Energy, Security, and Climate

This post was co-written with Cole Wheeler, CFR’s research associate for energy and the environment.  Unfettered access to U.S. liquefied natural gas (LNG) was reportedly a prime motivation behind Japan’s decision to join the Trans-Pacific Partnership (TPP) trade talks. The United States already gives automatic approval of exports to 18 other countries with which it has special free trade agreements (FTAs), but requires distinct permits for exports to others, including Japan. Yet there has been scant (if any) reporting on this issue since the release of the final TPP text two weeks ago, and there appears to be considerable confusion about what the deal actually does. A look at the text of the agreement in the context of U.S. law confirms that it grants automatic approval of exports to Japan and the other TPP member nations. The confusion seems to stem from the fact that the TPP text doesn’t mention natural gas at all. Rather, the critical element of the agreement is its language on “national treatment,” a trade law status which the TPP member nations commit to granting to each other’s goods, with no enumerated exception for natural gas. While national treatment doesn’t in itself provide the green light for all LNG exports to Japan, it triggers existing U.S. law in a way that does. Under the Natural Gas Act, any company wishing to export natural gas first needs authorization from the Department of Energy, which determines whether exports are “in the public interest.” For countries with which the U.S. has established an FTA including national treatment for natural gas, however, the law effectively waives this process, and requires DOE to grant authorization “without modification or delay.” A quick comparison of the TPP to the 2012 U.S.-Korea Free Trade Agreement, which is widely agreed to provide blanket approval for LNG exports, provides further confirmation of the TPP’s impact: like the TPP, the U.S. Korea agreement does not mention natural gas exports, but the language on national treatment is virtually identical to that of the TPP. The TPP’s approach to approving LNG exports shouldn’t come as a surprise. A January 2015 paper from the National Bureau on Asian Research, for example, described the “national treatment” recipe for automatic LNG export approval, and predicted that it was likely to be part of the deal. Other observers, from the Congressional Research Service to the International Business Times, also foresaw this outcome. All this said, it’s important to remember that the biggest barriers to LNG exports have always been commercial rather than legal. Several LNG exporters in the U.S. have already received authorization to export to non-FTA countries, and Japanese companies have signed contracts for the purchase of at least 100 billion cubic feet per year of U.S. LNG by 2020. But building LNG export terminals is expensive, and export capacity has lagged behind the massive increase in North American supply. Indeed, U.S. companies have had blanket FTA approval to export LNG to South Korea, the world’s second largest LNG importer, since 2012, but the first deliveries of U.S. LNG to South Korea are not expected until 2017. Moreover, even if export permits for Japan become easier to acquire, companies will still apply for permission to export freely, giving them the valuable option to sell to growing markets in China, India, and beyond. So why does this aspect of TPP even matter? Because of the confidence it provides. What Japan would gain from the TPP isn’t a sudden, massive increase in imports. It’s confidence in U.S. LNG as a reliable source of energy, insulated at least somewhat from the vicissitudes of U.S. energy politics. That matters not only for commercial dynamics and market flows, but for the broader U.S.-Japan relationship too.

Yesterday, after five years of negotiations, the Obama administration released the final text of the Trans-Pacific Partnership (TPP) trade agreement between the United States and eleven other countries. Ahead of the text’s unveiling, environmental groups had already voiced their displeasure at what they expected to see—indeed, the Sierra Club warned that “TPP would impose additional limits on the ability of governments to tackle climate change”. But now that the actual text is public, the direct implications of TPP for national climate policy appear minimal, and reductions in trade barriers may lower the costs and stimulate production of low-carbon goods and services. Thus, the net effect of TPP on efforts to combat climate change is likely to be positive, though limited in scope. Immediately after the text was released, many pointed out that TPP does not make a single reference to climate change. This is true but unsurprising—any direct mention of climate change would have seriously weakened TPP’s prospects for Congressional approval. In fact, an expectation of explicit reference to climate change misconstrues the Obama administration’s negotiating position. The administration has unveiled a suite of domestic and multilateral climate initiatives ahead of the Paris Climate Change summit, and its goal with TPP was to conclude a robust trade agreement that did not interfere with its substantial climate agenda. Judged against this goal, TPP is a success. Below are five questions about TPP’s relation to climate policy that the final text clarifies. The answer to each question entails a neutral or positive outcome for governments’ ability to enact and enforce climate policy, which should relieve the fears of many expecting a bad deal for climate. 1. Q: Will TPP’s Investor-State Dispute Settlement (ISDS) mechanism discourage governments from enacting climate regulations? A: No. Although some feared that TPP might enable private investors to challenge climate-related public policy, TPP explicitly protects policies in pursuit of legitimate environmental objectives. ISDS is a mechanism by which a foreign investor can seek redress for an alleged violation of international law by a host country. Today it is a common provision in bilateral and multilateral trade agreements. Some worried that TPP might empower investors to challenge climate policies—for example, a foreign owner of a coal power plant might demand arbitration if, under the U.S. Clean Power Plan, the investor’s asset lost considerable value. As a result, governments may worry about enacting such regulation in the first place. Nothing in TPP makes such a “regulatory chill” any more likely than it is currently is or would be if TPP were not adopted. First, the United States has never lost an ISDS case, so it is unlikely that the specter of arbitration would alter the U.S. climate policy process. Second, TPP’s ISDS provisions clearly leave room for public regulations in pursuit of legitimate environmental goals—even if those regulations are unprofitable for investors—which is important for assuring smaller countries that their rights to regulate are protected. From the Investment chapter: “The mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of this Article, even if there is loss or damage to the covered investment as a result… Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” 2. Q: Will TPP’s Technical Barriers to Trade (TBT) chapter hinder the ability of governments to enact stringent labeling and technical regulations and standards? A: No, provided such standards are transparent and nondiscriminatory. And because TPP should encourage standards harmonization and collaboration, trade in low-carbon technology could increase. The TBT section builds on existing trade pacts, including the World Trade Organization (WTO) TBT Agreement, to reduce barriers to trade from “technical regulations, standards, and conformity assessment procedures.” Energy-efficient appliances are a good example of a climate-relevant product class with different labeling requirements around the world—for example, the United States uses Energy Star rating labels, whereas other TPP countries, especially developing countries, may require different or no labels. Because of the differences in requirements, the same products cannot be sold in different markets, inhibiting trade. TPP’s TBT chapter explicitly protects the right of governments to set high standards (“nothing in this Chapter shall prevent a Party from adopting or maintaining technical regulations or standards…”). This implicitly includes environmental standards like energy efficiency labels. However, TPP does prohibit countries from only allowing domestic facilities to certify products, instead favoring reciprocal certification and international collaboration to enforce standards. The net effect of the TBT chapter is likely to accelerate standards harmonization among TPP countries, which in the case of the Energy Star program is already underway—in addition to the United States, Australia, Canada, Japan, and New Zealand all use the standards. As a result, clean technology products should become cheaper through trade, while their performance should rise to meet a high, harmonized set of standards. 3. Q: Will TPP’s provisions on Local-Content Requirements (LCRs) make it harder to enact clean energy policies? A: No— TPP does not appear to alter existing WTO law to make it harder or easier for a government to promote locally-sourced clean energy.LCRs are a tricky subject, because it is not clear whether they help or hinder the deployment of clean energy. Some argue that governments are more likely to deploy clean energy if they can use LCRs to stimulate the domestic economy. Others contend that LCRs drive up the cost of clean energy by limiting trade and therefore obstruct low-carbon solutions. At present, the status of LCRs in a clean energy context is ambiguous from an international trade law perspective. In a 2013 WTO case, Canada-Renewable Energy, the WTO’s Appellate Body found that a feed-in tariff (FIT) incentive program for solar energy breached Canada’s international trade obligations by requiring that over half of the renewable energy systems contain domestic components. However, the Appellate Body could not conclude that the FIT program was subsidizing local industry, because without the FIT policy, no market would exist for the clean energy products, imported or locally sourced. Therefore, Canada did not have to alter the program and other countries were not legally allowed to take retaliatory action. TPP does not change this uneasy equilibrium. Broadly, TPP upholds countries’ existing commitments not to pursue LCRs. But it does not shed light on how future cases of clean energy deployment that include LCRs will be adjudicated. 4. Q: Will TPP result in a net increase in greenhouse gas emissions? A: Maybe, because more trade may increase energy demand to fuel economic growth. But increasing economic growth is exactly the point of trade agreements like TPP, so the best such agreements can do is leave open policy options to mitigate greenhouse gas emissions. Some have argued that TPP could increase trade in natural gas—specifically U.S. liquefied natural gas (LNG) exports to Japan—and thus increase global emissions. Since U.S. law requires the Department of Energy to automatically approve commercial applications to export natural gas to countries with which the United States has a free trade agreement, the argument is that Japan would benefit from fast-tracked LNG exports. Some even add that in addition to Japan’s emissions from consuming natural gas, LNG exports would leave less natural gas for domestic consumption, increasing domestic use of dirtier coal. None of these arguments are particularly convincing. First, Japan has already done well in gaining access to LNG exports—by 2019, these supplies could account for 14 percent of its total LNG imports. So TPP has little room to improve Japan’s access to U.S. LNG, which depends much more significantly on commercial decisions. Second, the economic and regulatory predicament facing coal power plants in the United States is unlikely to change even if the United States exports more natural gas—fears of a coal resurgence are likely overblown. 5. Q: Is there anything in TPP that supports governments’ ability to enact and enforce climate policy? A: Yes, just not explicitly. Although TPP does not mention climate change or climate policy by name, there are various provisions that should advance a range of climate policy initiatives. First, TPP includes commitments to enforce environmental and conservation laws, rather than weaken them to encourage trade or foreign investment. Although these commitments do not explicitly mention climate, they encompass policies to curb emissions. Second, there is a particular set of provisions in TPP’s Environment chapter that specifically aim to prevent trade in timber that is illegally harvested anywhere in the world. This could substantially aid efforts to curb deforestation. And finally, TPP does set the stage for enhanced trade, lower costs, and accelerated deployment of goods and services that support a low-carbon transition. For example, because TPP lowers trade barriers for all existing and future services—including consulting, transportation, logistics, maintenance, and financial services related to low-carbon technologies—it should improve the economics of climate action. Some may contend that are several areas where TPP could have enabled stronger climate policies. For example, the pact could have specifically described tariff cuts for products with the lowest lifecycle greenhouse gas emissions. Instead, TPP simply aims to leave the door open for governments to achieve stronger climate policies through other routes. Thus, countries under TPP are free to implement non-discriminatory regulations that favor products with lower lifecycle emissions. It should come as no surprise that TPP does not tackle climate questions head-on. Rather, the administration has compartmentalized its priorities, aiming to address climate through a parallel set of domestic and international efforts that will culminate in the Paris summit later this month. Judged against the more limited objective of concluding a trade agreement that leaves room for ambitious climate policies, TPP is a success. Full Disclosure: I am a cleared trade advisor to the Administration. The views in this post are my own.