EoW September 2009

Transat lant ic Cable

The oil and metals sectors may also be vulnerable. Some analysts worry that emissions standards would encourage companies to keep inventories low and to import more refined fuels, contributing to idled capacity in US refineries. However, it may also encourage the creation of cleaner processes or the development of carbon-capture technologies, which are as yet far from being commercial. Trade concerns The risk that higher costs might accelerate a decline in the US manufacturing base, as more production is moved offshore, has prompted concern that compensatory import taxes might be placed on carbon-intensive imported goods. In saluting the passage of the climate bill in the House, President Obama insisted that the US must not discriminate against imports: doing so might lead to retaliatory protectionism. Paul Krugman [winner of the Nobel Prize in economics in 2008] suggested that the expressed view of the World Trade Organization toward import taxes – that they might be WTO-compliant in certain circumstances – is in line with its view of value added taxes. It has been pointed out elsewhere that administration of the carbon-cap system could become very complex, with a variety of different country-specific caps, tariffs, and remedies. Also, even as developing countries petition for trade restrictions on carbon-reducing technologies to be lifted, or for technology transfer, companies that developed the expertise have been reluctant to cut their prices. Tucked away in Prof Roubini’s analysis is this encouraging note: “Overall, businesses have supported establishing a climate regime, given that clarity over regulatory responses is key to planning.” However, he said, “There are still many uncertainties about how such a regime will be implemented.” Citing an Obama Administration initiative to close loopholes ❈ ❈ that have allowed American investors to use offshore tax havens, the Department of the Treasury on 19 th June announced that the US and Switzerland had agreed to cooperate in the prevention of tax evasion by sharing more information. At the G-20 Leaders’ Summit held in London, in April, the US had joined Germany, France, and Britain in bringing pressure to bear on Switzerland and other countries whose culture of discretion in banking matters may foster the improper use of hidden accounts. The protocol, which Switzerland and the US are expected to sign within a few months, would revise an existing treaty to conform with a model income tax convention adopted by the Paris-based Organisation for Economic Co-operation and Development. The negotiations over a strengthened Swiss-US tax treaty took place as American authorities were still pressing the Swiss bank UBS to hand over the names of 52,000 American clients suspected of tax evasion. The US also recently concluded tax-information exchange agreements with Gibraltar and Luxembourg. Waxman-Markey – if it is enacted – is a start. In brief . . .

The climate bill

By a narrow seven-vote margin, one house of the US Congress moves to limit the emissions blamed for warming of the planet On 26 th June, the House of Representatives approved 219 to 212 the landmark American Clean Energy and Security Act (“ACES”). Also known as the Waxman-Markley comprehensive energy bill (after its sponsors), or the “climate bill,” the legislation faces even tougher sledding in the Senate. At the heart of the Waxman-Markey global warming reduction plan is cap-and-trade, a market-based system that limits emissions but allows companies to buy permits for additional emissions from others that emit under the maximum. Presumably a market for these permits will increase the cost of using carbon-based energy (notably electricity from coal), which will in turn reduce demand. The number of permits is to be reduced over time. President Barack Obama’s commitment to the climate bill is intense, and his leverage in the Senate has likely been strengthened by the seating of Al Franken, of Minnesota, a member of the president’s Democratic Party, after a protracted dispute over vote counts. Assuming that Mr Obama succeeds in getting ACES through Congress, over the misgivings of business-orientated senators, one thing seems clear: the virtuous results of the legislation will come at a price. In the course of a broad analysis of Waxman-Markley (“Will the Global Warming Bill Cool the Global Economy?” Forbes, 2 nd July), Nouriel Roubini, a professor at the Stern Business School of New York University, considered its probable effect in the United States. Here, much abbreviated, are his views on the climate bill in three critical areas: cost estimates, sector-by-sector impact, and trade concerns. Cost estimates Predictions of the total economic costs of the cap-and-trade programme described in the bill vary widely. According to the Congressional Budget Office (CBO), the net annual cost of the programme in 2020 would be $22 billion – or about $175 per American household. Other estimates put the ultimate cost much higher. The Heritage Foundation [a Washington-based conservative think tank] concludes that cap-and-trade would cost the economy $161 billion by 2020 – or about $1,870 per household. Such estimates do not necessarily account for changes in the price of energy that would occur naturally as diminishing investment limits production of fossil fuel- based energy. Sector-by-sector impact Utilities are likely to be the most affected by the new price of carbon, especially in those regions that derive much of their power from coal-fired plants. The Midwest, the country’s manufacturing base and the home of many of its coal-fired plants, seems particularly vulnerable. (Allowances in the legislation are intended to find the funds to improve competitiveness of coal plants.)

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EuroWire – September 2009