Climate Border Adjustments and WTO Law : Extending the EU Emissions Trading System to Imported Goods and Services [1 ed.] 9789004391055, 9789004391048

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Climate Border Adjustments and WTO Law

Nijhoff International Trade Law Series Editorial Board Robert Howse (New York University) Miguel Maduro (European University Institute) Joost Pauwelyn (Graduate Institute of International Studies, Geneva) Jan Wouters (University of Leuven) Kern Alexander (University of Zurich)

volume 17

The titles published in this series are listed at brill.com/nint

Climate Border Adjustments and wto Law Extending the eu Emissions Trading System to Imported Goods and Services

By

Ulrike Will

leiden | boston

The Library of Congress Cataloging-in-Publication Data is available online at http://catalog.loc.gov Names: Will, Ulrike, author. Title: Climate Border Adjustments and WTO Law Extending the EU Emissions Trading System to Imported Goods and Services / by Ulrike Will, Leipzig University of Applied Sciences. Description: Leiden ; Boston : Brill Nijhoff, 2019. | Series: Nijhoff international trade law series ; volume 17 | Based on author's thesis (doctoral - Europa-Universität Viadrina Frankfurt an der Oder, 2018). | Includes bibliographical references and index. Identifiers: lccn 2018051133 (print) | lccn 2018051450 (ebook) | isbn 9789004391055 (E-book) | isbn 9789004391048 (hardback : alk. paper) Subjects: lcsh: Emissions trading--Law and legislation--European Union countries. | Foreign trade regulation--European Union countries. | World Trade Organization--European Union countries. Classification: lcc kje6246 (ebook) | lcc kje6246 .w55 2019 (print) | ddc 363.738/746094--dc23 lc record available at https://lccn.loc.gov/2018051133

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. issn 1877-7392 ISBN 978-90-04-39104-8 (hardback) ISBN 978-90-04-39105-5 (e-book) Copyright 2019 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi, Brill Sense, Hotei Publishing, mentis Verlag, Verlag Ferdinand Schöningh and Wilhelm Fink Verlag. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Acknowledgments  IX List of Abbreviations  X List of Figures  XIII List of Tables  xiv 1 Introduction  1 2 The eu Emissions Trading System Leading to Carbon Leakage Effects  14 2.1 United Framework Convention on Climate Change, Kyoto Protocol and Paris Agreement  14 2.2 eu Emissions Trading System (ETS)  21 2.3 Carbon Leakage Effects and Competitive Disadvantages  28 2.4 Current Approaches to Carbon Leakage in the eu  35 2.4.1 Export Rebates and Carbon Leakage List  35 2.4.2 The Extension of the eu ETS to International Flights  36 2.4.3 Proposal for an Import Border Adjustment (ba) for Cement and Clinker  42 2.5 Result: the Need for an Import Carbon Leakage Policy  43 3 Trade Measures to Resolve the Carbon Leakage Problem  45 3.1 Measures between Trade Liberalisation and Trade Restriction  47 3.2 Committee on Trade and Environment  50 3.3 Doha Round and Environmental Goods Agreement  51 3.4 Unilateral Instruments  54 3.4.1 Import Ban, Quota and Standard  55 3.4.2 Carbon Tariff  57 3.4.3  b a and the Integration into the eu ETS  61 3.4.4 Linking the eu ETS with Other ETSs  63 3.5 Climate-Related Trade Instruments within Preferential Trade Agreements  71 3.5.1 Recognition and Harmonisation of Climate-Related Standards  79 3.5.2 Conditional Tariff Policy  82 3.5.3 A Common ba  84

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3.5.4 Linking the eu ETS with Other ETSs  86 3.6 Result: Unilateral ba for the eu ETS  87 4 Structuring the ba in the WTO Context  89 4.1 Focus on Imports  90 4.2 Aims  92 4.3 Interests  94 4.4 Effects  96 4.5 Provoking or Avoiding WTO Disputes?  98 4.6 The Multiple Legal Nature of ETS, bas and Certificates  102 4.7 The Impact of International Climate Agreements on WTO Law  103 4.8 Result: ba on Imports Complementing the eu ETS  106 5 ETS and ba Restricting Trade in Goods  108 5.1 Measures at Issue: ETS and ba as Complementary Measures  108 5.2 Constellations of Discrimination  114 5.3 ETS and ba as Domestic Fiscal Measure  116 5.3.1 ba as a Charge Equivalent to an Indirect Tax  117 5.3.2 ETS and ba as Fiscal Measure  125 5.3.3 ba Not Charging Foreign Products in Excess of Domestic Like Products  128 5.3.4 Taxing Foreign Products Similarly Compared to Competitive eu Products  168 5.4 ets and ba as Domestic Non-Fiscal Measures  173 5.5 ba as a Restriction on Market Access  175 5.6 Different bas for Different Countries and the Most-Favoured Nation Treatment  181 5.6.1 Advantage  182 5.6.2 Like Products  182 5.6.3 Advantage Accorded Immediately and Unconditionally  183 5.6.4 Exceptions for Developing Countries (Enabling Clause)  185 5.6.5 Exceptions for Preferential Trade Agreements  189 5.7 How to Avoid Restrictions of Article III GATT  190 5.8 ETS and ba as Climate Measures under the General Exceptions  194 5.8.1 Climate-Related Concerns the ETS and ba Seek to Protect  194 5.8.2 Regulatory Autonomy for Climate Policy  206 5.8.3 Necessity Test  207

Contents

vii

5.8.4 ‘Relating to’ Requirements  215 5.8.5 Exclusion of Disguised Discrimination  219 5.8.6 Limiting Extra-Jurisdictional Effects  227 5.9 How to Avoid Restrictions of Article XX GATT  241 5.10 Notification and Transparency  243 5.11 Result: BA without Emissions-Based Product Distinctions  244 6 ETS and ba Implying Technical Regulations or Standards  248 6.1 Measures at Issue: ETS and ba as Complementary Measures  249 6.1.1 Technical Standards  251 6.1.2 Technical Regulations  254 6.2 Constellations of Discrimination and Restriction  258 6.3 Climate-Related Concerns the ETS and ba Seek to Protect  261 6.4 Necessity Test  262 6.5 Non-Discrimination of Foreign Products  266 6.5.1 Like Products  267 6.5.2 Treatment No Less Favourable and Exclusion of Disguised Discrimination  268 6.6 Limiting Extra-Jurisdictional Effects  271 6.7 Notification and Transparency  275 6.8 Technical Assistance and Special and Differential Treatment  277 6.9 Result: Product-Based ba Complying with the TBT Agreement  278 7 ETS and ba Affecting Trade in Services  280 7.1 Measures at Issue: ETS Alone or ETS and ba as Complementary Measures  280 7.2 Constellations of Discrimination and Affected Services  281 7.3 eu Schedule of Commitments in the Relevant Sectors  286 7.4 Restriction of Environmental Services  288 7.5 Restriction of Financial Services  290 7.5.1 The eu Schedule and Financial Services  290 7.5.2 Exclusion of Foreign Certificates as Market Access Restriction  295 7.5.3 National Treatment of Foreign Certificates  298 7.5.4 Most-Favoured Nation Treatment of Non-Kyoto Certificates  307

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7.6 Restriction of Aviation Services  314 7.6.1 Chicago Convention Relevant for the eu  315 7.6.2 Jurisdiction  319 7.6.3 The GATS Annex on Air Transport Services (aats)  321 7.6.4 Inclusion of International Flights into the eu ETS Providing Market Access  323 7.6.5 Treating Foreign as Favourably as eu Flights  323 7.6.6 Comparison between Non-Kyoto States and Kyoto States  325 7.7 ETS and ba as Climate Measures under the General Exceptions  327 7.7.1 Climate-Related Concerns the ETS and ba Seek to Protect  328 7.7.2 Necessity Test  329 7.7.3 Exclusion of Disguised Discrimination  332 7.7.4 Limiting Extra-Jurisdictional Effects  334 7.8 Participation of Developing Countries  337 7.9 Transparency  338 7.10 Result: Recognition of Foreign Certificates that Contribute to Climate Protection  339 8 Reform Proposal for an Import ba for the eu ETS  343 8.1 Emissions-Based Approach: Integration into the eu ETS  347 8.1.1 Measurement, Calculation  348 8.1.2 Necessary Reforms of the eu ETS  351 8.2 Price-Based Approach: ba Equivalent to the Restriction of the ETS Per Product or Service  355 8.2.1 Measurement, Calculation  359 8.2.2 Necessary Reforms of the eu ETS  361 8.3 Simplifications and Exemptions  362 8.3.1 Limitation of Sectors  362 8.3.2 Threshold  364 8.3.3 Foreign Climate Policies  365 8.3.4 State of Development  368 8.4 Use of Revenues from the ba  373 8.5 Moment of Adjustment  374 8.6 Result: Price-Based Import ba for the eu ETS  374 9 Outlook  380 Bibliography  383 Index  403

Acknowledgments This study was accepted as a doctoral thesis at the Faculty of Law of the European University Viadrina in Frankfurt (Oder), Germany. I thank my supervisor Professor Dr. Wolff Heintschel von Heinegg for his constructive critique of the drafts of my thesis, and I thank him and Professor Dr. Carmen Thiele for providing the reports quickly. I started my research about border adjustments in the context of the project ‘Re-thinking the Efficacy of International Climate Agreements Post COP15’ (RECAP15) at European University Viadrina. This project was funded by the German Federal Ministry of Education and Research within its programme on Economics of Climate Change, Grant No. 01LA1139A. Within the project, I had the opportunity to learn from my environmental economist colleagues. I would like to thank Professor Dr. Wolfgang Peters for his constant support, his patience in our interdisciplinary discourse and for his critical perspective on publications and presentations within the project. I am also grateful to Professor Dr. Daniel Becker and Professor Dr. Gerard Rowe for their constructive criticicism and for their motivation. The thesis was finalised at the University of Technology Dresden, Germany. I thank Professor Dr. Thilo Rensmann for giving me the opportunity to work at the Chair of International Law, European Law and Public Law and for providing me the chance to deepen my knowledge in a network of international lawyers. I thank my sister Nicole and my parents for their encouragement and Robert for being with me and for his support and patience. Finally, I thank Hugh Jackson for his corrections to the language and J­ ohanna Lee and Kayla Griffin of Brill Nijhoff Publishers for supporting and advising me during the publication process.

Abbreviations AAU ba bafu BAT BISD

Assigned Amount Units border adjustment Bundesamt für Umwelt (Switzerland) best available technology Basic Instruments and Selected Documents of the World Trade Organization BTA border tax adjustment °C degree Celsius CAD Canadian dollar CBDR common but differentiated responsibilities CDM Clean Development Mechanism CER Certified Emission Reduction CETA Comprehensive Economic and Trade Agreement between Canada and the European Union ch 4 methane CHF Swiss franc CNY Chinese yuan co 2 carbon dioxide co 2-eq carbon dioxide equivalents COP Conference of Parties CORSIA Carbon Offsetting and Reduction Scheme for International Aviation CPE cross price elasticity of demand CTE Committee on Trade and Environment DIW Deutsches Institut für Wirtschaftsforschung DCS directly competitive or substitutable DSU Dispute Settlement Understanding e.g. for example ec European Communities ECJ European Court of Justice EEX European Energy Exchange ERU Emission Reduction Unit etc. et cetera ETS emissions trading system ETS-ba border adjustment referring to an emissions trading system eu European Union EUA eu Emission Allowance FAO Food and Agriculture Organization

Abbreviations GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GCF Green Climate Fund GDP Gross Domestic Product GHG greenhouse gas GSP Generalized System of Preferences HFC hydrofluorocarbons hs Harmonized System hsc Health and Safety Code (California, USA) IASB International Accounting Standards Board ICAO International Civil Aviation Organization icap International Carbon Action Partnership icj International Court of Justice iea International Energy Agency IEC International Electrotechnical Commission IFOAM International Federation of Organic Agriculture Movements ILA Agreement on Import Licensing Procedures IMO International Maritime Organization incl. including INDC intended nationally determined contribution ISO International Organisation for Standardization IPCC Intergovernmental Panel on Climate Change ITMO internationally transferred mitigation outcome ji Joint Implementation JPY Japanese yen KRW South Korean won LDC least developed country ltd. limited company MA market access MEA multilateral environmental agreement MFN most-favoured nation MRA Mutual Recognition Agreement n footnote nn footnotes n 2o nitrous oxide NAFTA North American Free Trade Agreement nprppm non-product-related process and production method nf 3 nitrogen trifluoride no 3 nitrate NDC nationally determined contribution

xi

xii

Abbreviations

NTR national treatment rule NZD New Zealand dollar OJ Official Journal (eu) PCIJ Permanent Court of International Justice PFC perfluorocarbon PPM process and production method PTA preferential trade agreement REC Renewable Energy Certificate RGGI Regional Greenhouse Gas Initiative RMU Removal Units SATAP so as to afford protection SCM (Agreement on) Subsidies and Countervailing Measures sf 6 sulfur hexafluoride SPS Agreement on the Application of Sanitary and Phytosanitary Measures t tonne TBT Technical Barriers to Trade TEHG Treibhausgasemissionsgesetz (Germany) TEU Treaty on European Union TFA Trade Facilitation Agreement TFEU Treaty on the Functioning of the European Union tisa Trade in Services Agreement TNS Taylor Nelson Sofres un United Nations UNCLOS United Nations Convention on the Law of the Sea UNCTAD United Nations Conference on Trade and Development UNEP United Nations Environment Programme UNFCCC United Framework Convention on Climate Change UNGA General Assembly of the United Nations UNTS United Nations Treaty Series USA United States of America USD United States Dollar VCLT Vienna Convention on the Law of the Treaties WHO World Health Organization wp working party WTO World Trade Organization

Figures 1 2

Doha Amendment: status of ratifications on 6 August 2018  17 Paris Agreement: status of ratifications and submissions of the Nationally ­Determined Contributions (NDCs) on 14 May 2017  19 3 Price of 1 eu Emission Allowance (EUA) from 2012 to 2018  28 4 Carbon leakage effect: the development of various global macrovariables ­indexed to 1990  31 5 Extent of restriction of foreign climate policies in the aviation sector and extent of carbon leakage prevention  41 6 Greenhouse gas emissions in the model of the Environmental Kuznets Curve  48 7 Phases of green growth  48 8 Greenhouse gas emissions, analysis by source sector, eu-28, 1990 and 2015  49 9 Extent of regulatory cooperation  66 10 Extent of recognition of standards  80 11 Cross price elasticity of demand  138 12 Extra-eu trade of energy in 2015  158 13 The relevant market for like and DCS products  169 14 Climate measures without legal conflict  229 15 Restriction of WTO free trade rules  230 16 The ambitious climate measure restricts WTO free trade rules but has ­supportive effect on another climate measure  230 17 No restriction of WTO free trade rules; the lenient climate measure de facto limits the ambitious climate measure by carbon leakage  232 18 eu ETS and ETS-ba restrict WTO free trade rules and the competing climate policy; the lenient climate measure restricts the ETS by carbon leakage  232 19 eu ETS and ETS-ba restrict WTO free trade rules and the competing climate policy but recognise equivalent efforts; the lenient climate measure restricts ETS by carbon leakage  240 20 Jurisdiction on aviation  320 21 Constellation (4): Restriction of aviation extended to international flights ­starting or landing at an eu airport; restriction of Article 1 Chicago ­Convention and of the competing climate policy; the lenient climate measure restricts the ambitious climate measure by carbon leakage  336 22 Constellation (5): Restriction of aviation extended to international flights over eu territory; compensation of carbon leakage  336 23 Emissions per capita 2014  371 24 GDP per capita 2016  372

Tables 1 2 3 4 5 6 7 8 9 10 11

12

13 14 15 16 17 18 19 20

Phases of the eu ETS  23 Merchandise trade: top 10 exporters in 2016  34 Merchandise trade: top 10 importers in 2016  35 Overview of mandatory ETSs  68 Constellations of ETS and ETS-ba  115 Example of price change due to the ETS  135 Constellations of ETS and ETS-ba: compliance with Article III GATT  192 Constellations of ETS and ETS-ba: compliance with Article III compared to Article XX GATT  241 Climate-related product distinction  247 Constellations of ETS and ETS-ba implying technical regulations  259 Constellations of ETS and ETS-ba implying technical regulations: conformity with the necessity test (Article 2.2 and fifth and sixth recital of the preamble of the TBT Agreement)  265 Constellations of ETS and ETS-ba implying technical regulations: conformity with non-discrimination rules (Article 2.1 and the sixth recital of the preamble of the TBT Agreement)  274 Services and service providers potentially affected by the ets and the ETS-ba  284 Sectors potentially affected by the ets and the ETS-ba  289 GATS rules affected by the ets and the ETS-ba  313 Restrictions of the aviation sector  326 GATS rules violated by the ets and the ETS-ba  341 Constellations summarising the legal requirements for ETS and ETS-ba  344 Comparison emissions-based versus price-based ETS-ba  356 Reform proposals for the ETS Directive 2003/87/ec  375

Chapter 1

Introduction Climate change is a global problem. A multilateral agreement with ambitious greenhouse gas mitigation targets is considered to be the first-best solution to address this problem. The multilateral approach within the United Framework Convention on Climate Change (unfccc)1 finally led to the second multilateral agreement with material obligations, after the Kyoto Protocol:2 the Paris Agreement.3 The negotiators of the Paris Agreement agreed to limit global warming to two degrees Celsius (°C). In contrast to the Kyoto Protocol, the Paris Agreement did not fix the mitigation targets in the treaty (top-down) but left them open to future commitments of the contracting parties (bottomup).4 Substantial commitments depend on nationally determined contributions (ndcs). The price for ensuring that 195 states signed the Paris Agreement was the reduction of the treaty to its lowest common denominator. Although the Paris Agreement is a binding treaty,5 it contains only a few provisions that are mandatory and concrete enough to be considered rights or obligations. Many provisions of the Paris Agreement are only soft law or procedural obligations.6 Even if the submission of ndcs is binding,7 the Paris Agreement does not contain any sanctions if the self-defined commitments are not fulfilled. A loss of credibility or the ‘naming and shaming’ effect8 are only soft means to incentivise compliance with the Paris Agreement. Hence, the sufficiency of efforts, the ambition and the political feasibility of the commitments in the Paris

1 United Nations Framework Convention on Climate Change (signed 9 May 1992, in force 21 March 1994) 1771 unts 107 (unfccc). 2 Kyoto Protocol to the United Nations Framework Convention on Climate Change (signed 11 December 1997, in force 16 February 2005) 2303 unts 162 (Kyoto Protocol). 3 unfccc, Adoption of the Paris Agreement (signed 12 December 2015, in force 4 November 2016) Decision 1/CP.21 un Doc FCCC /CP/2015/10/Add.1, Annex (Paris Agreement). 4 Article 4(2) Paris Agreement (n 3). 5 Article 2(1)(a) of the Vienna Convention on the Law of the Treaties (signed 23 May 1969, in force 27 January 1980) 1155 unts 331 (vclt). 6 See also L Rajamani, ‘The 2015 Paris Agreement: Interplay Between Hard, Soft and Non-­ Obligations’ (2016) 28 Journal of Environmental Law 337; cf. infra Chapter 2.1. 7 Article 4(2) Paris Agreement (n 3). 8 Cf. S J Cabus and K de Witte, ‘Naming and Shaming in a ‘Fair’ Way: On Disentangling the Influence of Policy in Observed Outcomes’ (2012) 34(5) Journal of Policy Modeling 767.

© koninklijke brill nv, leiden, ���9 | doi:10.1163/9789004391055_002

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INTRODUCTION

­ greement can be doubted. The ‘great success’, as suggested by the media,9 A depends on future commitments for instruments and the willingness of the contracting parties towards enforcement. In June 2017, the president of the United States of America (usa), Donald Trump, announced a withdrawal from the Paris Agreement.10 This withdrawal could take place from 2020.11 As with the non-ratification of the Kyoto Protocol or the withdrawal of Canada from the Kyoto Protocol in 2011,12 such steps can worsen the situation for climate protection profoundly, though only if the Paris Agreement was progress compared to what the contracting states would have done outside the multilateral framework. This can be doubted.13 Although a more concrete design of an improved first-best solution might be desirable and substantial progress in climate protection might be advantageous for the community of states, the states are unlikely to agree on strong(er) commitments in the multilateral context. Even if the fairest and most costefficient solution were laid on the table, they would have no interest in being obliged to commitments any stronger than they are able to meet without the agreement, not to mention the willingness to accept enforcement measures or sanctions. At the same time, states want to be forerunners in renewable energy markets and in being independent of fossil energy imports what provides incentives for climate protection.14 9

10 11

12 13 14

C Davenport, ‘Nations Approve Landmark Climate Accord in Paris’ (The New York Times,  12 December 2015) accessed 7 June 2017; F Harvey ‘Paris Climate Change Agreement: The World’s Greatest Diplomatic Success’ (The Guardian, 14 December 2015) accessed 7 June 2017. The withdrawal follows Article 28 Paris Agreement. M D Shear, ‘Trump Will Withdraw u.s. From Paris Climate Agreement’ (The New York Times ) accessed 7 June 2017. It remains uncertain whether the withdrawal will be renegotiated or not. Cf. D Grandoni, ‘The Energy 202: Trump Keeps Saying the u.s. May Stay in the Paris Climate Accord. And the Media Keeps Believing him’ (The Washington Post, 30 January 2018) accessed 9 February 2018. This withdrawal came into effect on 15 December 2012, one year after its notification to the Depositary. Article 27 Kyoto Protocol. Rajamani (n 6); D G Victor and others, ‘Prove Paris Was More Than Paper Promises’ (2017) 548 Nature 25, pp. 25, 27. On the latter issue, see Z X Zhang, ‘Trade in Environmental Goods, with Focus on ClimateFriendly Goods and Technologies’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013), p. 684.

Introduction

3

Whether climate protection measures are embedded in the Paris Agreement and the unfccc or whether they go beyond them, additional incentives for substantial and timely climate protection are needed. This book does not seek to find the optimal climate agreement or global instrument.15 Instead, less ambitious (second-best) approaches are discussed. Second-best approaches are less comprehensive than first-best approaches so as to be concluded and implemented faster and more easily. Their conclusion might be made easier by a limitation on the number of negotiators, by a concentration on only a few sectors or by a combination of the unpopular topic of climate protection with non-climate-related issues. One state or a coalition of the willing is a firstmover, trying to make others follow. The agreement in one sector might help to make progress in other sectors. Alternatively, first-movers can offer co-­benefits in exchange for complying with a particular climate policy, for example advantages in other international negotiations and fora or offering financial transfers. However, first-movers can be successful only if they do not suffer from counterproductive effects resulting from free-riding. Climate protection in one country might be counteracted by another. As a one-sided climate policy makes production or the supply of a service more expensive, first-movers might suffer from competitive disadvantages, which might lead to carbon leakage effects: ‘The effectiveness of a national policy to reduce emissions can be undermined if it results in increased emissions in other countries, for example because of trading advantages in countries with more relaxed policies’.16 Carbon leakage makes first-mover policies less effective. The prevention of competitive disadvantages and carbon leakage effects would help to bring out the best of unilateral climate policies. A well-considered anti-leakage policy is not contradictory to multilateral climate agreements, and it minimises political resistance and double-counting. One option to combine the approach of limited actors and co-benefits is to link climate protection to trade. The trade and environment debate takes place on different levels of the World Trade Organization (wto).17 The wto appears to be attractive for forerunners because the enforcement of wto rules and sanctions are particularly effective. Besides the multilateral context, a coalition of the willing on trade and environment issues might also be built 15 16 17

A suggestion for an ambitious global climate agreement, starting from scratch, is made by L Wicke, Beyond Kyoto – A New Global Climate Certificate System (Springer 2005), pp. 46–311. ipcc Working Group iii, Fifth Assessment Report, Climate Change 2014: Mitigation of Climate Change (Cambridge University Press 2014), p. 237; see also infra Chapter 2.3. Cf. Marrakesh Agreement Establishing the World Trade Organization (signed 15 April 1994, in force 1 January 1995) 1867 unts 154 (wto Agreement).

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INTRODUCTION

on plurilateral agreements,18 on mutual recognition agreements (mras) or on preferential trade agreements (ptas). However, despite the possibility of ­offering co-benefits, another forum does not automatically lead to stronger commitments for climate protection. Therefore, it might be attractive to use unilateral measures which link trade and climate protection to fight carbon leakage. These unilateral climate measures with reference to trade would also have to comply with wto rules. The European Union (eu) submitted an intended nationally determined contribution (indc) before the Paris Agreement was concluded.19 It agreed to mitigate greenhouse gas emissions20 by 20 per cent in 2020 and by 40 per cent in 2030 compared to 1990 levels.21 The instrument to fulfil this goal is the eu emissions trading system (ets).22 The ets defines a reduction target and distributes emission allowances that can be traded among the participants of the ets. It seeks to reduce emissions in a cost-efficient and flexible way.23 The eu ets has been criticised for its limited effectiveness. There are too many certificates on the market, which means that their price is too low impeding the mechanism from working. Although the eu is seeking to address this problem by reforms to the ets, broad exemptions from the ets increase the number of allowances.24

18

See, for example, the negotiations on the wto, ‘Environmental Goods Agreement (ega)’ accessed 7 June 2017. 19 Submission by Latvia and the European Commission on Behalf of the European Union and its Member States: Intended Nationally Determined Contribution of the eu and its Member States (6 March 2015) (eu ndc) accessed 7 June 2017. 20 Greenhouse gases are measured by co 2-equivalent (co 2-eq), as co 2 is the most relevant greenhouse gas. The focus on co 2-eq can also be found in Article 3 Kyoto Protocol. The greenhouse gases covered by the ets Directive are listed in Annex ii of the European Union, Directive 2003/87/EC of the European Parliament and the Council of 13 October 2003 Establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community and Amending Council Directive 96/61/EC (2003) OJ L 275 (ets Directive). The Kyoto Protocol covers the same greenhouse gases. See Annex A Kyoto Protocol (n 2). 21 Cf. eu ndc (n 19). 22 ets Directive (n 20). 23 Other national etss were implemented in Canada, China, Japan, Kazakhstan, New Zealand, South Korea, Switzerland and a few us states. See also infra Chapter 3.4.4. 24 Critically D Becker, C Heuson, W Peters and U Will, ‘eu Emissions Trading System without Competitive Disadvantages’ (recap15-Policy Brief 2, 2015) accessed 20 April 2017, p. 4.

Introduction

5

This book will compare different instruments for carbon leakage prevention, asking how they might be linked to the eu ets and to which extent they are able to resolve carbon leakage problem while improving the effectiveness of the eu ets on climate protection. The book compares instruments at different levels of cooperation. This includes a critical discussion about multilateral negotiations on trade and environment, about unilateral climate-related trade instruments and about the embedding of such instruments in mras or ptas. After this comparison, the book will focus on the unilateral climate border adjustment. A border adjustment (ba) is a charge on traded goods that compensates for the competitive disadvantage caused by unilateral climate protection measures. When imposed on imports, bas raise the price of a product25 or service and prevent carbon leakage effects and competitive disadvantages in the eu market. To prevent leakage on the global market, exports can be relieved from the burden of the eu ets. bas are per definitionem not limited to a particular objective. An adjustment is possible, for example through taxes on alcohol or tobacco or the value added tax.26 Hence, the adjustment appears to be also possible for climate protection. As bas typically adjust taxes, the term ‘border tax adjustment’ (bta) is often used. This book relates bas to the eu ets. Accordingly, the term ‘ets-ba’ will be employed. If a rule or an argument applies more generally, the term ‘ba’ will be used. The ets-ba can apply to goods and services and can take the form of a charge equivalent to the domestic measure or of integration of imports into the existing eu ets. bas have been criticised for many reasons and in different disciplines of social sciences. First, the relevance of carbon leakage is not clear.27 Second, even if carbon leakage is recognised as a problem, bas are not guaranteed to be effective against carbon leakage effects.28 Third, the exact calculation of bas might be difficult. Fourth, bas might lead to wto disputes and unnecessary restrictions on trade and foreign climate policies if not carefully designed.29 Fifth, bas might be misused and as a result, might lead to distrust between states. In the worst case, this distrust of and political resistance to bas might compromise negotiations of international climate agreements or within the wto.

25 26

In this book the terms ‘goods’ and ‘products’ are used as synonyms. Cf. C E McLure, Jr. ‘The Carbon-Added Tax: An Idea Whose Time Should Never Come’ (2010) Climate & Climate Law Review 250, p. 250. 27 Cf. infra Chapter 2.3. 28 Cf. infra Chapter 4.4. 29 Cf. infra Chapters 5–8.

