University of Amsterdam
The EU and carbon
emissions
Designing a border carbon adjustment for the European Union
Author: Joris Kuper Studentnumber:11010800
Index
• Introduction ...P. 3
• What goals to keep in mind when designing a border carbon adjustment?...P. 5
• How would a border carbon adjustment work?...P. 9
• What forms could a border carbon adjustment measure take within the EU legal system?...P.14
• How would the possible options of an EU boarder carbon adjustment fit within the legal system of the WTO?...P. 19
• What is the best way to shape an EU border carbon adjustment, so that it achieves its goals and is complaint with WTO legal system?...P. 30
• Conclusion...P. 34
Introduction
The year 2019 saw large scale climate protest around the world. For the most part
spearheaded by the teenage climate activist Greta Thunberg1. More than six million people took to the streets to protest the lack of action of the global community against climate change2.This push towards a cleaner planet echoes through to the political spectrum. It is fair to say that climate change and the preservation of the environment is one of, if not the biggest issue facing the international community.
At the same time it has become increasingly clear that successful climate action on a global scale leaves some things to be desired. The last 30 years saw a significant amount of
multilateral climate agreements. With the Kyoto and Paris agreements being the foremost among them. The recent withdrawal of the United States from the Paris climate accord shows how fragile these types of multilateral climate agreements really are3. Not to mention that
these multilateral climate agreements are notorious for making vague promises and lacking any real form of enforceability. Over time this has created the idea that a multilateral approach has been tried and found ineffective at halting climate change.
As a reply to the failure of the multilateral approach to climate change, some regions are calling for a localized response to counteract global warming. One of the regions with the loudest voice in the area of climate change is the European Union. The EU’s response comes in the shape of the Green Deal that was recently proposed by the European Commission. This proposal aims to make Europe the first climate neutral continent by 20504. But tackling such a major global problem on a local scale comes with certain challenges. The local measure will need to have an impact on the global problem of climate change.
1 ‘Greta Thunberg: What does the teenage climate change activist want?’ (BBC News, 28 February 2020)
<https://www.bbc.com/news/world-europe-49918719> accessed 23 march 2020
2 Taylor M.'climate crisis: 6 million people join latest wave of global protests'(The guardian, 27 September 2019)
<https://www.theguardian.com/environment/2019/sep/27/climate-crisis-6-million-people-join-latest-wave-of-worldwide-protests> accessed 4 June 2020
3 Friedman L., 'Trump serves notice to quit Paris climate agreement' ( The New York Times, 4 november2019)
<https://www.nytimes.com/2019/11/04/climate/trump-paris-agreement-climate.html> accessed 26 march 2020
4 ‘Een Europese green deal’ (European Commission)
To achieve this goal, the European Commission believes that a border tax adjustment (BCA) will be needed5. A logical conclusion now is that an equalizing measure will be indispensable in a local initiative that is trying to tackle a global problem.
The idea of a BCA is not a new one. But it has never been truly implemented and therefore has never been judged by the WTO. This brings with it particular uncertainties about the legal feasibility of such a measure. This particular BCA will have some additional obstacles. Unlike most BCAs, this one will be implemented by an international organisation. Instead of a single country as is traditionally the case.
This paper will look at how such a BCA could and should look, so as to be compliant with both EU law and WTO law. While still being effective in achieving the objectives set for it. These objectives will be the first topic up for examination in this paper. This will be followed by laying out the mechanisms a BCA generally works by. The feasibility and legality of these options will then be tested and evaluated in both the EU and the WTO legal systems. As to end up with a road map to a WTO and EU compliant BCA.
5 ‘European green deal: what role can taxation play’ (European Commission)
What goals to keep in mind when designing a border carbon adjustment?
The first step in creating an EU BCA is to examine why a BCA would be implemented and to look at what goals a BCA would need to achieve to be deemed successful. As stated in the introduction, BCA’s are a relatively old idea that has been creeping back into the spotlight. The European Commission sees a BCA as a key part to a successful Green Deal. Therefore the goal of the Green Deal seems to be the logical starting point of the examination of the goals a BCA would need to achieve.
The Green Deal aims to make Europe the first climate-neutral continent by 20506.
Now, to say that for a BCA to successfully achieve its goals, it would need to make the EU climate-neutral in less than 30 years is a little unfair. It cannot be expected that one measure from a bundle of measures reaches the same goal as the bundle of measures as a whole. So what does it need to achieve? There are four goals that an EU BCA needs to achieve. Each one of these will fall into one of two categories; the first category would be the tangible goal: lowering carbon emissions and halting carbon leakage. These goals are more in line with why a BCA would be implemented. Although less of a legal nature, one should not lose sight of this when trying to work out a functioning legislation. The second category is that of the legal goals: designing the BCA in such a way that is legally viable in both the WTO and EU legal systems.
First up for examination are the tangible goals of the first category. The overarching goal of the Green Deal and the BCA that this includes, is to lower carbon emissions on a global scale. One of the great challenges in lowering carbon emission with a local measure is that carbon emissions need to be lowered on a global scale for it to have a local impact. This means that if the EU would lower its emissions but the total world emission would stay the same, then the local EU measure would have no effect on halting global warming and therefore it would not have a local effect. EU only has jurisdiction to take local measures. This means that if the EU implements an environmental measure this will lead to carbon leakage. Carbon leakage occurs when the implementation of a climate policy, reducing emissions, in one jurisdiction
leads to these emissions shifting to another jurisdiction7. This means that on a global scale these kinds of measures like the Green Deal will not have any effect8. Because it would not lower the total amount of global emissions, the only change is the source of the emissions. So for this measure to be local but with a global impact, it must be guaranteed that the carbon that is no longer being produced in the EU does not shift to another jurisdiction. This is where a BCA comes into the equation. BCA’s are meant to keep the local production local instead of letting the production flow to areas with less strict emission policies. This way a BCA can stop the outflow of emissions and thereby it can lower the global emissions and not just the local ones.
This carbon leakage occurs in several ways. The literature commonly divides carbon leakage into four channels9. These are; the energy market channel, the income channel, the spillovers
channel, and the competitiveness channel10. The energy market channel is not that relevant for
a BCA in the context of the EU, since the initial focus of this measure will be on other
industries11. The income channel will also not come into focus here since the effects of a BCA
are rather limited in this aspect. What is meant with technological spillover is that the areas outside of the jurisdiction of the EU will develop more eco-friendly measures to compete with the EU. Technological spillover is not the main focus of a BCA but can be an important point to keep in mind when policymaking. Lastly there is the competitiveness channel, the main type of leakage a BCA should prevent.
