IHS Chemical Week


Significant Leakage

9:01 AM MDT | March 11, 2009 | By VINCENT VALK

ACC CEO Cal Dooley wrote yesterday that the Obama administration’s proposal to auction permits for its cap-and-trade scheme would result in leakage, or the transferring of carbon emission from the U.S. into other, less regulated, economies. Not only would this offset any gains from a cap-and-trade system here – one of the big challenges of global warming is that it’s, you know, global – but it may even make things worse, as these developing countries presumably have dirtier manufacturing methods. Certainly, this idea makes sense in theory, but the evidence looks unclear.

Dooley cited a study by think tank Resources for the Future that found the leakage rate for certain industries, including chemistry, could be as high as 40 percent. Yet other research has found that, in China, industrial pollution intensity has declined as trade has increased. Could moving more formerly American production to the BRICs ultimately increase Chinese industrial efficiency? Maybe, and maybe not - but it's enough to cast doubt on the notion that cap-and-trade will wind up raising global carbon emissions.

Of course, I’m ignoring the detrimental effect even more outsourcing would have on an already-battered American economy – though, once again, it’s unclear precisely how much outsourcing would take place as a result of pricing carbon. The alternative, as Dooley suggests, is to allocate emission permits for free. But Europe already did that, and while it hasn’t been a total failure, the European carbon price is worryingly low.

The best solution may be a hybrid of the two, as Jon A. Anda of the Fuqua School of Business proposes. We’re in uncharted territory here, and any policy is likely to have unforeseen consequences, even if it’s relatively effective.

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