sectoral economic costs and benefits of ghg mitigation - IPCC

Energy Intensive Industries
energy cost that helps us to remain competitive when other components of our manufacturing
costs are higher. If our energy costs are disproportionately increased, the delicate competitive
balance of total manufacturing costs is distorted. In late 1998, we learned how relatively small
increments in cost structures can quickly create serious trade balance problems.
A couple of studies on the potential impacts of higher energy prices illustrate the effect. Both
Argonne 1 and the Economic Strategy Institute 2 have concluded that a Kyoto-driven doubling of
steel industry energy costs would lead to a shift of about 30% of current domestic steel
manufacturing to developing countries. This shift in manufacturing corresponds to a loss of about
100,000 direct steelmaking jobs and perhaps four to five times that for supporting businesses.
Perversely, no net environmental improvement will be realized if that production occurs in
developing countries where steel is manufactured with less energy efficiency than in the United
States. We also need to be aware of competitive distortions among competing materials, and
even within the domestic steel industry itself, by artificially altering the energy cost structure.
The Administration has been having consultations with energy-intensive industries to encourage
voluntary reductions and has asked industries to establish stretch goals, which they describe as
energy reductions above and beyond business-as-usual. If we equate business-as-usual as doing
the things that make economic sense – for example, those measures that have resulted in the 45%
reduction over 25 years – then a stretch goal suggests doing things that do not make economic
sense. To accelerate the trend beyond business-as-usual, therefore, we need to change the
economics – to take steps for more rapid injection of technology and turnover of capital stock.
Incentives to accelerate more rapid technological change can assume a variety of forms, and
ACCF has studied many of these mechanisms. They may include investment tax credits,
production credits for achieving stated energy efficiency goals, tax credits for research and
development investments related to energy efficiency, rapid amortization or expensing of energy
savings investments, expedited permitting for energy efficiency technology projects, or removal
of other regulatory impediments or barriers. As has been aptly explained by other panelists,
however, the real challenge with any financial incentives is to make them revenue-neutral or
budget-acceptable.
The steel industry has had some discussions with Congressional staffs working on tax incentive
legislation and several of these options are under consideration. One of particular interest to the
steel industry is a tax credit for co-generation facilities that utilize waste gas or waste heat that is
characteristic and prevalent in our industry. Utilization of these fuels to generate electricity can
replace purchased electricity that might be coal-based and associated with higher carbon dioxide
emissions. One fundamental requirement for any tax credit for the steel industry is the need to
apply the credit to the alternative minimum tax, because income tax credits are of no value to
many steel companies who have net operating losses carried forward.
However, the real key to stimulating more rapid turnover of capital stock and injection of more
energy efficient technology is improved profitability. Industries that are profitable – e.g.,
pharmaceuticals, medicine, information technology – invest in new technology and devote a
large percentage of their revenues to research and development (R&D). The American steel
industry spends on the order of one-half of one percent of its revenues on R&D. The Japanese
steel industry spends 2-3% of its revenues on R&D, and I would guess the industries mentioned
above spend considerably more. If energy efficiency comes about through more rapid investment
in technology, if technology flows from R&D, and if R&D is a function of profitability, then our
policies need to be focused not just on tax incentives but on more fundamental measures to make
energy-intensive industries like steel more competitive and profitable.
238