What does carbon leakage via the competitiveness channel entail? By taking local action for a global problem the manufacturing cost of the local product will undoubtedly increase
compared to the manufacturing cost of the global products12. This means that the EU would put itself at a competitive disadvantage. Now that the local product price rises due to the taxing of carbon, the global goods will be comparatively cheaper and therefore have a competitive advantage. This could lead to a loss of market share and lower profits for
7Cosbey A., 'Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and
Research Needs from the Literature' (2019) RoEEaP. Page 2 also, see: Peter P.,'Growth in emissions transfers via international trade from 1990 to 2008' (2011) PNAS
8 Ibis, at Page. 8907
9 Cosbey, supra note 7, at Page. 5 10 Ibis
11 Balas P.,'climate change: the EU moves toward a carbon border adjustment mechanism ' (global policy watch)
<https://www.globalpolicywatch.com/2020/03/climate-change-the-eu-moves-toward-a-carbon-border-adjustment-mechanism/> accessed 24 march 2020
domestic producers. This could severely hamper the economic prospects of the EU.
Especially because in the long term this will mean that the investments will also shift towards foreign markets13. A BCA can halt this process by letting importers pay a fee similar to the carbon tax in the local region, and reimbursing local companies on export.
This means that the BCA needs to effectively limit the process of carbon leaking via the competitiveness channel. That leaves the question; is a BCA an effective tool in limiting carbon? This is a difficult question now that most of the research done on this topic is done by computer models and therefore there always is a certain degree of guessing and
assumption. Nevertheless, a large part of these researchers agree on the effectiveness of a BCA to limit carbon leakage14. They do not agree on how effective such a measure could be in reducing carbon leakage.
Before the legal goals can be discussed, it is time to point out a significant goal. This sub-goal being that the BCA cannot punish another jurisdiction that has a similar system by taxing their industries twice. Although doing so would not jeopardize the ability of the BCA to limit carbon leaking it would come into conflict with the overarching goal of limiting emissions on a global scale, because it would discourage countries exporting to the EU from taking their own climate actions
Now that the tangible goals of a BCA and its sub-goals have been discussed, the legal goals can be addressed. BCA's will inevitably interfere with international trade. Therefore a
possible BCA will undoubtedly find itself in the spectrum of international trade law. But that is not the only legal spectrum it will find itself in. We are talking about a BCA being
implemented by the EU, not a single country. This means that a BCA should not only be compliant with the WTO legal system but also with the EU legal system.
The EU has been part of the WTO since 199515. Meaning that any regulation on trade, between the EU and other WTO members is subject to WTO law. Therefore any BCA introduced by the EU should be WTO compliant. The main GATT rules to keep in mind here
13 Cosbey, supra note 7, at Page. 5
14 See for instance: Dröge S., ‘Tackling leakage in a world of unequal carbon prices’ (2009) Climate Strategies
or Kuik O., ‘Border adjustment for European emissions trading: Competitiveness and carbon leakage’ (2009) institute for Environmental studies
15 The European Union and the WTO (WTO.org)
are Article II; not having any other barrier to trade than import tax16 and Art III; containing the national treatment standard17. Lastly, there is the possible clash with Art I; that of most favoured nation. Art. I GATT being the main barrier against achieving the sub-goal of not punishing nations with similar regulations on carbon emission. Since this sub-goal means that the BCA will inevitably treat one nation differently than the other.
Now that the outlines of a WTO compliant BCA and its hurdles have been sketched, there is only one legal goal left to discuss. That of compliance with the EU legal system. Since the EU is the one designing the BCA it is rather self-evident that it will have to follow EU law. The EU is a special organization and does not have all the same competences as a single country implementing a BCA might have. This means that the EU legal system creates its own unique obstacles to the implementation of a BCA. One of these obstacles is the lack of competence over internal taxes. Before the EU can make a change to taxes, it needs a
unanimous agreement between all member states18. Although the European Commission has
been moving towards a system where unanimity is no longer required within this field19,this is
unlikely to come in to play in the near future20. One of the goals of a BCA should, therefore, be staying within the competences and boundaries of EU law, while making sure that it is politically viable.
To summarise, the goals that a BCA should aim to achieve are to limit the carbon leakage via the competitive channel. Thereby limiting the amount of emissions transferred from the EU to other areas. This will ensure that the market share of the industries located in the EU will stay relatively stable. Furthermore, this will mean that the total global emissions will go down, instead of merely shifting the locations where the emissions are emitted. This will help the EU reach the overarching goal of fighting climate change. It needs to be kept in mind however, that this measure should preferably not punish other countries for pursuing similar measures. This will mean that part of achieving a functional BCA will necessitate exemptions. The BCA will need to achieve these tangible goals, all the while fulfilling its legal goals of being viable in both the WTO and EU legal systems.
16 Mehling, supra note 12, at Pages. 459-462 17 Ibis
18 Art 113 TFEU
19 'Commission launches debate on a gradual transition to more efficient and democratic decision-making in the
EU' (European Commission 15 January 2019)
<https://ec.europa.eu/commission/presscorner/detail/en/IP_19_225> accessed on 25 march 2020
How would a border tax adjustment work?
After looking at what goals to set for a BCA, the next step is to examine how a BCA could work. A BCA is not as simple as charging and refunding tax at the border. In order to get a real grasp on how a BCA works, this paper will look at three key design choices for a BCA. First, this paper will look at what tool a BCA would use to charge the producer21. A tax or tariff system, or more of a cap and trade system? Secondly, the treatment of a product based on their emission22. Meaning; what is the BCA going to charge for and how will this amount be calculated? And the last design element; the direction of the adjustment23. This entails such matters as; what triggers the payment of imported products, how does this system work with tax rebates on export and what to do with the collected tax funds.
A BCA at its core is a border tax adjustment (BTA) based on the size of the products carbon footprint24. The WTO working group on BTA's defines it as any fiscal measure which puts
into effect, in whole or in part, the destination principle (i.e. which enables exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enables imported
products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products)25. So in its classical view, a BCA is a trade neutral measure that adjusts the incoming and outgoing products to an internal tax. Therefore the key features for this classical style of BCA are trade neutral and internal tax. A key part of this trade neutrality is a tax rebate. These aspects will be discussed at length further on in this paper. For now it is enough to see that they are a key part of this style of BCA.
A classic BCA, being in essence a carbon based BTA, is not the only way the EU could charge a carbon related tax at the border. The EU has been using an emission trading system (ETS) for a while now, and this ETS might be expanded upon to affect incoming goods. The EU ETS works by giving specific industries an allowance. One emission allowance is equal to one ton of carbon dioxide. These producers have to monitor their emissions and, at the end of
21 Dröge, supra note 14, at Pages. 60-61 22 Ibis
23 Ibis
24 Mehling, supra note 12, at Page. 475
the year, hand in the corresponding amount of allowance26. How the producers deal with this budget is up to them. They can buy more allowances from other producers, they can invest in cleaner manufacturing or just manufacture less. By decreasing the amount of allowance these producers get, the EU can slowly lower the emissions output of the selected industries.
Simply broadening this measure to include other industries does not prevent carbon leakage. An extra set of measures would be needed. The EU could impose a charge on the import of goods. The amount would be based on the carbon footprint of the product and the current price of carbon in the EU at the moment of importation or production of the product27. This option does do away with the issue of tax, and it enables the EU to utilize an already existing framework. The big complication here will be the pricing. The EU member states regulate their own allowance within their jurisdiction. This means that there will be a disparity between carbon prices in the EU. To further complicate matters a worldwide ETS is
impossible. Therefore the EU would need to translate the cap and trade system to an amount that it could charge foreign products.