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INTRODUCTION

Despite all its uncertainties, the ets-ba has the potential to be an effective bottom-up climate protection instrument. Not only does it provide an additional incentive for traders that import to the eu to contribute to climate protection, but it also might prevent carbon leakage effects and competitive disadvantages. As first-mover policies might become more effective and less costly, the eu might become incentivised to strengthen its climate protection policies.30 If the ets-ba provides for exemptions for traders from countries with own climate policies, this might lead to stronger commitments also within other states, and double-counting might be avoided. So far, the eu has only made vague proposals for bas. The broad exemptions for sectors that are likely to be affected by carbon leakage from the ets31 are no example for export bas as they also apply to products that remain in the eu.32 In contrast, the inclusion of traded goods into the eu ets is an option for import bas33 but it is not yet used. The eu has also suggested the integration of international flights starting or landing in the eu.34 However, this ba was suspended.35 In February 2017, the European Parliament discussed an import ba for the cement and clinker sector.36 It refused this proposal for not being ­sufficiently

30

A critical discussion on the question whether the eu can be considered a first-mover in climate protection is provided by R K W Wurzel, J Connelly and D Liefferink (eds), The European Union in International Climate Politics: Still Taking a Lead? (Routledge 2017). 31 Article 10b(1)(a) ets Directive (n 20). 32 Cf. infra Chapter 2.4.1. 33 Article 10b(1)(b) ets Directive (n 20). 34 eu Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 Amending Directive 2003/87/EC so as to Include Aviation Activities in the Scheme for Greenhouse Gas Emission Allowance Trading within the Community (2009) OJ L 8/3 (eu Aviation Directive). 35 eu Parliament and Council, Decision No. 377/2013/eu of 24 April 2013 Derogating Temporarily from Directive 2003/87/EC Establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community (2013) OJ L 113/1 (eu Decision No. 377/2013/EU), paragraphs 3 and 15; Article 2(8) eu Parliament and Council, Regulation No. 421/2014/EC of 16 April 2014 Establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community, in View of the Implementation by 2020 of an International Agreement Applying a Single Global Market-Based Measure to International Aviation Emissions (2014) OJ L 129/1 (eu Regulation No. 421/2014/EC); Article 28a(8) ets Directive (n 20). 36 Cf. eu Committee on the Environment, Public Health and Food Safety, Report on the Proposal for a Directive of the European Parliament and of the Council Amending Directive 2003/87/EC to Enhance Cost-Effective Emission Reductions and Low-Carbon Investments (13 January 2017) COM(2015)0337 – C8-0190/2015 – 2015/0148(COD), A8-0003/2017 (eu Committee on the Environment, ets Reform Proposal, Plenary Sitting) accessed 17 February 2017, p. 15, Amendment 12, Recital 7, second part. eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36); eu Parliament, Results of Votes, Annex (15 February 2017) (eu Parliament) accessed 17 March 2017, p. 11, Amendment 12, Recital 7, second part; see also infra Chapter 2.4.3. Also, within the usa, proposals for bas have not so far been put into practice. Cf. us Senate, 111th Congress, 1st Session, American Clean Energy and Security Act of 2009 (6 and 7 July 2009) H.R. 2454 (us Waxman-Markey Bill 2009) accessed 18 April 2017; us Senate, 110th Congress, 2d Session, Lieberman-Warner Climate Security Act of 2008 S. 3036 (us Lieberman-Warner Climate Security Act 2008) accessed 18 April 2017; us Senate, 110th Congress, 1st Session, Low Carbon Economy Act of 2007 (11 July 2007) S. 1766 (us Low Carbon Economy Act 2007) accessed 18 April 2017. Cf. P Liese, deputy of Christlich Demokratische Union Deutschlands/Group of the European People’s Party (Christian Democrats) and B Kappel, deputy of Freiheitliche ­Partei Österreichs/Europe of Nations and Freedom Group, eu Parliament, Cost-Effective ­Emission Reductions and Low-Carbon Investments, Debate, Agenda Item 13 (13 February 2017) 2015/0148(COD) accessed 11 August 2017. eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36), Amendment 12, Recital 7, second part. eu Council, Genereal Secretariat of the Council, Permanent Representatives, Proposal for a Directive of the European Parliament and of the Council Amending Directive 2003/87/EC to Enhance Cost-effective Emission Reductions and Low-carbon Investments, Interinstitutional File (17 November 2017) 2015/0148(COD) (eu Council Proposal), para, 16b. See, for example, M Weitzel, M Hübler and S Peterson, ‘Fair, Optimal or Detrimental? ­Environmental vs. Strategic Use of Border Carbon Adjustment’ (2012) 2(34) Energy ­Economics S198; S Monjon and P Quirion, ‘How to Design a Border Adjustment for the ­European Union Emissions Trading System?’ (2010) 38 Energy Policy 5199; C ­Fischer and

8

INTRODUCTION

It tries to explain how these effects are intertwined with each other and how strong they are. Trade models show the effects of bas on international competition and on climate protection.42 Simulations try to calculate bas and their potential effectiveness for climate protection and against carbon leakage.43 The legal literature deals basically with wto law questions but also with compliance with the unfccc, the Kyoto Protocol44 and the Paris Agreement.45 It ranges from more general studies about the tension between trade and the environment46 over the conflict between climate protection policies and free trade rules47 to the compatibility of bas with wto law. Studies deal with bas in general,48 with climate-related bas,49 with bas for carbon taxes50 and with bas for the ets.51 Apart from these more or less precise studies on A K Fox, ‘Comparing Policies to Combat Emissions Leakage: Border Carbon Adjustments versus Rebates’ (2012) 64(2) Journal of Environmental Economics and Management 199. 42 D Becker, M Brzeskot, W Peters and U Will, ‘Grenzausgleichsinstrumente bei unilateralen Klimaschutzmaßnahmen, Eine ökonomische und wto-­rechtliche Analyse’ (2013) 36(3) Zeitschrift für Umweltpolitik und Umweltrecht 339. 43 Weitzel, Hübler and Peterson (n 41), p. S201. 44 S Sung, ‘Border Tax Adjustments and Developing Countries: A Perspective from China’ (2016) 21 Annual Survey of International and Comparative Law 149, pp. 151, 158–159. 45 B Chang, ‘Does International Trade Law Permit Border Carbon Adjustment Schemes If the Trump Administration Withdraws from the Paris Agreement?’ (ssrn Discussion ­Paper, 9 May 2017) accessed 8 June 2017. 46 Cf. E Vranes, Trade and the Environment: Fundamental Issues in International Law, wto law, and Legal Theory (Oxford University Press 2009). 47 P Low, G Marceau and J Reinaud, ‘The Interface between the Trade and Climate Change Regimes: Scoping the Issues’ (2012) Journal of World Trade 485; T Cottier, O Nartova and S Z Bigdeli (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press 2009). 48 H Horn and P C Mavroidis, ‘b(ta) or Not to b(ta)? On the Legality and Desirability of Border Tax Adjustments from a Trade Perspective’ (2011) 34, Issue 11 The World Economy 1911. 49 See, for example, K Holzer, Carbon-Related Border Adjustment And wto Law (Edward Elgar Publishing 2014); K Das and B Dhar, ‘Can Border Carbon ­Adjustments Be wto-Legal’ (2011) 8(3) Manchester Journal of International Economic Law 65. 50 On bas referring to taxes, see Becker, Brzeskot, Peters and Will (n 42); F Biermann and R Brohm, ‘Implementing the Kyoto Protocol without the usa, The Strategic Role of Energy Tax Adjustments at the Border’ (2005) 4(3) Climate Policy 289; 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; M K Crimp, ‘Environmental Taxes: Can Border Tax Adjustments be used to Counter Any Market Disadvantage’ (2008) 12 New Zealand Journal of Environmental Law 39. 51 Cf. J Pauwelyn, ‘u.s. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law’ (Nicholas Institute for Environmental S­ olutions

Introduction

9

bas and climate protection instruments, there are many finer discussions focussing on particular problems that environmental or climate measures might cause in wto law, e.g. literature about specific wto cases that might become relevant for the interpretation of environmentally related wto rules,52 the discussion on process and production methods53 or the General Exceptions of the ­General Agreement on Tariffs and Trade (gatt).54 Finally, there is only

52

53

54

Working Paper 07/02, 2007) accessed 26 August 2016; J de Cendra, ‘Can Emission Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis wto Law’ (2006) 15(2) Review of European, Comparative & International Environmental Law 131; M Genasci, ‘Border Tax Adjustments and Emissions Trading: The Implications of International Trade Law for Policy Design’ (2008) Climate & Climate Law Review 33; R Quick, ‘Border Tax Adjustments in the Context of Emission Trading: Climate Protection of Naked Protectionism’ (2008) Global Trade and Customs Journal 163; Ismer and Neuhoff (n 50); J Thompson, ‘Note – Return to Your Seats and Fasten Your Seatbelts: The European Union Encounters Turbulence in the Application of its Airline Emissions Trading System’ (2015) 47 George Washington International Law Review 383. See for example the discussions of J Meltzer and A Porges, ‘Beyond Discrimination? the wto Parses the tbt Agreement in us-Clove Cigarettes, us-Tuna ii (Mexico) and uscool’ (2014) 14(2) Melbourne Journal of International Law 383; J Carlone, ‘An Added Exception to the tbt Agreement After Clove, Tuna ii, and Cool’ (2014) 37(1) Boston College International and Comparative Law Review 103; C P Bown and J P Trachtman, ‘Brazil – Measures Affecting Imports of Retreaded Tyres: A Balancing Act’ (2008) 8(1) World Trade Review 85; I van Damme, ‘Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, Adopted on 17 December 2007’ (2008) 57(3) International and Comparative Law Quarterly 710; G Marceau, ‘A Comment on the Appellate Body Report in EC-Seal Products in the Context of the Trade and Environment Debate’ (2014) 23(3) Review of European, Comparative & International Environmental Law 318; C P Bown and R Brewster, ‘us–cool Retaliation: The wto’s Article 22.6 Arbitration’ (2017) 16(2) World Trade Review 371. R Howse and D Regan, ‘The Product/Process Distinction — An Illusory Basis for Disciplining ‘Unilateralism’ in Trade Policy’ (2000) European Journal of International Law 249; S Charnovitz, ‘The Law of Environmental ppms in the wto: Debunking the Myth of Illegality’ (2002) 27 Yale Journal of International Law 59; D H Regan, ‘How to think about ppms (and climate change)’ in Cottier, Thomas, Nartova, Olga and Sadeq Z Bigdeli (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press 2009). General Agreement on Tariffs and Trade, wto Agreement Annex 1A (signed 15 April 1994, in force 1 January 1995) 1867 unts 187 and Annex 1A wto Agreement (gatt 1994); General Agreement on Tariffs and Trade (30 October 1947) 55 unts 194 (gatt 1947). The gatt 1994 incorporates gatt 1947 and adds different understandings for selected gatt 1947 rules. Cf. paragraph 1(c) of the wto Agreement. Hereinafter the term ‘gatt’ will be used for the gatt 1994 incorporating gatt 1947. L Bartels, ‘The Chapeau of the General Exceptions of the wto gatt and the gats Agreements: A Reconstruction’ (2015) 109(1)

10

INTRODUCTION

limited research focussing on the design of bas, sometimes referring to economic arguments, sometimes referring to legal arguments55 and sometimes doing both.56 This book aims to design a carbon leakage measure which is immune to wto disputes, which does not put at risk the process of negotiations with other states and which is economically feasible. This book applies legal methods in the first place. However, it looks neither for the ideal climate agreement nor for an ambitious agreement dissolving the trade and environment dilemma for a green reform of the wto. The wto is a trade organisation. Environmental measures are a side issue which is basically left to Member States’ discretion. Although stronger climate protection is also desirable within the wto, this book will keep to the existing wto rules and their prevailing interpretation. As the legal text of the different wto agreements is often vague, the interpretation of wto law depends on case law, more so than other fields of international law depend on it (subsequent practice57).58 Case law is the consistent recurring pattern of interpretation of legal terms, argumentation and subsumption. A stable interpretation of legal terms

55

56 57

58

American Journal of International Law 95; A Davies, ‘Interpreting the Chapeau of gatt Article xx in Light of the ‘New’ Approach in Brazil-Tyres’ (2009) 43(3) Journal of World Trade 507. M Moore, ‘Carbon Safeguard? Managing the Friction between Trade Rules and Climate Policy’ (2017) 51(1) Journal of World Trade 43. A proposal for the design of an adjustment for taxes is discussed by R Astoria, ‘Design of an International Trade Law C ­ ompliant Carbon Border Tax Adjustment’ (2015–2016) 6 Arizona Journal of Environmental Law and Policy 491. Ismer and Neuhoff (n 50); D Becker and U Will, ‘Die Durchsetzbarkeit produktbezogener Border Adjustments’ in Felix Ekardt, Herwig Unnerstall and Beatrice Garske (eds), Globa­ lisierung, Freihandel und Umweltschutz (Metropolis 2016). Cf. Article 31(3)(b) vclt. On the subsequent practice, see also Appellate Body Report, European Communities—Customs Classification of Frozen Boneless Chicken Cuts (­adopted 27 September 2005) WT/DS269/AB/R, WT/DS286/AB/R (Appellate Body Report, ec—Chicken Cuts), paras. 271–273. The broad discretion of the wto adjudicating bodies is one of the reasons for the usa to bloc the appointment and re-appointment of the Members of the wto Appellate Body. Cf. T Payosova and Hufbauer, G C and Schott, J J ‘The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures’ (Peterson Institute for International ­Economics Policy Brief 18-5, March 2018) accessed 15 March 2018, p. 4. If the usa continue to bloc the appointment of every new Member of the Appellate Body, the Appellate Body will not be able to decide on the reports by the end of 2019. P J Kuijper, ‘The us Attack on the wto Appellate Body’ (Amsterdam Law School Legal Studies Research Paper No. 2017-44, 2017) accessed 28 May 2018, p. 5.

Introduction

11

d­ epends on its long-term application and its robustness in new constellations and contexts. If the wto adjudicating bodies strike a new path, an interpretation must prevail in more than one decision to become a binding track change. Even though the wto adjudicating bodies ultimately emphasise that interpretations depend on individual cases,59 and although new interpretations are ­legally possible, they do not often leave this path.60 Accordingly, the orientation at the existing case law is the best way to avoid disputes when designing a new measure. In contrast to the existing literature, this book will include wto case law more comprehensively than is often done in the discussion about bas. Decisions dealing with bas are as relevant as decisions on other environmentally related problems. Interpretations of wto rules outside the environmental context can also become relevant if dealing with the same wto rules to which the ba refers. Even though it is possible to risk conflicts and to break wto rules, the book seeks to avoid wto disputes. Looking also at cases that do not support climatefriendly arguments at first glance can, nevertheless, serve climate protection. A measure which can comply with the most sceptical interpretation of a wto rule will have a better chance to be stable and to resist wto complaints. The aim is to identify those criteria that make the difference between the cause of disputes and dispute prevention to make a proposal for the design of ets-bas that is unlikely to be challenged at the wto dispute settlement. Consequently, the final policy proposal will suggest a reform of eu law, not of wto law. While the compatibility of bas with the gatt is analysed extensively in the literature,61 fewer publications deal with ets or ets-ba in the context of the General Agreement on Trade in Services (gats)62 or with potential conflicts 59

Cf. Appellate Body Report, Japan—Taxes on Alcoholic Beverages (adopted 1 November 1996) WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (Appellate Body Report, Japan—­ Alcoholic Beverages ii), pp. 19–20; Panel Report, Japan—Taxes on Alcoholic Beverages (11 July 1996) WT/DS8/R, WT/DS10/R, WT/DS11/R (Panel Report, Japan—Alcoholic Beverages), para. 6.22; Appellate Body Report, European Communities—Measures Affecting Asbestos and Asbestos-Containing Products (adopted 5 April 2001) WT/DS135/AB/R (Appellate Body Report, ec—Asbestos), para. 102; Appellate Body Report, European Communities—­Regime for the Importation, Sale and Distribution of Bananas (adopted 25 September 1997) WT/DS27/AB/R (Appellate Body Report, ec—Bananas iii), para. 221; Appellate Body Reports, Argentina—Measures Affecting the Importation of Goods (adopted 26 January 2015) WT/DS438/AB/R, WT/DS444/AB/R, WT/DS445/AB/R (Appellate Body Reports, Argentina—­Import Measures), para. 5.245. 60 The gatt and wto reports are the subsequent practice in the contextual interpretation of gatt and wto rules. Cf. Panel Report, Japan—Alcoholic Beverages (n 59), para. 6.10. 61 See for example the study of Holzer (n 49). 62 General Agreement on Trade in Services (signed 15 April 1994, in force 1 January 1995) 1869 unts 183 and Annex 1B wto Agreement (gats); F Deane, ‘Emissions Trading and

12

INTRODUCTION

with the Technical Barriers to Trade Agreement (tbt Agreement).63 Instead of narrowing the discussion to the gatt or even to the General Exceptions of the gatt, this book also includes the gats and the tbt Agreement.64 For each wto agreement discussed, the book typifies constellations or designs of ets or ets-bas in order to find out how the respective wto agreement responds. These constellations extend the perspective on the relevant market. The striking parameters will be the basis of the chapters about the respective wto agreements, while the final reform proposal for the eu ets Directive is made in full awareness of all potential legal conflicts and the criteria that need to be respected in each relevant wto agreement. The book picks up the question of what belongs and what does not belong to the measure at issue and which elements of the measure refer to which wto agreement. These discussions are decisive in analysing the competitive effects of ets and ets-ba. The analysis of the relevant market of products and services, to find out whether ets and ets-ba lead to discrimination, will compare various products and services, and not only the most obvious ones. The book also provides new arguments about emissions and energy consumption as criteria for product distinction. Finally, the book sheds light on the question of to what extent foreign climate policies need to be recognised when designing ets-bas and how extra-jurisdictional effects could be avoided. This is not only a legal question but also a question of political and strategic interest. Bringing the ets-ba into consistency with wto rules alone is not sufficient. If possible, the ets-ba should at the same time be compatible with international climate agreements, avoid political resistance in the eu and of other wto Members65 and not be too costly. As far as still complying with wto rules,

63

64 65

the gats Financial Services Provisions: A Case Study of the Australian Carbon Pricing Mechanism’ (2014) 13 Journal of International Trade Law and Policy 44. Agreement on Technical Barriers to Trade (signed 15 April 1994, in force 1 January 1995) 1868 unts 120 and Annex 1A wto Agreement (tbt Agreement); Holzer (n 49), pp. 120– 122, 142–145; S R Sánchez-Tabernero, ‘For Whom the Bell Tolls: The eu ets in Aviation under the tbt Agreement’ (2015) 49(5) Journal of World Trade 781. The book does not discuss the Agreement on the Application of Sanitary and Phytosanitary Measures (signed 15 April 1994, in force 1 January 1995) 1867 unts 493 and Annex 1A wto Agreement (sps Agreement). The extension of the eu ets on foreign aviation resulted in threats of trade wars, countermeasures prohibiting the application of the eu ets and a complaint at the eu Court of Justice (ecj). Cf. ecj Judgment, Air Transport Association of America, American Airlines Inc. Continental Airlines Inc. United Airlines Inc./The Secretary of State for Energy and Climate Change Air Transport Association of America, American Airlines Inc. Continental Airlines Inc. United Airlines Inc./The Secretary of State for Energy and Climate Change v. Secretary of State for Energy and Climate Change (21 December 2011) Case C-366/10

Introduction

13

ets-bas that are not perfectly exact but are more likely to be implemented might be advantageous. Even if ets-bas are the thread of the analysis, the results of this discussion can have implications beyond this instrument. First, the requirements for ets-bas might also be applicable to other bas (e.g. on taxes). Second, the ­arguments discussed for ets-bas might apply to other climate measures or ­environmental measures. They might even be applicable to more general ­public non-trade interests and unilateral policies. Third, the interpretation of wto rules might be relevant in the broader context of wto law. After providing an overview about the eu ets in the context of the unfccc, the Kyoto Protocol and the Paris Agreement, it will be discussed how the eu first-­mover climate policy creates competitive disadvantages and carbon leakage effects (Chapter 2). Chapter 3 provides an overview of possible instruments against carbon leakage, clarifying why the focus is on unilateral ets-bas. Chapter 4 explains the structure of bas, discussing potential climate and economic effects, side effects, interests and reactions of involved actors. Afterwards, the wto compatibility of the ets-ba on imports will be analysed in detail. The classical ba is a measure to be applied to the trade in goods. Hence, the book discusses the potential restrictions of the gatt (Chapter 5). However, as the details of the ets and the ets-ba might fulfil the definition of technical standards or regulations of the tbt Agreement, this agreement will also be discussed in more detail (Chapter 6). Moreover, the ets and the ets-ba might restrict the trade in services (Chapter 7). The inclusion of international flights into the eu ets is the first ba established by the eu. It is only suspended. Therefore, the inclusion of international flights into the ets will be analysed in detail. Moreover, the ets might imply restrictions on foreign ets certificates, which might lead to a restriction of the trade in financial services. The ets-ba could open the eu ets as a market. Chapter 8 will address the question of which regulation on imports corresponds best to the legal requirements of wto law while providing the highest possible effectiveness against competitive disadvantages and carbon leakage and while being easy to implement without leading to ­political discord.

(ecj, ata/air and Others v. Secretary of State for Energy and Climate Change); Moore (n 55), p. 54; S Dröge and P M Richter, ‘Emissionshandel für den Luftverkehr’ (swp ­aktuell 55, September 2012) accessed 3 April 2017, p. 3.

Chapter 2

The eu Emissions Trading System Leading to Carbon Leakage Effects The eu ets implements obligations under the unfccc and the Kyoto Protocol but, as the ratification of the Doha Amendment66 is not guaranteed, the eu ets can also be considered a unilateral first-mover policy. Since the Paris Agreement is based on national commitments, the eu ets is both a ­multilateral and a unilateral climate protection instrument. The eu ets has the potential to be an effective instrument for climate protection, as long as it is based on ambitious mitigation aims. One reason not to agree on more ambitious aims within the eu is that participants fear competitive disadvantages on the global market and that other states will not ­follow the eu but free-ride. States doing less for climate protection face lower costs for production or the provision of services than those in the eu. This not only leads to carbon leakage effects but also prevents the eu from agreeing on (more) ambitious greenhouse gas emission targets.67 This chapter provides an overview of the international legal climate framework, of the ets and the carbon leakage effect; it also sets out an inventory of instruments against carbon leakage that are in place or are on the eu’s political agenda. 2.1

United Framework Convention on Climate Change, Kyoto Protocol and Paris Agreement

The unfccc is the framework for climate protection. It has 197 contracting parties. Article 2 of the unfccc requires states ‘to stabilise greenhouse gas concentrations of in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system’. Mitigation aims and instruments for climate protection were specified by the Kyoto Protocol.68 The Kyoto Protocol is an international agreement within the meaning of Article 17 66 67 68

unfccc, Conference of Parties Serving as the Meeting of the Parties to the Kyoto Protocol, Doha Amendment to the Kyoto Protocol (8 December 2012) Decision FCCC/KP/ CMP/2012/13/Add.1 (Doha Amendment). Of course, the eu does not have to be the only first-mover. Non-eu states might face the same problems. Kyoto Protocol (n 2).

© koninklijke brill nv, leiden, ���9 | doi:10.1163/9789004391055_003

The EU ETS Leading to Carbon Leakage Effects

15

unfccc and Article 2(1)(b) of the Vienna Convention on the Law of the T ­ reaties (vclt), which was signed by 37 of the 195 unfccc states. After expiring in 2012, the Kyoto Protocol was provisionally renewed until 2020.69 For all countries listed in its Annex B, the Kyoto Protocol contains an average binding greenhouse gas emissions reduction target of 5 per cent below the level of the common base year 1990. Greenhouse gases covered are listed in Annex A of the Kyoto Protocol. The national targets differ. The eu agreed on an 8 per cent target, which is further subdivided by an internal eu burden sharing system.70 Denmark, for example, must reduce 21 per cent of its carbon dioxide equivalents (co 2-eq), while Portugal can raise its emissions by 27 per cent. In contrast, developing countries are non-Annex B countries and do not have to reduce their emissions. Russia, as an industrialising country, is an Annex B country but only made a commitment of 0 per cent. Different commitments depending on the state of development are also reflected in the principle of common but differentiated responsibilities (cbdr).71 To fulfil the commitments of the Kyoto Protocol, the instruments can be freely chosen. Moreover, the Kyoto Protocol contains flexible mechanisms that enable contracting parties with obligations under Annex B to reduce some of their greenhouse gases in other countries.72 The different mechanisms create certificates that can be traded under the Kyoto ets. If a participating country wants to buy certificates instead of reducing greenhouse gases, it might pursue Assigned Amount Units (aaus) from another Annex B country in the respective commitment period. If it reduces emissions in another developed country (Joint Implementation, JI), it receives Emission Reduction Units (erus), which can be traded on the same market.73 Developed countries can also reduce emissions by establishing projects in developing countries (Clean Development Mechanism, cdm).74 As developing countries made no commitments under the Kyoto Protocol, the cdm generates additional certificates, 69 70 71

72 73 74

Doha Amendment. Article 4 Kyoto Protocol. Articles 3(1) and 4(1) unfccc and Article 10 Kyoto Protocol. The principle is also part of Article 2(2) Paris Agreement. Moreover, it is included in non-binding resolutions: ­Principle 7 of the unga, Report of the United Nations Conference on Environment and Development, Annex i, Rio Declaration on Environment and Development (3 June 1992) GA Res A/CONF.151/26 (Vol i) (unga, Rio Declaration); see also Principle 12 of unga, Transforming Our World: The 2030 Agenda for Sustainable Development (25 October 2015) A/Res/70/1 (unga, Sustainable Development Goals). Article 17 Kyoto Protocol. Article 6 Kyoto Protocol. Article 12 Kyoto Protocol.

16

Chapter 2

Certified E ­ mission Reductions (cers).75 Since the signing of the Marrakesh Accords,76 reforestation has also been able to generate certificates (Removal Units, rmus).77 To provide sanctions for the non-fulfilment of the Kyoto Protocol obligations, parties can be excluded from these flexible mechanisms; if parties still do not fulfil them, the initial target can be multiplied by a penalty rate of 1.3 to be fulfilled in the next commitment period.78 The effect of these sanctions depends on the commitments of the contracting parties in the second commitment period and under the Paris Agreement. However, the liability of the Kyoto targets is reduced significantly by the option to withdraw from the Kyoto Protocol.79 Canada, a big emitter, left the Kyoto Protocol in 2011.80 International agreements on climate change depend on the negotiations within the conference of parties of the unfccc (cop). The big hopes pinned on the cop15 in Copenhagen in 2009 were not fulfilled. The outcome, the Copenhagen Accord, was not a treaty but included only non-binding commitments. The main progress of Copenhagen was the agreement on usd30 billion financial transfers (2010–2012), which should be raised to usd100 us billion until 2020. At the cop17 conference in Durban in 2011, the Green Climate Fund was established. However, Canada, Japan and Russia did not join the Durban Package. Instead of concluding a new agreement in Doha (cop18), the Doha Amendment provisionally extended the Kyoto Protocol until 2020.81 However, this extension is not yet 75

76 77 78

79 80 81

Whether the cdm projects are really additional, thus whether they lead to climate protection that would not have been undertaken without the certification, is not easy to tell. Critically A Michaelowa, ‘Determination of Baselines and Additionality for the cdm: A Crucial Element of Credibility of the Climate Regime’ in Farhana Yamin (ed), Climate Change and Carbon Markets: A Handbook for Emission Reduction Mechanisms (Routledge 2005), pp. 296–302. unfccc, Conference of Parties Decision, Marrakesh Accords (21 January 2001) FCCC/ CP/2001/13/Add.1 (Marrakesh Accords). The incentives for the conservation of forests are a soft law provision also mentioned in Article 5(2) Paris Agreement. unfccc, ‘An Introduction to the Compliance Mechanism’ accessed 8 June 2017; C Hagem, S Kallbekken, O Mæstad and H Westskog, ‘Enforcing the Kyoto Protocol: Sanctions and Strategic Behavior’ (2005) 33(16) Energy Policy 2112, pp. 2112, 2113. Article 27 Kyoto Protocol; C Breidenich, D Magraw, A Rowley and J W Rubin, ‘The Kyoto Protocol to the United Nations Framework Convention on Climate Change’ (1998) 92(2) American Journal of International Law 315, p. 326. According to Article 27 Kyoto Protocol, this withdrawal came into effect on 15 December 2012. Doha Amendment.

The EU ETS Leading to Carbon Leakage Effects

17

ratified not ratified Figure 1

Doha Amendment: status of ratifications on 6 August 2018. Source: Updated version of United Framework Convention on Climate Change (unfccc), Status of the Doha Amendment, (25 January 2018)

in force and will become binding only if three-quarters of the 192 ­parties of the Kyoto Protocol ratify the amendment.82 In August 2018, 114 states are parties of the Doha Amendment. The status of ratification is provided in Figure 1. The Doha Amendment was concluded without Canada, Japan, New Zealand and Russia. For the remaining contracting parties, it tightens the mitigation targets in Annex B of the Kyoto Protocol for the second commitment period83 and adds nitrogen trifluoride (nf 3) as new greenhouse gas covered in Annex A of the Kyoto Protocol.84 It is questionable whether the Kyoto Protocol is progress in international climate protection, not only because major emitters such as Canada and Russia did not stay parties. The usa, as the biggest emitter per capita, did not ratify the protocol from the beginning. China, as the biggest emitter worldwide, was also not obliged to make commitments as it is a non-Annex B country. Even the commitments of developed countries that were Annex B countries did not 82

83 84

Articles 20(4) and 21(7) Kyoto Protocol. By August 2018, 114 states had ratified the Doha Amendment. Cf. the status of the Doha Amendment, United Nations Treaty Collection,  (6 August 2018). Article 1.A Doha Amendment. Article 1.B Doha Amendment.

18

Chapter 2

lead to improvements in climate ­protection.85 The unfccc and the Kyoto Protocol, however, set the course for future climate agreements. On 12 December 2015, the Paris Agreement was concluded and came into force on 4 November 2016.86 By December 2018, 184 states had ratified the Paris Agreement, and 181 states had submitted their ndcs.87 Instead of the bottomup approach of the Kyoto Protocol, the Paris Agreement only imposes vague obligations on Member States such as limiting average global warming to two °C.88 Although the Paris Agreement is a treaty within the meaning of Article 2 (1)(a) vclt, its binding effect is much weakened by the dominance of soft law provisions.89 Article 4(2) Paris Agreement states: Each Party shall prepare, communicate and maintain successive nationally determined contributions that it intends to achieve. Parties shall p ­ ursue domestic mitigation measures, with the aim of achieving the objectives of such contributions.

This provision is one of the strongest provisions of the Paris Agreement. It uses the term ‘shall’, imposes individual obligations on each contracting party and is precise.90 However, the Paris Agreement does not predefine any binding mitigation target for the parties. Figure 2 shows that not all contracting parties that had submitted ndcs agreed on greenhouse gas mitigation targets. Developing countries such as Somalia agreed on taking climate action but did not submit a binding mitigation target. The obligation for the unilateral climate policies to undergo technical expert review91 is also a concrete obligation imposed on each contracting party.

85

C Almer and R Winkler, ‘Analyzing the effectiveness of international environmental policies: The case of the Kyoto Protocol’ (2017) 82 Journal of Environmental Economics and Management 125. 86 Paris Agreement (n 3). 87 See unfccc, ‘ndc Registry (interim)’ accessed 28 December 2018. 88 Article 2(a) Paris Agreement. Critically D Bodansky, ‘The Paris Climate Change Agreement: A New Hope?’ (2016) 110(2) American Journal of International Law 288, p. 289. 89 The discretionary nature of the rules is either shown by the use of ‘should’ (Articles 4(4), 4(19), 5(1), 7(7), 8(3), 9(3), 11(3) and 11(4), 13(9) Paris Agreement), by an explicit ­formulation of discretion using the term ‘as appropriate’ (Article 7(9), 12 Paris Agreement) or by vague and undetermined scope of the respective rule or actor. Cf. Rajamani (n 6), pp. 337, 339, 343–352. 90 Cf. Rajamani (n 6), pp. 344, 354. 91 Article 13(11) Paris Agreement.

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19

ghg target Non-ghg target only Actions only ghg target and non-ghg target Non-ghg target and actions No indc submitted

Figure 2

Paris Agreement: status of ratifications and submissions of the Nationally Determined Contributions (ndcs) on 14 May 2017. Source: World Resources Institute, cait Climate Data Explorer, Selection: Mitigation Contribution Type (14 May 2018)

As with other transparency provisions,92 the review is a procedural obligation and does not require any particular result or standard. The obligations to cooperate in education, training and public awareness93 and to foster adaptation funding are even further weakened by the term ‘as appropriate’.94 The latter o­ bligation is even explicitly formulated as soft law provision using the term ‘should’;95 thus the contribution to adaptation funds is not binding.96 Other p ­ rovisions, such as the support for developing countries, is formulated in a ­passive form: ‘Support shall be provided to developing countries for the 92 93 94 95

96

Article 3, 4(16) Paris Agreement. Article 12 Paris Agreement. Article 7(9), 9(4) Paris Agreement. Article 7(7), 8(3) Paris Agreement. The preambular formulations that adaptation is recognised to be a global challenge and that mitigation is recognised to avoid adaptation efforts (Article 7 Paris Agreement) do also not constitute any binding obligation. Cf. Rajamani (n 6), pp. 347–348. Providing a systematic classification of provisions of the Paris Agreement into the categories of hard law, soft law and ‘non-obligations’, Rajamani (n 6), pp. 344, 354.

