Many industrialized countries are concerned about the potential
impact that mandatory carbon reduction targets would have on their
economies. Among these concerns is that any plan that exempts developing
countries from emissions limits would in fact not be effective because
carbon-intensive industries would simply shift their operations
to one of the exempt countries. Leakage may represent double trouble:
the environmental benefits of the treaty would be undercut, and
the competitiveness of industrialized-world industries would suffer.
Just how plausible are these problems? Are these concerns real or
do they serve to distract us from enacting meaningful and binding
carbon reduction policies?
The Intergovernmental Panel on Climate Change (IPCC)—the authoritative
scientific voice on climate change—recently examined the potential
for emissions leakage from industrialized to developing countries.
Within the specific context of the Kyoto Protocol, the IPCC concluded
that "the possible relocation of some carbon-intensive industries
to non-Annex I [developing] countries and wider impacts on trade
flows in response to changing prices may lead to leakage in the
order of 5-20 percent (IPCC 2001). The worst case estimate of 20
percent leakage would mean, in other words, that if we were to see
an emissions reduction of 5% in the industrialized world (roughly
what the Kyoto treaty calls for), one of those five percent would
not disappear completely but would instead become developing world
emissions due to shifting industrial activity.
However, the IPCC maintains that leakage is likely to be substantially
lower than 20 percent. The 20 percent estimate does not include
important assumptions such as the transfer of environmentally sound
technology and the existence of international emissions trading
(which is part of the Kyoto agreement). Potential leakage could
also be minimized through prudently designed domestic regulations.
The 1990 U.S. Clean Air Act Amendments serve as an example of how
environmental regulations that could potentially have been expensive
for industry to adjust to instead ended up being a relatively light
burden due to emissions trading schemes. Industrialized countries
will be able to build special adjustment provisions along these
lines into legislation for those industries that will be significantly
affected.
Generally speaking, most emissions in the industrialized countries
result from inherently domestic activities, where leakage is either
difficult or impossible. Transportation, heating, cooling, lighting,
and other activities cannot move south. However, in energy-intensive
industries, which represent about 20 percent of U.S. emissions,
international competitiveness is an important concern (WRI 2001).
Will carbon constraints in the United States cause companies to
flee to unregulated countries, thereby undercutting competitiveness?
The evidence suggests that this is not likely (Repetto and Maurer
1997).
Many factors go into foreign direct investment decisions. Labor
costs and skills, market size, political stability, income levels,
physical infrastructure, and a wide range of government policies
(e.g., tax, financial, and investment policies) are typically the
main investment considerations (OECD 1999:25; UNCTAD 1999; World
Economic Forum 1999:96). Energy prices are also a factor. However,
it is unlikely that energy prices would rise to the top of a decision-making
calculus. Even in energy-intensive sectors energy costs account
for between 10 and 20 percent of the value of sales—not trivial,
but also not dominant. And where there is substantial foreign direct
investment in energy-intensive industries, such investments are
better explained by other factors. For example, U.S. investments
in Brazilian primary metals and chemical industries are more likely
to occur because of domestic Brazilian market size and growth potential,
rather than lower energy costs. Over the past decade, most developing
countries have drastically reduced energy price subsidies, causing
energy prices to climb. Overall, most U.S. foreign direct investment
goes to other industrialized countries, most of which have higher
energy costs (Repetto and Maurer 1997: note 16).
A recent analysis (looking purely at the U.S.) by the Innovest Strategic
Value Advisors, an international investment research firm, suggests
that failure to control emissions domestically may actually hurt
U.S. competitiveness over the long term. Emission constraints can
have a dynamic effect on technological progress and the development
of new markets, such as those for renewable energy. According to
Innovest, "by insulating power producers from the need to address
greenhouse gas emissions domestically, the administration may have
reduced the attention that U.S. companies will pay towards cleaner
power generation technologies and in doing so, dilute their ability
to compete in these fast growing businesses abroad" (Innovest:2001).
Intelligent and effective action on climate change is necessary,
and leaky emissions do not appear to be a good argument against
binding reductions. Actual leakages are likely to be small. Leaky
emissions reduction appear to be more of a diversionary tactic rather
than a real reason for industrialized nations to withhold support
for action on climate change. |