The biggest problem with an ETS system would be how to translate the ETS to an amount you can charge a foreign producer. This brings up the second question of this chapter; what will this BCA charge for? Or in other words, how will the treatment of products based on the emissions work? Firstly, which products would be affected by this measure? It would be pointless to create a BCA for all products since carbon leakage will only really affect the more emission heavy industries. BCA's should only really affect energy-intensive trade-exposed industries (EITE). These are the industries where a large part of the product price is determined by their energy consumption and thereby by their emissions28. These are
industries such as steel, concrete, glass, and paper.
Having established which industries should fall under the EU measure the question arises; how will the emission of these industries be calculated and how will these industries be charged for said emissions? Within the literature there are generally two ways of doing this,
26 Gunter B., 'In the market: reforming the EU ETS revisited' (2014) CCLR Page. 65 27 O'Connor B,.'Guest post on carbon border adjustment' (IELP 5 December 2019)
<https://ielp.worldtradelaw.net/2019/12/guest-post-on-carbon-border-adjustment.html> accessed on 31 march 2020
28 EPA report, 'The effects of H.R. 2454 on international competitiveness and emission leakage in
the price equivalent method and the rate equivalent method29. The first method is the price equivalent method. This method work as follows: the amount an exporter would have to pay at the EU border would be based on the amount a locally produced like product would have to pay for their emissions30. One of the great benefits of this method is the ease of use. There is only a need for the calculation of local products and what is and isn't a like product has been widely established. This method seems fair but it isn't. If a foreign producer can produce cleaner than a local producer, the tax rate for the foreign producer is much higher than for the local one31. This would leave no incentive for foreign producers to make their manufacturing process cleaner. Meaning that the EU would move further away from its overarching goal of creating a cleaner environment.
The second method is the rate equivalent method. This method works by calculating the amount of emissions that a single product produces and taxes that amount of emissions32. This
means that if a foreign producer and a local producer pay the same tax rate, the only difference in the amount paid is the amount of emissions expended. The problem with this method is that, having to calculate all the emissions of all foreign producers that want to export to the EU, is a monstrous task. The solution would be to put the burden on the
exporters to produce third-party verified data on their emissions33. If they fail or refuse to do so, there will be a benchmark for the average carbon footprint of that product34. Because of the complexity of this system and the appearance of bias it might have, it is important to make sure that the foreign exporter has an easy and adequate form of legal recourse within the EU on this matter.
The last design question up for discussion is that of the direction of the adjustment. This can be split into three distinctive elements: the trigger to pay, the rebate problem and the question of what to do with the revenue made of this carbon tax. Starting with what triggers the need to pay. There are generally two ways of going about this. The first one makes the logical
assumption that the need to pay a carbon tax is triggered by the emission of carbon. This would work well enough for local producer, but runs into problems when it comes to foreign
29 Astoria R. 'Design of an international trade law compliant carbon border tax adjustment' (2015) AJoELP
Pages. 529-530
30 Ibis 31 Ibis 32 Ibis
33 Cosbey A.,'A guided for the concerned: Guidance and the elaboration and implementation of border carbon
adjustment' (2012) ENTIWINED Paragraphs. 55-64
produced products. Since they can only be taxed once they are within EU jurisdiction. The second method would be to make the trigger the sale of the product. If the producer wants to sell the product in the EU, then it will need to pay a carbon tax. The benefit to this is that the trigger to pay would be the same for local and foreign producers.
The next obstacle is what this paper will call the rebate problem. A classic BCA works by equalizing taxes. Meaning that a producer will have to pay tax upon importation into the EU. But if a producer would export from the EU then they would get a tax rebate. The idea of rebating producers for the tax levied upon emissions, is directly contrary to the overarching climate goal35. If the goal is to limit emissions within the EU, then rebating producers for the tax they pay for producing this emission, as long as the export of the product, is counter-intuitive. This means that the idea of a rebate might not be suited for the EUs purposes. If a rebate cannot be given upon exportation, then we are no longer talking about a trade neutral measure. It remains to be seen what kind of implications this has.
Lastly then, there is the question of what to do with the tax money made from this measure. Stimulating further advancements towards cleaner production on energy and other products seems to be the obvious choice. By doing so the EU would double the impact this measure has on climate policy. Secondly, a part of these funds should go towards setting up and maintaining a special EU judicial body, that exporters to the EU would have recourse to.
To conclude, the EU has various design choices to make. These choices can have a profound impact on the legal viability in the WTO and EU legal systems. But even without those considerations there are some options that seem more favourable than others. First of there is the choice of a classic BCA or an extended ETS. This offers the ease of an already established system and a system the EU is already experienced in using. The next big choice seems to be in the field of calculation methods. Although the price equivalent method is way easier to implement, it does seem to lose out against the rate equivalent method. For the simple reason that the price equivalent method would create a disincentive for foreign producers to produce products with a smaller carbon footprint. This disincentive to produce products with a smaller carbon footprint is also what holds back the possible use of a tax rebate on export. The one
35 Quick R., 'Guest post: a carbon tax or a climate tariff'(IELP 2 October 2019)
< https://ielp.worldtradelaw.net/2019/10/guest-post-a-carbon-border-tax-or-a-climate-tariff.html> accessed on 30 march 2020
design choice without a clear front runner seems to be that of what should be the trigger to pay. In the next two chapters it will be examined how these design choices hold up in the WTO and EU legal system.
What forms could a border carbon adjustment measure take within the EU legal system?
After laying out the goals and exploring the possible designs a BCA can have, the time has come to look how and if a BCA would be possible within the EU legal system. Normally when discussing BCAs, the legal possibilities in the domestic legal system are not of great interest. In most cases one can assume that a country has the power to adjust their own taxes and create their own regulations. In the case of the BCA central to this paper however, it’s the EU that is the one implementing it. The EU works based on the principle of conferral36. This means that the EU only has ability to create legislation and regulate based on the powers conferred upon it by the member states. The limits in the power of the EU will therefore influence the overall design of the BCA. In this chapter this aspect of the design will be explored and explained.
As stated before, the EU is based upon the principle of conferral37. This means that when the
EU creates new legislation, it requires a fitting legal base for its measure38. There are several
possible EU legal bases for an EU BCA. First there is the most general legal base of Art 115 TFEU that gives the council the power, when acting unanimously, to take any measure that directly affects the internal market39. The second option would be Art 113 TFEU. This article gives the council the power, when acting unanimously, to harmonize indirect taxes40. The third option is found in Art 207 TFEU. A BCA could be based on the common commercial policy, since there is a good argument to be made that a BCA will greatly affect the in- and outgoing EU trade. Art 207 TFEU is also the first legal base that only requires a qualified majority in the council. The fourth and last option can be found in Art 192 TFEU. Art 191 TFEU sets out the environmental objectives of the EU, one of these being the combating of climate change. Art 192 TFEU in turn forms the legal base to create measures to achieve these objectives, via a qualified majority in the council41 .