20

Chapter 2

i­ mplementation of this Article’.97 The term ‘shall’ signifies a binding rule. However, as the ­addressee is not explicit, the extent to which particular states are bound is not clear.98 The Paris Agreement suggests a flexible mechanism for the parties to join, which is to be supervised by the cop.99 It supports the promotion of the mitigation of greenhouse gases and the facilitated access of public and private entities to that mechanism; it also contains the option to achieve the mitigation targets of ndcs in other countries.100 Double and non-counting shall be prevented.101 However, the new mechanism of the Paris Agreement is not yet f­urther specified, and its use is within the discretion of the contracting ­parties.102 At the least, it supports a coalition of the willing that want to be firstmovers.103 This approach allows for the linking of existing national or regional etss104 but also for the establishment of new etss. While within the Kyoto Protocol the cbdr is reflected in the differentiation between Annex B and non-Annex B countries and by the different mitigation aims formulated for the Annex B countries, the meaning is less clear in the Paris Agreement: This Agreement will be implemented to reflect equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances.105

The broad differentiation between developing and developed countries was dropped. This gives room to individual commitments, this time also for developing countries. Even though all contracting parties need to submit an ndc, the expectations on developing parties are lower. Developing countries are still 97 98 99 100

101 102 103 104 105

Article 13(14) Paris Agreement. Defining a concrete addressee is important for the binding power of a rule, Rajamani (n 6), p. 343. Article 6 Paris Agreement. The transferred units are named internationally transferred mitigations outcomes (itmos). Cf. E-M Mauer, ‘Linking von Emissionshandelssystemen: Die eu als Vorreiter für einen globalen co 2-Markt?’ (recap15 Discussion Paper Series 25, 1 January 2016) accessed 3 April 2017, p. 65. Article 6(2) Paris Agreement. See also H-J Luhmann and C Arens, ‘Von den flexiblen Mechanismen des Kyoto Protokolls zu den kooperativen Ansätzen des Übereinkommens von Paris’ (2016) Special Issue ­(Sonderheft) Zeitschrift für Umweltpolitik und Umweltrecht, p. 95. Article 6(1) Paris Agreement. Cf. Mauer (n 100), pp. 68–70. Article 2(2) Paris Agreement.

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21

recognised to be more vulnerable than developed countries and have lower capacities and abilities to pay. Therefore, they are likely to submit less ambitious commitments than developed countries. This was also shown in Figure 2. Moreover, the Paris Agreement contains various soft law obligations to provide additional support for developing countries.106 However, the extent and quality of special and differential treatment accorded to developing countries are not specified,107 even more markedly than was the case in the unfccc and the Kyoto Protocol. Finally, the cbdr does not stand for a precise obligation. It rather represents an aim to be pursued or a vague fairness requirement.108 The wide scope of the cbdr makes it difficult to claim a breach or violation of the principle.109 Even if the cbdr were legally binding, owing to its uncertain scope, it appears to be easy to comply with the principle. As long as a state doing climate protection supports developing countries at all, a violation of the cbdr is unlikely. At the least, it cannot be said at which point a state does not comply with the cbdr. 2.2

eu Emissions Trading System (ets)

In the Kyoto Protocol, the eu agreed to reduce 8 per cent of its emissions between 2008 and 2012 compared to the 1990 base year. This target was raised by the Doha Amendment. In the second commitment period, between 2013 and 2020, the eu agreed to reduce 20 per cent of its emissions. In its ndc, ­submitted under the Paris Agreement, the eu agreed to a 40 per cent target for reductions by 2030. The base year for the eu remains 1990.110 The eu established its own ets.111 On the one hand, the eu ets could be seen as an instrument which is independent of the international climate agreements. The eu ets (established in 2005) started earlier than the Kyoto ets (established in 2008). The eu ets also differs in its functioning. Actors 106 Articles 3, 4(1), 4(4), 4(5), 4(6), 4(15), 5(2), 6(6), 7(2), 7(3), 7(6), 7(7)(d), 7(10), 7(13), 7(14), 9(1), 9(3), 9(4), 9(5), 9(7), 9(9), 10(5), 10(6), 11, 13(2), 13(3), 13(9)–(12), 13(14), 13(15), and the fifth recital of the preamble of the Paris Agreement. 107 C D Stone, ‘Common But Differentiated Responsibilities in International Law’ (2004) 98(2) American Journal of International Law 276, pp. 283–284. 108 Stone (n 107), p. 301; see also the differentiation between principles and rules in Robert Alexy, Recht, Vernunft, Diskurs: Studien zur Rechtsphilosophie (suhrkamp 1995), pp. 182–201. 109 Arguing for a breach of cbdr, Sung (n 44), pp. 158–160, 174. 110 eu ndc (n 19). 111 ets Directive (n 20).

22

Chapter 2

buying and trading ets certificates are private entities, while within the Kyoto ets the Annex B countries trade the certificates. The Kyoto ets uses both the cap and trade system, with a fixed number of certificates,112 and the baseline and credit system, with credits for improvements in climate protection compared to a fixed benchmark (benchmarking), while the eu ets uses only cap and trade.113 On the other hand, the eu ets is an instrument to fulfil the commitments made in the international climate agreements.114 These commitments define the maximum emissions permitted within the eu (the cap). According to this cap, the eu distributes certificates, which are digital and unique and can be transferred.115 One certificate represents one tonne of co 2-eq. Hence, the number of certificates is limited and distributed only to installations falling under the eu ets. These installations must hold the allowances according to their emissions. If an installation improves in climate efficiency, it can sell the remaining certificates (euas) to others. If it emits more than it can cover with the certificates, it needs to buy additional certificates from other traders. If the number of certificates on the market is limited, this provides an incentive to lower emissions, for example by replacing climate-intensive technologies with climate-friendly technologies. In contrast to a carbon tax, the price of ets certificates changes depending on the market and the potential for efficiency improvement and technology change. The number of certificates remains ­stable or decreases. The ets makes climate-intensive products in the eu market more expensive. Additional costs in the production process can be transferred to the consumer. This provides an incentive to buy fewer emissionintensive products. The eu ets is in its third phase (2013–2020). Since 2005, the number of participants, the covered sectors, the greenhouse gases and the number of recognisable allowances of the Kyoto system have increased, while the cap in ­relation to the participants has decreased (Table 1). 112 This system is used for projects of Joint Implementation (Article 6 Kyoto Protocol) and the Kyoto ets (Article 17 Kyoto Protocol). 113 ‘Benchmarking is used to compare operations of a company with those of others, to industry average, or to best practice, to determine whether they have opportunities to improve energy efficiency or reduce [greenhouse gas] emissions’. Ecofys/The World Bank, ‘Mapping Carbon Pricing Initiatives: Developments and Prospects’ (Washington d.c. 2013), p. 87. Benchmarking is used for projects under the cdm (Article 12 Kyoto Protocol). See also Mauer (n 100), p. 13. 114 Mauer (n 100), p. 41. 115 F Deane, Emissions Trading and wto Law: A Global Analysis (Edward Elgar Publishing 2015), p. 77.

23

The EU ETS Leading to Carbon Leakage Effects Table 1

Key Features

Phases of the eu ets

Phase 1 (2005–2007)

Geography eu27

Sectors

Phase 2 (2008–2012)

Phase 3 (2013–2020)

eu27 + Norway, Iceland, Liechtenstein

eu27 + Norway, Iceland, Liechtenstein Croatia from 1 January 2013

Power stations Same as phase and other combus- 1 plus aviation tion plants (from 2012) ≥20mw; oil ­refineries; coke ovens; iron and steel plants; cement and clinker; glass; lime; bricks; ceramics; pulp; paper and board

Same as phase 2 plus aluminium, petro­ chemicals, ammonia nitric, adipic and ­glyoxylic acid production, co2 capture, transport in pipelines and ecological storage of co2

Greenco 2 house gases

co 2, n 2o emissions via opt in

co 2, n 2o, pfc from aluminium production

Cap

2,058 million tco2

1,859 million tco2

2,084 million tco 2 in 2013, decreasing in a linear way by 38 million tco 2 per year

Eligible Trading Units

euas

euas, cers, erus; not eligible: ­credits from forestry, and large ­hydropower projects

euas, cers, erus; not eligible: cers and erus from forestry, hfc, n 2o or large hydropower projects; cers from projects registered after 2012 must be from least developed countries

Source: Based on European Commission, eu ets Handbook (28 September 2016), pp. 18–19.

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Chapter 2

In the first commitment period (2005 to 2007), 1,850 industries were covered. co 2 was the only greenhouse gas covered. Certificates were allocated for free, based on the historical emissions within a reference year (grandfathering). eu Member States distributed the certificates according to national allocation plans.116 From this starting point, additional emissions had to be covered by additional certificates, while savings made it possible to trade certificates on the market. If not covered by certificates, €40 per tonne of co 2 had to be paid as a penalty. However, co 2 reductions were easy and the exemptions to the ets Directive were numerous. Thus, the price of certificates was too low to provide strong incentives for climate protection. In the second commitment period (2008 to 2012), Norway, Iceland and Liechtenstein joined the ets. Only 1,650 industries had to hold emission allowances. Nitrous oxide (n 2o) was optionally included as a new greenhouse gas. In 2012 the aviation sector was included in the ets. Instead of grandfathering, the eu Member States partly used benchmarking for allocation. With benchmarking, allowances are allocated for free, but the technology standard is taken into account as a reference point for calculating the number of certificates.117 Several states allocated certificates using auctioning.118 The total number of certificates was shortened with a fixed rate of 1.25 per cent per year. A share of 10 per cent of the certificates was auctioned. The auctioning created additional incentives to reduce emissions. Since this commitment period, certificates from the Kyoto Clean Development Mechanism (cers) and from Joint Implementation (erus) have been recognised as eligible trading units.119 In the third commitment period (2013 to 2020), the cap was fixed directly by the European Commission.120 Croatia joined the eu and the ets. n 2o and also perfluorocarbon (pfc) from aluminium production were included as ­mandatory greenhouse gases covered by the eu ets.121 1,820 industries and energy plants were covered. As a reaction of too many certificates being on the market, the fixed rate to shorten the cap is now 1.74 per cent per year. Moreover, grandfathering will become successively replaced by auctioning. In 2013, 20 per cent of the allowances were auctioned; in 2020 it will be 70 per cent. In the third commitment period, cers are only exceptionally recognised as eligible 116 Mauer (n 100), p. 42. 117 See Mauer (n 100), p. 16. 118 Austria, Germany, The Netherlands, Lithuania, Czech Republic and the United Kingdom. European Commission, ‘Phase 2 Auctions (2008–2012)’ accessed 15 May 2017. 119 Article 11a ets Directive (n 20). 120 Mauer (n 100), p. 43. 121 Mauer (n 100), p. 43.

The EU ETS Leading to Carbon Leakage Effects

25

for the least developed countries (ldcs).122 In 2014, the European Commission and the European Parliament agreed on the establishment of a market stability reserve, to start on 21 January 2019.123 The fourth commitment period is planned for 2021–2028.124 The European Commission made a proposal for reforming the ets.125 This proposal was developed further and voted on in the European Parliament in February 2017. The number of free allowances is to be reduced to make the ets more effective. Article 10a(5) of the ets Directive will be changed: only 5 per cent of the certificates distributed from 2021–2030 will be distributed for free.126 In 2013, full auctioning was announced for 2027.127 According to the revised reform proposal, full auctioning is planned for 2030.128 If the International Maritime Organization (imo) does not agree on a consensual solution, the eu plans to 122 This was a reaction on the uncertainties about the additionality of the cdm projects and should assure local climate protection. Cf. Mauer (n 100), p. 43. 123 eu Parliament and Council, Decision 2015/1814 of 6 October 2015 Concerning the Establishment and Operation of a Market Stability Reserve for the Union Greenhouse Gas Emission Trading Scheme and Amending Directive 2003/87/EC (2015) OJ L 264/1 (eu Decision 2015/1814). 124 Calculations and problems for the planning of the fourth commitment period can be found in European Commission, Staff Working Document Accompanying the Document Proposal for a Decision of the European Parliament and of the Council Concerning the Establishment and Operation of a Market Stability Reserve for the Union Greenhouse Gas Emission Trading Scheme and Amending Directive 2003/87/EC (21 January 2014) SWD(2014) 17 final (European Commission, Staff Working Document) accessed 28 September 2016. 125 European Commission, Proposal for a Directive of the European Parliament and the Council Amending Directive 2003/87/EC to Enhance Cost-Effective Emission Reductions and Low-Carbon Investments (15 July 2015) COM(2015) 337 final accessed 17 March 2017. 126 eu Parliament, Cost-Effective Emission Reductions and Low-Carbon Investments, Amendments Adopted by the European Parliament on 15 February 2017 on the Proposal for a Directive of the European Parliament and of the Council Amending ­Directive 2003/87/EC to Enhance Cost-Effective Emission Reductions and Low-Carbon Investments, Ordinary Legislative Procedure: First Reading, Texts Adopted (provisional edition) COM(2015)0337 – C8-0190/2015 – 2015/0148(COD) (eu Parliament, Amendments ets Directive 2017) accessed 31 March 2017, Amendment 42, Article 10(1) Subparagraph 2 and Amendment 71, Article 10(5). 127 European Commission, ‘Questions and Answers on the revised eu Emissions Trading System’ (Brussels, 2008) accessed 22 September 2015. 128 eu Council Proposal (n 40), pp. 3, 12, 17, 19.

26

Chapter 2

include shipping by 2023.129 These changes would make the ets more effective. However, the reduction of free distribution would potentially worsen the carbon leakage problem as the price difference compared to foreign traders might increase.130 The functioning of the eu ets depends on the ambition of the cap. The incentive of the ets is stronger if a high share is allocated by auction. So far, the eu has continued to use the mixed allocation system, with the share of auctioned certificates increasing. An installation under the eu ets has a choice between paying the full price for the required certificates and reducing greenhouse gas emissions in order to save certificates. Saving certificates might be possible, for example by using renewable energies or technologies that are climate-efficient. A company might also decide to limit growth or even to shrink. In the beginning, emission reductions might be easy to achieve (‘low-hanging fruits’). However, the more improvements are implemented, the more mitigation becomes difficult and costly. If the economy grows, the efficiency gains of restructuring would have to be higher than the growth effects to be able to sell the remaining certificates. However, as carbon-intensive sectors might not be fully decoupled from emissions, eu installations falling under the eu ets need to pay for the emissions they cannot save if firms grow. If certificates are short, they become more expensive. Provided that the obligation to hold allowances for emissions is effectively monitored, the cap and trade mechanism reduces emissions where it is cheapest. This can make climate protection cost-efficient. At least 50 per cent of the income of auctioning has to be used for climateand energy-related purposes. This also contributes to climate protection. The other 50 per cent is recommended to be used for climate purposes but this recommendation is not binding; the eu Member States may decide on the use of these revenues.131 The penalty rate for a tonne of co 2 that cannot be covered by emission allowances depends on the sector. While the penalty rate in the aviation sector is €100 per tonne,132 the penalty rate in other sectors is

129 eu Council Proposal (n 40), pp. 3, 9. 130 Jadwiga Wiśniewska, deputy of Prawo i Sprawiedliwość/European Conservatives and Reformists Group, (n 38). 131 Article 10(3) ets Directive (n 20); Article 17 eu Regulation No 525/2013 of the European Parliament and the Council of 21 May 2013 on a Mechanism for Monitoring and Reporting Greenhouse Gas Emissions and for Reporting other Information at National and Union Level Relevant to Climate Change and Repealing Decision No 280/2004/EC (2013) OJ L 165/13 (eu Regulation No 525/2013). 132 Article 16(3) ets Directive (n 20).

The EU ETS Leading to Carbon Leakage Effects

27

fixed by the national laws of the eu Member States that implement the eu ets Directive.133 The eu ets includes problematic exemptions from the ets and a critical carbon leakage policy. The eu ets does effectively cover only 40 per cent of the eu co 2 emissions.134 Sectors where costs for emission reductions are particularly high are not covered, for example buildings, agriculture and waste.135 The sectors that are most endangered by carbon leakage effects are exempted from auctioning (carbon leakage list136). Once qualified as relevant to carbon leakage effects, the whole sector is exempted from the obligation to buy certificates, not only the traded products or services but also those products and services that remain within the eu. This broad exemption overcompensates the carbon leakage effect the eu suffers on the world market. Although the cap decreases, it is not adjusted to the number of freely allocated certificates. As a result, the carbon leakage effect impedes the effectiveness of the ets. As the carbon leakage list is renegotiated for the fourth commitment period, there are huge incentives to influence the criteria of the list. The fulfilment of the Kyoto goals is, therefore, not due to the ets137 but rather due to a decrease in economic activity, for example induced by the financial crisis.138 A further challenge for the eu ets will be the enforcement of the 2016 decision of the United Kingdom to leave the eu (Brexit).139 If the United ­Kingdom leaves the eu ets and offloads its certificates, this will worsen the over-allocation problem and weaken the eu ets further.140 Figure 3 shows the price development of euas in the recent time. 133 For example, the German and the Austrian law also apply a sanction of €100 for each tonne co2-eq that is not covered by an ets certificate. § 30(1) Gesetz über den Handel mit Berechtigungen zur Emission von Treibhausgasen (21 July 2011, last amended 18 July 2017) BGBl. i 1475 (German tehg); § 28(2) Bundesgesetz über ein System für den Handel mit Treibhausgasemissionszertifikaten (12 December 2011) BGBl. i Nr. 118/2011 (Austrian Emissionszertifikategesetz 2011-ezg 2011). 134 Thompson (n 51), p. 385. 135 Victor and others (n 13), p. 26. 136 European Commission, Decision 2014/746/EU of 27 October 2014 Determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of Sectors and Subsectors which are Deemed to Be Exposed to a Significant Risk of Carbon Leakage, for the Period 2015 to 2019 (29 October 2014) (2014) OJ L 308/114. 137 Thompson (n 51), p. 395. 138 The climate effect caused by the financial crisis is considered to be outrun by Glen P Peters and others, ‘Rapid Growth in co 2 Emissions after the 2008–2009 Global Financial Crisis’ (2012) 2(1) nature climate change 2. 139 Victor and others (n 13), p. 27. 140 Mauer (n 100), p. 49.

28

Chapter 2

Figure 3

Price of 1 eu Emission Allowance (eua) from 2012 to 2018. Source: European Energy Exchange (eex), European Emission Allowances ­Auction (eua): Primary Market Auction, (27 August 2018)

Whether the recent price increase is a general trend remains to be seen. However, even if the eu ets becomes more effective for climate protection when the eua price is higher, the carbon leakage problem would remain relevant. 2.3

Carbon Leakage Effects and Competitive Disadvantages

The ets makes climate-intensive products and services from the eu more ­expensive than those of their competitors. In contrast, other countries have competitive advantages on the global market while also taking advantage from climate efforts of the first-movers (free-riding). This effect might not only make climate protection more costly for the forerunners but also demotivate them to do as much as they can. If having access to an alternative, consumers might not pay the higher prices for the products and services of the climate-friendly country but might pay the lower prices of states with less ambitious or no climate measures.141 The foreign competitor will sell more than the eu. Investments

141 Cf. ipcc Working Group iii, Fourth Assessment Report: Mitigation of Climate Change (Cambridge ­University Press 2007), p. 665.

The EU ETS Leading to Carbon Leakage Effects

29

might shift abroad142 or even whole industries might be outsourced.143 This might happen even if the leakage effect is not proven, it is sufficient that investors think leakage is relevant.144 This competitive disadvantage hampers firstmovers and makes unilateral climate protection less effective. Moreover, the EU moving away from fossil fuels and climate-intensive goods leaves more of these resources for other states.145 ‘Pollution havens’146 could be considered the extreme form of carbon leakage effects. The effectiveness of unilateral climate measures is further questioned by the ‘green paradox’: the announcement of ambitious climate measures might provoke accelerated growth, resource consumption and stronger effects on climate change in the short term in order to take advantage of profits before the climate measure is fully effective.147 ‘The effectiveness of a national policy to reduce emissions can be undermined if it results in increased emissions in other countries, for example because of trading advantages in countries with more relaxed policies’.148 To calculate the carbon leakage rate, ‘the increase in co 2 emissions outside the countries taking domestic mitigation is divided by the reduction in the emissions of these countries’.149 The rate is measured in per cent. If the carbon leakage rate is above 100 per cent, the counterproductive effect exceeds the ­positive effect of the initial measure on the climate. If it is below 100 per cent, the net effect of the climate measure is still positive but lower than if carbon

142 The shift of emissions and the respective production abroad is also defined as ‘operational leakage’ while for the outsourcing of industries the term ‘investment leakage’ can be used. Monjon and Quirion (n 41), p. 5201. 143 Cf. ipcc Working Group iii (n 16), p. 386, Box 5.4. 144 Cf. M Hecht and W Peters, ‘Border Adjustments Supplementing Nationally Determined Carbon Pricing’ (2018) Environmental and Resource Economics 1, p. 3. 145 On ‘competitiveness-driven carbon leakage’, see Das and Dhar (n 49), p. 66. 146 M S Taylor, ‘Unbundling the Pollution Haven Hypothesis’ (2004) 3(2) Advances in Economic Analysis & Policy 1. 147 Cf. H-W Sinn, Das grüne Paradoxon: Plädoyer für eine illusionsfreie Klimapolitik (Econ 2008), pp. 405–416. A detailed analysis about the relevance of the green paradox and carbon leakage effects is provided by T Eichner and R Pethig, ‘Carbon Leakage, the Green Paradox, and Perfect Future Markets’ (2011) 52(3) International Economic Review 767. 148 ipcc Working Group iii (n 16), p. 237 and p. 386, Box 5.4; cf. the definition of Aaron ­Cosbey and others, ‘A Guide for the Concerned: Guidance on the Elaboration and Implementation of Border Carbon Adjustment’ (Entwined Policy Report 3, 2012) accessed 14 April 2017, p. 8; cf. Fischer and Fox (n 41), p. 207. 149 ipcc Working Group iii (n 141), p. 665; R Ismer, Klimaschutz als Rechtsproblem: ­Steuerung durch Preisinstrumente vor dem Hintergrund einer parallelen Evolution von ­Klimaschutzregimes verschiedener Staaten (Mohr Siebeck 2014), p. 452.

30

Chapter 2

leakage is avoided. If the carbon leakage rate is below 0, the transfer of emissions into another country leads to more emissions reduction than would have been achieved in the regulating country.150 The carbon leakage calculation methods depend on detailed information and data, for example on the ease of substitution between products and the technology available in the respective countries.151 As these data are often not provided, assumptions must be made. These assumptions are the reason why the calculation of the leakage rate varies remarkably.152 The relevance of the carbon leakage effect might also be different based on the decision about whether all trade-related emission transfers (‘weak carbon leakage’) or only policy-induced emission transfers are included in the calculation (‘strong carbon leakage’).153 Weak carbon leakage is the increase of emissions in countries not taking mitigation efforts that does not necessarily depend on climate policies but also on socio-economic drivers.154 This can have many causes such as c­ omparative advantages in certain sectors. For example, a country might extend its use of fossil fuels whether or not the eu undertakes an effort for climate ­protection.155 However, if these carbon leakage effects are also trade-induced, they might

150 Cf. G Michalek and R Schwarze, ‘Carbon Leakage: Pollution, Trade or Politics?’ (2015) 17(6) Environment, Development and Sustainability 1471, pp. 1472–1473. 151 Cf. Michalek and Schwarze (n 150), p. 1482. 152 Results vary from 2 per cent to 130 per cent. Providing an overview on relevant studies, P Summerton, ‘Assessment of the Degree of Carbon Leakage in Light of an International Agreement on Climate Change: A Report for the Department of Energy and Climate Change’ (Cambridge Econometrics, Department of Energy and Climate Change, 2010) accessed 5 September 2017, pp. 7–8; cf. Ismer (n 149), p. 359. 153 Cf. G P Peters and E G Hertwich, ‘co 2 Embodied in International Trade with Implications for Global Climate Policy’ (2008) 42(5) Environmental Science & Technology 1401, p. 1402; see also ipcc Working Group iii (n 16), p. 386, Box 5.4; C L Weber, G P Peters, D Guan and K Hubaceck, ‘The Contribution of Chinese Exports to Climate Change’ (2008) 36(9) Energy Policy 3572, p. 3575. 154 G P Peters, J C Minx, C L Weber and O Edendorfer, ‘Growth in Emission Transfers via International Trade from 1990 to 2008’ (2011) 108(21) Proceedings of the National Academy of Sciences 8903, p. 8907. The definition of carbon leakage in the fourth assessment report of the ipcc corresponds to the definition of weak carbon leakage: the carbon leakage effect is ‘the increase in co 2 emissions outside the countries taking domestic mitigation divided by the reduction in the emissions of these countries’. ipcc Working Group iii (n 141), p. 665. Distinguishing ‘weak’ and ‘strong’ carbon leakage, Peters and Hertwich (n 153), p. 1402. 155 Cf. P Krugman, ‘Empire of Carbon’ (New York Times, 14 May 2009) accessed 11 August 2017.

The EU ETS Leading to Carbon Leakage Effects 420 400 380 360 340 320 300 280 260 240 220 200 180 160 140 120 100

31

Population Gross Domestic product (gdp) International Trade Global fossil co2 emissions Emissions embodied in trade Net emissions transfers Annex B to non-Annex B

08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 90 19 Figure 4

Carbon leakage effect: the development of various global macrovariables indexed to 1990. Source: G P Peters, J C Minx, C L Weber and O Edendorfer, ‘Growth in Emission Transfers via International Trade from 1990 to 2008’ (2011) 108(21) Proceedings of the National Academy of Sciences 8903, p. 8905

a­ ffect mitigation costs.156 Peters et al. show the weak carbon leakage effect correlating with economic growth, growth of the population and growth in trade (Figure 4). The net emission transfers from Annex B to non-Annex B countries (orange line) reveal the carbon leakage effect. While the export leakage makes eu products less competitive on the world market, the import leakage makes these products less competitive on the domestic market. Strong carbon leakage is the increase in foreign greenhouse gas emissions due to a particular climate policy.157 It is also called policy-induced carbon leakage.158 Although strong carbon leakage reflects the actual emission transfers caused by the first-mover climate policy, the exact calculation of the strong carbon leakage effect appears to be dispensable in the context of this book. For the wto analysis, it is only important that the anti-leakage policy is nondiscriminatory and, depending on the rule with which the ba seeks to comply, 156 Cf. Peters, Minx, Weber and Edendorfer (n 154), p. 8907. 157 Also defining carbon leakage effects as a causal effect of ambitious climate efforts, ipcc Working Group iii (n 16), p. 237; Moore (n 55), p. 46. 158 M Sakai and J Barrett, ‘Border Carbon Adjustments: Addressing Emissions Embodied in Trade’ (2016) 92 Energy Policy 102, pp. 102–103.

32

Chapter 2

that it contributes to climate protection while remaining within the jurisdictional limits of the eu. Hence, as far as carbon leakage measures are certain to contribute to climate protection, the carbon leakage effect does not need to be quantified. If it can be shown that at least parts of the carbon leakage effect are policy-induced, this would provide additional arguments for the compatibility of the leakage policy with wto rules. In economic studies, the carbon leakage effect was found to be particularly relevant in the cement and clinker sector159 and in ceramics, the chemical and plastic sector, coke, glass, refineries and fuels, iron and steel, and aluminium, as well as in sectors of highly emissions-intensive final goods such as food and tobacco, machinery and optics and vehicles.160 In the aviation sector, the carbon leakage effect raises similar problems as in the product sectors. If the ets is applied only to eu aircraft operators, they might suffer competitive disadvantages in comparison to non-eu aircraft operators. The more ambitious the cap and the higher the share of auctioned certificates, the more relevant this competitive disadvantage becomes. Whether the aircraft operator suffers lower gains or whether the higher costs are passed on to the consumer,161 both constellations increase the share of non-eu airlines compared to eu airlines. If the price difference is significant, either eu airlines will seek alternative markets and routes or passengers would look for cheaper airlines, for example by taking other routes.162 With only 15 per cent of the eu 159 G Cook, ‘Use of Border Adjustment Measures: A Cement Sector Perspective’ (Carbon Trust, September 2011) accessed 3 April 2017; Boston Consulting Group, ‘Assessment of the Impact of the 2013-2020 ets Proposal on the European Cement Industry, Final Project Report’ (November 2008) accessed 15 February 2017; Summerton (n 152), pp. 9–10, 70; B E ­ ickhout, deputy of Fractie De Groenen/Vrije Europese Alliantie and Peter Liese, deputy of Christlich Demokratische Union Deutschlands/Group of the European People’s Party ­(Christian Democrats) (n 38). 160 R Martin, M Muûls and L B de Preux, U J Wagner, ‘On the Empirical Content of Carbon Leakage Criteria in the eu Emissions Trading Scheme’ (2014) 105 Ecological Economics 78, p. 82, Table 1; F Branger and P Quirion, ‘Climate Policy and the “Carbon Haven” Effect’ (2014) 5(1) wires Climate Change 53, p. 56; Summerton (n 152), p. 70. 161 A difference is discussed by Dröge and Richter (n 65); ipcc Working Group iii (n 16), p. 2. Whether the airlines will be able to pass through these costs appears to be uncertain. Cf. J Meltzer, ‘Climate Change and Trade—The eu Aviation Directive and the wto’ (2012) 15(1) Journal of International Economic Law 111, p. 121. 162 In 2012 the price difference appeared to be marginal. A flight from Frankfurt (Main), Germany to Peking was only €4 more expensive than without the ets. Cf. Dröge and Richter (n 65), p. 3.

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33

allowances being allocated by auctioning, the price difference today is not that high. Therefore, the leakage effects in the aviation sector might be moderate. Moreover, the aviation market in the eu appears to be too attractive for foreign airlines to leave it in case of (partial) inclusion into the eu ets. However, if the share of auctioned certificates increases or if the sector grows further, the carbon leakage effect will become more relevant in the aviation sector. Emissions from aviation are 2.5 per cent of the world’s global emissions163 and 10.62 per cent of the emissions in the transport sector.164 While trade through aviation is only 0.5 per cent of global trade volume, it is 35 per cent of global trade value.165 The growth of aviation emissions is higher than the saving of emissions through efficiency gains.166 Hence, the carbon leakage problem might become relevant in the aviation sector. Despite the uncertainties about the quantification of the carbon leakage effect, general trends appear to be clear: (a) the more climate-intensive goods and services the eu offers that fall under the eu ets, the more relevant carbon leakage might become;167 (b) carbon leakage is more relevant the more emissions-intensive goods are traded globally168 and can be substituted;169 (c) carbon leakage effects might become more relevant if the price difference between eu and other states’ climate policies increases;170 (d) if foreign technologies are less climate-efficient than eu technologies, carbon leakage effects are further worsened if production and emissions are transferred abroad; (e) conversely, if other states also establish climate protection measures,171 if these measures are comparable to the eu ets, or if trade intensity 163 Meltzer (n 161), p. 113. 164 Cf. ipcc Working Group iii (n 16), p. 606, Figure 23. 165 Meltzer (n 161), p. 122. 166 Thompson (n 51), p. 392; Meltzer (n 161), p. 114; ipcc Working Group iii (n 141), p. 49. 167 Cf. Summerton (n 152), p. 62. 168 Fischer and Fox (n 41), p. 206. Sakai and Barrett assume one quarter of global emissions being embodied in international trade. Sakai and Barrett (n 158), p. 102; Summerton (n 152), p. 62. It is possible that foreign countries have an incentive to (re)activate highly inefficient and polluting energy plants and factories if they can trade the respective ­product internationally. Cf. Ismer (n 149), p. 409. 169 Summerton (n 152), p. 63. 170 See also Hecht and Peters (n 144), p. 1. 171 An overview of national climate measures world-wide is provided by the International Energy Agency. See International Energy Agency (iea), ‘Addressing Climate Change, Policies and Measures Database’ accessed 22 June 2017.

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and substitutability are low, the carbon leakage effect becomes less relevant.172 The eu ets has its weaknesses, but the eu is still a forerunner in climate protection. The target to mitigate greenhouse gas emissions between 1990 and 2030 by 40 per cent is one of the most ambitious reduction targets of the Paris Agreement. If the eu collected all its ‘low-hanging fruits’, further emission reduction might be costly. This might lead to a substantial price difference ­between eu and foreign climate policies. If the eu resolves the problem of stagnating allowance prices, establishes full auctioning until 2030 and reduces the exemptions from the ets, these effects might become more relevant. The trade volume of the eu is the highest in the world. An overview of the top ten traders worldwide is provided in Tables 2 and 3. Hence, the eu might suffer carbon leakage effects, at least if strengthening its climate policy. Table 2

Merchandise trade: top 10 exporters in 2016

Exports

Million us Dollars

Inner- and extra-eu (28) China

5,373,460.0 2,098,161.0

Extra-eu (28)

1,930,041.0

United States Germany Japan Netherlands Hong Kong, China France Korea, Republic of

1,454,606.9 1,339,646.5   644,933.3   569,705.4   516,734.0   501,262.8   495,426.0

Source: Own design based on: wto Secretariat, wto Pentaho application and wto Short-term Trade Statistics, International Trade and Market Access Data, (30 May 2017).

