The EU and carbon leakage: How to reconcile border adjustments with the WTO?

European Energy and Environmental Law Review

Volumn 17, Issue 6, 2008, Pages 328-340

  Sindico, Francesco ^a,b  

^a UNIVERSITY OF SURREY   (United Kingdom)

^b Environmental Regulatory Research Group (ERRG)   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

ADJUSTMENT MECHANISM; CARBON EMISSION; COMPETITIVENESS; EUROPEAN UNION; POLICY DEVELOPMENT; POLLUTION POLICY; WORLD TRADE ORGANIZATION;

EID: 61549110589     PISSN: 18793886     EISSN: 25890387     Source Type: Journal    
DOI: 10.54648/eelr2008032     Document Type: Article

References (113)

1. See these concerns as reflected in Voestalpine, Annual Report 2007-08, available at http://www.voestalpine.com/ag/en/press/publications.html, p. 48: "Before final adoption by the European Parliament, the concrete provisions of this climate package [2008 Commission Energy and Climate Package] will have to be made sufficiently precise to avoid international or global distortions of competition and unequal treatment. This is also necessary to create the conditions at the European level prerequisite for the long-term effectiveness of major industrial investments and, consequently, for maintaining the industrial base, or at least a large portion of it, in Europe"; thereafter Voestalpine (2008).
2. Concerns also have been raised by the oil refining industry. Shell's chief executive Jeroen van der Veer has strongly encouraged the Commission to take into consideration the special situation of this sector, which employs 100.000 people and gives jobs indirectly to over 2 million people in the EU through the chemicals and the plastics industry. See R. Pagnamenta, "Shell boss Jeroen van der Veer says EU carbon plan could destroy oil industry in Europe", [15 April 2008] The Times.
3. R. Ratnayake, "Do Stringent Environmental Regulations Reduce International Competitiveness? Evidence from an Inter-industry Analysis" [1998] 5 International Journal of the Economics of Business 77.
4. 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation" [2006] 6 Climate Policy 93;
5. and H. Van Asselt and F. Biermann, "European Emissions Trading and the International Competitiveness of Energy-intensive Industries: A Legal and Political Evaluation of Possible Supporting Measures" [2007] 35 Energy Policy 497.
6. 2 emissions trading. 93% of this increase comes from direct emissions.
7. See ibid, pp. 37-41.
8. We will see that this is important for WTO purposes since under the general exception provided for in GATT article XX the multilateral trading system will favour a measure whose goal is to prevent dangerous climate change (prevention of carbon leakage) rather than one whose goal is to level the economic playing field (prevention of the loss of competitiveness). See infra section 4.2.
9. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions COM/2008/0030 final of 23 January 2008 ± 20 20 by 2020 ± Europe's climate change opportunity, p. 5; thereafter 20 20 by 2020 - Europe's climate change opportunity. Peeters and K. Deketelaere, EU Climate Change Policy: The Challenge of New Regulatory Initiatives (Edward Elgar Publishing, 2006);
10. and M. Mehling and L. Massai, "The EU and Climate Change: Leading the Way towards a Post-2012 Regime?" [2007] 1 Carbon and Climate Law Review 45.
11. Commission Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC;
12. 2 emissions.
13. Commission Directive 2004/101/EC amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms.
14. Dir. 2003/87/EC, art. 30.2.c).
15. Ibid, art. 30.2.
16. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions COM(2006)676 final of 13 November 2006, Building a global carbon market - Report pursuant to Article 30 of Directive 2003/87/ EC.
17. Ibid, p. 13: "The working group will consider whether not creating a reserve for new entrants is a suitable approach for all or some sectors taking into account the temporary status of an installation as a new entrant, the degree of competition from outside the EU and the climate policy these competitors are subject to. Alternatively, the setting aside of some allowances in a reserve to be allocated for free (for some sectors) could be continued." Emphasis not present in the original.
18. Final Report of the 3rd meeting of the ECCP working group on emissions trading on the review of the EU ETS on Further Harmonisation and Increased Predictability, 21-22 May 2007. Mr Vianney Schyns (IFIEC Europe) considered that auctioning may have negative effects on carbon leakage and competitiveness;
19. see ibid, p. 6. During the discussion the possibility of adopting border tax adjustments in defence of energy intensive industries was proposed;
20. see ibid, p. 13, which was followed by an interesting comment that "leakage is often confused with the impact of globalisation";
21. see ibid, p. 13. The linkage between environmental integrity of EU measures and the prevention of carbon leakage was stressed by Mr Daniel Redov at the workshop;