These legal bases can be divided into two categories. The ones requiring unanimity within the council; Art 115 and 113 TFEU, and the ones that require a qualified majority in the council; Art 192 and 207 TFEU. The need for all member states to agree on a BCA measure can and
36 Art. 5 TFEU 37 Ibis
38 Weishaar S., 'Carbon taxes at EU level introduction issues and barriers' (2018) Page. 2 39 Ibis
40 Ibis 41 Ibis
will form a major road block for the realisation of the BCA. In 1992, the EU already tried to implement an environmental tax. The main stumble block for this measure turned out to be the need for unanimity in the council42. In a more recent communiqué the commission pointed to the unanimity requirement as the reason for the lack of effective environmental protective measures43. Taking this into account, the BCA should steer away from legal bases requiring unanimity since this will be highly unlikely to be reached.
By concluding that the unanimity requirement should be avoided, only two possible legal bases remain; Art 192 and 207 TFEU. Faced with several possible legal bases, it is standard ECJ case law to look at the aim and content of the measure to determine the proper legal bases44. The foremost aim of the BCA would be to reduce carbon emissions. And secondly to make sure that the domestic industry does not suffer too much of a competitive disadvantage compared to foreign produced products. Looking at the content of this measure it is difficult to find a justification for the use of Art 207 TFEU when it comes to the implementation of the internal part of the measure. Creating a way to tax emissions for local producers has very little, if anything, to do with the CCP. Combined with the fact that the overarching goal is a climate neutral continent by 2050, thereby being environmental in nature, this means that looking at the aim and the content of the measure Art 192 is the most suitable legal base.
The determination of the legal base being Art 192 TFEU, is a step in the right direction but does not completely take away the problem of unanimity. Art 192 (2)(a) TFEU determines that unanimity is still required for a climate measure if it is ''predominantly of a fiscal nature''. As discussed previously, the classical style BCA uses an indirect tax to charge for the
emission of carbon. Therefore it is important to understand what is meant with; ''predominantly of a fiscal nature''.
How broad or narrow should: '' predominantly of a fiscal nature '' be interpreted? The main problems with finding a clear answer to this question is that there is no case law on Art 192(2)(a) TFEU, and that the different language versions of the TFEU do not agree on the
42 European commission, Communication from the Commission to the Council, 'proposal for a council directive
introducing a tax on carbon dioxide emissions and energy', 30 June 1992, COM(1992) 226 Final.
43 European Commission, Communication from the Commission to the European parliament, the European
Council and the Council, 'Towards a more efficient and democratic decision making in the EU tax policy', 15 January 2019, COM(2019) 8 final Page. 5
44 Case C-155/91 Commission v. Council [1993] Paragraph. 7, also see: Case C-271/94 Parliament v. Council
meaning of ''fiscal''45 .The different language versions of the TFEU do not agree on the meaning of ''fiscal nature''. Most notably the German version of the TFEU only refers to tax not fiscal nature, taking the narrowest interpretation46. As stated, there is no case law on Art 192(2)(a) TFEU. However, there is case law on similar worded articles. Therefore taking a systemic approach is a good option. The ECJ has stated that the same aim and content test, as used for finding the right legal base, can be used to determine what type of voting needs to be used. Even if the right legal base has already been found47. This would mean it is required to look at the aim and content of the measure to determine if it is predominantly of a fiscal nature. Such a test was done in the air transport case (ATAA) within the context of the ETS. From this case, it can be ascertained that; the charge not being intended to generate revenue for the public authorities, and that the amount that must be paid cannot be established in advance are strong indications the measure is not of a predominantly fiscal nature48. These
cases seem to lend credence to the ECJs willingness to interpret ''predominantly of a fiscal nature'' in a narrow manner49. Looking at ATAA criteria however it would seem that a classic
BCA, being based on a sales tax, would have a predictable amount to be paid and it would be hard to prove that a sales tax is not intended to create revenue. Therefore, a classical BCA would most likely be seen as of a predominantly fiscal nature. This means that that the proper legal basis for a classic BCA would be Art 192 (2)(a) TFEU, and therefore unanimity would be required.
With the classical BCA requiring unanimity, the adoption of an EU BCA seems increasingly unlikely. However this is not the case. As discussed in previous chapters, it is possible to create a cap and trade style BCA. The ETS in its current form came into existence to
circumvent the predominantly of a fiscal nature hurdle50. The ETS has no problem complying with the ATAA case criteria. Being a way to reduce carbon at heart and a market based
measure there is no way of determining the amount to be paid in advance. Therefore, expanding the ETS or modelling the measure after the ETS seems the way forward in the eventual adoption of an EU BCA.
45 Weishaar, supra note 38, at Page. 4
46Ismer R.,' Inclusion of consumption into the EU ETS: the legal basis under European Union law' (2016)
RECIEL 2016 Page. 77
47 Case C-36/98 Spain v. Council [2001] Paragraph. 49
48 Case C-366/10 Air transport Association of America and others v. Secretary of the state for energy and climate
change [2011] Paragraph. 143
49 Ismer, supra note 46, at Page.79
Now that the ETS has been shown as the way forward, it is time to look at how the EU would implement an ETS BCA. Implementing an ETS BCA means creating two measures: one to charge the local producers and one to charge the imported products. The first measure could be a direct expansion of the ETS, simply adding new industries to the already existing system. If it turns out that this is not possible, then the EU could create a measure heavily based on the ETS. This should be possible as long as it keeps to the ATAA case criteria.
Following this, there is the measure for the imported products. A worldwide ETS is impossible. Therefore a way needs to be found to translate the ETS charges for local
producers to a charge for imported products. It would make sense to tie this in with the ETS or an ETS type measure. Therefore these measures would need to be sufficiently connected51.
Both of these measures are pursuing the same environmental goals. Furthermore the charge on imported products exists to make the extended ETS more effective and less susceptible to leakage52. Taking all this into account it would seem that these two measures are sufficiently
linked. If the measure for the imported products can be seen as sufficiently connected to the ETS, then it can be based on the same legal base. If it turns out it cannot, then this does not mean it cannot be based on Art 192 (1) TFEU. If the measure works in the way that the incoming product is taxed for its carbon footprint and its price is based upon the ETS market value at the time of production, then this means that one can not define the amount to be paid in advance. Therefore it is clear that the intention is not to create revenue for the public authorities but rather to halt carbon leakage. Thereby passing the ATAA case test. This would mean that the measure on its own cannot be seen as predominantly of a fiscal nature. This makes it clear that Art 192 (1) TFEU would still form the proper legal bases for this measure. Making sure unanimity is not required.