172 Cf. J de Cendra de Larragán, ‘Emission Trading Schemes and wto Law: A Typology of Interactions’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013), pp. 641–643.

35

The EU ETS Leading to Carbon Leakage Effects Table 3

Merchandise trade: top 10 importers in 2016

Imports

Million us Dollars

Inner- and extra-eu (28) United States

5,329,940.0 2,251,351.4

Extra-eu (28)

1,891,978.0

China Germany United Kingdom Japan France Hong Kong, China Netherlands

1,587,431.0 1,054,891.3   635,762.3   606,926.8   573,021.8   547,336.0   503,414.2

Source: Own design based on: wto Secretariat, wto Pentaho application and wto Short-term Trade Statistics, International Trade and Market Access Data, (30 May 2017).

2.4

Current Approaches to Carbon Leakage in the EU

Measures against carbon leakage aim at the prevention of competitive disadvantages and climate protection. It is possible to focus on either aim when arguing for measures against carbon leakage. Even measures that are in e­ ffective against carbon leakage, might be climate measures. So far, the eu has exempted exports from the eu ets. However, it has also tried to include international flights within the eu ets and suggested a border ­adjustment for imported cement and clinker. 2.4.1 Export Rebates and Carbon Leakage List Within the eu ets Directive, there are two options for how to deal with the carbon leakage problem: exempting industries that are threatened by carbon leakage effects from the obligation to pay for the certificates and the establishment of an equalisation system173 or an integration of imported goods 173 25th recital of the eu Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 Amending Directive 2003/87/EC so as to Improve and Extend the

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into the ets.174 So far, the eu has applied the first instrument.175 On the one hand, operators using the most efficient technology are exempted from the ets (benchmarking). On the other hand, operators of climate-intensive and trade-exposed sectors (on the carbon leakage list) receive allowances for free.176 The problem of these exemptions is twofold: once qualified as a sector under the carbon leakage list, the sector is exempted from auctioning whether or not it continues to export. Hence, exemptions from the eu ets are not bound to the amount of exports but only to the sector.177 It is not clear whether a product falling under this exemption will ultimately be traded with a non-eu state. Therefore, the exemption not only prevents export leakage but also weakens the eu ets. As the cap is not adjusted to the exemptions from the ets, the ets becomes even more ineffective.178 There are too many certificates on the market. Furthermore, imports are not charged at all. Hence, more attention should be paid to alternative ways of tackling carbon leakage effects. Integration into the eu ets is the second option within the ets Directive.179 2.4.2 The Extension of the eu ets to International Flights After the failed negotiations to reach an international agreement on emissions in the aviation sector in the context of the International Civil Aviation ­Organization (icao),180 the eu extended the eu ets to the aviation sector and included the flights starting or landing in the eu.181 This should make the ­ reenhouse Gas Emission Allowance Trading Scheme of the Community (2009) OJ L G 140/63 (eu Directive 2009/29/EC). 174 Article 10b (1)(a) and (b) of the ets Directive (n 20). 175 Cf. supra n 136; European Commission, ‘Stakeholder consultation process on Post-2020 carbon leakage provisions for the eu Emissions trading system’ (15 April 2014) accessed 31 July 2014, p. 2. Cf. R Howse and A L Eliason, ‘Domestic and International Strategies to Address Climate Change: an Overview of the wto legal Issues’ in Cottier, Thomas Nartova, Olga and Sadeq Z Bigdeli (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press 2009), p. 76. 176 Cf. supra n 136; Martin, Muûls and de Preux, Wagner (n 160), pp. 80–81. 177 Crtitically Monjon and Quirion (n 41), p. 5201; Becker, Heuson, Peters and Will (n 24). Considering these broad exemptions as a subsidy, Martin, Muûls, de Preux and Wagner (n 160), p. 85. 178 Critically R Martin, M Muûls, L B de Preux, U J Wagner, ‘Industry Compensation under Relocation Risk: A Firm-Level Analysis of the eu Emissions Trading Scheme’ 104(8) The American Economic Review 2482, pp. 2485, 2506. 179 Cf. supra n 174. 180 L Bartels, ‘The wto Legality of the Application of the eu’s Emission Trading System to Aviation’ (2012) 23(2) European Journal of International Law 429, pp. 432, 434. 181 eu Aviation Directive (n 34).

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37

eu ets more effective for climate protection.182 In contrast to other sectors covered by the ets, only 15 per cent of the certificates should be pursued by auction; the remaining certificates in the aviation sector should be allocated for free. In the aviation sector, co 2 is the only greenhouse gas covered by the ets so far.183 The share of auctioned certificates is planned to be raised.184 To hold sufficient emission allowances, aircraft operators could use auctions, buy certificates from other aircraft operators or from non-aviation sectors. They can also transfer certificates from the Kyoto mechanisms (cers, erus)185 into euas.186 Every tonne of emissions in the aviation sector that cannot be covered by a certificate is charged at €100 per certificate.187 If an aircraft operator cannot cover its emissions by certificates and does not pay the penalty, the administering eu Member State can request that the European Commission imposes an operating ban on the respective operator.188 Owing to the higher costs of greenhouse gas emissions, efficiency gains were expected, either by saving emissions or by using more climate-friendly technologies or fuels or by increasing passenger capacity.189 However, as aviation depends on a certain amount of co 2, emissions reduction is particularly difficult. Initially, the Aviation Directive covered all flights starting from or landing in an eu country. This included intra-eu flights of foreign aircraft operators and also the distances flown outside the eu if starting or landing at an eu airport.190 This broad application of the measure should prevent carbon leakage effects and competitive disadvantages. This inclusion of foreign airlines and international flights can be considered the first practical example of ets-ba. In contrast to eu aircraft operators, foreign operators cannot save emission allowances in other sectors to use them for aviation, as the eu can do.191 Moreover, the inclusion of the aviation sector might go beyond the regulatory scope of the eu as it covers not only foreign airlines in the eu airspace but also within the foreign airspace. The integration of international flights into the eu ets did provoke strong resistance from non-eu countries. China, Russia and India prohibited the

182 Cf. Meltzer (n 161), p. 115. 183 Annex i, paragraph 5 ets Directive (n 20). 184 Article 3d ets Directive (n 20). 185 Article 11a ets Directive (n 20). 186 Article 11a(2) ets Directive (n 20). 187 Article 16(3) ets Directive (n 20). 188 Article 16(5) ets Directive (n 20). 189 Cf. Meltzer (n 161), p. 121. 190 Article 3(r) and Annex 1, paragraph 6 of the ets Directive (n 20). 191 Bartels (n 180), p. 431.

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f­ulfilment of the obligations of the eu ets Directive.192 The usa even established a law on this prohibition.193 Countermeasures considered included charges against the eu, the withdrawal of air rights and the threat to terminate bilateral agreements with the eu.194 Non-eu countries claimed their sovereign right to define an own climate policy for their airspace, which was being restricted by the eu ets (extra-jurisdictional effects),195 as well as the freedoms of air.196 They claimed the ets-ba violated eu law, international customary law, the law of the sea, the Chicago Convention and the eu–us Open Skies Agreement.197 Apart from negotiations in the icao, the European Court of Justice (ecj) was invoked.198 The ecj excluded the discussion of the Chicago Convention, as the eu itself is not a party to this treaty, though its Member States are.199 It also did not discuss Article 2(2) of the Kyoto Protocol (referring to the Chicago Convention) and some rules of international customary law as these rules were not considered to be unconditional and sufficiently precise.200 [J]udicial review must necessarily be limited to the question whether, in adopting the act in question, the institutions of the European Union made manifest errors of assessment concerning the conditions for applying those principles [of international customary law].201

While the ecj did not find such manifest errors, it analysed the compatibility of eu Directive 2008/101 with the eu–us Open Skies Agreement in more 192 Cf. Moore (n 55), p. 54. 193 us Senate, 112th Congress (2011-2012), European Union Emissions Trading Scheme Prohibition Act (27 November 2012) H.R.2594 accessed 6 October 2017; Thompson (n 51), pp. 405–406; Dröge and Richter (n 65), p. 3. 194 Dröge and Richter (n 65), p. 3. 195 Cf. Meltzer (n 161), p. 151. 196 Article 5 Convention on International Civil Aviation (signed 7 December 1944, in force 4 April 1947) 1948 unts 295 (Chicago Convention). 197 us–eu Air Transport Agreement (signed 25 and 30 April 2007, in force 30 March 2008) (2007) OJ L 134/4 (eu–us Open Skies Agreement). 198 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65). 199 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), paras. 52, 57–71. 200 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), paras. 54, 55, 74–77, 110–111. 201 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), para. 110.

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39

­detail.202 In particular, it addressed the problem of extra-jurisdictional effects. The ecj did not find that the principle of sovereignty over a state’s own airspace (Article 1(9) eu–us Open Skies Agreement) was violated as at least one airport of an international flight falling under the ets Directive was within the eu.203 Ultimately, the ecj considered the extension of the ets to international flights to be compatible with eu law and the eu–us Open Skies Agreement.204 Non-eu states remained critical despite this decision because the ecj was not considered to be a neutral instance in this dispute.205 As a reprisal, transit through Russian, Chinese and Indian airspace was forbidden until the ­European Commission decided to ‘stop the clock’ and exclude all non-eu ­airlines and international flights fully from the obligation to hold emission allowances for aviation until 2016.206 Non-eu airlines did not even need to pay allowances as regards intra-eu flights. This exemption was extended in 2014 until 2020.207 The Members of the icao also opposed an extension of the eu ets on all airlines208 and considered a climate regulation in the aviation sector to be possible only in states’ own airspace.209 After the eu suspended the extension of the ets Directive to international flights, the icao agreed to stabilise emissions at the 2020 level.210 Market-based mechanisms should be negotiated with other states.211 In Resolution A39-2 of October 2016, the icao decided 202 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), paras. 78–157. 203 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), para. 124. 204 ecj Judgment, ata/air and Others v. Secretary of State for Energy and Climate Change (n 65), paras. 134–135, 151–156; cf. Thompson (n 51), p. 400. As the focus of this book is on wto law, the ecj decision and the questions about jurisdictional limits might become relevant mainly as regards the relevance of this problem in wto law. Cf. infra Chapters 7.6.2 and 7.7.4. 205 Cf. Ismer (n 149), p. 549. 206 Paragraphs 3 and 15 eu Decision No. 377/2013/EU (n 35); cf. Thompson (n 51), pp. 386, 408–410; Ismer (n 149), p. 545. 207 Article 2(8) eu Regulation No. 421/2014/EC (n 35); Article 28a(8) ets Directive (n 20). 208 icao, ‘Inclusion of International Civil Aviation in the European Union Emissions Trading System (eu ets) and Its Impact’ (icao Working Paper, 17 October 2011) C-WP/ 13790 accessed 5 October 2016, para. 2.2. 209 icao (n 208), para. 1.5; see also Thompson (n 51), p. 404. 210 icao, ‘icao Report, Section on Climate Change’ (3 October 2013) A 38-WP/430 P/44 ­ accessed 3 April 2017, paras. 17.3.35, 17.3.38, 17.3.40; Ismer (n 149), p. 550. 211 Ismer (n 149), p. 551; Thompson (n 51), p. 403; icao, ‘Addressing co 2 Emissions from Aviation’ (icao Working Paper, 24 July 2013) A38-WP/68 EX/33 Rev. 3 accessed 3 April 2017.

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on a renegotiation of a global market-based mechanism starting in 2021 that will include an offsetting system to exempt national climate efforts for climate protection.212 Resolution A39-3 specifies this mechanism, which is named Carbon Offsetting and Reduction Scheme for International Aviation (corsia).213 This market-based mechanism will make growth in the aviation sector carbon-neutral from 2020. After a pilot phase (2021–2023) and the first phase (2024–2026), the second phase (2027–2035) will include all flights that have a share of, at least, 0.5 per cent of the world’s aviation emissions. However, corsia only applies to those emissions that go beyond the 2020 level. Nothing needs to be paid for emissions if the aviation sector does not grow from 2020. A critique of corsia is that emissions can be at a problematic level even if not growing after 2020.214 Emissions falling under corsia are not charged but they need to be offset. If flying more than in 2020, the additional emissions need to be compensated for by climate projects in other sectors.215 The offsetting mechanism is similar to the Kyoto cdm and faces similar challenges. Projects that would also have been established without corsia may not be taken into account, as they do not make an additional contribution to climate protection. However, as for cdm projects, this additionality will be difficult to evaluate.216 As a reaction on the outcome of the Paris Agreement and the icao decision of 2016, the eu initiated another reform of the eu ets in 2017 also dealing with the aviation sector. This reform is still in the negotiating process. In the proposal made by the European Commission, the ets Directive continues to include the integration of both intra-eu and extra-eu flights. Owing to the plans to establish an international mechanism in the context of the icao, the exemption for extra-eu flights will be upheld until 2020.217 It appears that the outcome of 212 icao, Assembly – 39th Session, Consolidated Statement of Continuing icao Policies and Practices Related to Environmental Protection – Climate Change (October 2016) A39-2 (Resolution A39-2) accessed 3 April 2017, p. 24, Annex (f). 213 icao, Assembly – 39th Session, Consolidated Statement of Continuing icao Policies and Practices Related to Environmental Protection-Climate Change (October 2016) A39-3 (Resolution A39-3) accessed 4 September 2017. 214 See also Sinn (n 147). 215 On corsia, see icao, ‘Carbon Offsetting and Reduction Scheme for International Aviation (corsia)’ accessed 11 July 2017. 216 Cf. Michaelowa (n 75). 217 European Commission, Proposal for a Regulation of the European Parliament and of the Council Amending Directive 2003/87/EC to Continue Current Limitations of Scope for Aviation Activities and to Prepare to Implement a Global Market-Based Measure from

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41

Extent of restriction of foreign policies

corsia will affect whether the eu will, finally, integrate international flights into the ets or keep to the suspension and, if it re-activates the ets-ba on international flights, to what extent. corsia is not as ambitious as the eu ets, which covers 15 per cent of emissions in the aviation sector and applies before 2020 and to all emissions across the board (not only to those emissions beyond a certain threshold). Although offsetting through projects is possible also within the eu ets,218 the eu ets contains a sanction of €100 per tonne co 2 that is not covered by certificates; if the sanction is not paid, the eu bans the aircraft operator. corsia does not contain comparable sanctions. corsia appears to be less ambitious than the eu ets, in that it limits carbon leakage only partly. Therefore, the eu might decide to drop the exemptions for foreign countries, including all flights starting or landing within the eu, at least for the part of the flight that is within eu airspace. National measures in spite of corsia were against the aims of corsia but do not appear to be prohibited if excluding double-counting.219 To avoid double-counting, the eu might ­reduce the number of ets certificates to be held by foreign ­aircraft

Full integration of international f lights into eu ets (suspended rule) Integration of international flights as far as f lying in eu airspace

corsia (while maintaining the exemption for third states from eu ets) Extent of carbon leakage prevention

Figure 5

Extent of restriction of foreign climate policies in the aviation sector and extent of carbon leakage prevention. Source: Own design

2021 (3 February 2017) com(2017) 54 final (eu Commission, Proposal Aviation), Article 1 amending Directive 2003/87/EC. 218 Article 11a ets Directive (n 20). 219 Paragraphs 21, 25 and seventh, eighth and ninth recital of the preamble of Resolution A393 (n 213).

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operators falling under crosia or apply an exchange rate.220 For political reasons, however, it is likely that the eu might keep international flights exempted from the eu ets to avoid disputes in the icao. Figure 5 shows the different possibilities to extend the ets-ba to international flights. The more the international flights are included, the higher the carbon leakage prevention but also the interference with foreign climate policies. Proposal for an Import Border Adjustment (ba) for Cement and Clinker The European Commission’s 2017 proposal to reform the eu ets221 was reported by Ian Duncan.222 This proposal contained amendments for the cement and clinker sector. While the cement used for exports should no longer be exempted from the ets (being omitted from the carbon leakage list), cement imports should be included in the ets.223 Whether import bas can compensate for the suspension of export exemptions can be doubted. Import and export leakage might be interrelated but the prevention of one of the leakage effects does not necessarily prevent the other. If the eu does not export (much) while instead importing much cement, the shift from an export to an import leakage policy makes sense from an ­economic perspective. From a climate protection perspective, such reform is useful as exported cement and clinker would fall under the eu ets then. After all, the proposal was the first tangible suggestion for carbon leakage prevention applied to imported goods. However, an integration of only the ­cement sector appeared to be too narrow and potentially arbitrary.224 Therefore, an amendment was suggested containing the proposal to initiate further research on import bas and to keep the question of bas open: 2.4.3

(1ba) Following up to Article 6(2) of the Paris Agreement, the Commission shall assess in its report, to be prepared in accordance with Article 28aa, the development of climate mitigation policies, i­ncluding ­market-based 220 This would help to comply with the eighth recital of the Resolution A39-3 (n 213). 221 European Commission, Proposal for a Directive of the European Parliament and the Council Amending Directive 2003/87/EC to Enhance Cost-Effective Emission Reductions and Low-Carbon Investments (15 July 2015) COM(2015) 337 final 2015/148(COD). 222 Cf. eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36). 223 Cf. eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36), Amendment 12, Recital 7, second part. 224 P Liese, deputy of Christlich Demokratische Union Deutschlands/Group of the European People’s Party (Christian Democrats) and Babara Kappel, deputy of Freiheitliche Partei Österreichs/Europe of Nations and Freedom Group, (n 38).

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43

­approaches, in third countries and regions and the effect of these policies on the competitiveness of European industry. (1bb) If this report concludes that a significant risk of carbon leakage remains, the Commission shall, if appropriate, come forward with a legislative proposal introducing a carbon border adjustment, fully compatible with wto rules, based on a feasibility study to be initiated at the publication of this Directive in the oj. This mechanism would include in the eu ets importers of products which are produced by the sectors or subsectors determined in accordance with Article 10a.225

However, the amendment on import border adjustments was refused at the first reading.226 The strongest critique was that the amendment had been included too late and without substantial elaboration on the details.227 By the end of 2017, the European Council referred to import bas as one possible carbon leakage measure but still without going into detail or establishing them.228 However, adding this option to the reform proposal of the ets Directive makes clear that the import ba might not be limited to the integration of imports into the eu ets but can also take the form of a charge equivalent to the eu ets. Finally, although the inclusion of imports into the ets has been part of the eu Directive since 2009229 and although the ba is still discussed as one possibility to face import leakage, the eu has not yet made use of import bas. 2.5

Result: the Need for an Import Carbon Leakage Policy

The eu ets is the instrument to fulfil the eu mitigation target under international climate agreements. However, the effectiveness of the ets is limited. The cap and trade mechanism does not provide for strong incentives for ­climate protection because too many ets certificates are on the market.

225 eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36), Amendment 37, Article 1, paragraph 1, point 20a (new) (emphasis added). 226 eu Parliament (n 37), Amendment 12, Recital 7, second part. 227 Cf. P Liese, deputy of Christlich Demokratische Union Deutschlands/Group of the ­European People’s Party (Christian Democrats) and B Kappel, deputy of Freiheitliche Partei Österreichs/Europe of Nations and Freedom Group, (n 38). 228 Cf. supra n 40. 229 Article 10b(1)(b) ets Directive (n 20).

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One exemption from the ets that leads to an over-allocation relates to the current eu carbon leakage policy. This leakage policy exempts sectors from the ets if they are particularly relevant to carbon leakage (whether goods are traded within or outside the eu), what weakens the effectiveness of the ets. Economic researchers found various results on the relevance of carbon leakage, which makes it easier to find trends rather than fixed numbers. The more expensive the eu ets makes eu goods and services in comparison to foreign goods and services, the more carbon leakage becomes relevant. The eu tried to initiate further reforms for carbon leakage prevention: adjustments of the share of free allocation, the integration of international flights and of imported cement and clinker into the eu ets. While the extension to international flights was suspended owing to the strong political resistance of third countries, the inclusion of the cement sector did not even pass the European Parliament. Nevertheless, bas remain on the agenda. To make unilateral climate policy effective and to provide incentives to push forward with climate protection an export ba could be established, that exempts goods and services from the eu ets only if they are actually traded. With the recent proposals of the European Council it becomes likely that the eu establishes a measure preventing import leakage. The eu might either reform the existing proposals made for aviation, cement and clinker or establish import bas also in other sectors.

Chapter 3

Trade Measures to Resolve the Carbon Leakage Problem As it is difficult to establish an ambitious, concrete and enforceable climate policy at the multilateral level, it is worth discussing alternative approaches to addressing climate change problems. This book seeks to connect climate protection with international trade and to avoid carbon leakage. This chapter will analyse these connections at the multilateral level of trade negotiations, at the unilateral level and for a coalition of the willing. Climate protection is not only an ecological but also an economic interest. At the least, in the long run climate protection is less cost-intensive than continuing with business as usual. The costs of mitigation are lower than of adaptation.230 However, owing to the heterogeneous effects of climate change and the related free-rider problem, owing to uncertainties about climate change causes and instruments for climate protection, and owing to the late and indirect advantages of any climate protection effort, climate agreements might be considered costs rather than benefits. New markets in the green sector, independence from energy imports and cheap climate protection instruments (‘low-hanging fruits’) are the reasons for first-mover interests. In spite of these visible and short-term benefits, climate agreements are limited in ambition and binding force. Enforcement mechanisms and sanctions are not in the interest of states.231 Compared to the multilateral climate negotiations, progress is easier in trade negotiations as trade liberalisation is considered a win-win situation. For example, the reciprocal reduction of tariff and non-tariff barriers stand for concrete short-term benefits without high costs. Although the comparative benefits of liberal trade are depleted by a possible lowering of standards, the benefits are seizable. This leads to the idea that climate efforts might be made in the trade context in order to achieve what cannot be achieved in the regular climate negotiations, for example by taking advantage of co-benefits.

230 N Stern, ‘The Stern Review: The Economics of Climate Change’ (2006) accessed 27 June 2017, pp. 308–448. 231 Cf. supra Chapter 2.1.

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Using trade measures for climate purposes, the eu might seek to be followed in its first-mover conduct and might avoid carbon leakage effects. The reference of the eu ets to trade can be threefold: (a) The eu ets is a trade instrument. (b) The eu might connect the adoption of eu climate measures to trade concessions in other sectors. (c) If complying with wto rules, the ets and the carbon leakage policy might be embedded in a system with an effective enforcement mechanism: the wto. Argument (a) is intuitive. However, the eu ets is not yet an instrument beyond eu borders; it is a regional trade instrument. Hence, it does not necessarily belong in the context of international trade. This changes, for example if the eu linked its ets with other etss as it was done in 2017 with the Swiss ets.232 The ets might also become an international trade instrument if extended to imports. Argument (b) might be difficult, as trade negotiations have come to a point where further trade liberalisation is no longer a fast-selling item: inter alia, further liberalisation has ambiguous effects and is not per se a win-win situation. States have different standards. They pursue different regulatory objectives or choose different policy instruments.233 The climate for trade liberalisation has also changed owing to the financial crisis that started in 2008.234 The trend unwillingness for further multilateral trade commitments must be taken into ­account for the hypothesis that climate protection efforts have a better chance of succeeding when put into the trade context. Another critique is that trade liberalisation in non-climate-related sectors might provoke further resource consumption and, consequently, can be questioned in its compatibility with climate protection interests. Ambitious climate commitments and concrete and enforceable instruments within the trade context might be as difficult to be concluded as in other fora if nothing is offered in exchange for climate commitments. The wto could include explicit rules on climate protection (c). In contrast, the wto dispute settlement mechanism is nothing the eu can make use of

232 Agreement between the European Union and the Swiss Confederation on the Linking of their Greenhouse Gas Emissions Trading Systems (23 November 2017) (2017) OJ L 322/3 (eu–Switzerland Linking Agreement). 233 S Lester and I Manak, ‘Adressing Regulatory Trade Barriers in Mega-Regional Trade Agreements’ in Thilo Rensmann (ed), Mega-Regional Trade Agreements and the Future of International Trade and Investment Law (Springer 2017), p. 342. 234 Cf. P van den Bossche and W Zdouc, The Law and Policy of the World Trade Organization (3rd edn, Cambridge University Press 2008), pp. 90–91.

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to make progress in climate protection. The eu instead is under pressure to comply with wto rules as soon as its climate policy affects international trade. These links between the eu ets and international trade will be the context in which carbon leakage measures need to be discussed. After clarifying the impacts of general trade regulation and liberalisation on climate change, ­different climate-specific measures will be compared. I will start with the role of climate protection in the multilateral trade negotiations of the wto, then discuss unilateral climate-related trade measures and finally analyse climate-related trade measures that might be used by a coalition of the willing. The chances and limits of the different trade measures will be compared, considering both the effect on the climate and on carbon leakage prevention. Then possible wto problems caused by the different measures will be mentioned. Finally, potential economic effects, the relevance of the respective measure in the current political debate and expected reactions will be described. 3.1

Measures between Trade Liberalisation and Trade Restriction

Trade liberalisation has an impact on climate change, even if there is no explicit reference to the climate. Trade liberalisation promotes economic growth and the consumption of resources. Growth effects and the consumption of fossil energy raise global greenhouse gas emissions. In economic literature it was discussed whether the negative effects of growth on the climate stagnate or decrease once a particular level of welfare is achieved. The inverted U-shaped curve (Environmental Kuznets curve) illustrates this (Figure 6).235 Even if the negative effects of growth effects on the climate decreased at some point, it is not clear when the turning point comes to make environmental and growth interests compatible with each other and whether this point is achieved before the climate impact is at a problematic level. Moreover, the unequal distribution of welfare might uphold the negative impact on the climate as long as not all regions achieve the level of welfare from which the negative impact on the climate decreases. If a turning point exists at all, the climate 235 Cf. Stern (n 230), p. 191; critically also S Dinda, ‘Environmental Kuznets Curve Hypothesis: A Survey’ (2004) 49(4) Ecological Economics 431; W T Harbaugh, A Levinson and D M Wilson, ‘Reexamining the Empirical Evidence for an Environmental Kuznets Curve’ (2002) 84(3) The Review of economics and statistics 541; W M Huang, G W Lee and C C Wu, ‘ghg Emissions, gdp Growth and the Kyoto Protocol: A Revisit of Environmental Kuznets Curve Hypothesis’ (2008) 36(1) Energy Policy 239.

48 Greenhouse gas emissions per capita

Chapter 3

Figure 6 Greenhouse gas emissions in the model of the Environmental Kuznets Curve.

Greenhouse gas emissions per capita

Per capita income (growth)

Source: Own design based on S Dinda, ‘Environmental Kuznets Curve Hypothesis: A Survey’ (2004) 49(4) Ecological Economics 431, p. 434

Figure 7 Phases of green growth.

Green growth

Per capita income (growth)

Source: Own design based on S Dinda, ‘Environmental Kuznets Curve Hypothesis: A Survey’ (2004) 49(4) Ecological Economics 431, p. 434

i­ mpacts need to be prevented before this turning point is reached. Otherwise, the effects on the climate and side effects can destabilise the global ecosystem, which also has effects on resources and humans and might lead to ­constrained degrowth.236 Figure 7 shows the effects of green growth. In the context of climate change, it might be assumed that liberalisation and growth can, at least to some extent, be decoupled from climate change problems.237 The sharp bend of the curve marks this. This effect might cushion the destabilising effects of climate change but not allow for eternal growth without emissions increasing. For example, if renewable energies were able to supersede fossil energies worldwide, growth would still lead to greenhouse gas emissions. The production of goods and services depends on a minimum amount of greenhouse gases. Economic growth is, at least in the long run, coupled with resource ­consumption and growth of population, which needs basic resources to survive.238 The 236 Cf. ipcc Working Group iii (n 16), pp. 25, 89, 113, 116, 118, 119, 129, 233, 392–394, 473–477, 975. 237 An optimistic assumption about the positive effects on climate protection dominating the negative effects is made by T Cottier and N Shariff, ‘International Trade and Climate Change’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013), pp. 417–418. 238 See also D H Meadows, D Meadows, J Randers and W W Behrens, The Limits to Growth: The Club of Rome’s Project on the Predicament of Mankind (Universe Books 1972), pp. 33–72.

49

Trade Measures to Resolve the Carbon Leakage Problem 1990

2015 Waste management 3% Agriculture 10% Industrial process and product use 8%

Waste management 4% Agriculture 10% Industrial process and product use 9%

Transport (incl. International aviation 15%)

Figure 8

Fuel combustion and fugitive emissions from fuels (without transport) 62%

Transport (incl. International aviation 23%)

Fuel combustion and fugitive emissions from fuels (without transport) 56%

Greenhouse gas emissions, analysis by source sector, eu-28, 1990 and 2015. Source: Own design based on Eurostat, Greenhouse gas emissions, analysis by source sector, -28, 1990 and 2015 (percentage of total) new.png, 12 June 2017 (26 August 2017)

a­ gricultural sector, for example, also causes emissions that cannot be easily replaced by a­ nother technology (Figure 8). Moreover, the past fossil energy path might have d­ elayed emissions. Finally, the emissions saved in wealthy nations do not disappear but are often outsourced (carbon leakage). As long as the wealthy nations over-compensate their savings of emissions by imported emissions, they cause these emissions, even if, geographically, they are emitted abroad.239 While broad trade liberalisation has a negative rather than a positive impact on the climate, selective liberalisation for the short term might potentially promote climate protection instruments. A selective trade liberalisation of climate-friendly products, services, technologies or investments might support climate protection. It can make climate-friendly products and services more competitive in the market. The elimination of subsidies for fossil fuels and of trade barriers in climate-friendly sectors, for example, might have a positive impact on climate protection. The liberalisation of climate-friendly technologies might help to replace climate-intensive technologies. However, the climate protection effect must be put into perspective with the increase of greenhouse gas emissions through side effects in other sectors that are also liberalised. For example, a product might be produced using renewable energy but lead to emissions during its transportation or removal. 239 Cf. J K Steinberger, J T Roberts, G P Peters and G Baiocci, ‘Pathways of Human Development and Carbon Emissions Embodied in Trade’ (2012) 2 nature climate change 81, pp. 81, 82.

