The Trade Side of Climate Policy
By Nicole Ahner for ISN
Europe is tightening its climate change policy and with that its pollution control legislation, leading the way toward a low carbon economy, while the rest of the globe is lagging behind in greenhouse gas emission reduction efforts.
Both developed and developing countries are facing political pressure to take action against climate change. With an unconditional 20 percent reduction commitment below 1990 levels, the EU has taken the lead.
With key developing countries such as India and China (both of which have very fast rates of emissions growth and no reduction commitments under the current protocol) it is increasingly becoming clear that tackling climate change is essential to their own survival, Roderick Abbott, former World Trade Organization (WTO) deputy director general and now senior trade advisor at the European for International Political Economy, told participants of a recent workshop on climate change and trade measures.
However, due to the pending reluctance of developing countries to put a price on carbon, and of developed countries to commit to concrete financial aid for them, the agreement of a legally binding successor treaty at the December Copenhagen Climate Change Summit is rather unlikely.
Beyond 2012
Regardless of whether the post-2012 international climate agreement is postponed or if a respective successor treaty is reached, it is likely that different commitments for different countries will persist.
According to Abbott, despite the wide spectrum of possible outcomes, it is most likely that the successor treaty will contain reduction commitments for industrialized countries, whereas emerging countries will commit only to ‘controlled’ CO2 increases.
Such a state of affairs perpetuates fears of ‘carbon leakage’ - the relocation of energy-intensive industries to jurisdictions with less strict climate change legislation. It also undermines efforts undertaken by the committed countries and gives an economic advantage to countries without reduction commitment plans, which will become more attractive to carbon-intensive producers.
Moreover, there are concerns about a severe competitive disadvantage in the global marketplace for those countries following a stringent climate change regime, since it imposes additional costs on domestic producers relative to foreign producers.
As Joost Pauwelyn, professor of International Economic Law and WTO Law at the Graduate Institute of International Studies in Geneva, external pagenoted, the concern about the competitiveness of American firms vis-à-vis firms in developing countries was a major reason that the US failed to sign on to the Kyoto Protocol.
Carbon ‘equalizers’
Against this backdrop, the outcome of the Copenhagen negotiations will also set the course for future climate policy options with respect to energy-intensive imports.
Whereas currently there is no legislative framework in place in any country for ‘carbon-equalizing’ measures that would subject imported goods to a tax or tariff based on the quantity of CO2 emitted in producing the good, proposals for ‘adjustment’ measures are being discussed in Europe, as well as in the US, Australia and Canada.
However, it should be noted that in aiming at leveling the carbon playing field, the inclusion of trade related provisions might be also considered for an effective implementation once a legally binding Kyoto successor is reached.
With regard to Europe, the European Commission will consider whether to establish trade measures to impose climate change-related costs on imports from countries with little or no climate policy and low energy costs, if no global agreement is reached in December 2009.
Importers could be required to acquire emission allowances corresponding to the embedded carbon in their goods. Similar proposals have been discussed in the US, as well as in Australia and in Canada. Such an extension of national greenhouse gas policy has a direct bearing on the free flow of trade across borders.
Stepping on trade toes
Abbott points out that the WTO membership of all players needs to be highlighted. He asks: “Does the fear of competitive disadvantages, the impact of carbon leakage or the ambition to convince reluctant states by means of trade restrictions to join a global agreement allow measures that are irrefutable restrictions of free trade?”
Indeed, he says, such measures have the potential to infringe upon central tenets of international trade law.
It seems very unlikely that such a measure would withstand being challenged before the World Trade Organization (WTO).
Implementing border measures against countries that have not introduced measures to combat climate change would contravene a whole host of WTO rules, particularly the GATT, international trade lawyer Gary Horlick told the workshop participants.
Although GATT allows for the unilateral imposition of trade measures in the pursuance of environmental protection under special conditions, the protection of domestic producers from foreign competition is not recognized as a legitimate policy objective under WTO law.
In order to prove the actual intention, the design, architecture and structure will need to be scrutinized. This will reveal that the envisaged trade measures, such as the extension of domestic cap-and-trade schemes, are primarily aimed at levelling the competitive playing field for domestic industries.
Political posturing?
As such, Reinhard Quick - trade policy adviser for the German Chemical Industries Association (VCI) and honorary professor for international economic law at Saarland University, Saarbrücken - asked workshop particpants whether talk of trade measures was simply political posturing in order to get an agreement in Copenhagen, or whether we could expect to see a real renaissance of unilateral trade measures.
It is difficult to predict how the adjudicating bodies of the WTO will decide the case, he said.
However, as the Indian ambassador to the WTO, Ujal Singh Bhatia, emphasized during the workshop, border adjustments are the “big monster in the room,” which would create huge problems for the WTO being in fact the final body deciding the legality of a country’s climate change legislation.
There are furthermore real concerns that the implementation of trade measures will lead to a tit-for-tat situation.
This is evident in the current draft US legislation and also in draft proposals in Australia and Canada, which point in the same direction.
In June 2009, the US House of Representatives passed the American Clean Energy and Security Act (ACES), which calls inter alia for an economy-wide greenhouse gas cap-and-trade system and various complementary greenhouse gas reduction measures. In its Sec. 766, it provides for the implementation of an “international reserve allowance” regime. Under this scheme, importers might also have to purchase special allowances to cover the emissions associated with their imports under special conditions.