To conclude, the principle of conferral, means that the EU has some implementation barriers most other entities would not suffer from. One of these obstacles being the selection of the proper legal bases. The possible legal bases can be divided in to two categories; needing unanimity in the council and needing a qualified majority in the council to be adopted. Having a legal bases that requires unanimity means that implementing BCA will be as good as
impossible. As it is incredibly unlikely all member states would come to an agreement on
51Ismer, supra note 46, at Page 79 52 Ibis Pages.74-76
such a measure. The BCA being an environmental measure at its core means Art 192 TFEU will be the most suitable. Therefore the measure cannot not be of a ''predominantly fiscal nature''53, since that would mean unanimity is required. The classical BCA would most likely fall within this category and therefore does not seem like the most favoured option. Extending the ETS or creating a heavily ETS inspired measure would avoid this problem, making
unanimity unnecessary. The measure effecting imported products could be tied to the ETS or a standalone measure based on Art 192 (1) TFEU. Using a cap and trade type measure seems to be the most achievable way of creating an EU BCA.
How would the possible options of an EU boarder carbon adjustment fit within the legal system of the WTO?
After having tested and weight the options of the possible BCA within the EU legal system, it is time to look at how these options would fare within the system of the WTO. The extended ETS will now be tested and weight within the WTO legal system. Firstly it will need to be assessed if the ETS on its own is WTO compatible. If this is not the case there is no need to look at the extended ETS option. Afterward it will be tested against the normally raised BCA obstacles of; no other barriers to trade than tariffs (Art II GATT), national treatment (Art III GATT), and lastly the most favoured nation clause Art I GATT)54. Following this there will be a short examination of the rebate problem. As to finally end up at exceptions the EU might call upon if the EU BCA fails to clear any of the previously established hurdles.
ETS-WTO compatibility is something that has been assumed throughout this paper. The time has come to see if this is truly the case. The WTO, with some exceptions, does not concern itself with how territories treat their own product internally. One of these exceptions however is the prohibition of subsidies as laid down in the agreement on subsidies and countervailing measures (SCM agreement). A large element of the ETS is that the EU gives a certain amount of carbon emissions allowance to their industries. And this creates a possible clash with Art 1.1(a)(1)(II) and (III) of the SCM Agreement55.
On the breach of Art 1.1 (a)(1)(II) of the SCM agreement there are generally speaking two lines of thought. Since emissions allowance can be bought and traded combined with the fact that the EU gives them away for free could mean that the EU would forgo revenue that otherwise would have been due56. Now that a company has acquired this allowance for free and this allowance could always be sold on the free market this would confer a benefit on the company57. This would mean that the free allocation would be a subsidy under WTO law. The other line of thinking is that the choice between auctioning or given an allowance is a matter of national sovereignty in implementing a particular piece of environmental law58.
54 Trachtman J.,'WTO law constraints on border tax adjustment and tax credit mechanisms to reduce the
competitive effect of carbon taxes' (2016) Pages. 4-5
55 Cendra de J.,'Can emissions trading schemes be coupled with border tax adjustments an analysis vis-a-vis
WTO law' (2006) RECIEL Page.136
56 Holzer K.,'WTO law issues of emissions trading' (2016) Page. 4 57 Ibis
Even if one follows the first line of reasoning, this subsidy would be unlikely to be viewed as a prohibited subsidy, because this subsidy is not specifically provided for on export and the use of domestically produced components is not a requirement for receiving the subsidy59.
Following this argumentation, there is only the possible breach of Art 1.1 (a)(1)(III) of the SCM agreement left to consider. For the allocation of allowance to be seen as a breach, the allowance to produce a ton of carbon needs to be seen as a good. The allowance is not a good as such, but one could argue that by giving a company the possibility to produce a curtained amount of carbon you are giving a good to a company. This type of reasoning was followed by the Panel in Canada-softwood. Where the granting of a license by Canada to cut down otherwise protected trees was seen as granting a good in the form of giving the company access to these trees60. The Panel comes to this conclusion by taking the ordinary meaning of
goods as ''tangible personal property other than money''61. And concluding that the term
goods is not qualified and its meaning should be interpreted broadly62. This line of reasoning
would not hold if it comes to the allocation of carbon emissions however. Where in Canada-softwood the license gave direct access to a raw material, the ETS only allows for the
emission of a by-product during the manufacturing process. Furthermore the raw material that the license in Canada-softwood granted access to, has intrinsic value. The same cannot be said of a ton of carbon emissions. The value of the ton of carbon comes from the ETS license that is needed to produce carbon as a by-product. In stark contrast with Canada-softwood where this is the other way around; the value of the license comes from the value of the wood63. Therefore allowance cannot be seen as a granting access to a good and therefore would not breach Art 1.1 (a)(1)(III) of the SCM Agreement. This means that the ETS, as it stands, would be WTO compliant. Therefore the next step would be to examine if it would still be WTO compliant if it is combined with a BCA.
The first obstacle for a BCA being WTO compliant is Art II GATT. Art II GATT reads; each contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the appropriate part of the appropriate schedule annexed to this agreement. This means that a WTO member cannot raise any other barriers to
59 Holzer, supra note 56, at Page. 5
60 WTO, United states - Final countervailing duty determination with respect to certain softwood lumber from
Canada, Canada-softwood, report of the Panel (29 August 2003) WT/DS257/R
61 Ibis, at Paragraph. 7.24 62 Ibis, at Paragraph. 7.25
trade, other than the import tax laid down in its schedule of concession. This would naturally disqualify any form of BCA if the payment of the tax is triggered by the importation of the product64. Therefore a BCA needs to be designed in such a way as to bypass this Article.
How can a BCA bypass Art II GATT? In the WTO BTA working group report it is assumed that; a border tax adjustment is in most cases triggered by the sale of the product65. Therefore there would not be any outer border and therefore no conflict with Art II GATT. The
Appellate Body has held that for a measure to fall under Art II GATT: One has to look at whether the item is already ''imported'' and the obligation to pay is triggered by an ''internal'' factor, it is not important if the actual payment takes place at the border66. This means that the charging of a carbon tax should be triggered by the sale of the product. As to avoid conflict with the insurmountable barrier of Art II GATT67.
So if the barrier of Art II GATT needs to be avoided by designing the BCA in such a way as to be triggered by an internal measure, then this will naturally create a possible conflict with Art III GATT; the rule of national treatment. Art III GATT holds two obligations; the need to apply taxes in the same way for domestic products as for ''like'' imported products68, and needing to accord treatment no less favourable to an imported product than to a like domestic product69. For a more classic BCA it would be clear that it would work via a tax and therefore would fall within Art III (2) GATT. But is that the case for an extended ETS? Can the
requirement to take part in the cap and trade system be seen as a tax or as a measure?
The question of tax or measure has already been discussed at length in the context of EU law in the previous chapter70. If the ECJ jurisprudence is followed then this means the extended ETS would be a measure not a tax71. In fact the design choice to go with an ETS style
measure is based on the idea of avoiding a tax measure. There is no consensus on whether the ECJs line of reasoning will be upheld in the WTO legal system72. The fact that the ECJ holds
64 Trachtman, supra note 54, at Page. 6
65 Report L/3464, supra note 25, at Paragraph. 5
66 WTO, China - Measures affecting imports of automobile part, Report of the Appellate Body (18 December
2008) WT/DS339,DS340/AB/R Paragraph. 161
67 Trachtman, supra note 54, at Page. 6 68 Art III (2) GATT
69 Art III (4) GATT
70 See pages 15-16 of this paper.
71 Case C-366/10, supra note 48, at Paragraph. 144
the ETS to be a measure is a strong indication, for it to be seen as such within the WTO legal system. Combined with the fact that ETS only requires a compulsory purchase to be able to sell the product on the EU market and this purchase retains its value and is capable of becoming even more valuable73, it is safe to assume that it will be seen as a measure instead of a tax.