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Counterproductive effects are even stronger if the trade liberalisation strategy is not limited to climate-friendly goods and services but applied to broader sectors, for example to offer co-benefits. This broader liberalisation and side effects might make the selective climate-related liberalisation an ambiguous instrument for climate protection. In contrast, trade-restrictive instruments lower the impact on climate change. However, a climate-related trade policy needs to respect the limits of wto law. Even if it remains within the limits of wto law, other states might criticise trade-restrictive climate measures or react with the establishment of own trade-restrictive measures. This can lead to an atmosphere of distrust, which might affect multilateral climate negotiations as well. Therefore, trade restrictions must be well-considered. The metaphor of carrots and sticks is often employed in the context of carbon leakage instruments.240 It stands for a constructive combination of trade restriction and liberalisation for climate protection purposes that can be both an incentive and a threat. Climate-friendly goods and activities are liberalised while carbon-intensive goods and activities are restricted. However, as liberalisation instruments do not focus on climate protection, it is difficult to make trade and climate interests compatible with each other. The connection between trade and climate protection might be drawn on different levels. It might be negotiated multilaterally within the wto. If a multilateral agreement is not achieved, states can go ahead by using unilateral trade measures. If only some of the wto Members agree on a common s­ trategy, climate protection might also be fixed in a plurilateral agreement, within a preferential trade agreement or in a mutual recognition agreement. 3.2

Committee on Trade and Environment

An initiative to establish new environmentally related provisions in wto law is the Committee on Trade and Environment (cte), formed in 1995.241 240 T Cottier, O Nartova and A Shingal, ‘The Potential of Tariff Policy for Climate Change Mitigation: Legal and Economic Analysis’ (2014) 48(5) Journal of World Trade 1007, p. 10; M B Eichenberg, ‘Greenhouse Gas Regulation and Border Tax Adjustments: The Carrot and the Stick’ (2009–2010) Golden Gate University Environmental Law Journal 283; F Zelli and H van Asselt, ‘The Interplay Between the United Nations Climate Regime and the World Trade Organization: Consequences, Causes and Policy Options’ (1 January 2010), p. 71. 241 wto, Decision on Trade and Environment (14 April 1994) 1867 unts 133. The establishment committees follows Article iv:7 wto Agreement. On the cte, see also S C ­ harnovitz,

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The cte provides a forum for national officials and ministries to meet regularly. It discusses the compatibility of environmental and trade rules and interests. A r­ eport is published every year.242 Beyond these reports, the wto Members ­submit documents on environmental protection aims and instruments.243 The documents and initiatives of the cte contribute to the environmental debate in wto law,244 but they neither influence the interpretation of existing wto rules nor accelerate the reform process of the wto or create new wto rules. In this context, the cte suggested a list of environmental goods and services in order to support trade liberalisation in the environmental sector.245 Climate goods and services are included. Apart from the reports of the cte, the wto Secretariat publishes further documents on trade and the environment. 3.3

Doha Round and Environmental Goods Agreement

In November 2001 a new wto negotiation round was established to reform the multilateral agreements: the Doha Round.246 It focussed inter alia on a stronger support of developing countries247 and a further reduction of subsidies,248 ­tariffs and non-tariff barriers,249 in particular in the agricultural sector250 and

242 243

244 245 246 247

248 249 250

‘The wto’s Environmental Progress’ (2007) 10(3) Journal of International Economic Law 685, p. 690. The 1996 report contains a discussion about process and production methods as well as on border adjustments for environmental purposes. Cf. wto Committee on Trade and Environment, Report (12 November 1996) WT/CTE/W/40, paras. 49–54. Such contribution was submitted, for example, by Singapore: wto Committee on Trade and Environment, Communication from Singapore, Promoting Mutual Supportiveness between Trade and Climate Change Mitigation Actions: Carbon-Related Border Tax Adjustments (30 March 2011) WT/CTE/W/248. Cf. S Puth, ‘wto und Umwelt’ in Meinhard Hilf and Stefan Oeter (eds), wto-Recht: Rechtsordnung des Welthandels (2nd edn Nomos 2010), para. 18. Cf. Zhang (n 14), pp. 677, 682. wto, Ministerial Conference, Doha Ministerial Declaration (20 November 2001) WT/ MIN(01)/DEC/1 (Doha Ministerial Declaration). Paragraphs 1–4 Doha Ministerial Declaration (n 246). Owing to the strong focus on development, the Doha Round has also been called the ‘Doha Development Round’ or the ‘Doha Development Agenda’. Cf. S Hörmann, ‘Post-Uruguay-Prozess’ in Meinhard Hilf and Stefan Oeter (eds), wto-Recht: Rechtsordnung des Welthandels (2nd edn Nomos 2010), ­paras. 18, 20. Paragraphs 13, 28 Doha Ministerial Declaration (n 246). Paragraph 16 Doha Ministerial Declaration (n 246). Paragraph 13 Doha Ministerial Declaration (n 246).

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for industrial goods.251 The reform should clarify the relationship between environmental and trade agreements and reduce trade barriers for environmental goods and services.252 The deadline for the conclusion of the Doha Round lapsed in 2005 but negotiations are ongoing.253 The Doha Agenda was planned as an all-or-nothing reform package (‘single undertaking’).254 However, consensus on the broad agenda is hard to achieve.255 Reasons for the stagnation of the negotiations are the high ambition of the agenda,256 ambiguous formulations257 and the sensitivity of sectors remaining to be liberalised.258 The poorer, southern countries expect more than the developed, northern countries are ready to offer.259 The long duration of the Doha negotiations and the lack of transparency in the negotiations260 (green room talks)261 make it difficult to evaluate the future of multilateral trade liberalisation. To escape the stagnation of the multilateral negotiations within the wto, negotiators lowered the ambition of liberalisation in selected sectors and gave up the single undertaking approach. Instead, they conclude multilateral agreements only in the sectors where they find consensus or they negotiate with a coalition of the willing. In 2005, the Ministerial Conference agreed on the elimination of agricultural export subsidies by 2013.262 In 2014, the Trade Facilitation Agreement (tfa) was concluded, which is a multilateral agreement in terms of Annex 1A wto Agreement. This agreement raises transparency standards and rules on digitalisation. In 2015, six ministerial decisions were taken in the context of the Nairobi Package, inter alia reducing subsidies in the agricultural sector, cotton and in ldcs. Although these agreements do not deal with environmental or

251 Hörmann (n 247), paras. 16–26, 34, 37, 49. Further contents are described by van den Bossche and Zdouc (n 234), pp. 87–88. 252 Paragraphs 6, 31–33 Doha Ministerial Declaration (n 246); Zhang (n 14); Hörmann (n 247), para. 27. 253 van den Bossche and Zdouc (n 234), pp. 87, 92. 254 Cf. pargraph 47 Doha Ministerial Declaration (n 246); cf. Hörmann (n 247), paras. 20, 29, 30; van den Bossche and Zdouc (n 234), pp. 88, 91. 255 van den Bossche and Zdouc (n 234), p. 90. 256 Hörmann (n 247), para. 29. 257 Cf. van den Bossche and Zdouc (n 234), p. 91. 258 Cf. van den Bossche and Zdouc (n 234), p. 90. 259 Cf. Hörmann (n 247), paras. 31, 34, 40. 260 Charnovitz (n 241), p. 693. 261 Hörmann (n 247), paras. 39, 49. 262 Cf. van den Bossche and Zdouc (n 234), p. 89.

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climate change problems, they provide examples of how to liberalise the wto despite the stagnation of the Doha Round. In the context of the trade and environment debate, a plurilateral a­ greement has been negotiated. In 2014, fourteen wto Members launched negotiations for the plurilateral Environmental Goods Agreement (ega).263 In 2018, 46 wto Members negotiated the ega. The ega aims at reducing tariffs and non-tariff barriers for environmental goods.264 Moreover, 23 wto Members negotiate the Trade in Services Agreement (tisa).265 Within these negotiations, environmental issues also seem to play a role. In a leaked document, Canada emphasises the contracting parties’ right to regulate in the environmental context.266 However, owing to a lack of more precise information about tisa, the relevance of environmental issues and the likelihood of the conclusion of this agreement are uncertain. The stagnation of the Doha Round has not led to an end of the relevance of the wto. Existing wto rules and agreements continue to apply. The wto ­dispute mechanism continues to be invoked. If no multilateral wto agreement dealing with environmental concerns is concluded, this is not the end of environmentally related trade measures. Climate protection is possible also in the context of the existing wto rules. Even the boom of ptas267 does not render wto rules irrelevant. ptas provide exceptions only to a limited number of wto rules. They often refer to existing wto rules.268 Moreover, wto rules remain relevant in the relationship between the parties of the pta and non-parties. Therefore, both wto rules and ptas need to be discussed in more detail. 263 wto (n 18). 264 Cf. C Frey, ‘The Role of Mega-Regionals in the Decarbonization of the Economy’ in Thilo Rensmann (ed), Mega-Regional Trade Agreements and the Future of International Trade and Investment Law (Springer 2017), p. 289. 265 WikiLeaks Release, Trade in Services Agreement (tisa) Draft (21 June 2016) accessed 20 June 2017. 266 Article 2 of the WikiLeaks Release, Proposal by Canada for an Annex of the Trade in Services Agreement (tisa) accessed 20 June 2017. 267 The eu, for example, was party to 48 ptas in April 2018, while it was negotiating on 13 ptas. wto, ‘rta Database’ accessed 4 April 2018. 268 Cf. P-T Stoll, ‘Mega-Regionals: Challenges, Opportunities and Research Questions’ in ­Thilo Rensmann (ed), Mega-Regional Trade Agreements and the Future of International Trade and Investment Law (Springer 2017), pp. 5, 11.

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After providing an overview of unilateral trade measures for climate protection and for carbon leakage prevention, I will discuss trade-related climate measures within a coalition of the willing within mras and ptas. 3.4

Unilateral Instruments

To face the problem of carbon leakage effects, unilateral climate-related trade measures might be chosen because they do not need to be coordinated with other states. Unilateral strategies are not necessarily confrontational. They can be designed in a non-discriminatory way, based on reciprocity; they can recognise foreign efforts in climate protection while avoiding double-­counting and interferences with foreign climate protection policies. Moreover, the prevention of carbon leakage might be beneficiary for all states owing to the ­contribution to climate protection. Carbon leakage measures might also be combined with non-climate-related co-benefits. In the following sections, a selection of different unilateral trade instruments against carbon leakage will be discussed. It focuses on instruments that received particular attention in the climate context; starting with measures restricting market access such as bans, quotas and standards, moving to less restrictive measures such as tariffs, border adjustments (bas) and the linking of the eu ets with other etss.269 Intellectual property rights,270 anti-dumping measures271 and countervailing measures against subsidies272 are not discussed in this book. Although the term ‘eco-dumping’ might be used for the externalisation of environmental costs,273 it is not clear whether the externalisation of ecological costs fulfils the 269 Discussing anti-dumping measures in terms of article vi:1 gatt and Article 2.1 of the wto’s Anti-Dumping Agreement and countervailing duties in terms of Article ii:2(b) gatt and Article vi gatt and of the Agreement on Subsidies and Countervailing Measures, Holzer (n 49), pp. 207–213. 270 Cf. D Shabalala, ‘Challenges for Technology Transfer in the Climate Change Arena: What Interactions with the trips Agreement’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013); Cottier and Shariff (n 237), p. 441. 271 Cf. J Pauwelyn, ‘Carbon Leakage Measures and Border Tax Adjustments under wto Law’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013), pp. 466–469; M Friedrich, wto und ­Klimaschutz: Konflikte und Synergien zwischen nationalen Klimaschutzmaßnahmen und dem wto-Recht (Beiträge zum nationalen und internationalen öffentlichen Recht, Peter Lang 2012), pp. 144–147; Holzer (n 49), pp. 207–208. 272 Cf. Friedrich (n 271), pp. 147–154; Holzer (n 49), pp. 208–213. 273 M Rauscher, ‘On Ecological Dumping’ (1994) 46 Oxford Economic Papers 822, pp. 823–824.

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definition of ‘dumping’ or ‘subsidies’ in wto law.274 Even if the externalisation of climate costs is considered ‘dumping’, it is unclear whether the climate protection level of a first-mover in climate protection defines the ‘normal price’ of a product. Therefore, the matter is not discussed further.275 Another measure that is highly relevant for climate protection, which would go beyond the scope of this book is the establishment of green subsidies276 and the elimination of subsidies on fossil fuels and technologies provoking high emissions. Subsidies might also be combined with other instruments such as taxes or labels.277 3.4.1 Import Ban, Quota and Standard To avoid carbon leakage, the eu might ban imported climate-intensive products from its market, at least if these products are not restricted by a foreign climate policy.278 Or a climate-friendly production method could be required as a standard for domestic products and imports. Examples are efficiency standards,279 carbon intensity standards280 or labels revealing the emissions per traded unit (carbon footprint labels).281 Alternatively, the number of imports of climateintensive products could be restricted (quota).282 These measures could also be combined: products below a certain climate standard might be traded only 274 ‘Dumping’ is defined in Article 2.1 of the wto Agreement on Implementation of Article vi of the General Agreement on Tariffs and Trade 1994 (Anti-Dumping Agreement). 275 For a discussion on anti-dumping measures against carbon leakage, see Pauwelyn (n 271), pp. 466–470; see also Fischer and Fox (n 41), p. 200. 276 R Howse and A L Eliason, ‘Domestic and International Strategies to address Climate Change: an Overview of the wto legal Issues’ in Cottier, Thomas Nartova, Olga and Sadeq Z Bigdeli (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press 2009), pp. 86–90. On subsidies in the climate context, see L Rubini, ‘Subsidies for Emissions Mitigation under wto Law’ in Denise Prévost and Geert van Calster (eds), Research Handbook on Environment, Health and the wto (Edward Elgar Publishing 2013). 277 R Quick and C Lau, ‘Environmentally Motivated Tax Distinctions And wto Law, The European Commission’s Green Paper On Integrated Product Policy in Light of the Like Product and ppm Debates’ (2003) Journal of International Economic Law 419, pp. 422–423; Low, Marceau and Reinaud (n 47), pp. 526–532; de Cendra (n 51), pp. 136–138. 278 Friedrich (n 271), pp. 141–144. Bans for environmental purposes were discussed in wto reports. See, for example, Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products (adopted 6 November 1998) WT/DS58/AB/R (Appellate Body Report, us—Shrimp); Appellate Body Report, Brazil—Measures Affecting Imports of Retreaded Tyres (adopted 17 December 2007) WT/DS332/AB/R (Appellate Body Report, ­Brazil—Retreaded Tyres). 279 Cf. Friedrich (n 271), pp. 156–185. 280 Holzer (n 49), pp. 186–187. 281 Friedrich (n 271), pp. 185–197. 282 On quotas, see S Lester, B Mercurio and A Davies, World Trade Law: Text, Materials and Commentary (2nd edn, Hart Publishing 2012), p. 244–250.

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to a certain extent, while beyond this quota the national standard must be met. If the standard is not met, the product has no market access. All three measures might have positive effects on climate protection and against import leakage. The eu would import a smaller number of climate-intensive goods from other countries. As the eu is a strong market, foreign traders are unlikely to replace all their eu trading partners. Hence, they might have an incentive to comply with the eu standards. Bans, quotas and standards are clear and predictable. However, they restrict the market more than tariffs, taxes or the ets as they restrict the total number of imports.283 Moreover, standards are static and cannot easily respond to technological changes. It might not be easy to fix a standard if climate change causalities and the instruments against climate change are uncertain. ­Moreover, the incentive to go beyond the fixed standard for climate protection is low. This is the reason why within the eu flexible mechanisms were preferred such as the eu ets. wto problems with regard to import bans, quotas and standards arise in two respects: restrictions of market access for goods are prima facie forbidden284 and depend on the schedule of concessions as regards services.285 In contrast, standards are permitted but may not lead to discrimination. Even if all three climate-related measures fall under the General Exceptions in case of a prima facie violation of the gatt286 or the gats,287 a measure may not be more restrictive than necessary and disguised restrictions must still be excluded.288 If the eu maintains the flexible approach of the ets for eu traders while applying a standard, ban or quota on imports, this differential treatment would not be easy to justify, even on behalf of the General Exceptions.289 The high trade restriction of bans, quotas and standards would also be likely to lead to strong resistance from other states. This can be shown by the high number of wto disputes raised on these measures.290 283 Import bans are considered the most restrictive trade measure. Cf. Appellate Body Report, Brazil—Retreaded Tyres (n 278), para. 150; Appellate Body Report, Argentina—­Measures Relating to Trade in Goods in Services (adopted 9 May 2016) WT/DS453/AB/R (Appellate Body Report, Argentina—Financial Services), para. 6.238. 284 Article xi gatt; cf. Holzer (n 49), p. 194. 285 Article xvi:1 gats. 286 Article xx gatt. 287 Article xiv gats. 288 Cf. Friedrich (n 271), p. 142. 289 See also infra Chapter 5.8. 290 See, for example, the recent dispute on a ban on pigs and wild boar imposed by Russia Appellate Body Report, Russian Federation—Measures on the Importation of Live Pigs, Pork and Other Pig Products from the European Union (adopted 21 March 2017) WT/DS475/AB/R (Appellate Body Report, Russia—Pigs (eu)); see also the dispute on a

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The label revealing the carbon footprint of a product appears to be one of the least trade-restrictive standards for climate protection.291 Carbon labels make the actual emissions of a product transparent seeking to influence consumers to buy products with a low impact on the climate.292 Transparency might reduce the problem of carbon leakage arising through imports if eu consumers have a preference for climate-friendly products. If consumers decide to pay the higher price of the eu product falling under the eu ets, this will reduce the competitive disadvantage for eu products. However, the preference of consumers for climate-friendly products alone might not necessarily be strong enough to compensate for the competitive disadvantage suffered by the payments related to the eu ets.293 Finally, climate-related bans, quotas and standards can support climate protection. However, they do not properly address carbon leakage effects and can cause discrimination as a reference to the eu ets is not provided. While bans and quotas are highly restrictive, standards could be restrictive or not. A less restrictive standard is the carbon footprint. However, the effectiveness of carbon footprint labels against carbon leakage depends on the preferences of eu consumers for climate protection. 3.4.2 Carbon Tariff Tariffs are ‘[c]ustoms duties on merchandise imports’.294 Within the wto their reduction is easier to negotiate than the harmonisation of standards. Member States agree on bound tariffs, which form the tariff ceiling that may not be exceeded.295 Applied tariffs are mostly below this bound tariff. If a tariff is ­lowered for one state, it must be lowered for every wto Member as well to comply with the most-favoured nation principle (mfn).296 Ad valorem tariffs us ban on Shrimps Appellate Body Report, us—Shrimp (n 278); Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products (15 May 1998) WT/DS58/R (Panel Report, us—Shrimp); Appellate Body Report, ec—Asbestos (n 59); Panel Report, European Communities—Measures Affecting Asbestos and Asbestos Containing Products (18 September 2000) WT/DS135/R (Panel Report, ec—Asbestos). 291 On labels for climate protection and their compatibility with the gatt and the tbt Agreement, see also Low, Marceau and Reinaud (n 47), pp. 521–524. 292 Cf. C Tietje, ‘Voluntary Eco-Labelling Programmes and Questions of State R ­ esponsibility in the wto/gatt Legal System’ (1995) 29 Journal of World Trade 123, pp. 126, 130. 293 The limited incentives are also discussed by Moore (n 55), p. 55. Discussing the wto compatibility of labels with wto rules, Tietje (n 292). Focusing on climate-related labels, Low, Marceau and Reinaud (n 47), pp. 521–526; see also Holzer (n 49), pp. 28–29. 294 wto, ‘Tariffs’ accessed 27 June 2017. 295 Article ii:1(b) gatt. 296 Article i:1 gatt.

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that are based on the price of a product can be distinguished from specific tariffs that are based on the quantity of a product and mixed tariffs that are based on both forms. Tariff lines are classified in the harmonised system of the World Customs Organization (hs). Detailed product classifications have up to six digits in the hs and up to ten digits in national systems.297 Cereals (hs 10), for example, are subdivided according to their ingredients. Rice is a subcategory (hs 1006). Brown rice (hs 100620) belongs to a different category than does broken rice (hs 100640).298 These detailed categories could be subdivided further to include the climate impact into the tariff. So far, climate-based subcategories do not exist in the hs.299 There is also no emissions-based tariff distinction.300 If the hs is subdivided into further subcategories taking emissions into account, the ­distinction between products will become challenging and difficult to verify, at least if products had no further differences.301 To refer tariffs to climate concerns it is not necessary to change the existing tariff lines. Tariff policies could also refer to the existing categories of the hs. The first option would be to reduce tariffs on goods and technologies with low climate impacts. This corresponds to the negotiations of the ega and with the reports of the cte. The second option would be to establish new tariffs on climate-intensive goods. The third way might be to replace existing tariffs. The impact on the climate could be verified by the carbon footprint or by the product characteristics, as materials correlate with a minimum impact on the climate. Hence, both lowering and raising tariffs can have a positive effect on climate protection if well-considered. Tariff reduction could be applied to low-carbon products and products central to low-carbon technology302 while upholding tariffs on carbon-­intensive products. The advantage of this instrument is that, as far as complying with mfn or an exception from this rule, selective tariff reduction for climate purposes will not cause resistance from other states as it is a liberalisation 297 Cf. Zhang (n 14), p. 683. 298 wto, ‘Tariff Download Facility’ accessed 28 May 2018. 299 Zhang (n 14), pp. 682–683. 300 Cottier, Nartova and Shingal (n 240), p. 422. 301 It is not easy to tell whether tariff reductions can be based on process and production methods. Cottier et al. consider product distinctions based on process and production methods as being possible because of the Shrimp decision. Cf. Cottier, Nartova and Shingal (n 240), pp. 14, 16; Appellate Body Report, us—Shrimp (n 278). 302 See also Howse and Eliason (n 175), pp. 83–84.

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­instrument.303 However, although the reduction of tariffs is an easy way to include climate issues into the tariff policy, it is not very effective as tariffs are already low (four per cent on average).304 For climate-intensive sectors, existing tariffs are considered to be even lower (one per cent on average).305 Hence, the potential for climate regulation based on tariff reduction is limited from the start. A problem of the establishment of new tariffs is that they need to be renegotiated with the other wto Members. If emissions are not included in this tariff policy, the climate impact of many products would have to be brought into consistency for the climate protection aim. However, climate issues are far from being the only rationale for tariff policy. Therefore, non-climate issues would also be taken into consideration if the Doha Round was concluded. If there is no room for new tariffs, the applied mfn tariffs in climate-intensive sectors might, at the least, be raised to the level of bound tariffs. This would not conflict with wto rules as long as the bound tariffs are equally applied to all wto Members. Besides establishing new tariffs within the Doha Round, wto Members could also create tariffs outside the Doha negotiations. To avoid a conflict with the gatt, unilateral tariff reduction could be combined with the consolidation of other tariffs as long as they do primarily affect the same Members.306 Taking the eu tariff for steel and aluminium as an example, the incentives are already rightly positioned. The tariff on aluminium is higher than on steel; aluminium is also the more climate-intensive good. In contrast, the eu tariff on cement is lower than on aluminium.307 To make the tariff compatible with climate interests, the tariff for cement could be higher than for aluminium, as cement is more climate-intensive than aluminium.308 Even such tariff policy that does not require substantial changes of wto rules or a conclusion of the Doha Round reaches to its limits if products cannot

303 As seen above, trade liberalisation might lead to growth effects at least partly foiling climate protection aims. 304 Y Dong and J Whalley, ‘Carbon, Trade Policy and Carbon Free Trade Areas’ (2010) 33(9) The World Economy 1073, pp. 1081, 1089. 305 Carbon-intensive products are paper, rubber, glass, plastics, iron and steel, cement and basic chemicals. Cf. Cottier, Nartova and Shingal (n 240), p. 18. 306 Cf. Cottier, Nartova and Shingal (n 240), p. 15. 307 wto, ‘Tariff Download Facility’ accessed 26 August 2017. 308 I Z Bribián, A V Capilla and A A Usón, ‘Life Cycle Assessment of Building Materials: Comparative Analysis of Energy and Environmental Impacts and Evaluation of the Eco-­ Efficiency Improvement Potential’ (2011) 46 Building and Environment 1133, p. 1134.

60

Chapter 3

replace each other. A higher tariff on cement than on aluminium is unlikely to reduce the demand for cement, as the products do not substitute for each other. Moreover, this climate-related tariff policy still depends on the level of existing tariffs. If a state wants to establish or raise a tariff outside the wto negotiation rounds, it has to pay compensation to the affected states. mfn309 and the principle of reciprocity must be respected.310 A positive effect of carbon tariffs on climate protection is possible.311 Yet, the effectiveness of carbon tariffs depends on the consistency of tariffs ­regarding climate purposes. To replace the climate-intensive products, a less climateintensive alternative product or substitute must be available312 and the tariff for this alternative must be lower than for the initial product. As carbon tariffs depend on the conclusion of the Doha Round, on full compensation for the affected states or on the existing tariffs, the effect on climate protection might be moderate. Exceptions from mfn can be made for developing countries (Enabling Clause313), in the form of waivers or within ptas.314 In the context of tariffs, developing countries take advantage of the Generalized System of ­Preferences (gsp).315 In contrast to the mfn tariff, the gsp can be conditional. Thus, it is possible that tariff preferences are only afforded to a developing country if it fulfils certain climate standards, for example. Still, the gsp is voluntary. Although discussions might arise about which countries can be c­ onsidered developing countries in the context of wto law and about when conditions for the preferences are met, the gsp is a conceivable way to refer tariffs to climate protection. If tariffs restrict climate-friendly products less than climate-intensive ­products, this has a positive effect on the prevention of carbon leakage. ­Climate-intensive sectors falling under higher tariffs might also be s­ectors affected by carbon leakage, as carbon leakage becomes relevant only in 309 Article i gatt. 310 Article xxviiibis: 1 gatt; cf. Holzer (n 49), p. 207. 311 Cf. de Cendra de Larragán (n 172), p. 661. 312 Cottier, Nartova and Shingal (n 240), p. 23; Holzer (n 49), p. 207. 313 gatt Decision, Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (28 November 1979) L/4903, bisd 26S (Enabling Clause). wto decisions in the sense of Article ix wto Agreement are subsequent agreements in terms of Article 31(3)(a) vclt. Appellate Body Report, United States—­ Measures Affecting the Production and Sale of Clove Cigarettes (adopted 24 April 2012) WT/DS/406/AB/R (Appellate Body Report, us—Clove Cigarettes), paras. 257–269. 314 Cf. infra Chapters 5.6.4 and 5.6.5. 315 Enabling Clause (n 313).

Trade Measures to Resolve the Carbon Leakage Problem

61

c­ limate-intensive sectors. To include the carbon leakage problem in the tariff policy, the tariff rate might take the national climate policy of the exporting state into account. However, the effectiveness of carbon tariffs against carbon leakage e­ ffects appears to be difficult to predict, as the leakage rate caused by the eu ets ­depends on the actual price, which the ets imposes on a product. The price changes every day. Tariffs are static and cannot be renegotiated that quickly. The tariff might either not compensate the (whole) carbon leakage effect caused by the eu ets or overcompensate the leakage effect. While overcompensation would be desirable for climate protection, it is likely to provoke resistance from other states, even if the carbon tariff is compatible with wto rules. Carbon tariffs are still not linked to the eu ets as they are static. ­However, they are less restrictive than quotas or bans as they do not restrict the number of imports. More research about the establishment of carbon tariffs needs to be done. Finally, for carbon leakage prevention it appears to be more appropriate to connect the carbon leakage policy closely with the intra-eu policy, the ets. 3.4.3 ba and the Integration into the eu ets A ba compensates for the different prices between domestic and foreign goods or services due to unilateral regulation. A ba can either make imports more expensive or rebate exports or do both (symmetric ba). The design and level of the adjustment depend on the unilateral instruments that it refers to. So far, bas are applied to taxes; they are called border tax adjustments (btas). The term ‘ba’ is used for the application of national standards or other measures to imports. Within the climate context disadvantages caused by the ets or by standards can be adjusted. At first sight, bas might be considered trade-­ restrictive measures.316 However, bas on imports or exports are defined as origin-neutral.317 The integration into the eu ets is a particular form of import ets-ba.318 Although it provides additional flexibility compared to a ba imposing a definite charge on imports, it might impose more concrete requirements concerning the measurement of emissions in foreign countries as the eu ets applies to installations, not to final products.319

316 317 318 319

Eichenberg (n 240). The effect on competition, however, depends on the design of bas. Cf. infra Chapters 5–8. Cf. Howse and Eliason (n 175), pp. 69–73; Holzer (n 49), pp. 180f. On the details of the functioning of bas, see infra Chapters 4.2 and 4.4.

62

Chapter 3

For the analysis within this book, it is important to distinguish carbon tariffs from climate-related bas.320 The instruments are independent of each other. Both the tariff and the import ba can make climate-intensive products more expensive. Tariffs and bas can both be collected at the border. However, bas are still considered domestic measures,321 while tariffs regulate market access.322 Accordingly, tariffs and bas have different calculation methods and ­legal requirements. New tariffs depend either on a conclusion of the negotiation round of the wto in Doha or need compensation. The freedom to establish a new tariff is, therefore, very limited within the wto. In contrast, bas can be established without such a consensus and without any compensation if properly designed. The limit of bas is the orientation at the corresponding domestic measure.323 If a domestic measure is highly restrictive, the ba can be at the same level. Moreover, the tariff is an instrument used only for trade in goods, while the ba might also be applied to services.324 Finally, in contrast to tariffs, bas can adjust the domestic measure to imports and exports.325 As long as the ba is designed in an origin-neutral manner, it prevents carbon leakage effects.326 Import bas avoid competitive disadvantages in the home market and make the eu ets more effective for climate protection. They make carbon-intensive goods more expensive, which might reduce the consumption of imported climate-intensive goods or services. Imported products or services that previously did not fall under a climate regulation or that were less restricted than comparable products and services in the eu might now also be regulated.

320 This distinction is not always properly made in academia. Mixing the terms and their meaning, Weitzel, Hübler and Peterson (n 41); Sakai and Barrett (n 158), p. 103; Moore (n 55), pp. 50, 51, 62. Using the term ‘tariffs’ but consequently discussing bas, P-E Veel, ‘Carbon Tariffs and the wto: An Evaluation of Feasible Policies’ (2009) Journal of International Economic Law 749; J Reinaud, ‘Would Unilateral Border Adjustment Measures be Effective in Preventing Carbon Leakage?’ in Lutz Weischer and others (eds), Climate and Trade Policies in a Post-2012 World (unep 2009), p. 73. In contrast, there is little literature really dealing with carbon tariffs. Cf. Cottier, Nartova and Shingal (n 240). 321 Article iii and Ad Article iii gatt. 322 Article ii gatt; see also A H Qureshi, ‘Trade-Related Aspects of International Taxation’ (1996) 30(2) Journal of World Trade 123, p. 163. 323 Cottier et al. argue that this leads to a limited effectiveness of tariffs to reduce pollution in foreign countries. Cf. Cottier, Nartova and Shingal (n 240), p. 13; Qureshi (n 322), pp. 169, 171. 324 Cf. supra Chapter 2.4.2 and infra Chapter 7. 325 Lester and Davies (n 282), pp. 250, 251, 258. 326 Becker and Will (n 56), pp. 204–205; Becker, Brzeskot, Peters and Will (n 42), pp. 347–350.

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In contrast, export bas are guaranteed to address the competitive disadvantages while being less certain to be effective for climate protection.327 However, even if the prevention of competitive disadvantages was the only effect of export bas, this might still incentivise first-movers, such as the eu, to do more for climate protection.328 The compatibility of bas with wto rules is controversial. It is questionable whether the ba leads to market access restrictions, whether it is more restrictive than necessary or whether it causes discrimination of foreign goods and services against domestic equivalents. bas are not discriminatory as long as they do not go beyond the burden of the ets on eu products or services. A problem in this context is the distinction between products that differ only concerning the emissions during their production process or life cycle. The ba might also lead to extra-jurisdictional effects, in particular, if foreign climate measures are not recognised as equivalents. Finally, the uncertain e­ ffectiveness of the ba against carbon leakage might lead to problems with wto law. To find a wto-compatible design, the wto rules must be discussed in more detail.329 Resistance to bas appears to be high. This was shown by the strong resistance to the integration of international flights from or to the eu into the eu ets.330 Even if complying with wto rules and all other relevant international agreements, non-eu states would likely consider bas to be unnecessary trade restrictions and to interfere with their own climate policies. If establishing an ets-ba, provocations might be avoided if it is communicated as early as possible, if negotiating consensual solutions is attempted, and if the ets-ba is only used as far as common instruments fail or are ineffective. The avoidance of unnecessary restrictions reduces the likelihood not only of wto disputes but also of over-reactions. At the least, bas are less restrictive than bans, ­quotas or tariffs as they also apply to domestic products. Products and services to which the ba applies still can be traded as long as the ba is paid. They are also less restrictive than standards not requiring one particular climate policy. 3.4.4 Linking the eu ets with Other etss Another option to avoid competitive disadvantages and carbon leakage effects and to improve the effectiveness of the eu ets would be the linking of the eu 327 Ismer (n 149), pp. 425f; P Demaret and R Stewardson, ‘Border Tax Adjustments under gatt and ec Law and General Implications for Environmental Taxes’ (1994) 28(4) Journal of World Trade 5, pp. 62–63; Cf. Sakai and Barrett (n 158), p. 105; Monjon and Quirion (n 41), p. 5201. 328 On the effects of export bas, see also supra Chapter 4.1. 329 See infra Chapters 4–8. 330 See also supra Chapter 2.4.2.