22. see ibid, p. 22.
23. COM(2008) 16 final, Proposal for a Directive amending Directive 2003/ 87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, 23.1.2008;
24. thereafter Proposal for a Directive amending Directive 2003/87/EC.
25. 20 20 by 2020 - Europe's climate change opportunity.
26. The European Council underlined the objective of limiting the rise in global average temperature to no more than 2 Celsius above pre-industrial levels. To achieve this goal, Member States agreed to reduce the EU's greenhouse gas (GHG) emissions by 20% in 2020 compared to 1990 levels and by 30% provided other developed countries commit themselves to comparable reduction targets. In order to achieve these objectives, the EU intends to increase energy efficiency by 20% and increase the share of renewable energy to at least 20% and biofuels to 10% by 2020. See European Council Presidency Conclusions - Brussels, 8/9 March 2007 [Doc. 7224/1/07 REV 1], par. 30-31 (on overall targets) and Annex I.7 (on renewable energy and biofuels targets).
27. Draft Report on the proposal for a Directive amending Directive 2003/ 87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, (COM(2008)0016 - C6-0043/2008 - 2008/0013(COD)), Committee on the Environment, Public Health and Food Safety, Rapporteur: Avril Doyle, 11.06.2008.
28. Compromise Amendments 1-25, Draft Report on the proposal for a Directive amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, (2008/0013(COD)), Committee on the Environment, Public Health and Food Safety, Rapporteur: Avril Doyle, 05.10.2008, (2008);
29. thereafter Doyle Report.
30. 20 20 by 2020 - Europe's climate change opportunity, pp. 4-5.
31. Ibid, p. 11; emphasis not present in the original.
32. According to the Commission's Impact Assessment report on the Proposal for a Directive "the achievement of the 20% independent GHG reduction without addressing the impacts on the energy intensive sectors could lead to a rise in emissions beyond business as usual in other world regions equal to 2.5% of EU27 emissions and hence reduce the overall effect of EU policies accordingly": Commission staff working document accompanying document to the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the EU greenhouse gas emission allowance trading system (2008), p. 17.
33. Thereafter Commission staff working document.
34. Proposal for a Directive amending Directive 2003/87/EC, p. 7.
35. Ibid, p. 8.
36. Ibid, recital 19, italics not present in the original text.
37. The 2008 January Climate and Energy Package stated the rationale of a border adjustment measure as a last possible resort in the following way: "A comprehensive international agreement would address this [The particular needs of energy-intensive industries]. But in the absence of such an agreement, or of significant unilateral action by competitors in energy-intensive sectors, the EU must take action to ensure a level playing field"; 20 20 by 2020 - Europe's climate change opportunity, p. 11.
38. See ibid, p. 11:
39. "Sectors meeting these criteria would be given some or all of their ETS allowances free of charge." See also Proposal for a Directive amending Directive 2003/87/EC, p. 8:
40. "Energy-intensive industries which are determined to be exposed to significant risk of carbon leakage could receive up to 100% of allowances free of charge...". Finally, this approach is present in Proposal for a Directive amending Directive 2003/87/EC, recital 20: "Energy-intensive industries which are determined to be exposed to a significant risk of carbon leakage could receive a higher amount of free allocation..." and in EU Proposal, art. 10b: "This shall be accompanied by any appropriate proposals, which may include: adjusting the proportion of allowances received free of charge by those sectors or sub-sectors under Article 10a;"
41. See 20 20 by 2020 - Europe's climate change opportunity, p. 11: "...proposals such as ... requiring importers to enter ETS auctions to purchase allowances alongside European competitors".
42. See also Proposal for a Directive amending Directive 2003/87/EC, recital 20: "Such a system could apply requirements to importers that would be no less favourable than those applicable to installations within the EU, for example by requiring the surrender of allowances."
43. Finally, see Proposal for a Directive amending Directive 2003/87/ EC, art. 10b: "This shall be accompanied by any appropriate proposals, which may include: inclusion in the Community scheme of importers of products produced by the sectors or sub-sectors determined in accordance with Article 10a."
44. Doyle Report, Amendment 20, p. 23: "...the feasibility of including importers of products produced by the sectors or subsectors determined in accordance with Article 10a in the Community scheme or of setting up a Border Adjustment Mechanism." Emphasis added.
