International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns

There is a growing consensus that a market mechanism that puts a price on carbon, such as a cap-and-trade system or a carbon tax, should be at the heart of the most flexible and cost-effective way to address climate change.1 Ideally, such an approach would be adopted as part of a multilateral agreement. The reason is that carbon is a global pollutant, so a ton of carbon emitted in Beijing contributes to climate change just as much as a ton of carbon emitted in New York. This tragedy-of-the-commons nature of climate change raises concerns that any unilateral effort by the United States to put a price on car bon could disadvantage U.S. industrial firms or undermine the measure's environmental objective. These two concerns, in effect flip sides of the same coin, are referred to as "competitiveness" and "leakage," respectively. The com petitiveness concern is that U.S. products?particularly carbon-intensive ones like steel, cement, chemicals, glass, and paper?will be at a competitive dis advantage relative to foreign-made goods if the United States unilaterally imposes a carbon price policy and thus raises production costs for U.S. firms.2