64

Chapter 3

ets with other etss.331 The eu might also recognise foreign ets certificates without actual linking taking place. This indirect linking332 can be mutual but it does not depend on whether the foreign ets also recognises the eu ets.333 Alternatively, the eu ets might be linked with other etss if both the eu and the foreign ets are connected with a third ets. The indirect linking is already provided by the flexible mechanisms of the Kyoto Protocol, insofar as the Kyoto certificates are compatible with the eu ets.334 As far as other states also make their ets compatible with the Kyoto mechanisms, the eu might indirectly exchange certificates with these states. However, only a limited number of states have ratified the Kyoto Protocol and, even if they have, they have not all agreed on mitigation targets under Annex B of the Kyoto Protocol and use a national ets which is connected with the Kyoto ets. Moreover, the Doha Amendment is not yet in force.335 For example, New Zealand has established its own national etss and is at the same time a country in Annex B of the Kyoto Protocol, but it did not agree on a second commitment period of the Kyoto Protocol. Other countries with national etss, such as China and Kazakhstan, are not listed in Annex B. Hence, the indirect linking through the Kyoto Protocol might become practically relevant only for Switzerland, which is an Annex B country, has ­ratified the Doha Amendment and has established a national ets.336 How ever, Switzerland has not established an automatic offsetting mechanism 331 J Bazelmans, ‘Linking the eu ets to Other Emissions Trading Schemes’ in Michael Faure and Marjan Peeters (eds), Climate Change and European Emissions Trading: Lessons for Theory and Practice (Edward Elgar Publishing 2008), 297; Mauer (n 100), p. 22; P Sopher, ‘Emissions Trading Around the World: Dynamic Progress in Developed and Developing Countries’ (2012) 6(4) Carbon and Climate Law Review 306. 332 On the differentiation between direct and indirect linking, see also Mauer (n 100), pp. 34–36. 333 Article 25(1a) and (1b) ets Directive (n 20). Cf. Panagiotis Delimatsis and Despina Mavromati, ‘gats Financial Services and Trade in recs’, International Trade Regulation and Climate Change (Cambridge University Press 2009), p. 248. On mutual recognition of similar standards P C Mavroidis, Trade in Goods (Oxford University Press 2012), p. 676; Mauer (n 100), p. 34. 334 Article 25(1), Article 28(3), Article 30(2)(d), (l) and (o) and 30(3) and for aviation Article 11a(2), (3), (4), (5) and (8) ets Directive (n 20); J Jaffe, M Ranson and R Stavins, ‘Linking Tradable Permit Systems: A Key Element of Emerging International Climate Policy Architecture’ (2009) 36 Ecology Law Quarterly 789, pp. 795–798. 335 On the Kyoto Protocol and the Doha Amendment, see also the introduction in supra Chapter 2.1. 336 Federal Act on the Reduction of co 2 Emissions (Non-Authentic English Version) 641.71 accessed 30 August 2017 (Swiss co 2 Act).

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65

i­ntegrating Kyoto certificates into the system. It only contains a more general optional recognition of foreign climate activities.337 As the Kyoto Protocol has had different caps from the beginning, ­competitive disadvantages and carbon leakage effects are relevant even among Annex B countries. Indirect linking through the Kyoto Protocol does not necessarily lead to progress for climate protection. If the caps of the etss of the linking states differ, linking might even increase carbon leakage effects. However, Switzerland has the same cap and uses the same base year as the eu in the Kyoto Protocol and the Doha Amendment.338 Moreover, the eu limited the total number of Kyoto certificates that can be recognised in the eu ets.339 Therefore, the carbon leakage effect caused by Swiss firms owing to indirect l­inking is not expected to be high. Finally, indirect linking through the Kyoto ets does not yet have high practical relevance. However, minding the problem of different caps under the Kyoto Protocol, indirect linking might be established in upcoming national etss or in combination with a potential market-based mechanism agreed on the basis of the Paris Agreement.340 The direct link between different national etss might be independent of commitments made in international climate agreements. A common ets provides more options to reduce emissions while being less costly than n ­ ational etss, provided that both states agree on a common mitigation target.341 A strong coalition of the willing might even lead to incentives for third-­party states to join the common ets or to design their etss in a similar way as the eu and the linked state. In the best case, the ets linking could initiate a ­bottom-up development towards a global ets. The different stages of c­ ooperation are shown in Figure 9. However, whether the harmonisation of national etss really is more effective for climate protection than separate etss depends on the compatibility of the systems. Linking also bears the risk of lowering the protection levels (race to the bottom). Although it does not matter where emissions are reduced, 337 338 339 340 341

Article 5 Swiss co 2 Act (n 336). See Annex B of the Kyoto Protocol and Article 1, footnotes 7 and 11, Doha Amendment. Articles 11a, 11b ets Directive (n 20). Article 6 Paris Agreement. Linking exists between the Californian and the Quebec ets. Cf. J Swartz, ‘China’s National Emissions Trading System: Implications for Carbon Markets and Trade’ (ictsd Global Platform on Climate Change, Trade and Sustainable Energy Issue Paper  6,  2016)  ­accessed 26 August 2016, p. 8.

66

ets-ba on imports Figure 9

Chapter 3

Indirect linking through Kyoto Recognition of foreign ets ets certificates as equivalents

Global/ Direct linking by multilateral ets mutual recognition

Extent of regulatory cooperation. Source: Own design

c­ limate protection in another country might abate local co-benefits such as the development of climate-friendly technologies.342 Harmonisation has a positive effect on climate protection if the ­harmonised ets does not fall behind the ambitions of one of the linking states but if the harmonisation instead leads to additional efforts. Otherwise, it is not the linkage with other etss that contributes to climate protection but the commitment that the respective states made before establishing their etss. States with etss that are similar, in particular as regards ambition, are unlikely to suffer strong carbon leakage effects from each other. In contrast, if the systems to be harmonised are not similar to each other, linking might worsen the carbon leakage problem, and the common ets might become less effective for climate protection. Since the eu established its ets, other countries have followed:343 Canada,344 China,345 Japan,346 Kazakhstan, New Zealand,347 South Korea,348

342 Mauer (n 100), p. 40. 343 The International Carbon Action Partnership (icap) provides an interactive figure as an overview for the ets worldwide. International Carbon Action Partnership (icap), ‘icap ets Map’ accessed 30 August 2017. 344 Cf. Ministre du développement durable, environnement et lutte contre les changement climatiques du Québec, ‘The Québec Cap and Trade System for Greenhouse Gas ­Emission Allowances’ accessed 30 August 2017. 345 China established ets pilot systems in seven of its regions: Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen and Tianjin. See for an overview Swartz (n 341). 346 Japan has two etss. The Tokyo Cap-and-Trade Program was established in 2010. The Saitama Target Setting ets was established in 2011. Cf. Tokyo Bureau of Environment, ‘Tokyo Cap and Trade’ accessed 30 August 2017. 347 Cf. New Zealand Ministry for the Environment, ‘New Zealand Emissions Trading Scheme’ accessed 30 August 2017. 348 Korean Ministry of Environment, ‘Introduction of Emissions Trading Scheme’ accessed 30 August 2017.

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Switzerland349 and the usa.350 More etss are planned in Brazil, Chile, India, Indonesia, Mexico, Russia, Thailand, Turkey, Ukraine and Vietnam. Australia abolished its ets and established a funding instrument instead. Table 4 shows that foreign etss differ from the eu ets. Different designs do not automatically lead to the conclusion that the etss are not compatible or that linking would compromise their effectiveness for climate protection. However, a minimum of equivalence or harmonisation is necessary in order to maintain the effectiveness of the eu ets for climate protection.351 The cap of the foreign ets to be linked with the eu ets must be binding, similar in ambition and structure, using cap and trade.352 The combination of the eu ets with a system using flexible caps (baseline and credit system353) would weaken the climate effect of the eu ets. This would exclude the Chinese ets from eligibility for linking.354 This comparability of ambitions is the most problematic criterion. The free definition of ndcs under the Paris Agreement supports different mitigation targets and climate instruments rather than defining criteria for a common instrument.355 If the eu ets were harmonised with an ets using free allocation, this would not lead to inefficiencies of the harmonised ets but to competitive disadvantages of eu traders. Therefore, as the eu envisages using full auctioning in 2030, a mixed allocation with similar shares of auctioned certificates or full auctioning of the foreign ets would be closer to the eu ets.356 This would exclude most etss established so far from eligibility for linking. Only the rggi and the Californian ets would fulfil this requirement of full auctioning.357 The recognition of certificates of third systems (offsetting) does not make the eu ets less effective so long as offsetting is similarly structured as in the eu ets. In the eu ets, the flexible mechanisms of the Kyoto Protocol can be recognised for offsetting.358 If the system to be harmonised with the eu ets 349 Swiss co 2 Act (n 336). 350 There are two etss in the usa: The rggi in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont since 2009 and in California since 2013. Cf. California Environmental Protection Agency, ‘Cap-and-Trade Program’ accessed 30 August 2017; Regional Greenhouse Gas Initiative, ‘An Initiative of the Northeast and MidAtlantic States of the U.S.’ accessed 30 August 2017. 351 Cf. Mauer (n 100), p. 50. 352 Mauer (n 100), pp. 35, 38, 51–53. 353 This system is currently used in the Chinese pilot ets. See Mauer (n 100), p. 57. 354 Cf. Mauer (n 100), p. 60. 355 Cf. supra Chaper 2.1. 356 Mauer (n 100), pp. 53–54. 357 Mauer (n 100), p. 57. 358 Article 21a Kyoto Protocol.

68 Table 4

Chapter 3 Overview of mandatory etss

State and name of the ets

Start

Greenhouse gases covered in 2017

Canada, Québec and Ontario

2013

co 2, ch 4, n2o, sf 6, 85% hfc, pfc, no 3 and other fluorinated ghgs

China, Pilot Schemesa

2013

co 2

eu

2005

Japan, Satima

Emissions covered

Share of auctioned ­certificates in 2020

Price stabilisationh

0% or 100%f

MinP, msm, Ba

35–60%

0%

msm, Ba

co 2, n2o, pfcs

45%

40% or 100%f,g

Ba

co 2

18%

0%

Ba

Japan, Tokyo

2010

co 2

20%

0%

Ba

Kazakhstan

2013

co 2

50%

0%

Ba

New Zealandb

2008

co 2, ch 4, n2o, sf 6, 52% hfcs and pfcs

10–40%

MaxP, Ba

South Koreab

2015

co 2, ch 4, n2o, pfcs, hfcs, sf 6

86%

ets

ba≈ets

tbt Const1

ba=ets

ntr General Exceptions ntr General Exceptions ntr

(+) (+)

gatt Const7

Disproportionally higher restriction of imported dcs products Improper application of the ba

tbt Const2

ba=ets

tbt Const3

ba=ets

gatt Const4

ba=ets

Price-based ets-bas (ets price per ­product or service)

Flexibility

(+) (+)

Application of the ba only to sectors with strong climate impact and carbon leakage effects Product-based calcula- ntr tion method for the ba Product-based ntr exemptions

(–)

eu enjoys cap and ntr trade while foreign General traders have no (full) Exceptions access to the eu ets (unequal flexibility and recognition but equal competitive effects)

(+/–) (+/–)

(–) (–)

345

Reform Proposal for an Import BA for the EU ets Category

Agreement, Level: constellation ba vs. ets/ ba 1 vs. ba 2

Constellation

Affected wto rule

Restriction

gats Const2

ba=ets

eu enjoys cap and trade while importers have no (full) access to the eu ets but always need to pay a fix ba (unequal flexibility but equal competitive effects)

ma NTR General Exceptions

(+) (+) (+/–)

Trade volume

gatt Const6

ba=ets

ntr

(–)

Recognition of foreign efforts

tbt Const4

ba=ets–foreign climate measure

ntr

(–)

gats Const1

ba=ets–foreign ets

Foreign traders produce more of the restricted goods than the eu Recognition of equivalent foreign climate measures Non-recognition of foreign ets certificates

(+/–) (+/–) (+/–)

gats Const3

ba 1>ba 2 ba=ets–Kyoto ets

Selective recognition only of Kyoto certificates

ma ntr General Exceptions mfn General Exceptions

gatt Const2, 3

ba>ets

General Exceptions

(+/–)

gats Const4

ba=ets ba=ets

Outside eu jurisdiction ma MFN NTR General Exceptions

(+)

gats Const5

eu regulates production process (also) within foreign countries if products are imported eu regulates international aviation eu regulates international aviation in the own airspace

Extrajurisdictional effects

(+) restriction/violation of wto rules (–) no restriction of wto rules (+/–) compliance uncertain or depending on particular requirements Source: Own design.

(+) (+/–)

(–) (–) (–) (–)

346

Chapter 8

do not lead to a violation of wto law or are unlikely to lead to a violation are marked with a minus (–). These constellations provide the frame for the design proposals for the ets-ba. Constellations marked with a plus (+) should be avoided, as they lead to restrictions of wto rules. The following proposals seek to avoid restrictions of wto rules and other applicable rules of international law. The two basic designs that will be discussed will be the integration of imports into the ets and the establishment of a price-based approach1641 taking the form of a charge representing the burden the ets imposes on like products or services within the eu. These two approaches will be compared according to their compatibility with wto rules, their compatibility with other applicable rules of international law and their effectiveness for climate protection and carbon leakage prevention. Within the scope of what is legally possible, economic, strategic and political criteria shall guide the comparison between different proposals on the design of the ets-ba. Taking economic and political criteria into account for the design of the ets-ba will help to make the measure feasible for the eu while avoiding wto disputes and a destabilisation of the international negotiations on climate protection and trade. Economic criteria are mainly transaction costs and efficiency. Thresholds and a limit on the number of sectors in which the etsba applies might simplify the ets-ba and reduce these costs. The prevention of wto disputes also reduces the costs of the ets-ba.1642 Political and strategic criteria are the attractiveness of the design for particular interest groups and their perceptions of fairness, also reflected in the principle of cbdr.1643 The transparency and predictability of the ets-ba will also help to find acceptance.1644 Another important political criterion is path dependence. An etsba that is close to the existing eu ets Directive and harmonic with existing international climate agreements increases its chance of being implemented. This chapter will focus on the following questions: should the ets-ba be emissions- or price-based? To what extent might changes to the eu ets Directive become necessary? How can the ets-ba become cost-efficient without conflicting with wto rules? How can it respond to development needs?

1641 For the adjustment of taxes, this broad distinction was also made by Astoria. Astoria uses the term ‘rate equivalency’ for the emissions-based approach and the term ‘price-equivalency’ for the price-based approach. However, Astoria only discusses the rate-equivalency approach in detail focusing only on one possible option, the carbon footprint/life cycle analysis. Cf. Astoria (n 55), p. 497. 1642 Monjon and Quirion (n 41), p. 5205; cf. supra Chapter 4.5. 1643 Cf. Cosbey and others (n 148), p. 8; see also supra Chapter 2.1. 1644 Defining ‘good governance’ as a criterion Cosbey and others (n 148), p. 8.

Reform Proposal for an Import BA for the EU ets

347

To what extent must foreign climate measures be recognised as equivalents? How should the revenues of the ets-ba be used? 8.1

Emissions-Based Approach: Integration into the eu ets

Even if the emissions related to foreign and domestic goods and services are treated alike, the emissions-based approach can lead to prima facie violations of the ntr and mfn.1645 The reason for this is that products and services are above all compared according to their characteristics, end-uses and consumer preferences, while tariff lines are a criterion only for products and the central product classification and the modes of supply are a criterion only for services. Hence, even if emissions during the production process or life cycle differ, foreign emissions-intensive products and services might be considered to be like competitive climate-friendly products and services in the eu. Hence, products or services may not be disfavoured only because they cause different emissions if they are like in all or most other respects. Taking emissions as a criterion to calculate the ets-ba is, nonetheless, possible if the General Exceptions of the gatt or gats are invoked.1646 Relying on the General Exceptions means that the ets-ba always needs to fulfil the necessity test or the ‘relating to’ requirements. To fulfil these criteria, the relevance to climate protection must be made plausible. As far as the necessity test applies, the ets-ba must be the least restrictive means that is reasonably available to achieve the desired climate protection level. Uncertainties about climate change and also about the ets-ba as an instrument against climate change and carbon leakage are allowed. However, uncertainties in calculating the emissions would easily be considered disguised discrimination, in particular, if problematic calculation methods disfavoured foreign countries. Moreover, taking emissions abroad as a benchmark might restrict trade and foreign climate measures, which can possibly lead to extra-jurisdictional effects that might be difficult to justify under the General Exceptions.1647 If the eu cannot monitor the actual emissions

1645 Cf. supra Chapters 5.3, 5.4, 5.6, 7.5.3 and 7.5.4. In contrast, emissions-based criteria are unlikely to be relevant in the context of the tbt Agreement. Annex 1 tbt Agreement excludes nprppms to fall under the tbt Agreement. The only possibility that the emissionsbased ets-ba falls under the tbt Agreement might be that the emissions are reflected by label, although it is not certain that the tbt Agreement becomes relevant in this case. Cf. supra Chapters 6.3–6.5. 1646 Article xx gatt, Article xiv gats; cf. Chapters 5.8 and 7.7. 1647 Cf. supra Chapters 5.8.6 and 7.7.4.

348

Chapter 8

during the production of a product or the proliferation of a service, emissionsbased approaches do not only lead to disguised discrimination but also seem to be ineffective for climate protection and carbon leakage prevention.1648 If an ets-ba is based on the actual emissions of a product or service and refers to the General Exceptions of the gatt or the gats, an exact measurement is necessary. Emissions-based approaches that are sufficiently precise to comply with the General Exceptions might be costly. However, if precise, emissions-based ets-bas might not only prevent wto disputes and political distrust but also be effective in reducing competitive disadvantages and related carbon leakage effects.1649 This advantage of emissions-based ets-bas are reasons for going into further detail on emissions-based approaches. 8.1.1 Measurement, Calculation The eu uses an emissions-based approach for eu products and services falling under the eu ets. Integrating imports into the existing ets is the straight application of a domestic measure to imports. Such ets-ba provides the same design, administration and flexibility as the eu ets. As with eu firms, the foreign trader could choose between pursuing the emission allowances or using a more climate-friendly technology to save certificates to sell them to other ­traders. In the best case, carbon leakage effects can be prevented in a costefficient way, and the eu ets becomes more effective for climate protection. At first glance, the ets-ba taking the form of integration of imported products into the eu ets does not seem to be discriminatory, as the eu measure is simply applied to imports and emissions are charged equally. However, taking a closer look at this type of ets-bas, it might not be close enough to the traded product to be considered non-discriminatory. Possibly, foreign installations are treated like eu installations, but the restriction on foreign installations might be too high. Even those foreign products that are not traded with the eu would be charged and not only traded goods. The integration of the whole foreign installation into the eu ets would also be more restrictive than necessary to achieve the eu climate protection level and carbon leakage prevention. As far as the state affected by the ets-ba has a deviating climate policy in place, it might also lead to disguised discrimination not to recognise the foreign policy as equivalent.1650 This influence might be criticised by other states, in particular by developing countries, for being paternalistic and unfair.1651

1648 Cf. supra Chapters 5.8.5 and 7.7.3. 1649 Cf. Becker, Brzeskot, Peters and Will (n 42), pp. 363–366. 1650 Article xx(chapeau) gatt and Article xiv(chapeau) gats. 1651 Cf. Becker and Will (n 56), p. 213.

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To avoid these problems of discrimination and extra-jurisdictional effects the eu would need to apply the ets-ba only to those products that are actually imported to the eu. Even if an installation-based approach is chosen, the eu would have to find out what share of products of a foreign installation is actually traded with the eu. Such a calculation would be highly challenging, if not impossible, as the eu would depend on the exact data of production and trade volumes in the respective commitment period, which are not available in the allocation phase, not to speak of the willingness of exporting states to provide this information. The eu ets might also include the trade in services, for example aviation services.1652 The ets-ba may cover those (parts of) services that are actually traded with the eu. In the case of aviation, the ets-ba might only apply to eu airspace.1653 The ets-ba on aviation could be calculated as for eu operators: based on the payload of the aeroplane and the flying distance. In contrast to the suspended provisions of the eu ets Directive, the ba might only take into account the distance that is flown in eu airspace.1654 The ets-ba in the aviation sector becomes necessary only if the corsia mechanism of the icao is not effective enough to achieve the level of climate protection the eu pursues. As far as the eu has more ambitious climate policies in place in the aviation sector, it still faces carbon leakage problems and competitive disadvantages. It might reactivate the inclusion of international flights into the eu ets, but only to the extent to which the corsia mechanism is ineffective. To avoid double-counting and extra-jurisdictional effects, corsia certificates might be taken into account when foreign airlines need to submit ets certificates. Once the corsia certificates can be traded, they might be used to lower the burden of the ets-ba. If the eu limited the charge to foreign airlines in their own airspace, other states might still be provoked, but the resistance to the ets-ba might be lower than in 2012, also because the ets-ba only within the eu airspace complies with the Chicago Convention. The eu might also refer to a benchmark technology. This benchmark could be the average technology used within the eu for producing a good,1655 the best available technology (bat) or one particular technology defined as a 1652 Cf. supra Chapters 7.6, 7.7. 1653 Article 1 Chicago Convention. 1654 Annex iv, Part B ets Directive (n 20); cf. supra Chapter 7.7.4. 1655 The average technology of the foreign country is not recommended as benchmark technology as it is also difficult to verify for the eu. On the proposal to take the average technology, see also Branger and Quirion (n 160), p. 62. A benchmark technology would be most likely analysed under the gatt, as the tbt Agreement is unlikely to become relevant for emissions-based measures or other measures using nprppms, at least as far as the emissions are not reflected in a label. Cf. supra Chapter 6.1.2.

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s­tandard, for example combined with a label.1656 If the foreign technology used for production is comparable to the eu standard, the ets-ba would be at the same level as for like products within the eu. If the foreign technology is not equivalent, it might be charged higher. However, whatever reference technology is used, the foreign trader might claim its product produced with a less efficient technology to be a like product. If foreign products are charged higher than eu like products based only on the use of a climate-intensive technology in the production process, this less favourable treatment is likely to lead to discrimination against the foreign product. It is difficult to justify these disadvantages even in terms of the General Exceptions. The concentration on an eu benchmark technology might still lead to arbitrary treatment defining a too narrow instrument. Another method for referring the emissions during the production process or life cycle1657 to the final products is the carbon footprint. There are different methods to calculate the carbon footprint. The carbon footprint can include co 2 or other greenhouse gases. There is also an iso standard for the carbon footprint: iso 14067 and ISO 14044.1658 As far as the products to be charged by the ets-ba bear a label with the carbon footprint, this might qualify the etsba as a measure under the tbt Agreement.1659 If the ets-ba is based on the carbon footprint and falls under the tbt Agreement, the international standard for carbon footprints needs to be used for the ets-ba rather than other carbon footprint standards. Other standards can be used only if the iso norm is less effective to achieve the level of climate protection the eu has chosen. Referring to the iso norm rather than to another norm for carbon footprints would also be more likely to be recognised by other states. However, even if the international standard is applied, methods of calculating the carbon footprint depend on assumptions, for example whether the life cycle of a product is included or whether the carbon footprint concentrates only on emissions during the production process. Moreover, the monitoring and verification would be so difficult that discrimination is likely to arise or, at least, to be claimed by other wto Members. If the carbon footprint uses very fine criteria for product distinction, products that are very similar to each other might be treated in a discriminatory manner. As an example, Car A might have a higher carbon footprint than Car B, as it can drive fewer miles per gallon. Still, Car A and Car B might have much in common as regards their physical characteristics, end-uses, 1656 On these approaches, see Ismer (n 149), pp. 411, 457; Monjon and Quirion (n 41), p. 5204 1657 Cf. Quick and Lau (n 277); Ismer (n 149), pp. 415f. 1658 Cf. Micallef-Borg (n 714); Ismer (n 149), p. 555. 1659 Cf. supra Chapter 6.1.2.

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consumer preferences and tariff lines. Car A might be claimed to be a like product or, at least, a dcs product that needs to be charged in a similar way as Car B.1660 To make the method for calculating the carbon footprint reliable would be expensive and difficult to monitor. The longer the value chain, the more difficult the verification would become. If the calculation method is not exact, this might not only lead to wto problems but also make the ets-ba less effective. Only if the emissions are properly calculated would the emissions-based ets-ba really become effective against carbon leakage without leading to disguised discrimination and unnecessary extra-jurisdictional effects. Discrimination possibly arising through the flexible certificate price must also be avoided. The ETS-BA should refer to whichever is cheaper: the initial allocation price for the valid commitment period or the daily certificate price (unless the foreign traders participated in the auctioning process). 8.1.2 Necessary Reforms of the eu ets Changes to the ets Directive might become necessary with and even without the establishment of the ets-ba to comply with wto rules. A few changes are indispensable. Other reforms might be advisable to limit the risk of wto disputes, although restrictions are not absolutely certain. The current ets Directive focuses on export leakage, exempting sectors from the ets obligations and allocating certificates for free. The respective product sectors are enumerated in the carbon leakage list. This approach was considered to be insufficient to face the carbon leakage problem comprehensively. First, the carbon leakage list does not address the problem of carbon leakage and competitive disadvantages caused by imports. Second, the carbon leakage list might adjust the export leakage too extensively, weakening the overall effectiveness of the ets Directive.1661 The establishment of import ets-bas is the first step to prevent carbon leakage effects caused by imports. The book focuses on suggestions on import adjustments. Import bas do not lead to discrimination as long as exported products exempted from the eu ets and imported like products are not competitive. Therefore, an import ba needs to be accompanied by an omission of 1660 The similarity between the products compared is likely to remain relevant also for the ets-ba based on the carbon footprint if discussed in the context of the General Exceptions of the gatt or of the tbt Agreement. 1661 Cf. supra Chapter 2.4.1. The latter problem might be addressed by replacing the carbon leakage list by a more precise adjustment of exports. Cf. Becker, Heuson, Peters and Will (n 24), p. 4. Further requirements for the export ba were discussed by Holzer (n 49), pp. 201–205; de Cendra (n 51), pp. 136–141.

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the respective product or sector from the carbon leakage list. Consequently, the eu might either replace the carbon leakage list by an export ba that properly separates eu products from products on the international market or, if the leakage list is maintained, only include those sectors into the import ba that do not appear on the leakage list. The eu has the right but not the obligation to adjust all competitive disadvantages and carbon leakage effects. Hence, the eu might either focus only on the import adjustments (asymmetric ba1662) or also establish export rebates. Instead of using the carbon leakage list, which exempts even products that remain within the eu, it might establish an export ba only on products and services that are actually traded.1663 The export ba does not need to be introduced at the same time as the import ba. As this book focusses on import bas, it only needs to be made clear that the import ba does not the exclude export ba at a later stage. 8.1.2.1 Allocation If integrating imports into the eu ets, the eu has three options for an allocation system that avoids discrimination of foreign traders: (a) it could either apply the mixed system for both the ets and the ets-ba; (b) it could distribute all certificates for the ets-ba for free while using mixed allocation for the ets; or (c) it could apply full auctioning for both the ets and the ets-ba. If mixed allocation (a) shall be upheld as the allocation method for the ets, the ets-ba must also have a share of certificates that are allocated for free.1664 To also comply with mfn, this share of free allocation should be equal for a particular product irrespective of the country of origin. As far as the eu upholds the free allocation for all sectors that are on the leakage list, either the ets-ba might not be applied within these sectors or the ets-ba on imports must also take the form of free allowances.1665 Alternatively, the eu might distribute all certificates to be used for the etsba for free (b) while maintaining mixed allocation only within the eu.1666 The difference in the allocation form would result in a positive discrimination 1662 1663 1664 1665

On symmetric and asymmetric bas, see also supra Chapter 4.1. Cf. Becker, Heuson, Peters and Will (n 24), pp. 3–4. This proposal is made by Fischer and Fox (n 41), p. 201. Discussing the application of the mixed allocation system critically in this context, Monjon and Quirion (n 41), p. 5200. 1666 In contrast, going back to free allocation also within the eu ets is not useful, as it makes the eu ets less effective.

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f­ avouring foreign traders. According to the ntr, foreign goods and services may not be treated less favourably or charged in excess of like products and services within the eu. Hence, the better treatment of foreign traders would not be a violation of the ntr. If free allocation applies to all imported products and services, the ba also complies with mfn. This approach would certainly be in the interest of foreign traders, as the costs are lower than if auctioning is used. However, using free allocation for the ets-ba could even be less e­ ffective for climate protection than not establishing an ets-ba. The additional certificates for foreign traders might lower the certificate price and, therefore, undermine the cap and trade mechanism. To avoid this problem, the cap of the eu would need to be tightened.1667 However, as the number of imports cannot be predicted with certitude while the cap is fixed at the beginning of each commitment p ­ eriod, the calculation of the correction factor for the cap would be challenging. Eventually, the eu could use full auctioning for the ets and the ets-ba(c). This approach seems to be non-discriminatory, as long as the price per product is equivalent. To also avoid discrimination in the administration of the ets-ba, the initial auctioning at the beginning of each eu ets commitment period needs to be opened to foreign traders, not only to eu traders. Otherwise, the price difference between the ets certificates auctioned and the euas finally traded might lead to discrimination. The eu might introduce the ets-ba only in 2030 when full auctioning is planned.1668 The ets-ba could be introduced earlier only if full auctioning is also introduced earlier within the eu. Sectors listed in the carbon leakage list may not fall under the import ba. As the carbon leakage list exempts the whole sector from the eu ets, whether or not the good is traded in the end, the parallel application of the leakage list and the import ba would lead to discrimination.1669 If establishing the ets-ba only in selected sectors, the eu should use full auctioning, at least within these sectors, to avoid discrimination.1670 The eu could also replace the carbon leakage list by a more differentiated export ba, which only exempts products from the ets that are exported. Finally, full auctioning is not only the most promising allocation method from a wto law perspective, but it also appears to be the allocation form to make the ets and the ets-ba effective for climate protection and against carbon leakage. 1667 Becker, Heuson, Peters and Will (n 24). 1668 Cf. supra n 128. 1669 Cf. Holzer (n 49), p. 234. 1670 This might be the reason why the proposal of 2017 for an import ba in the cement and clinker sector included an omission of cement and clinker from the carbon leakge list. Cf. Cf. eu Committee on the Environment, ets Reform Proposal, Plenary Sitting (n 36), Amendment 12, Recital 7, second part.