Establishing the extended ETS as a measure means it will have to be tested against Art. III (4) GATT. This means that the EU cannot accord any treatment less favourable to an imported product then it does to a like domestic product. A BCA, by its very definition, discriminates between two products based on the amount of carbon emitted during its manufacturing
process. Therefore the key question becomes when are products like products. What the WTO legal system understands as a like product determined by: the properties, nature and quality of the products, the end-uses of the products, consumers' tastes and habits – more
comprehensively termed consumers' perceptions and behaviour – in respect of the products and the tariff classification of the products74. Looking at these criteria it becomes abundantly
clear that it will be hard to justify the difference in the amount of the carbon allowance required, between a cleanly produced bar of steel and a carbon-intensive produced bar of steel.
There is a decent argument to be made however, that these bars of steel could be found un-alike. Firstly one could convincingly argue that; the EU consumer is much more aware of the effects and causes of climate change and strives more towards the halting of climate change and therefore, that carbon footprint of a product has become increasingly important in the consumer tastes and habits75. Secondly the Appellate Body has been opening the door to the consideration of processes and production methods (PPM) in determining the competitive relationship between products within the context of Art 2.1 of the Technical Barriers to Trade Agreement76. Stating that differentiating between products based on PPMs would not in itself constitute a less favourable treatment77, and what constitutes a competitive relationship may
73 Bartels L., 'The inclusion of aviation in the EU ETS WTO low consideration' (2012) Issue Paper No.6 Page. 9 74WTO, EC - Measures affecting asbestos and asbestos-containing products, report of the appellate body (12
March 2001) WT/DS135/AB/R Paragraph. 101
75 Holzer, supra note 56, at Page. 13 76 Trachtman, supra note 54, at Page. 13
77 WTO, United states - Measures concerning the importation marketing and sale of tuna and tuna products,
require a consideration of PPMs78. The very similar wording of Art 2.1 TBT agreement compared to Art III (4) GATT. In essence, a different treatment based on carbon footprint is a different treatment based upon PPMs. Taking all of this into account it creates the possibility to treat similar products with different carbon footprints differently, because they can be found to be un-alike.
But the like product test is not necessarily the only problem for the EU BCA when it comes to Art III GATT. When the ETS extension method is used there is another possible conflict. The carbon buy-in would need to be translated into a charge for the incoming product. This could be seen as treating a like product differently. However if the calculation is done via the rate equivalent method then this would mean that two like products with the same carbon footprint would be charged equally even though one would be via a cap and trade system and the other via a charge. The treatment would be different but no less favourable, and therefore it would not be an Art III GATT breach.
Concluding on the possible conflicts between an EU BCA and Art III GATT. There is a good argument to be made that a BCA will not clash with Art III GATT and it is high time for the Appellate Body to open the door for this type of environmental measure. It is far from unthinkable that a breach of Art III GATT would be found. This would mean that the BCA could only be saved via the exceptions in Art XX GATT. This will be discussed later on.
Having discussed Art II and III GATT it is time to look at the last article that could form a barrier for the EU BCA; Art I GATT and its most favoured nation clause (MFN). There are two types of conflicts concerning Art I GATT. The first one being that two exporters exporting to the EU, with the only difference between their products being their carbon footprint, that these products will be held to different rates. Again one could argue that these products are not ''like'' products as has been done in the context of Art III GATT. But in this case there is a second argument to be made. The Panel has stated that difference in treatment not based on the product itself, is not in conflict with Art I GATT but the difference in treatment based on origin is79. Following this line of reasoning it would be GATT compliant
78 WTO, Canada - Certain measures affecting the renewable energy generation sector/ Canada - measures
relating to the deed-in tariff program, reports of the appellate body (6 May 2013) WT/DS412/AB/R, WT/DS426/AB/R Paragraph. 5.63
79 WTO, Canada - Certain measures affecting the automotive industry, report of the Panel (10 February 2000)
to charge products differently based upon their carbon footprint. This leaves the second possible type of conflict with Art I GATT. Being that if the EU would like to charge products differently because they come from countries that implore a similar system. Then this would mean that the different treatment is based upon the regulations the country of origin has in place. This practice would clash with Belgian family allowances and Canada - Autos80. Unless the Appellate Body would follow the argumentations of un-alike, the EU would need to justify this via one of the exceptions.
Now that the main obstacles of the WTO legal system have been discussed, there is one more subject worth mentioning before it is time to examine the exceptions: the rebate problem. The idea of a tax rebate on export would, of course, only be possible if an indirect tax was used. Therefore if the extended ETS was followed there would be no possibility of a tax rebate and therefore no rebate problem. But in the unlikely event that the EU would use the more
classically shaped BCA and would like to employ a rebate on export would this be WTO compliant?
The legal issue would lie in the fact that a tax rebate upon exportation might be seen as an export subsidy81. The Appellate Body has established the following test for the existents of export subsidies: Is the granting of the subsidy geared to induce the promotion of future export performance by the recipient82. In this case it is clear that a BCA tax rebate could not be seen as trying to stimulate export. This type of rebate aims to create a level playing field as the products now find themselves in the same situation as they would have been had the EU not taken environmental measures. This would give foreign countries sovereignty over their own climate policy83 without having to worry about double punishing clean producers. Therefore the idea of a BCA tax rebate is WTO compliant.
For the last part of this chapter there is the matter of the exceptions. These can be invoked if the BCA breaches any of the previously discussed GATT Articles. The exceptions are laid down in Art XX GATT. Even though this paper argues that there is a good case to be made that these exceptions are not needed, the possibility needs to be entertained and examined. Art
80 WTO, Belgian family allowance, report of the Panel (7 November 1952) G/3215/59 and WT/DS139/R, and
WT/DS142/R, supra note 79
81 Ibis
82 WTO, EC and certain member states - measures affecting trade in large civil aircraft, report of the appellate
body (18 May 2011) WT/DS316/AB/R Paragraph. 1044
XX GATT uses a two steps test to determine the applicability of these exceptions; First examining the applicability of one of the paragraphs of the article and if this test is passed, the conformity with the chapeau84. In the case of the BCA the paragraphs most likely applicable will be Art XX (b) and (g) GATT.
