EU Emission Trade Rethink

The European climate action package coming into force in March 2011 includes a more stringent target to reduce emissions by 20 percent below 1990 levels by 2020 with an option for a 30 percent reduction, if a Kyoto successor treaty is agreed upon.

Moreover, it prescribes the third trading period (2013-2020) of the EU Emission Trading Scheme with a much larger share of allowances that will be auctioned off by the member states. Most European industries will be required to bid for the allowances they need to cover their emissions, as opposed to receiving an initial amount free of charge.

In addition, the scope of the scheme will be enlarged to more industries such as the petrochemical, ammonia and aluminium sectors as of 2013, the aviation industry as of 2012 and furthermore to new gases (nitrous oxide and perfluorocarbons).

Related concerns refer to the severing of competitive disadvantages for European carbon-intensive industries on the global marketplace and the relocation of carbon-intensive industries to regions without a carbon price. Emissions may not be reduced but simply relocated outside Europe.

Against this background, the EU is considering the extension of its Emissions Trading Scheme (ETS) to imported goods from countries that do not take comparable action to reduce greenhouse gas emissions. This implies the requirement for affected importers to buy emission allowances relating to the amount of CO2 emitted in the production of their goods when crossing European borders.

As an infringement of basic World Trade Organization (WTO) rules cannot be excluded, the question will be whether the European Communities, possibly challenged under the multilateral trading system, will succeed in proving an exception based on environmental grounds.

The European Communities would need to argue inter alia that the measure at issue must not run counter to the environmental objective. Such an argument would be difficult since the need for an allowance when entering the EU seems to be linked to the country of origin. As a result, goods produced using clean energy could nevertheless be subject to the extension of the EU’s ETS solely because they have been produced in factories located in countries without comparable climate change actions.

A related problem would be identifying those countries that actually take ‘comparable’ action. Note that even the effectiveness of the EU’s ETS to reduce greenhouse gases and/or conserve the earth’s atmosphere remains to be proven.

Another crucial challenge will be proving that there are no protectionist motivations hidden behind publicly stated environmental intentions. This will indeed be difficult, given that the envisaged unilateral imposition of an emission allowance requirement on imported products appears to suggest protectionist motives in the sense that it pursues the creation of a competitive level playing field for the European carbon-intensive industry.

It is difficult to predict how the WTO dispute settlement bodies will adjudicate in this field, particularly since trade in carbon-intensive goods is considerably large. However, previous cases show considerable understanding with environmental concerns and the control of climate change may approach the threshold of peremptory norms of international law. In addition, one should not forget the ‘sustainable development’ commitment in the preamble of the WTO. This increases the likelihood that trade-related climate measures will pass muster under WTO agreements.