There is no better way to adjust laws and practices to encourage research, development, and dissemination of goods and knowledge and techniques combatting climate change, than through an international agreement. The fourteen countries that launched negotiations at the World Trade Organization with a modest tariff-cutting proposal were not modest in their ambition. They described their proposal as “one of the most concrete, immediate contributions that the WTO and its Members can make to protect our planet,” a program intended to “protect our environment and address climate change.” They saw the tariff-cutting only as a beginning, and only as part of something grander, “committed to exploring a broad range of additional products in the context of a future oriented agreement able to address other issues in the sector and to respond to changes in technologies in the years to come, that can also directly and positively contribute to green growth and sustainable development.”

The USTR Notice inviting Comments did not reflect fully the ambition of the APEC countries, nor faithfully the ambitions of President Obama in his climate change address at Georgetown University on June 25, 2013. While the TPSC Chair invited comments on all relevant matters, it focused “in particular,” in three of its four parts, on specific products. Fortunately, in the fourth category of invited Comments, the TPSC Chair asked “how best to ensure that such an agreement remains relevant into the future.”  

A new agreement will not be relevant into the future without ambition beyond tariff-cutting because innovation should mean an endless cycle of new products, and innovation will be encouraged only through government investments that current rules will punish. Countries investing to protect the planet should not have their products kept out of world trade because they invested. They should be rewarded, not punished, congratulated, not sued. These talks are the opportunity to make the rules accommodate the reality of climate change. Adherence only to the more modest ambition of tariff reduction would be less than the APEC countries seek, an opportunity missed which might never timely present itself again.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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