Climate policy and energy-intensive manufacturing: A comprehensive analysis of the effectiveness of cost mitigation provisions in the American Energy and Security Act of 2009

In response to the ongoing climate policy debates, this study examines the cost impacts of carbon‐pricing legislation on selected US energy‐intensive manufacturing industries. Specifically, it evaluates output‐based rebate measures and the border adjustment provision specified in the bill, and tests the effectiveness of cost containment features of the policy, such as the international offsets, under various market assumptions. Results of the examination confirm that in all policy cases or industries, the output‐based rebates would effectively mitigate the manufacturers' carbon‐pricing costs in the short‐to‐medium term. However as the rebates decline after 2020, especially in a case where low‐carbon electricity generation or international offsets are not readily available or implemented, these industries would suffer greater declines in profitability. At the same time, the study's findings were mixed concerning the effectiveness of the border adjustment measure in reducing cost impacts after 2020. While border adjustments could reduce costs to US manufacturing sectors, at least temporarily, they could create problems for domestic downstream producers and exports, under cost pass‐along conditions. However at best, the output‐based rebates, international offset, and border adjustment and measures primarily buy time for manufacturers. The only long‐term solution is for EITE industries to invest in energy‐saving and next‐generation low‐carbon technologies.