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8.1.2.2 Modification of the Cap and the Allowance Reserve If importers receive eu ets certificates, the eu cap would need to be adjusted as more traders enter the market.1671 If the ba takes the form of integration into the eu ets, the demand for certificates will increase. Although the higher number of traders competing for the same amount of certificates would make the ets more effective for climate protection, the demand would be disproportionately high, as all trading partners of the eu might suddenly be obliged to hold allowances. One proposal to maintain the effectiveness of the ets and to make the eu cap and the number of available allowances predictable could be a separate allowance reserve for imports controlled by the eu.1672 To get an idea of the number of reserved allowances, the eu would have to predict the future trade volumes. As a proxy, it might use past data on imports. The eu cap and the allowance reserve must be defined at the beginning of each commitment period to make the ets effective. If the eu imports more than predicted and the allowance reserve is insufficient, this does not need to lead to a ban on all further imports (quota).1673 In case of the allowance reserve not covering all certificates needed for imports, the importers might be included in the eu cap rather than using a quota. In this way, inaccuracies when calculating the allowance reserve will not be at the expense of foreign traders. In this case, the demand for ets certificates on the home market might grow. In contrast, if the allowance reserve is ­higher than the certificates needed, the eu might save the remaining certificates. The reserve would not weaken the eu cap and trade mechanism. 8.1.2.3 Monitoring and Sanctions The monitoring requirements and sanctions should be equivalent to the respective requirements for the eu ets. However, if the ets-ba takes the form of integration into the ets-ba, the emissions relevant to the ets-ba are caused in foreign countries. At least as regards the trade in goods, it might be difficult to monitor the emissions of foreign installations, as the eu might not necessarily get access to the foreign installations. Either the eu concludes an agreement with other states which allows for monitoring within foreign countries or the foreign states must monitor the emissions. The monitoring of ­technologies and

1671 Becker, Heuson, Peters and Will (n 24). 1672 This suggestion was also made in the us proposal on bas Sec. 504 (c)(2)(B)(i) us ­Waxman-Markey Bill 2009 (n 37); see also Fischer and Fox (n 41), p. 199; Reinaud (n 320), p. 75; see also de Cendra de Larragán (n 172), p. 651. 1673 Cf. supra Chapters 3.4.1, 5.5 and 7.5.2.

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standards used for production might also not be provided willingly by ­foreign traders and countries. They have an incentive to understate their emissions and to claim that installations are more efficient than they are. As long as the eu does not have the right to measure the emissions or to certify the foreign installations, manipulations would be difficult to detect. In the aviation sector, the eu defines the sanction: every operator that cannot cover its emissions by certificates pays €100 per tonne of co 2-eq, which it could not cover while also being obliged to deliver the missing certificates.1674 If this operator does not pay the penalty rate, it is banned from operation. Owing to the suspension of the ets-ba in the aviation sector the penalty rate is not applied. It might become relevant only if the ets-ba is reactivated. However, as these restrictive sanctions apply equally to eu and foreign operators, they are no market access restrictions and could be applied in a non-­discriminatory manner. Hence, the restrictive penalty might be compatible with wto rules if the ets-ba on international aviation were reactivated for eu airspace. In all other sectors, the sanctions for installations not covering their emissions by certificates can be individually defined by national laws of the Member States, which would also apply to imports. For example, the German law on the trade of emission allowances also applies a penalty rate of €100 per tonne co 2-eq, which cannot be covered by ets certificates unless the certificates could not be provided owing to force majeure.1675 The Austrian law also applies a penalty rate of €100 per tonne co 2-eq.1676 8.2

Price-Based Approach: ba Equivalent to the Restriction of the ets Per Product or Service

The price-based approach uses the price the eu ets imposes on a product or service as a benchmark for the ets-ba.1677 Instead of referring to the emissions during the production process, life cycle or service provision, it is based on the actual burden of the eu ets per product or service. This price applies to all imported products and services that would qualify as like products or services (as far as they fall within eu jurisdiction). This approach is less accurate and not as strong against carbon leakage as emissions-based methods1678 but might be easier to verify and to be made compatible with wto rules and 1674 1675 1676 1677 1678

Article 16(3) ets Directive (n 20). § 30(1) German tehg (n 133). § 28(2) Austrian Emissionszertifikategesetz 2011-ezg 2011 (n 133). A product-based approach is also suggested by Ismer and Neuhoff (n 50), p. 154. Cf. Astoria (n 55), p. 532.

356 Table 19

Chapter 8 Comparison emissions-based versus price-based ets-ba

Emissions-based (integration into ets or carbon footprint)

Price-based (burden of ets per product/service)

Legitimate regulatory goal Only climate protection

Neutral competition, climate protection

wto rules on which the ets-ba depends

Article xx gatt, Articles ii, xiv, xvi, xvii gats

Article iii gatt Article 2 tbt Agreement Articles ii, xiv, xvi, xvii gats

Burden of proof in a wto dispute

Defendant rather than complainant

Complainant rather than defendant (goods) Defendant rather than complainant (services)

Prevention competitive disadvantages/carbon leakage

High (if properly measured)

Moderate

Costs

High

Moderate

Necessary changes of the ets and required data

Integration into eu ets: Full auctioning, data about full auctioning, trade volume, assignment adjustment of the eu cap, of costs to single products monitoring in foreign countries Carbon footprint: full auctioning, exact calculation of carbon footprint

Recognition of foreign measures

Mandatory

Voluntary (goods) Mandatory (services)

Extra-jurisdictional effects Likely (as broad recognition is required)

Unlikely (as recognition is limited to equivalent ets certificates)

Unintended side effects/ abuse

Unlikely

Source: Own design.

Likely

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is also more difficult to manipulate. Table 19 provides an overview of the legal, political and economic advantages of such ets-ba compared to the emissionsbased approaches. The most important argument for the price-based approach is that wto compatibility is more likely than for the emissions-based approaches. As ­regards the trade in goods, the price-based approach depends less on the General Exceptions but is likely to fulfil the stricter requirements of Articles i and iii gatt1679 or, if applicable, of Article 2 tbt Agreement.1680 As regards the trade in services, it also complies with Articles ii and xvii gats and as far as restricting Article xvi gats seems to comply with Article xiv gats.1681 The price-based approach does not depend on the measurement of actual emissions or on the definition of the bat. It can be based on the characteristics, end-uses, consumer preferences, tariff lines (products) or the central product classification and modes of supply (services). To avoid discrimination, the foreign product or service is charged as for the eu like product or service that bears the lowest burden. At the same time, the ets-ba could remain to some extent climate-based, selecting those goods and services for adjustment that have a strong impact on climate change and import leakage. Some products and services are always climate-intensive, even if they use the most climatefriendly and efficient production method. If these goods and services are often imported, the adjustment has a positive effect on climate protection and carbon leakage prevention. For example, if cement is more climate-intensive than steel, cement could be charged more than steel, without this higher charge being referred to the actual emissions. If the same product is equally charged in any other country, this will not lead to discrimination in the sense of wto rules. Even if the General Exceptions of the gatt or gats need to be invoked and the necessity test applies,1682 it is likely to be also fulfilled. There is no less restrictive alternative in sight that has the same effect on climate protection as the price-based ets-ba while being less restrictive. Particularly, the price-based approach does not need to be compared to the emissions-based approaches as the latter imply a different climate protection level. If the eu defines a moderate level of protection and leakage prevention and chooses the price-based approach to achieve this protection level, the necessity test does not require to choose the emissions-based approach as this modifies the initial climate protection aim. 1679 Cf. supra Chapters 5.3, 5.4 and 5.7. 1680 Cf. supra Chapters 6.2–6.7. 1681 Cf. supra Chapter 7. 1682 If the ets-ba implied technical regulations or standards, it would always need to comply with the necessity test (Articles 2.1 and 2.2 tbt Agreement). Cf. supra Chapter 6.4.

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However, the approach taking the actual burden on a product or service as a reference for the calculation of the ets-ba still faces two wto problems. The price-based approach provides less flexibility than the eu ets, which is discriminatory as soon as foreign traders are treated less favourably than eu traders. Moreover, foreign certificates are still not recognised as equivalents in the eu market.1683 To the extent to which other states consider the full flexibility an advantage (rather than considering it a further restriction of the own trade and climate policy), they might claim that non-integration into the eu ets is discrimination. This leads to a dilemma: both integration into the ets and non-integration can lead to discrimination. To overcome this dilemma, it is recommended to provide other states with two options: if other states establish an ets that is comparable with the eu ets, their certificates can be recognised as equivalents and might also be used to lower the ets-ba. If foreign ets certificates are incompatible with the eu ets (also when combined with an exchange rate), the eu does not need to recognise foreign certificates.1684 Moreover, when establishing the ets-ba the eu could offer an optional integration into the eu ets. If other states decide to be included into the ets, they would have to comply with the monitoring requirements of the eu ets. Particularly, the eu might have access to measure the actual emissions per installation. Otherwise, the price-based approach is applied to lead to less interference with foreign climate policies but also providing less flexibility. As far as the option of linking foreign ets with the eu ets is available to all wto Members that come close to the eu ets, the ets Directive already might be sufficiently flexible to comply with mfn and the ntr.1685 For example, the linking of the eu ets with the Swiss ets concluded in 20171686 complies with mfn as far as other equivalent etss have the same chance to be linked with the eu ets. A price-based ets-ba does not avoid carbon leakage completely, but it contributes to carbon leakage prevention. The contribution of the price-based ets-ba to carbon leakage prevention depends on the restriction the eu ets imposes on those products or services bearing the lowest burden under the eu ets. In this way, no foreign trader is treated in a discriminatory manner. The price-based ets-ba would also be less likely to meet resistance from other wto Members. Hence, to some extent, the foreign traders are still treated 1683 This could restrict Articles xvi and xiv gats. Cf. supra Chapters 7.5.2 and 7.7. 1684 Article xiv gats. See also supra Chapter 7.7. 1685 Cf. Article 25(1a) and (1b) ets Directive (n 20). 1686 eu–Switzerland Linking Agreement (n 232).

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more favourably than eu traders but this less ambitious ba would reduce the carbon leakage effect. If the emissions do not need to be measured and assigned to particular products or services but only the price the ets imposes on a product or service, the transaction costs for the calculation of the ets-ba might be moderate.1687 This makes the price-based approach attractive for the eu, also because it does not need to rely on data on foreign emissions. Finally, the characteristics of products and services are easier to verify than emissions during the production process or life cycle. This would reduce the likelihood of manipulations of data. The interference with other climate policies is also less intensive, which might be welcomed by other wto Members. As even the price-based ets-ba leads to restrictions compared to an ets without a ba, the political resistance to the measure cannot be fully excluded. To reduce the resistance of other states, the eu should make strong, constant and equal efforts to find a cooperative solution and make the ets-ba as transparent as possible.1688 Possible negotiations might take place on all levels of cooperation, whether on the level of a coalition of the willing (mra, pta or linking agreement) or in the broader context of multilateral climate negotiations.1689 8.2.1 Measurement, Calculation The price-based approach differs in its calculation method depending on whether it refers to products or services. Apart from the restriction of foreign certificates the book dealt with the restriction of aviation services. The ets-ba for aviation has the advantage that the flying distance and the payload of the machine are objectively measurable without measuring the actual emissions. The only correction that needs to be made if the suspended ets-ba was reactivated is the limitation of the ba to the part of the flight that takes place in eu airspace, and corsia certificates should be automatically recognised to avoid double-counting. The ets-ba for imported products is based on the price that the ets imposes on the least restricted product within the eu. The reference product is the eu product produced in the most efficient installation, i.e. the installation with the lowest burden in the eu. This should be the product produced with the bat of the eu.1690 Hence, if this low price is the reference point for all 1687 Cf. Becker and Will (n 56), p. 196; see also Friedrich (n 271), pp. 126–127. 1688 Article X gatt, Article iii gats, Article 2.9, 2.10, 10 tbt Agreement. 1689 Cf. supra Chapters 2.1 and 3. 1690 Suggesting taking the technology or product with the lowest burden as reference point for the ba, Ismer and Neuhoff (n 50), p. 155; Friedrich (n 271), p. 120. Making a similar

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foreign like products, there will be no foreign product being treated less favourably than the eu like product. The challenge would be to refer the installationbased burden imposed by the ets to the final products in the eu. Emissions of the whole commitment period need to be divided by the number of products produced in this commitment period and multiplied by the certificate price. BA product

= ETS product =

emissionsinstallationBAT number of productsinstallationBAT

= emissions productBAT ´ certificate price As the actual emissions and the number of final products produced in the installation are not clear at the beginning of a commitment period, data for emissions and the number of products produced in the last commitment period could be used as reference point. The certificate price to be used in the calculation of the ets-ba is whatever is lower: the allocation price of this commitment period or the price on the day of import. This will again weaken the effectiveness of the ba against carbon leakage, but it avoids discrimination. Provided that climate-intensive goods still suffer a substantial burden (which is, ultimately, the reason for carbon leakage), this lowest burden imposed on eu products still has an effect against carbon leakage and on climate protection when applied to imports. Let us take a car as an example for the calculation of the price-based etsba. Assume the eu factory with the bat falls under the eu ets. If the factory only produces cars and each car causes the same amount of emissions, the calculation of the emissions per car would be easily calculated by dividing the emissions per installation by the number of cars produced in the same commitment period. The emissions per car in tonnes only would have to be multiplied by the price of one ets certificate. The certificate price used for the ­example is calculated based on an average price of euas between 2012 and 2016, which is €5.88.1691 This fictive example would lead to an ets price s­ uggestion for export bas, Genasci (n 51), pp. 39–40; cf. Holzer (n 49), p. 235. Suggesting taking the highest burden of the eu as benchmark, Moore (n 55), pp. 57, 58. This suggestion would clearly violate wto rules as it does not only impose a higher burden on the imports that actually lead to higher emissions but even on those products that are more efficient for climate protection than comparable eu products. 1691 The average price is based on own calculations using the official data of European Emission Allowances Auction (eua), Global Environmental Exchange (16 February 2017).

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of €58.80 per car produced in the eu and, consequently, also to an ets-ba of €58.80 per imported car. BA product =

ETS = product

emissionsinstallationBAT number of productsinstallationBAT

= emissions productBAT × certificate price

500,000 t CO2 = 10 t CO2 per car × 5.88 € 50,000 cars = 58.80 €

= BAcar BAcar

This is a simple example. The formula might get more complicated if the factory where the car is produced is an installation producing different goods. In this case, the assignment of the additional price the ets imposes on one single eu product would be more difficult and the ets-ba could not be calculated that easily. The formula might also get more complicated if the car has a longer value chain, where only a part of the production falls under the eu ets. Further details of the formula remain open to future research if the price-based ets-ba is considered for implementation. Although the price-based approach is climate-based, it is not the actual emissions of the product or service that are the basis for calculation but the product characteristics and the price imposed on the installation or service falling under the lowest restriction of the eu ets. Even though the starting point of such a calculation is based on the emissions, the ba is calculated only on the basis of the price actually paid for eu like products and services. 8.2.2 Necessary Reforms of the eu ets The eu ets would need to be reformed not only if the ets-ba takes the form of integration into the eu ets but also if the ets-ba is based on the price paid for like products and services in the eu. The price-based approach always requires a payment. To avoid discrimination, the full auctioning is recommended. If mixed auctioning is upheld, the ets-ba might only apply to those sectors in which free allocation is not applied. Hence, the eu would still have to omit the sectors to which the ets-ba applies from the carbon leakage list. Unlike the integration into the ets, the adjustment of the cap or an allowance reserve would be dispensable for the price-based approach. If the ets-ba takes the form of the price-based approach, the monitoring of emissions in other states would be unnecessary. Importers would simply pay the ets-ba. The fact that the price-based approach requires only a reform of the allocation

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form is a strong argument for this approach. Such reform seems to be more realistic than the substantial reforms that would be necessary for the emissionsbased approach. 8.3

Simplifications and Exemptions

If the ets-ba is too complicated, too expensive or too far away from the existing international or eu climate policy, it is difficult to negotiate. Complicated calculation methods are also more likely to provoke wto disputes. Therefore, simplifications of the ets-ba are recommended where they do not lead to violations of wto rules. The ets-ba could apply to a smaller number of products than the eu ets, at least at the beginning. Whether the scope of application is limited or whether it takes the form of exemption from the ets-ba does not make a difference for compliance with wto rules but the conditions for the application of the etsba. While country-specific ets-bas1692 run an elevated risk of violating mfn, sector- or product-specific approaches and thresholds might be easier to justify. The eu might include exemptions from the ets-ba. For example, a trader might come from a state that is responsible only for a small amount of greenhouse gas emissions. Or the state might have established its own climate p ­ olicy lowering the relevance of carbon leakage and climate change problems, which might lead to a lower rate for the ets-ba. Alternatively, the trading partner might come from a developing country. These three issues might also be correlated. Even if the existence of foreign climate measures and a low responsibility for climate change problems reduce the relevance of the respective country for carbon leakage effects and climate change, every exemption from the ets-ba would reduce its effectiveness for climate protection. However, to comply with the Paris Agreement and to avoid provocation, the eu might consider exemptions. Simplifications of and exemptions from the ets-ba are relevant for both emissions- and price-based designs. 8.3.1 Limitation of Sectors To reduce transaction costs, the ets-ba could start by charging only a limited number of products and sectors, in particular emissions-intensive and ­trade-exposed sectors.1693 In the best case, the eu should prove a high import 1692 Cf. Low, Marceau and Reinaud (n 47), p. 493. Critically Regan (n 53), pp. 103–104. 1693 Moore (n 55), p. 60; Astoria (n 55), p. 498; see also 25th recital of the eu Directive 2009/29/EC (n 173); Hoerner and Muller (n 605), p. 21.

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leakage rate for a sector to which the ets applies and also prove that this carbon leakage effect is a causal effect of the higher efforts for climate protection (strong carbon leakage).1694 From a climate perspective, it is recommendable to establish the ets-ba where carbon leakage is most relevant. The application of the ets-ba only to selective sectors is compatible with wto rules, as it can be based on the stricter definition of like services or like products and as far as the differential treatment of products or services does not go beyond these definitions. The sectors not chosen are treated more favourably than the adjusted sectors but this can be based on different product or service characteristics. To avoid discrimination, the definition of sectors should be absolutely clear. Even if the General Exceptions of Article xx gatt or Article xiv gats need to be invoked, proof that the relevant sector is more relevant for carbon leakage than other sectors is not necessary, as long as the chosen sector is relevant for the carbon leakage problem.1695 It is sufficient that the chosen sector is relevant for climate change problems and that the ets-ba contributes to climate protection or carbon leakage prevention, at all.1696 Within its refused proposal, the eu suggested import bas only for the cement sector, as this sector is considered as particularly vulnerable to import leakage. This suggestion took the form of integration of imports into the emissions-based ets. Another example of the application to a limited service sector is the extension of the ets to the aviation sector. However, this selection of sectors does not depend on emissions-based approaches or on the integration into the ets. The price-based ets-ba might also be limited to cement or aviation. Whether the cement and the aviation sector are charged by an etsbas or whether another sector is more relevant should be discussed in more detail. The carbon leakage effect depends on the carbon-intensity and the tradeintensity of a product. For the import adjustment, the import volume in the respective sector is decisive. Besides cement and aviation,1697 aluminium, iron 1694 Cf. supra Chapter 2.3. 1695 A risk assessment is only required if the ets-ba falls under the tbt Agreement, which might be the case only for the product-based ets-ba or, possibly, for an emissions-based ets-ba that is based on a label. However, even if a detailed risk assessment must be provided, the ets-ba does not have to focus on the most serious risks of climate change or on the strongest leakage rate, as long as the sector chosen for adjustment is one factor causing carbon leakage. On the requirement of a risk assessment, see supra Chapter 6.4. 1696 Cf. supra Chapters 5.8.3.2, 5.8.4.3, 6.4 and 7.7.2. 1697 Cf. F Sindico, ‘The eu and Carbon Leakage: How to Reconcile Border Adjustments with the wto?’ (2008) European Energy and Environmental Law Review 328, p. 329; D ­Damailly and P Quirion, ‘The Competitiveness Impact of co 2 Emissions Reduction in the Cement Sector’ (oecd Environment Directorate Centre for Tax Policy and ­Administration,

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or steel might also be relevant sectors.1698 However, the ets-ba limited to raw materials might not resolve the carbon leakage problem1699 as final products are traded more, and ets-ba on a specific raw material might also be extended to final products containing this material,1700 at least if the share of the respective materials in the final product is high. As imported products falling under the ets-ba may not be treated less ­favourably than eu like products, the sectors to which the ets-ba applies must be omitted from the carbon leakage list, or the list needs to be replaced by a differentiated export ba only rebating the products that are actually exported. As the replacement of the leakage list does not seem to be on the agenda of the eu,1701 it is useful to choose those sectors for the import ba that are not on the leakage list or to omit the sectors where import leakage exceeds export leakage. From a political and economic perspective, it also seems to be easier to start with one sector and to include other sectors afterwards. In this way, the eu could administrate the ets-ba more easily and avoid manipulations and limit lobbying behaviour.1702 The eu can make experiences from which it could learn. This might reduce the transaction costs for the establishment of the ets-ba and lower the backlash from foreign states and traders. More research about the sectors that are most relevant to carbon leakage might be necessary. 8.3.2 Threshold Minimum thresholds might further narrow the scope of application of the ets-ba to the most relevant goods and services. This could reduce administrative costs for the ets-ba. The sum of total annual greenhouse gas emissions or the sector-specific annual greenhouse gas emissions might be taken into consideration in this context. Another criterion would be the sector-specific emissions. A trader that can prove that its good was produced with bat might 16 ­November 2005) COM/ENV/EPOC/CTPA/CFA(2004)68/FINAL accessed 27 July 2017, para. 73. 1698 Cf. Friedrich (n 271), p. 140; supra Chapter 2.3. 1699 The ba on raw materials is discussed by McLure, Jr. (n 26), pp. 255, 259. 1700 Also suggesting the ba for final products, Holzer (n 49), pp. 221–222; Monjon and Quirion (n 41), p. 5203; C F Izard, C L Weber and H S Matthews, ‘Primary and Embedded Steel Imports to the us: Implications for the Design of Border Tax Adjustments’ (2010) Environmental Science & Technology 6563, pp. 6563, 6567. 1701 Cf. supra Chapter 2.2. 1702 Cf. Monjon and Quirion (n 41), p. 5203. At the same time, the selection of the first sectors to fall under the ets-ba would also be highly relevant to lobbyism.

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pay a lower ba. The gdp per capita might also be a criterion for a threshold. However, as the state of development can be independent of the impact on climate change, it is discussed as a separate category. Thresholds might apply to ets-bas for goods or services.1703 For example, the eu might integrate the aviation sector by not only limiting the application of the ets to its own airspace but also to flights that pass a minimum distance. Another example of a threshold is the exemption of non-commercial aircraft operators emitting less than 1,000 tonnes per annum.1704 An ets-ba on cement and products containing cement might also depend on a minimum quantity of cement in the final product. Thresholds for the application of ets-bas reduce its effectiveness against carbon leakage. However, as with the selection of sectors, thresholds do not violate the ntr. They only lead to positive discrimination of foreign goods or services. eu traders to which the ets applies even below this threshold are in a worse competitive relationship than foreign traders, not the other way around. As long as a threshold does not imply disguised restrictions against foreign traders, such positive discrimination does not restrict the ntr. Thresholds might apply equally to all foreign traders (mfn). 8.3.3 Foreign Climate Policies If foreign climate measures are equivalent to the eu ets, the eu might lower the ets-ba rate. The criteria for recognition should be formulated as clearly as possible. Recognition might lead to exemptions for whole countries or for specific installations, enterprises, firms, aircraft operators, goods or services. It is important that the imported product or service is actually covered by the foreign climate measure for exempting it from the eu ets-ba. If the ets-ba is emissions-based, for example if it takes the form of integration into the ets, the General Exceptions of Article xx gatt and Article xiv gats need to be invoked. In this case, foreign climate measures must be recognised if they are equally effective for climate protection.1705 Extra-­jurisdictional effects need to be avoided if they are dispensable for the functioning of the ets and the ets-ba.1706 Hence, if the ets-ba is emissions-based, the eu should make sure that all foreign climate measures that are equally effective 1703 Suggesting a threshold for carbon footprint-based services, Holzer (n 49). 1704 This exemption of the ets for the aviation sector is included in the new proposal for a reform of the ets Directive. Cf. eu Commission, Proposal Aviation (n 217), Annex 1. 1705 Cf. supra Chapters 5.8.5 and 7.7.3; Low, Marceau and Reinaud (n 47), p. 487. See also ­Section 6001(2), Section 6004(b)(1) and (b)(2), Section 6006(b)(2)(A)(i) us LiebermanWarner Climate Security Act 2008 (n 37). 1706 Cf. supra Chapters 5.8.6 and 7.7.4.

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are directly recognised when calculating the ets-ba and that those climate measures that cannot be recognised are not treated more restrictively than necessary to prevent the carbon leakage effect. Recognition may neither be narrowed to full equivalence with the eu ets and its underlying mitigation target nor depend on the absolute number of climate measures in place, the costs for climate investments,1707 the absolute price a measure imposes on a trader1708 or a particular climate standard. It is not yet clear whether only foreign etss need to be recognised or whether various climate instruments also need to be, at least if the General Exceptions of the gatt or the gats are invoked. The equivalence depends on the effect of the foreign climate measures on climate protection. As it is beyond the scope of this book to compare the eu ets with all possible foreign climate measures, the comparison is made only for a few examples. The eu might impose a lower ets-ba on those traders that use the bat or include exemptions for products and services that have a small carbon footprint.1709 Such an approach would allow for a differentiated incentive for climate-friendly traders. However, the exact measurement of the contribution of emissions-based approaches in foreign countries remains difficult whether formulated as a condition for the application of the ba or as an exemption from the ba. Hence, the eu might limit such exemptions to measures with a verifiable effect on climate protection. In contrast, if the foreign country used export rebates for its climate measure, the eu would not have to recognise it. So far, recognition is required for equivalent ets certificates.1710 As soon as an emissions-based ets-ba is established, recognition of equivalent climate measures needs to become mandatory if the ets Directive shall comply with wto rules. If the price-based approach is chosen, recognition is mandatory for ­foreign certificates of equivalent etss.1711 Recognition is required, even without an ets-ba being established,1712 but seems to be even more relevant as soon as the e­ ts-ba is in place. While the eu ets excluding foreign certificates only restricts the traders of these certificates, the exclusion of foreign certificates as equivalent, lowering the ba rate, also leads to double-counting and restricts traders of goods and other services. Hence, foreign equivalent ets certificates need to be recognised. If within the price-based approach, foreign 1707 Arguing for recognition of foreign measures due to a high number of investments, Sung (n 44), pp. 164–170. 1708 Suggesting the price for the foreign climate measure as a proxy, Astoria (n 55), p. 500. 1709 Cf. Moore (n 55), p. 46. 1710 Article 25a ets Directive (n 20). 1711 This is possible, as the price-based approach is likely to comply with Articles i and iii gatt. Cf. supra Chapters 5.3–5.7. 1712 Cf. supra Chapters 7.5, 7.7.3 and 7.7.4.

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emissions-based ­climate measures are recognised as equivalents, this makes the price-based approach becoming emissions-based, which requires justification by the General Exceptions of the gatt and gats. To preserve the effectiveness of the eu ets, the eu could adjust the cap and establish an exchange rate when recognising foreign etss that are not fully compatible with the eu ets.1713 The membership to an international climate agreement such as the unfccc, the Kyoto Protocol and the Paris Agreement might also reduce the burden imposed by the ets-ba. If the membership to an international climate agreement is relevant, this reduces the rate of the ets-ba for the whole state, not only for particular traders.1714 However, being a party to a climate agreement alone is not sufficient to consider the respective state having established an equivalent climate measure in the sense of wto non-discrimination rules. Although participation in the first-best climate policies can be an effective climate protection strategy if all states participate, the commitments made in international climate agreements are not always strong and concrete. Being a party to the Kyoto Protocol or to the Paris Agreement does not necessarily improve the climate protection policy of a state. The better treatment based on the membership to a climate agreement alone without substantial commitments is insufficient to justify a violation of mfn.1715 Therefore, efforts of other states in the context of multilateral climate agreements might be r­ ecognised only if they are sufficiently precise and effective for climate protection. For the emissions-based approach recognition of these efforts is mandatory as soon as they are effective for climate protection. For the price-based approach recognition of foreign climate measures is compulsory if the foreign climate measure also takes the form of an ets and if this ets is equivalent to the eu ets. Hence, the eu might at least recognise corsia certificates or possible c­ ertificates of a mechanism under the Paris Agreement as far as they are equivalent to the eu ets, at least when combining them with an exchange rate. Apart from the direct recognition of foreign climate protection efforts, the eu might also implicitly recognise foreign activities. Indirect recognition means that no additional step from sides of the eu is necessary. Those activities that are part of multilateral climate agreements might implicitly lead to recognition, as the eu or its Member States are party to these agreements. The existing option to trade Kyoto cers of ldc projects within the eu ets indirectly includes other Kyoto Annex B parties. 1713 Cf. supra Chapters 3.4.4, 3.5.4, 7.5 and 7.7. 1714 The missing precision and reference to final products of such exemptions is criticised by Howse and Eliason (n 175), p. 60; Sindico (n 1697), pp. 337, 340. 1715 Cf. Monjon and Quirion (n 41), p. 5205.

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Another option of implicit recognition is the establishment of (export) bas by other states.1716 Not only the eu but also other states might seek to avoid competitive disadvantages and carbon leakage effects if they are first-movers in climate protection. bas for every state would lead to the ­realisation of the consumer pays principle1717 (consumption-based approach1718). Although this ­approach avoids double-counting, it only partly prevents the r­ ecognition problem and extra-jurisdictional effects. As far as the eu has the more ambitious climate policy and as far as foreign bas also comply with wto non-­discrimination rules, the bas of others would remain below the eu level. Hence, the extrajurisdictional effect on the less ambitious states would remain relevant.1719 Finally, in the past, the wto adjudicating bodies have often found exemptions from the measure at issue to be violations of the General Exceptions, at least of Article xx gatt.1720 Exempting more than the equivalent foreign measures from the ets-ba, reduces the effectiveness of the ets-ba for carbon leakage prevention and raises the risk of disguised discrimination.1721 Therefore, the eu should either not use exemptions or relate them strictly to climate protection. If foreign measures are equally effective for climate protection, they might lower the ets-ba without being discriminatory and without increasing the carbon leakage problem. 8.3.4 State of Development The eu has the option to include exemptions from the ets-ba by taking the state of development into account. However, such exemptions are not mandatory under wto law.1722 In the unfccc and the Kyoto Protocol, the consideration of the state of development is reflected in the differentiation between developed countries with obligations for mitigation1723 and developing countries without these obligations. Besides these broad categories, the unfccc and the Kyoto Protocol also formulate the principle of cbdr.1724 The different responsibilities for countries with different states of development are also reflected in the burden sharing system.1725 The different mitigation targets in the Kyoto 1716 This compensatory effect of export bas of others is emphasised by Pauwelyn (n 51), p. 33. 1717 Cf. supra Chapter 5.8. 1718 Ismer, Haussner, Neuhoff and Acworth (n 1192). 1719 Cf. supra Chapter 5.8.6, Figure 19. 1720 Appellate Body Reports, EC—Seals (n 535), paras. 5.289–5.290, 5.319–5.320, 5.333–5.339, 5.193; Appellate Body Report, Brazil—Retreaded Tyres (n 278), paras. 233, 239, 246; see also supra Chapter 5.8.5. 1721 Article xx(chapeau) gatt, Article xiv(chapeau) gats. 1722 Cf. supra Chapters 5.6.4, 6.8 and 7.8. 1723 Annex i unfccc and Annex B Kyoto Protocol. 1724 Article 3(1), 4(1) unfccc, Article 10 Kyoto Protocol. 1725 This system imposes higher commitments on the most developed countries while transition countries have low caps. Article 4 Kyoto Protocol. See also, supra Chapter 2.1.