Art XX (b) GATT reads: Necessary to protect human, animal or plant life or health. The fact that changing of the environment has a negative effect on the health and life of humans, animals, and plants will not be hard to argue. The main problem lies in the proving of the ''necessity'' of this measure85. On the meaning of necessity the Appellate Body has held: Such a contribution exists when there is a genuine relationship of ends and means between the objective pursued and the measure at issue. The selection of a methodology to assess a measures’ contribution is a function of the nature of the risk, the objective pursued, and the level of protection sought86. Furthermore the restrictiveness of the measure has to be weight
against the importance of the objective that the measure strives towards87. The danger of
climate change is one of the biggest problems facing the international community and a carbon equalization measure is an extremely effective measure against this problem88. A BCA is a key part of making this measure effective. It does so by making sure that the
production of carbon decreases instead of shifting to other territories. It is to be expected that this will contribute to the worldwide decrease of carbon emission89. Taking all of this into account it is clear that there is a genuine relationship between the measure and the objective. Furthermore, this measure cannot be deemed too restrictive90 and the importance of the goal to be achieved is immense. Therefore it is safe to say that the BCA will be in line with Art XX (b) GATT.
So Art XX (b) GATT can be called upon, but this is not the only possible subparagraph of Art XX GATT. The second option is Art XX (g) GATT: Relating to the conservation of
exhaustible natural resources if such measures are made effective in conjunction with
restrictions on domestic production or consumption. The first question at hand would then be
84 Cendra, supra note 55¸at Page. 143 85 Trachtman, supra note 54, at Page. 17
86WTO, Brazil - Measures affecting imports of retreaded tires, report of the Appellate body (3 December 2007)
WT/DS332/AB/R Paragraph. 145
87Ibis at Paragraph. 144
88 Sindico F., 'The EU and Carbon Leakage: how to reconcile border adjustments with the WTO' (2008) EEaELR
Page. 338
89 Astoria, supra note 29, at Page. 521
whether to reduce carbon emissions can be seen as conservation of exhaustible natural resources. The Panel noted that clean air was an exhaustible resource within the meaning of Article XX (g) GATT since it could be exhausted by pollutants such as those emitted through the consumption of gasoline91. This type of argumentation could also be used to justify carbon reduction being a conservation of natural resources92.
The next question at hand is if the BCA would relate to this objective. Relating has been interpreted to mean: looking into the relationship between the measure at stake and the legitimate policy of conserving exhaustible natural resources93. Therefore the key is to show that the local measure being taken would only have an effect if it was done conjointly with a BCA94. Therefore it has to be clear within the design of the BCA that it is aimed toward conservation of this resource and not geared towards the protection of one’s own market. If it is clear from the design of the BCA that it is aimed towards conservation of the environment, then in all due likelihood the EU would have recourse to Art XX (g) GATT.
Lastly the BCA will need to pass the chapeau requirements. This means that the measure cannot cause arbitrary or unjustifiable discrimination and it cannot be a disguised restriction on international trade95. When faced with an Art XX GATT chapeau question, the Appellate Body is known to apply a form of necessity test before getting to the question of
discrimination96. The WTO will not ban unilateral actions, but it will only allow them as a last resort97. Meaning that the EU will have to demonstrate that all other options to resolve this issue have been exhausted98. There is a good argument to be made that the EU has tried all other options. The EU is part of both the Kyoto and Paris climate accords. As argued earlier these multilateral agreements have been proven inadequate in the fight against climate change. Due to the lack of an enforcement mechanism and how susceptible they are to the departure of key players. Secondly there are the bilateral actions undertaken by the EU. Within the EUs FTAs, an increasingly larger part has been dedicated to the preservation of the
91 WTO, United state - Standards for reformulated and conventional gasoline, report of the Panel (29 January
1996) WT/DS2/R Paragraph. 6.36
92 Trachtman, supra note 54, at Pages. 22
93 WTO, United states - Import Prohibition of certain shrimp and shrimp product, Report of the Appellate body
(12 October 1998) WT/DS58/AB/R Paragraph. 135
94Cendra, supra note 55, at Page. 144
95 WTO, United states - Standards for reformulated and conventional gasoline, report of the Appellate body (29
April 1996) WT/DS2/AB/R Page. 23
96 WT/DS58/AB/R, supra note 93, at Paragraph. 171 97 Sindico, supra note 88, at Page. 339
environment. It is safe to say that the EU is really trying to solve this issue via a less trade restricting route, but it is proving not to be enough. Thereby seemingly passing the necessity test.
The next question is that of arbitrary discrimination. Within a BCA there is naturally going to be discrimination between products with different carbon footprints. However, this does not necessarily constitute arbitrary discrimination. The key point in making sure that the
discrimination is not arbitrary is the calculation method of the carbon tax. The EU should allow foreign producers to provide data on their carbon emissions. Not all producers have the ability or the desire to do so. Therefore this will have to be done in conjunction with a
benchmark based on the product and the place of origin99. This will create the fairest possible way of gathering data on the carbon emissions. This could even be combined with its own legal procedures as to safe guard due process in this gathering of data100.
The seconded issue concerning arbitrary discrimination is that the discrimination cannot be coercive in nature101. Meaning that the measure cannot be designed in such a way as to push other countries into taking the same type of measures. Letting producers provide data on their own carbon emissions will take away part of this coercive nature. But in conjunction with this, a key part of the BCA is that it will have to be flexible. Being able to adapt its tax regime based on the climate actions taken by the country in question, will be a big point in favour of the BCA102. By combining all these aspects into one measure it seems fairly certain that the discrimination will not be seen as arbitrary.
Lastly the discrimination cannot be unjustifiably discriminatory. The Appellate Body
interprets this test to mean: whether the discrimination can be reconciled with, or is rationally related to, the policy objective with respect to which the measure has been provisionally justified 103. Now that the objective is to preserve the environment and the discrimination takes place based on the carbon emissions during production, this part of the test seems an easy pass. However this is not entirely the case. The key here is to make sure that the difference in price does truly reflect the difference in environmental impact. If there are two
99 WT/DS58/AB/R, supra note 95, at Page. 24 100 Trachtman, supra note 54, at page . 26
101 WT/DS58/AB/R, supra note 93, at Paragraph. 161 102 Trachtman, supra note 54, at page. 26
103 WTO, EC - Measures prohibiting the importation and marketing of seal products, reports of the Appellate
products with a small difference in carbon footprint but with a big disparity in carbon price, then this is most likely unjustifiable discrimination. The EU will have to ensure that the BCA scale works with very small incremental steps to make sure that a small difference in carbon emissions will also result in a small difference in carbon tax.
All in all, passing the chapeau will be the hardest step in successfully calling upon the Art XX GATT exceptions. The idea of a BCA seems perfectly eligible for these exceptions, but the true test is in how this BCA is implemented. The key for the EU is to be of purity of
purpose104.