It must be noted that such a policy approach carries the risk of sparking off damaging trade wars, ultimately hindering the exports of those countries that also implement border measures.
Both developed and developing countries are facing political pressure to take action against climate change. With an unconditional 20 percent reduction commitment below 1990 levels, the EU has taken the lead.
With key developing countries such as India and China (both of which have very fast rates of emissions growth and no reduction commitments under the current protocol) it is increasingly becoming clear that tackling climate change is essential to their own survival, Roderick Abbott, former World Trade Organization (WTO) deputy director general and now senior trade advisor at the European for International Political Economy, told participants of a recent workshop on climate change and trade measures.
However, due to the pending reluctance of developing countries to put a price on carbon, and of developed countries to commit to concrete financial aid for them, the agreement of a legally binding successor treaty at the December Copenhagen Climate Change Summit is rather unlikely.
Beyond 2012
Regardless of whether the post-2012 international climate agreement is postponed or if a respective successor treaty is reached, it is likely that different commitments for different countries will persist.
According to Abbott, despite the wide spectrum of possible outcomes, it is most likely that the successor treaty will contain reduction commitments for industrialized countries, whereas emerging countries will commit only to ‘controlled’ CO2 increases.
Such a state of affairs perpetuates fears of ‘carbon leakage’ - the relocation of energy-intensive industries to jurisdictions with less strict climate change legislation. It also undermines efforts undertaken by the committed countries and gives an economic advantage to countries without reduction commitment plans, which will become more attractive to carbon-intensive producers.
Moreover, there are concerns about a severe competitive disadvantage in the global marketplace for those countries following a stringent climate change regime, since it imposes additional costs on domestic producers relative to foreign producers.
As Joost Pauwelyn, professor of International Economic Law and WTO Law at the Graduate Institute of International Studies in Geneva, external pagenoted, the concern about the competitiveness of American firms vis-à-vis firms in developing countries was a major reason that the US failed to sign on to the Kyoto Protocol.
Carbon ‘equalizers’
Against this backdrop, the outcome of the Copenhagen negotiations will also set the course for future climate policy options with respect to energy-intensive imports.
Whereas currently there is no legislative framework in place in any country for ‘carbon-equalizing’ measures that would subject imported goods to a tax or tariff based on the quantity of CO2 emitted in producing the good, proposals for ‘adjustment’ measures are being discussed in Europe, as well as in the US, Australia and Canada.
However, it should be noted that in aiming at leveling the carbon playing field, the inclusion of trade related provisions might be also considered for an effective implementation once a legally binding Kyoto successor is reached.
With regard to Europe, the European Commission will consider whether to establish trade measures to impose climate change-related costs on imports from countries with little or no climate policy and low energy costs, if no global agreement is reached in December 2009.
Importers could be required to acquire emission allowances corresponding to the embedded carbon in their goods. Similar proposals have been discussed in the US, as well as in Australia and in Canada. Such an extension of national greenhouse gas policy has a direct bearing on the free flow of trade across borders.
Stepping on trade toes
Abbott points out that the WTO membership of all players needs to be highlighted. He asks: “Does the fear of competitive disadvantages, the impact of carbon leakage or the ambition to convince reluctant states by means of trade restrictions to join a global agreement allow measures that are irrefutable restrictions of free trade?”
Indeed, he says, such measures have the potential to infringe upon central tenets of international trade law.
It seems very unlikely that such a measure would withstand being challenged before the World Trade Organization (WTO).
Implementing border measures against countries that have not introduced measures to combat climate change would contravene a whole host of WTO rules, particularly the GATT, international trade lawyer Gary Horlick told the workshop participants.
Although GATT allows for the unilateral imposition of trade measures in the pursuance of environmental protection under special conditions, the protection of domestic producers from foreign competition is not recognized as a legitimate policy objective under WTO law.
In order to prove the actual intention, the design, architecture and structure will need to be scrutinized. This will reveal that the envisaged trade measures, such as the extension of domestic cap-and-trade schemes, are primarily aimed at levelling the competitive playing field for domestic industries.
Political posturing?
As such, Reinhard Quick - trade policy adviser for the German Chemical Industries Association (VCI) and honorary professor for international economic law at Saarland University, Saarbrücken - asked workshop particpants whether talk of trade measures was simply political posturing in order to get an agreement in Copenhagen, or whether we could expect to see a real renaissance of unilateral trade measures.
It is difficult to predict how the adjudicating bodies of the WTO will decide the case, he said.
However, as the Indian ambassador to the WTO, Ujal Singh Bhatia, emphasized during the workshop, border adjustments are the “big monster in the room,” which would create huge problems for the WTO being in fact the final body deciding the legality of a country’s climate change legislation.
There are furthermore real concerns that the implementation of trade measures will lead to a tit-for-tat situation.
This is evident in the current draft US legislation and also in draft proposals in Australia and Canada, which point in the same direction.
In June 2009, the US House of Representatives passed the American Clean Energy and Security Act (ACES), which calls inter alia for an economy-wide greenhouse gas cap-and-trade system and various complementary greenhouse gas reduction measures. In its Sec. 766, it provides for the implementation of an “international reserve allowance” regime. Under this scheme, importers might also have to purchase special allowances to cover the emissions associated with their imports under special conditions.
It must be noted that such a policy approach carries the risk of sparking off damaging trade wars, ultimately hindering the exports of those countries that also implement border measures.