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Protocol are not based on an indicator of economic power, but the voluntary commitments made in the Kyoto Protocol can still be related to the state of development. In the Paris Agreement the ndcs might also reflect higher commitments depending on the state of development.1726 Although the commitments under the Paris Agreement do not depend on the ‘developed country’ and ‘developing country’ categories, the distinction is useful.1727 Developing countries have contributed less to climate change. At the same time, they are more vulnerable to climate change problems.1728 Developing countries have lower per capita emissions. However, developing countries can still be highly relevant to climate change owing to high absolute emissions and growth trends. Depending on the trade volume, developing countries can also be responsible for carbon leakage effects.1729 Therefore, it is not easy to find an appropriate design for exemptions based on the state of development without making the ets and the ets-ba ineffective for climate protection.1730 It could be argued that developing countries do not really suffer disadvantages from the ets-ba as they trade less and only lose one competitive advantage while maintaining others, such as lower wages. Moreover, it is possible to transfer the additional costs of the ets-ba to the consumer.1731 However, developing countries might have more difficulties in making efficiency improvements to lower the burden of the ets-ba. Developing countries might also not have the same access to technology as the eu and other developed countries and would, consequently, have more difficulties replacing inefficient technologies, materials or establishing structural changes. Developing countries would also have less capacity to establish their own climate policies that are equivalent to the eu ets to lower the ets-ba rate. While etss are established in developed countries or newly industrialising countries, climate measures of developing countries are less likely to be recognised as equivalents for the eu ets as they deviate from the eu ets. They neither stand for a comparable mitigation aim nor imply a comparable price per product.

1726 Article 2(2) Paris Agreement. 1727 Without looking for a precise threshold I will continue to use the terms ‘developed countries’ and ‘developing countries’ but without excluding commitments for the latter. 1728 Cf. ipcc Working Group ii (n 985), pp. 17–20. 1729 Considering developing countries as particularly relevant for carbon leakage effects, Martin, Muûls and de Preux, Wagner (n 160), p. 78. 1730 At the point the ets and the ets-ba become ineffective owing to exemptions, the ets-ba might have difficulties complying with the necessity test or with the ‘relating to’ requirements or it might be considered to lead to disguised discrimination. Cf. supra Chapters 5.8, 6.4, 6.5, 7.7.2 and 7.7.3. 1731 Sung (n 44), p. 172.

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Hence, they might be disproportionally affected not only by climate change but also by the ets-ba.1732 To overcome this dilemma the development needs might be linked to the climate protection criteria or to the carbon leakage effect in the respective country. For example, a trader might be charged by the ets-ba only if it exceeds a specific trade volume of climate-intensive products in a year. Such provision would automatically favour developing countries if they trade less; this is also related to carbon leakage, as those states trading less are less relevant for carbon leakage.1733 The development needs could also be referred to emissions per capita. The emissions per capita are reflected in Figure 23. If such a relative indicator is chosen, the threshold(s) should be carefully defined. As high-population countries still can have high absolute emissions, high trade volumes and cause high shares of carbon leakage effects, the threshold should not lead to a full exemption of the respective country from the ets-ba. Moreover, as soon as the emissions of a country change, the exemptions from the ets-ba should be adapted to these changes. If the price-based approach is established the overall restriction seems to be lower than with the emissions-based approach. As far as developing countries use technologies implying higher emissions than those used by developed countries, the orientation only at the product-related characteristics of a good automatically lowers the restriction against developing countries. In contrast, if the lower impact on climate change can be achieved by using alternative production methods to which the developing country does not have access, they would still face a higher restriction by the ets-ba. If developing countries are to be supported that are not efficient in climate protection, they need development-based exemptions. Development-based exemptions explicitly treat developing countries more favourably than developed countries without depending on the contribution to climate protection. The eu might decide on such exemptions without this leading to violations of wto rules.1734 To differentiate between more than two categories of countries and to avoid disguised restrictions that are not exclusively based on development goals the state of development could, for example, refer to particular indicators such as gdp per capita or similar indicators.1735 However, although development-based exemptions are permitted under wto law, the primary goal (climate protection) and the secondary goal 1732 Cf. Sung (n 44), pp. 161–162. 1733 Cf. supra Chapter 2.3. 1734 Cf. supra n 1722. 1735 Unnecessary trade restrictions not related to development goals are prohibited by ­paragraph 3(c) Enabling Clause.

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< 2.77 2.77 – 6.50 6.50 – 10.31 10.31 – 17.36 > 17.36 Figure 23 Emissions per capita 2014. Source: The World Bank, ‘co2 emissions (metric tons per capita)’ (2014) accessed 28 ­February 2018

(­ development) should be properly distinguished. If the eu establishes development-based exemptions from the ets-ba that do not correlate with the climate impact (e.g. the GDP per capita), it does not only take into account that the ets and the ets-ba become less effective for climate ­protection; it also needs to bring the secondary goal into consistency with the primary goal.1736 Traders of a developed country taking the exempted ­developing country as a transit country might seek to escape the ets-ba. This 1736 At least, if the General Exceptions need to be invoked, the development-based exemptions might question the primary goal of the ets-ba, which might lead to restrictions of the necessity test (Article xx gatt, Article xiv gats, Article 2.2 tbt Agreement) or to disguised discrimination (Article xx(chapeau) gatt, Article xiv(chapeau) gats, Article 2.1 in conjunction with the sixth recital of the preamble of the tbt Agreement). In ec— Seals, for example, the development needs of indigenous people were not recognised to be legitimate to justify exemptions from the measure at issue. However, whether this denial excludes development as secondary goal, or whether the denial was only owing to an inconsistent application of the secondary goal of the exemption from the measure at ­issue, was not clearly stated. At least, EC—Seals did not refer to the Enabling Clause,

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re-routing would further weaken the effectiveness of the ets-ba for climate protection.1737 The gdp per capita is reflected in Figure 24 below. The ets-ba might also take the capacity problem of developing countries into account, providing longer grace periods than for developed countries before applying the ets-ba.1738 This would provide more time for information on the ets-ba, capacity building and, where possible, technological change. Finally, although it is possible to make the primary and secondary goals consistent in a way that allows for the effectiveness of the ets and the ets-ba for climate protection, the climate-based exemptions are less ambiguous than development-based exemptions. Defining thresholds or exemptions on the basis of emissions per capita would combine development needs with c­ limate

Thousands < 6.79 6.79 – 16.73 16.73 – 30.53 30.53 – 45.29 > 45.29 Figure 24 gdp per capita 2016. Source: The World Bank, Data Bank: World Development Indicators: gdp per capita (2016) accessed 20 February 2017 which might have changed the argumentation. Cf. Appellate Body Reports, EC—Seals (n 535), para. 5.325, 5.333, 5.337. 1737 Cf. supra Chapters 4.4. and 5.6.5. 1738 This proposal is made by Sung (n 44), p. 159.

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effects of a country and is, therefore, a suitable indicator for exemptions from the ets-ba. For example, the eu could define several thresholds of emissions per capita to create a ba reduction system where states with the lowest emissions per capita receive the lowest ba rates. Or the eu could apply both indicators (gdp and emissions per capita) in parallel to support also the ldcs that have higher emissions per capita. Apart from the structural advantages, developing countries enjoy from threshold rules or the price-based approach; the eu might also strengthen financial support for capacity building.1739 8.4

Use of Revenues from the ba

As soon as the contribution to climate protection matters for the compatibility with wto rules, the effectiveness of the ets-ba for this aim must be certain. Although wto rules do not require the contribution to be quantified, it needs to be made plausible.1740 The contribution is required for the emissions-based ba and for the price-based ba with emissions-based exemptions. To be effective for climate protection, the revenue of ets and the ets-ba does not have to be used for any particular purpose. The effectiveness of the measures can be achieved by the price incentives alone. This might be the reason why only 50 per cent of eu ets revenue is explicitly bound to climate purposes while the use of the revenue of the other 50 per cent could be freely defined by eu Member States.1741 To use only 50 per cent of the revenue for climate purposes seems to be sufficient to make the ba compatible with wto rules. However, using higher shares of the revenue for climate purposes might provide an additional argument for the contribution of ets and ets-ba to ­climate protection. Using the full revenue for climate purposes, at least, as r­ egards the ets-ba, might help to make the ets-ba be considered only as a ­climate instrument. It would prevent the suspicion of protectionist intentions behind the ets-ba. The use of the revenue for international climate funding seems to be sufficient to fulfil this aim. This might also help to address capacity problems in developing countries.1742 The redistribution to the country of the r­ espective trader would be dispensable.1743 1739 See, for example, C Heuson, W Peters, R Schwarze and A-­K Topp, ‘Voluntary International Climate Finance under the Post-Kyoto Framework: The Strategic Consequences of Different Modes of Funding’ (2015) 6(3) Climate Change Economics 1. 1740 Cf. supra Chapters 5.8.1, 5.8.3.2, 5.8.4.3, 6.4, 7.7.1 and 7.7.2. 1741 Cf. supra Chapter 2.2. 1742 Cf. Ismer (n 149), p. 439. 1743 Suggesting the redistribution to the country of the trader, Regan (n 53), p. 104; Hecht and Peters (n 144), p. 3.

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Moment of Adjustment

The ets-ba’s compatibility with wto rules does not depend on the moment or place it is raised. However, the ets-ba depends on the goods and services that are actually imported. Therefore, the ets-ba might be collected before a product or service enters the eu. If the ets-ba applies to aviation in eu airspace, it might be raised after an aeroplane has landed in the eu or before it leaves the eu. As long as it is non-discriminatory, the ets-ba remains a domestic measure extending the eu ets to imports, wherever it is raised. 8.6

Result: Price-Based Import ba for the eu ets

This book analysed measures to avoid carbon leakage problems and competitive disadvantages that first-movers face when establishing ambitious climate protection measures taking the eu ets as an example. It provided an overview of carbon leakage measures, focussing on unilateral import bas. A detailed analysis of the compatibility with wto rules while taking economic and political criteria into account leads to the following suggestions for the design of the ets-ba. As the relevance of wto disputes, the transaction costs, the extent of restriction and the interference with foreign climate policies are lower, it is suggested to establish the price-based ba. In this way, the eu can face the carbon leakage problem and the competitive disadvantages that it suffers from having a more expensive climate policy than other states. In the beginning, this ba might be established only for imports and for one sector. The level of the ba would depend on the lowest price the eu ets adds to an eu product or service. Even if the price-based approach abstracts from the actual emissions, the contribution of such ba to carbon leakage prevention is better than not having an import leakage measure. To avoid discrimination, the ets-ba would have to be accompanied by an introduction of full auctioning of ets allowances within the eu, at least for the sector to which the ba applies. Alternatively, the eu could also provide for an option of full integration of imports into the ets without the foreign state having established an own ets, provided that the respective state accepts the monitoring and verification requirements that would be necessary to calculate the emissions and that the state provides reliable information about the exports to the eu. This optional integration into the ets helps to provide equal flexibility to foreign traders while not questioning the effectiveness of the eu ets and the ets-ba for climate protection.

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In the case of aviation, the emissions can be calculated more easily as the necessary data are available. Hence, a mandatory inclusion into the ETS is possible if it takes the efforts of corsia into account. If the eu decides to reactivate the ETS-ba on international flights, it might change the suspended measure as regards the limitation to the eu airspace. This approach would still fit into the concept of price-baed approaches as the ba is only paid for the imported services and the price referring to objective criteria. However, the strong resistance against this ba needs to be kept in mind, even if corsia is not equally effective compared to the eu ETS. Exemptions from the ets-ba should be applied narrowly to maintain the effectiveness of the ETS-ba. The following approaches are possible (while not all approaches suggested here, have to be used in the end): traders submitting certificates from equivalent etss, countries with low emissions per capita, ldcs and traders using the bat world-wide. The eu might also exempt certificates from both foreign unilateral and multilateral etss. An exchange rate might help to make the respective ets compatible with the eu ets. To lower the transaction costs and the restriction against developing countries while maintaining the effectiveness for climate protection, the eu might apply a minimum threshold from which the ets-ba applies. Revenues from the ets-ba should be used for climate purposes only. The final proposal for an ets-ba is summarised in Table 20.1744 The underlined terms as well as the formula in Article 10c(7) of the proposal might be developed further in the end. Table 20

Reform proposals for the ets Directive 2003/87/EC

Proposal for a new Article 10c Article 10c (1) A border adjustment (ba) extending the burden the eu ets imposed on eu goods and services to imported goods and services is hereby established. (2) The ba is a measure to make the eu ets more effective for climate protection. It prevents competitive disadvantages and carbon leakage effects the eu suffers from its climate protection policy being more expensive than of states without equivalent climate protection efforts. Accordingly, the eu recognises foreign efforts for climate protection if these efforts are equivalent. 1744 The reform proposal of the ets Directive implies the repeal of the suspension of the extension of the ets Directive to international flights to the extent that foreign operators fly in eu airspace. Cf. eu Decision No. 377/2013/eu (n 35); Article 2(8) eu Regulation No. 421/2014/EC (n 35).

376

Chapter 8

Table 20

Reform proposals for the ets Directive 2003/87/EC (cont.)

Proposal for a new Article 10c (3) The ba is applied to products and services imported into the eu. It is limited to those sectors that are most relevant for carbon leakage effects caused by imports (­Annex ib). This list is updated at the beginning of every commitment period. (4) To comply with wto rules, the ba may not exceed the burden of a like product or service of the eu. In contrast, a better treatment of imported products or services compared to eu products or services is possible. (5) The ba on foreign aircraft operators flying in eu airspace is calculated as provided for in Chapter ii, Articles 11a(8) subparagraph 4, Article 12(2a), 18a, 25a, 28a(8), 30(4) and in Annex ia. (6) The ba for imported goods is calculated as provided for in paragraphs (7)–(8). (7) The price of the ba is based on the price the ets imposes on a product with the same product characteristics within the eu. The reference product is the eu product produced in the most efficient installation, i.e. the installation with the lowest burden in the eu. Emissions of the whole commitment period are divided by the number of products produced in this commitment period and multiplied by the certificates price. BA product =

ETS = product

emissionsinstallationBAT number of productsinstallationBAT

= emissions productBAT × certificate price As the number of actual emissions and of final products is not clear at the beginning of a commitment period, data for emissions and the number of products refer to the time of allocation of the respective commitment period. The certificate price to be used in the calculation is whatever is lower: either the allocation price of the respective commitment period or the price on the day of importation. (8) The ba applies to raw materials and final products containing the relevant materials listed in Annex ib. (9) The eu might recognise foreign ets certificates as equivalents for its own ets certificates if both etss are directly connected by a linking agreement. The linking agreements are listed in Annex ic. Foreign ets certificates are

Reform Proposal for an Import BA for the EU ets

377

Proposal for a new Article 10c

(10)

(11)

(12) (13)

also recognised as equivalents without an agreement if the foreign ets is equally effective for climate protection as the EU ETS. A foreign ets is considered to be equally effective only if (a) the mitigation target, (b) the price stabilisation instruments, (c) the requirements for monitoring and verification, and (d) the sanctions of the foreign ets of the respective country are comparable to the mitigation target, price stabilisation instruments, requirements for monitoring and verification and the sanctions of the eu ets. To maintain the effectiveness of the eu ets when recognising foreign certificates that are not equally effective to the eu ets, the eu may decide to combine the recognition of foreign ets certificates with an exchange rate. The eu takes into account the common but differentiated responsibilities as it was agreed upon in Article 3 of the United Framework Convention on Climate Change (unfccc), Article 10 of the Kyoto Protocol and confirmed by Article 2(2) of the Paris Agreement. Therefore, the ba is not applied in countries, where (a) the sector-specific greenhouse gas emissions are below 0.5 per cent of the worldwide average in the same sector, (b) the greenhouse gas emissions per capita are below 2 t co2-eq, (c) the Gross Domestic Product (gdp) per capita is below €3,000. Annex id lists all countries falling under these exceptions. This list is updated on 31 December of every year. 100 per cent of the revenue of payments for the ets-ba shall be used for the Green Climate Fund to support developing countries and, in particular least developed countries, in mitigation, adaptation and capacity building. An aircraft operator or a product neither having paid the ets-ba nor the applicable penalty rate can be excluded from the eu market. The ba comes into force in the fourth commitment period of the ets Directive 2003/87/EC by 2030 when full auctioning is applied within the eu.

378 Table 20

Chapter 8 Reform proposals for the ets Directive 2003/87/EC (cont.)

Proposal for a reform of Annex i Existing text

Proposal

Annex i Categories of activities to which this Directive applies (6) From 1 January 2012 all flights which arrive at or depart from an aerodrome situated in the territory of a Member State to which the Treaty applies shall be included.

Annex ia Categories of activities to which this Directive applies (6) From 1 January 2021 all flights which arrive at or depart from an aerodrome situated in the territory of a Member State to which the Treaty applies shall be included for the distance flown in eu airspace.

(6a) The inclusion of foreign airlines into the eu ets shall be applied only (a) if and as far as the Carbon Offsetting and Reduction Scheme for International Aviation (corsia) fails to be established; or (b) as far as corsia is less ­effective for climate ­protection than the eu ets.

Annex ib Sectors for adjustment Price the ets imposes per tonne co 2-eq

Threshold/ minimum content in the final product (in %) making a product fall under the ba

379

Reform Proposal for an Import BA for the EU ets Services aviation Raw materials cement iron steel aluminium … Final products motor vehicles5t commercial road vehicle>7.5t

…

…

… … … …

… … … …

… … …

… … …

Annex ic Linking agreements in place

– Agreement between the European Union and the Swiss Confederation on the Linking of their Greenhous Gas Emissions Trading Systems (signed 7 November 2017) (2017) OJ L 322/3 (eu–Switzerland Linking Agreement) Annex id States exempted on the basis of Article 10c(10)

–

– Source: Own design.

… …

Chapter 9

Outlook This discussion about carbon leakage measures and on the import ets-bas brought new insights into second-best climate measures and how they could be made compatible with wto rules while being implementable. Results on the import ba for the eu ets might be valid for bas for other climate ­instruments. The interpretations of non-discrimination rules, nprppms and new approaches to extra-jurisdictional effects might also become relevant beyond the context of bas and climate protection. The book excluded the discussion of export bas. The existing export leakage measure applied to the eu ets is the carbon leakage list. It exempts sectors fully from the ets. In the reform of 2017/18, the share of free allocation was adjusted but it is still not directly linked to the export volume. Establishing an ­export ba instead of the carbon leakage list means to include export rebates only for products that are actually exported.1745 An export ba requires a different legal analysis, taking a closer look on the scm Agreement. Future research might not only have a closer look at the legal requirements for the export ba that has been provided so far but also develop concrete proposals for the design. The book made suggestions on how to lower the transaction costs of the ets-ba while maintaining its effectiveness for climate protection and against carbon leakage and competitive disadvantages while fitting into the existing paths of international and eu climate policy. The book tried to close a few gaps making concrete suggestions for reforms of the eu ets. However, the proposals made need to be elaborated in more detail. More information from other disciplines are needed to formulate technical details, in particular concerning the sectors to be chosen for adjustment, the method to assign the burden of the installation-based eu ets to single products to calculate the ets-ba and the criteria for exemptions from the ets-ba. The selection of sectors for the ets-ba should be based on a precise estimate of the relevance of import leakage effects for the eu. From a wto law perspective, any sector that is relevant for carbon leakage could be chosen; it does not have to be the most relevant sector. However, robust calculations of the carbon leakage effects might help to select those sectors for adjustment that are the most relevant. This might prevent political resistance to the 1745 See also the references in supra Chapter 4.1.

© koninklijke brill nv, leiden, ���9 | doi:10.1163/9789004391055_010

Outlook

381

ets-ba within and outside the eu.1746 As results of studies on carbon leakage still differ extremely, further research might be necessary to find out about carbon leakage effects in different sectors. The price-based approach seems to be simple, objective and non-discriminatory for the trade in services, such as the aviation sector. If the price-based approach is chosen for the ets-ba on imported goods, the formula to c­ alculate the restriction for an eu product using the bat should also be applicable to installations producing different goods and to products that contain raw materials and intermediate goods that were charged in different installations. These calculations depend on precise information about the value chain of a ­product and might, at some point, become very cost-intensive. Economic research might not only include final products made of materials produced in different installations in the calculation. It might also help to define thresholds for climate-intensive materials in the final product. Although the emissions-based approach was not recommended in this book, it is possible to design an emissions-based ba in a way that is compatible with wto rules. Further research might discuss the possibility of making the carbon footprint a reliable method to calculate the ets-ba for imported products, without the assumptions on which the carbon footprint depends leading to disguised discrimination in the sense of wto law. Exemptions from the ets-ba might also be discussed further. On the one hand, the climate-related exemptions should be discussed in more detail. The suggestion made for the design was made in the context of the Paris Agreement, reflecting a policy of the lowest common denominator. If states agree on more cooperation in climate protection and move closer towards an ambitious first-best solution, the ets-ba might include more exemptions. The book only provided an overview of instruments reflecting coalitions of the willing.1747 Promising approaches were the harmonisation of climate standards, for example in the context of mras or ptas. The harmonisation and the recognition of foreign climate policies might prevent carbon leakage effects from the beginning if the measures to be recognised really are equivalent while the prevention of carbon leakage was not considered to be effective so far, it remains an i­mportant approach and also a reason for exemptions from the ba. 1746 The resistance to bas owing to the integration of only selected sectors into the ets-ba might arise from eu industries suffering carbon leakage effects in the eu market that might argue for imports being included. 1747 Cf. supra Chapter 3.

382

Chapter 9

The book could not fully address the question from which point different climate policies are equivalent. As the equivalence of foreign climate measures is highly uncertain, recognition was suggested only for equivalent foreign ets certificates, at least for lowering the ets-ba rate. Future interdisciplinary research might discuss in detail to what extent other foreign climate policies are equivalent to the eu ets and must be recognised lowering the ba rate. Although the state of development lowers the effectiveness of the ba for climate protection, the eu might decide to include such exemptions. In this event, further research is necessary to define the indicators for development properly and to decide which thresholds qualify countries for exemptions. It should be kept in mind that each exemption from the ba lowers its effectiveness. The rerouting problem would have to be taken into account.

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Index adaptation 19, 45, 377 aims and effects test 164, 167, 172 aviation 36, 314, 324 best available technology (bat) 349, 357, 359–360, 366, 381 border adjustment (ba) 5, 42, 61, 84, 343 asymmetric ba 92 border tax adjustment (bta) 5, 89 calculation 348–351, 359–361 definition 5, 61–63 emissions-based approach 347 exemption 362 export rebate 35, 61, 85, 89–92, 319, 352, 366, 380 import ba 6–7, 42–44, 62, 90–92, 116, 121, 217, 264, 343–379 integration into ets 5, 35, 37, 61–63, 85, 88, 92, 102, 108, 159, 174, 179, 226, 240, 257, 285, 298, 324, 335, 347–355 price-based approach 355–362 sector 248, 255, 259, 269, 286–288, 362–364 symmetric ba 61, 89–91 threshold 259, 364–365 bottom-up 1, 6, 65 Canada 2, 4, 16–17, 53, 66, 68, 75, 99, 160, 190, 300–302, 307, 311 carbon border adjustment. See border adjustment (ba) carbon footprint 57, 134, 143, 145, 149–150, 152, 170, 182, 254, 257, 267, 346, 350–351, 356, 365–366, 381 carbon leakage 3, 28–43 carbon leakage rate 29 Carbon Offsetting and Reduction Scheme for International Aviation (corsia) 40, 349 carbon tariff 57–61 cbdr. See common but differentiated responsibilities (cbdr) Central Product Classification (cpc) 292, 304 Chicago Convention 315–318 China 66–68, 307, 311

coalition of the willing 3, 45, 47, 52, 54, 65, 72, 80, 88, 95, 97, 359 co-benefit 3, 75, 81 Committee on Trade and Environment (cte) 50–51 common but differentiated responsibilities (cbdr) 15, 20–21, 346 competitive disadvantage 3, 14, 28–35, 90, 92, 94, 99, 269, 324, 343 complementary measures 93, 108–114, 154, 162, 177, 209, 217, 237, 244, 249–258, 280 Comprehensive Economic and Trade Agreement (ceta) 75 consumer preferences 303–304, 309–310 consumer tastes and habits 132–139, 267 Copenhagen Accord 16 corsia. See Carbon Offsetting and Reduction Scheme for International Aviation (corsia) cross-price elasticity of demand (cpe) 137 developing country 15, 185–189, 277–278, 337–338, 368–373 directly competitive and substitutable (dcs) products 168, 173, 182, 190, 223 disguised discrimination 219–227, 268–271, 332–334 Dispute Settlement Understanding (dsu) 210, 233 Doha Amendment 14, 16, 21, 64, 302 Doha Round 51–54 double-counting 3, 6, 41, 54, 82, 94, 98, 104, 121, 123, 239, 253, 266, 272–273, 276, 321, 332, 335, 340, 349, 359, 366, 368 eco-dumping 54, 94 electricity 68, 102, 152–153, 156–159, 161 emissions trading system (ets) 14, 21 allocation 24, 26–28, 352–353 auctioning 24–26, 33, 67, 118, 300, 352, 361 benchmarking 22 cap 22, 24, 26–27, 32, 36–37, 65, 67, 118, 177–178, 298, 300–302, 308–309, 332, 337, 353–354, 361, 367

404 emissions trading system (ets) (cont.) certificate 15, 22, 37, 102–103, 118, 159–161, 178, 248, 280, 282, 284, 290, 295, 327–328, 333, 335, 339–342, 349, 352, 354–355, 360, 366 grandfathering 24, 120 integration into ets 5, 36–37, 61–63, 85, 88, 92, 102, 108, 159–160, 174, 179, 226, 240, 257, 285, 298, 324, 335, 337, 347–355 linking 63–71, 86–87 penalty rate 16, 26, 98, 118, 179, 355 revenue 373 stability reserve 25 Enabling Clause 60, 185–189 energy-intensity 151–152, 155–156 Environmental Goods Agreement (ega)  53, 58 ets-ba. See border adjustment (ba) European Union (eu) 4–7, 11–44, 66–71, 286–325, 343–379 exchange rate 42, 306, 310, 331–332, 334, 337, 340, 358, 367, 375 external requirement 77–78, 83–86, 223, 312 extra-jurisdictional effect 12, 38–39, 63, 154, 180, 195, 214, 227–240, 246, 261, 271–273, 276, 279, 285, 334–337, 347, 349, 351 financial service 290–314 first-best 1–3, 367, 381 first-mover 3, 6, 13–14, 20, 28, 31, 45–46, 55, 63, 71–72, 74, 80, 92, 93, 198, 231, 246, 343, 368, 374 free-riding 3, 14, 28, 45, 94, 99 free trade agreement. See preferential trade agreement (pta) General Agreement on Tariffs and Trade (gatt) 108 General Exceptions (Article xx gatt) 194 market access restriction 175–177, 179–181 most-favoured nation (mfn) 181 national treatment rule (ntr) 126 necessity test 207–215 relevant market 114, 130, 168, 174

Index General Agreement on Trade in Services (gats) 280 aviation 314–315 environmental service 288 financial service 290–291 General Exceptions (Article xiv gats) 327 horizontal commitment 287, 291 market access restriction 295–298 most-favoured nation (mfn) 307 national treatment rule (ntr) 298 necessity test 329–332 relevant market 297 schedule of commitments 286–288, 290 Generalized System of Preferences (gsp) 60 genuine link 234 import ban 55–57, 175, 323, 354 internal requirement 76, 82–84, 86, 312 International Civil Aviation Organization (icao) 36 Japan 16–17, 66, 300, 307 jurisdiction 227–240, 271–273, 319–321 Kazakhstan 4, 64, 66, 68, 300, 307, 311, 314 Kyoto Protocol 1, 14, 103, 307–314, 325, 333–334, 337 Annex B country 15, 64, 285 Assigned Amount Unit (aau) 15 Certified Emission Reduction (cer) 16, 333–334 Clean Development Mechanism (cdm) 15 conference of parties (cop) 16 Doha Amendment 14, 16, 21, 64, 302 Joint Implementation (ji) 15 Removal Unit (rmu) 16 sanction 16 least developed country (ldc) 25, 52, 186, 277, 302, 309, 332, 334, 338 less favourable treatment 174, 268, 305, 311, 350 like product 116, 124, 127–132, 141, 142, 144, 150, 155, 160–161, 166–169, 173, 182–184, 190–191, 267–270, 346, 350–352, 355, 357, 360–361, 363, 376

405

Index like service 298–300, 303–308, 310, 325, 333, 339, 363 market access restriction 175–181, 295–298 mfn. See most-favoured nation (mfn) mitigation 1, 14, 17–20, 26, 29–30, 34, 43, 45, 64, 71, 86, 105, 189, 198, 207, 213, 307, 368, 369, 377 most-favoured nation (mfn) 181, 266, 307 multicausal 202, 270 multilateral agreement 1, 45, 51–52, 79, 207, 367 mutual recognition agreement (mra) 50, 81, 226, 272 naming and shaming 1 nationally determined contribution (ndc) 1, 18, 343 national treatment rule (ntr) 125–126, 266, 298, 323 necessity test 195, 198, 204, 207–215, 250, 262–266, 330 negative list 75, 77, 82, 85 New Zealand 17, 64, 66, 70, 300, 302, 307 non-product-related process and production methods (nprppms) 128–129, 143–163, 167, 170, 183, 223, 256–258, 267, 273, 380 ntr. See national treatment rule (ntr) origin-neutral 61–62, 112, 124, 127, 148 Paris Agreement 1, 14–21 path dependence 346 payload 324 plurilateral agreement 4, 50, 53, 71 positive list 75, 81, 85, 112 preferential trade agreement (pta) 4, 50, 189–190 product-related process and production method 144, 148, 256 public morals 195–199, 208, 328–329 public order 328–329 quota 54–57, 175–176, 296–298, 354 race to the bottom 73, 80, 86 race to the top 73, 86 regional trade agreement (rta). See preferential trade agreement (pta) re-routing 74, 189, 372, 382

risk assessment 151, 196, 200, 206, 263, 278, 330, 363 Russia 15–17, 37, 56, 67, 302 sanction 3, 70, 98–99, 179, 255, 301, 315, 354–355 second-best 3, 343 South Korea 4, 66, 71, 300, 307, 311 special and differential treatment 21, 277–278 standard 55–57, 79–82, 173, 198, 248–279 substantial relationship 215 sufficient nexus 215, 217–218, 256 sustainability 74, 103, 215–216 Sustainable Development Goals 15 Switzerland 64–65, 67, 70, 226, 300–302, 307, 311 tariff 57–61, 82–84, 139–141 Technical Barriers to Trade Agreement (tbt Agreement) 248 label 251, 255, 257–258, 260, 266–267, 272 most-favoured nation (mfn) 266–272 national treatment rule (ntr) 266 necessity test 262–266 technical standard 251–254 technical regulation 254–258 relevant market 266 top-down 1 transaction costs 97, 162–163, 285, 346, 359, 362, 364, 374–375, 380 transparency 19, 52, 57, 94, 101, 107, 165, 191, 218–223, 227, 239, 243–244, 252, 268, 270, 275–278, 338–339 unilateral 3, 14, 29, 54–71, 87–88, 343, 374 United Framework Convention on Climate Change (unfccc) 1, 3, 8, 14, 189, 264, 308, 343, 367–368 United States of America (usa) 17, 38, 67, 72, 99, 190 Vienna Convention on the Law of the Treaties (vclt) 1, 15, 18 World Trade Organization (wto) 3, 50–51, 98 dispute 5, 98–101 dispute settlement 11, 46, 99