45. On the possibility of using a border tax adjustment to deal with carbon leakage see R. Ismer and K. Neuhoff, "Border tax adjustment: a feasible way to support stringent emission trading" [2007] 24.2 European Journal of Law and Economics 137.
46. The Commission has never been very fond of strong measures such as border tax adjustments against imports from laggard climate countries. See Energy security and climate change - what role for trade policy?, Speech by Peter Mandelson at the Conference organised by Confederation of Norwegian Enterprise and EC Delegation in Norway at the Oslo Military Society, Oslo, Norway, 9 February 2007: "A Kyoto tariff gets the international politics of climate change wrong. The climate crisis requires that we build international consensus for radical change. That we build a global coalition. It's ultimately more productive to encourage clean trade than to try and punish dirty trade. We will never bully the non-signatories to Kyoto into being virtuous [sic!]- it is counterproductive to try." However, some EU countries are in favour of such strong measures, in particular France that has repeatedly suggested that the Commission must consider them as part of possible climate policy tools.
47. For an overview of the French position see J. Wiers, "French Ideas on Climate and Trade Policies" [2008] 2 Carbon and Climate Law Review 18 at 18-19.
48. Interestingly within the climate debate in the US a border adjustment measure of this kind was provided for in the non-enacted America's Climate Security Act, S. 2191, 110th Cong. 1st Sess. (2007).
49. See, in particular; section 6006 (c)(1) and(c)(2)(A) of the latter.
50. For a brief overview of the America's Climate Security Act see C. Claybourne Fox, "Summary of the Recently Departed Climate Security Act: A look at what's coming in US federal climate change law" [2008] 17 European Energy and Environmental Law Review 260;
51. and for an analysis of the WTO compatibility of the climate related trade measure therein see F. Sindico, "Climate and Trade in a Divided World" in Y. Le Bouthillier, H. Mcleod-Kilmurray, B. Richardson and S. Wood, Climate Law and Developing Countries: Legal and Policy Challenges for the World Community (Edward Elgar Publishing, 2009).
52. 20 20 by 2020 - Europe's climate change opportunity, p. 11.
53. Proposal for a Directive amending Directive 2003/87/EC, art. 10b: "Any binding sectoral agreements which lead to global emissions reductions of the magnitude required to effectively address climate change, and which are monitorable, verifiable and subject to mandatory enforcement arrangements shall also be taken into account when considering what measures are appropriate."
54. On sectoral agreements see D. Bodansky, International Sectoral Agreements in a Post-2012 Climate Framework, Prepared for the Pew Center on Global Climate Change (2007).
55. 20 20 by 2020 - Europe's climate change opportunity, p. 11.
56. See the comments from the steel industry in Europe: Voestalpine (2008).
57. In the explanatory statement to the June 2008 version of the Doyle Report, note 18 above, one can read as follows at p. 34: "... it would be detrimental to the chances of international negotiations reaching an international climate agreement, if certain sectors were to be named outright in the proposal. Furthermore, one should not attempt to preempt the soon-to-be published findings on the European Commission study on this issue."
58. Proposal for a Directive amending Directive 2003/87/EC, art. 10a.9. According to the Doyle Report this should take place by 31 March 2010;
59. Doyle Report, Amendment 19, p. 20.
60. Proposal for a Directive amending Directive 2003/87/EC, art. 10b.
61. According to the Doyle Report the report should be submitted not later than June 2010;
62. Doyle Report, Amendment 20, p. 22.
63. 2 certificates to the most environmentally friendly companies and recognize past climate protection efforts." (Emphasis not present in the original).
64. 20 20 by 2020 - Europe's climate change opportunity, p. 11.
65. Commission staff working document, p. 11. The Commission also concludes in ibid that: "[T]he competitiveness problem for energy intensive industries therefore appears to be concentrated in a limited number of genuinely energy intensive industries while not generally affecting manufacturing industry as such." There is some controversy as to whether the cement industry should not be included.
66. The industry calls for a preferential treatment for "the most environmentally friendly companies", see Voestalpine (2008), p. 48.
67. Proposal for a Directive amending Directive 2003/87/EC, art. 10a. 9. Similar wording can be found in 20 20 by 2020 - Europe's climate change opportunity, p. 11
68. Proposal for a Directive amending Directive 2003/87/EC, art. 10a. 9, amended by the Doyle Report, Amendment 19, pp. 21-22.