In conclusion of the question if a EU BCA is WTO compliant. Firstly it needed to be
established that the ETS on its own is WTO compliant before it can be expended upon with a BCA. For several reason the ETS could not be seen as a prohibited subsidy and is therefore WTO compliant. Making it possible to continue to the three possible conflicts between the WTO legal system and an EU BCA. Art II GATT being the hardest, if not impossible, to overcome. Leading to the need to avoid this article all together, by using an internal trigger like the sale of a product. The use of this internal trigger leads to a possible conflict with Art III GATT. The extended ETS being a measure it leads specifically to Art III (4) GATT. Meaning that a foreign like product cannot be treated less favourably than a local like product. This likeness test forms the second big hurdle for the extended ETS. Based on the recent room given to PPMs by the Appellate Body and the impact the consumer taste can have on the outcome of this test, there is a chance that an extended ETS could pass an Art III GATT test. These same arguments can be used to pass the likeness test of Art I GATT, the last of the three hurdles. For this article there is a second argument. If one follows the line of reasoning of the Appellate Body then it is possible to accord different treatment as long as this is not based upon the origin of the product. If the extended ETS would fail any of these tests, it will need to rely upon the exceptions laid down in Art XX GATT. Meaning it would have to pass the subparagraph and chapeau tests. Calling upon the exceptions within Art XX (b) and (g) GATT seems very possible as long as it can be shown that a BCA is absolutely necessary for the internal measure to have an effect. And the passing of the chapeau requirements seems equally possible. As long as it can be established that the multilateral approach to the fight against climate change has failed, and the rules and benchmarks used to determine the carbon
footprint are sufficiently clear and fair. All in all there seems to be a possibility for the measure to be WTO compliant without needing the exceptions. It is however wise to make sure that if needs be, the measure is designed in such a way as to be able to call upon the Art XX GATT exceptions. As the Appellate Body has never judged a BCA before there can be no real certainty in the outcome.
What is the best way to shape an EU border carbon adjustment, so that it achieves its goals and is complaint with WTO legal system?
After looking at what goals a BCA should achieve, how it could achieve those and how these options would hold up within several legal systems, the moment has come to examine what a successful BCA could look like. For a BCA to be seen as successful, it would need to achieve the goals set out for it. So to recap. The goals set out in chapter one can be summarised as: limiting the amount of carbon that leaks through the competitive channel. Thereby making sure that the internal measures the EU takes are effective in lowering global carbon emissions and making sure that the market share of EU companies does not decrease significantly105.
To achieve these goals a BCA will firstly need an internal measure. This measure will need to effectively charge for carbon emissions and thereby stimulate more environmentally friendly production methods. This internal measure needs to be compliant with its own local rules and regulations, in this case the EUs rules and regulations. The EU being a regional organization and not a state means that there are different considerations to be made when implementing such measures. Such as; does the EU have the power to take these types of measures in her own constitutional framework? In the case of such a controversial issue as a BCA, the political feasibility should not be overlooked. The legal bases for the internal measure will almost certainly need to be Art 192 TFEU being the key legal bases for taking environmental measures106.
Using Art 192 TFEU as the legal bases creates an issue for using indirect taxes. Art 192 TFEU dictates that if the measure is of a predominantly fiscal nature then unanimity is
required. This will make the creation of a tax measure extremely unlikely if not impossible107. The classical BCA most often works via a sales tax. This means that the creation of a BCA in the classical sense is almost impossible within the EU. However, the EU does already have a system in place to charge for the emissions of carbon in the form of the ETS cap and trade system. The ETS itself is WTO compliant108. This ETS could be extended to cover other emission intensive industries that are vulnerable to carbon leakage. This has the benefit of an
105 See pages 9-10 of this paper for a complete explanation. 106 See pages 14-15 of this paper for a complete explanation. 107 Ibis
already established system, in the form of the ETS, and being a non-tax measure meaning that there would only need to be a qualified majority in the council109.
Taking this into account, it seems that the ETS style BCA is the way to go for the EU. The ETS in its current form does miss a component to charge incoming products based on their carbon footprint. So a system to do so will need to be developed. The first key feature is that the need to pay this charge is triggered by the sale of the foreign product in the EU as to avoid the insurmountable obstacle of Art II GATT. The second consideration is that this part will also need to be designed to not be of a predominantly fiscal nature. Something that is
complicated by the need for sale as a trigger to pay, as this gives the impression that this is a form of indirect tax. This part of the measure needs to be designed in such a way that it is closely linked with the ETS as to be able to use its legal bases. Or it will need to be able to pass the air transport case test. This will not be easy, but is very much so possible110. Making
it possible to base both the internal and external part of the measure Art 192 TFEU and not require unanimity.
The third and most complicated consideration when creating an ETS style BCA, is; how do you translate a cap and trade style system to a charge for foreign products? The idea of using two different measures seems discriminatory by default but it does not need to be. The key is in the calculation method and that this causes a treatment no less favourable then for the domestic product. The best way to calculate this would be by using the rate equivalent method and giving foreign producers the chance to supply the EU with accurate data on the emissions expended at production111. This calculation method will mean that the treatment is no less favourable112. Giving the foreign producer the possibility to supply their own
information will greatly increase the likelihood of a positive outcome of an Art XX GATT chapeau test.
The main compatibility issue with the WTO lay in the like product test. The criteria laid down in the WTO case law do not leave a lot of space for differentiating between products based on their carbon footprint. Climate protection has been gaining a massive amount of traction in the last couple of years, and there is a real argument to be made that this has affected the
109 Art 192 (1) TFEU
110 See page 17 of this paper for a complete explanation. 111 See pages 11-12 of this paper for a complete explanation. 112 Art III GATT
consumer taste in the EU marked113. The other saving grace is that the importance of PPMs has been gaining traction with the Appellate Body in recent years114. Since the differentiation between products based on carbon footprints is nothing else then a differentiation based on PPMs, this seems to positively impact the BCAs chances. This means that there is a decent chance that un-alikeness will be found. But these are untested waters, and the EU should not count on this. The BCA should be designed in a way that it could always pass an Art XX GATT test.
The fourth and last key design point is that of the rebate problem. The rebating of tax on exportation is most likely WTO law compliant. But the idea of rebating a carbon tax simply because the product is being exported seems to directly contradict the BCAs goals115. The second problem with tax rebates in this case is that it creates the impression that the actual intention is to protect the EUs own marked instead of fighting climate change. Lastly and maybe most importantly, when the BCA will be based on the ETS it seems unlikely that it is even possible to rebate the charge of a cap and trade system116. Therefore the logical
conclusion is that the BCA will need to work without a rebate system. This will mean an economic hit for exporting producers in the EU. But a necessary evil, because having a BCA with no rebate is still less harmful for the EU economy then taking climate measures without a BCA at all.
If the BCA fails to be WTO compliant then there is always the safety net in de form of Art XX GATT. But can the EU call upon Art XX GATT as a panic button? If the EU uses a transparent and clear rate equivalent calculation method and is prepared to harm their own industry by not giving a tax rebate on exportation, then calling upon the exceptions in Art XX GATT seems very realistic. Even so, the EU should keep showing their willingness to solve this problem bi/multilaterally. The EU could do so by increasing its sustainable development chapters in its FTAs for instance. Combined with the facts that the large climate accords such as Paris and Kyoto have all suffered the same problems of non-enforceable and vague
promises, not to mention key players leaving the treaties. It is clear that the time has come to take a different approach in the form of local action. Further justifying the use of a BCA and increasing the chances of a successful Art XX GATT appeal.
113 See page 22 of this paper for a complete argumentation. 114 Ibis
115 See page 12 of this paper for a complete explanation. 116 See page 24 of this paper for a complete explanation.