69. The Proposal for a directive has established the benchmarks that the Commission can use in order to determine whether an energy-intensive sector is actually threatened by importers coming from laggard climate countries. See Proposal for a Directive amending Directive 2003/87/ EC, art. 10a.9: "[T]he Commission shall take... into account the following: (a) the extent to which auctioning would lead to a substantial increase in production cost; (b) the extent to which it is possible for individual installations in the sector concerned to reduce emission levels for instance on the basis of the most efficient techniques; (c) market structure, relevant geographic and product market, the exposure of the sectors to international competition; (d) the effect of climate change and energy policies implemented, or expected to be implemented outside the EU in the sectors concerned. For the purposes of evaluating whether the cost increase resulting from the Community scheme can be passed on, estimates of lost sales resulting from the increased carbon price or the impact on the profitability of the installations concerned may inter alia be used."
70. Ibid, art. 10a just mentions "less carbon efficient installations outside the Community." and recital 20
71. A reference to the non-participation in the future international climate agreement can be found in the explanatory memorandum to ibid, p. 8: "In the event that other developed countries and other major emitters of greenhouse gases do not participate in an international agreement that will achieve the objective of limiting global temperature increase to 2C, certain energy-intensive sectors and sub-sectors in the Community subject to international competition could be exposed to the risk of carbon leakage." Emphasis not present in the original.
72. June 2008 version of the Doyle Report, note 18 above, Amendment 24, p. 23.
73. Doyle Report, Amendment 20, p. 22.
74. See the concerns arising from the US as to whether their future climate policies will be WTO compatible; Subcommittee on Energy and Air Quality of the US House of Representatives, Climate Change Legislation Design White Paper (2008), p. 2: "[S]ince the US cannot unilaterally bind other countries, our goal will be to craft legislation that also induces developing countries to limit their emissions growth... in a manner that is reasonably certain to withstand challenge before the World Trade Organization."
75. The academic literature on climate and trade cannot be fully quoted here. For comprehensive recent studies see the special issue of the journal Carbon and Climate Law Review edited by J. Pauwelyn & F. Sindico, "Climate Change in a Global Economy", [2008] 2 Carbon and Climate Law Review.
76. 20 20 by 2020 - Europe's climate change opportunity, p. 11. Emphasis not present in the original.
77. Proposal for a Directive amending Directive 2003/87/EC, recital 20. Emphasis not present in the original.
78. The scope of this paper does not allow us to delve further into this debate. However, should a developing country consider that the EU has breached its obligations under the international climate regime, it may find institutional and substantial obstacles to its attempt to seek redress before the international climate regime. In fact, the latter does not seem well-equipped for a dispute of this kind. It is unclear where a dispute over the application of a climate related trade measure could be brought within the international climate regime. Would it be before the Kyoto Compliance Committee? Would the developing country have to rely on the UNFCCC dispute settlement provision? Both do not seem to lead in any concrete direction. From a substantial point of view, the developing country may face further problems. On the one hand, the EU may argue that the measure is linked to a domestic cap and trade scheme and, therefore, should be deemed as a unilateral measure not linked to the international climate regime. Despite the fact that we do not agree with such an approach since all domestic EU measure are taken in order to fulfil its international emissions reduction obligation under the Kyoto Protocol, it is possible that the border adjustment measure could escape revision before the international climate regime because of its alleged unilateral nature. On the other hand, despite the fact that the principle of common but differentiated responsibilities is well established within the international climate regime, and in international environmental law more generally, it is still unclear whether it places upon parties to the international climate regime a specific obligation that would be breached by the adoption of a border adjustment measure against imports coming from developing countries.
79. Seema Arora, head of the Centre of Excellence for Sustainable Development, Confederation of Indian Industry, quoted in "Europe threatens carbon tax on Third World" [Tuesday May 6, 2008] 16 Down to Earth: Science and Environment online, available at http://www.downtoearth.org.in/full6.asp?foldername=20080515&filename= news&sec_id=4&sid=11
80. The General Agreement on Tariffs and Trade (GATT 1947), article I.
81. Doyle Report, amendment 24, p. 23.
82. GATT 1947, article III.
83. See Report of the Working Party adopted on 2 December 1970 (Doc. L/3464), § 18
84. and European Communities - Measures Affecting Asbestos and Asbestos-Containing Products (EC - Asbestos), Appellate Body Report (Doc. WT/DS135/AB/R, 12 March 2001), § 101.
85. See United States - Restrictions on imports of tuna (Doc. DS21/R, 3 September 1991), § 5.15.
86. EC - Asbestos, Appellate Body Report, § 113, 114.
87. On the debate surrounding process and production methods see S. Charnovitz, "The Law of Environmental 'PPMs' in the WTO: Debunking the Myth of Illegality" [2002] 27.1 Yale Journal of International Law 59-110;
88. R. Read, "Like Products, Health & Environmental Exceptions: The Interpretation of PPMs in Recent WTO Trade Dispute Cases" [2004] 5.2 The Estey Centre Journal of International Law and Trade Policy 123;
89. and R. Howse & D. Regan, "The Product/Process Distinction - An Illusory Basis for Disciplining 'Unilateralism' in Trade Policy" [2000] 11.2 European Journal of International Law 249-289.
90. On the one hand, J. De Cendra, "Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law" [2006] 15 Review of European Community and International Environmental Law 131 at 135-136
91. and R. Ismer and K. Neuhoff, "Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading" [2004] 36 CMI Working Paper at 11, argue that an emissions trading scheme can be considered a tax for WTO purposes.
92. On the other hand, J. WIERS, "French Ideas on Climate and Trade Policies" (2008) 2.1 Carbon and Climate Law Review 18 at 22, argue against this position and do not consider that a WTO Panel would uphold this approach.
93. GATT 1947, article III:2.
94. GATT 1947, article III:4.
95. WTO case law on GATT article XX has clarified the need for this twofold approach: see United States - Standards for Reformulated and Conventional Gasoline (US - Gasoline), Appellate Body Report (Doc. WT/DS2/AB/R, 29 April 1996), section IV,
96. and United States - Import Prohibition of Certain Shrimp and Shrimp Products (US - Shrimp), Appellate Body Report (WT/DS58/AB/R, 12 October 1998), § 119-120.
97. IPCC, Fourth Assessment Report. Climate Change 2007: Synthesis Report. Summary for Policymakers (2007), p. 9
98. and IPCC, Climate Change 2007: Synthesis Report (2007), p. 48.
99. In US - Reformulated Gasoline clean air was considered an exhaustible natural resource; US - Gasoline, Appellate Body Report, section III.B. Within the literature authors like J. WIERS, Trade and Environment in the EC and in the WTO. A Legal Analysis (2002), p. 239
100. and C. Voigt, "WTO Law and International Emissions Trading: Is there Potential for Conflict?" [2008] 2.1 Carbon and Climate Law Review 54 at 61, consider climate change measures to be related to the conservation of exhaustible natural resources.
101. See United States - Section 337 of the tariff act of 1930, Panel Report (Doc. L/6439, 16 January 1989), § 5.26;
102. and Thailand - Cigarettes, Panel Report Doc. DS10/R - 37S/200, 7 November 1990, § 75.
103. Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef, Appellate Body Report (Doc. WT/DS161/AB/R, 11 December 2000), § 164.
104. US - Shrimp, Appellate Body Report, § 141.
105. The triple approach has been highlighted in US - Shrimp, Appellate Body Report, § 150,
106. and United States - Import Prohibition of Certain Shrimp and Shrimp Products - Recourse to Article 21.5 of the DSU by Malaysia (US - Shrimp, art. 21.5 DSU), Appellate Body Report (Doc. WT/DS58/AB/RW, 22 October 2001), § 118.
107. US - Shrimp, Appellate Body Report, § 172.
108. Ibid, § 173-175.
109. In the Shrimp Turtle case the US had given fourteen Caribbean/western Atlantic countries more time to modify their fisheries techniques than what was given to the apellees; ibid, § 173.
110. EC - Asbestos, Panel Report (Doc. WT/DS135/R, 18 September 2000), § 8.236.
111. Commissioner Dimas welcomes EP Environment Committee vote on climate - energy package, (7 October 2008): "It is important that the committee, while approving a range of amendments, has voted to keep the broad architecture of our proposals unchanged".
112. European Association of Metals, EU Parliament's Environment Committee threatens the long-term future of Europe's metals industry, (7 October 2008): "Today's vote opens the door to a significant delocalisation of energy-intensive industries, like ours, to regions without restrictions on greenhouse gas emissions".
113. Karl-Heinz Florenz MEP, on behalf of the EPP-ED Group in the European Parliament, maintained in the Press Release, Emission Trading: Environment Committee for wrong tools, 7 October 2008: "We have missed the chance to come up with a practical solution. Europe will face a tough burden in the internal market, while America and China's industry will enjoy a light regime. This is going to cost us jobs".