In this paper, Gary Hufbauer and Jisun Kim examine the conditions necessary for achieving a credible, low cost alternative to fossil fuel-based energy, placing an emphasis on how trade policy can be used to spur development in the sector, and the key issues that need to be addressed in order to accomplish a sustainable energy trade agreement (SETA).

This publication is a joint effort by ICTSD, the Global Green Growth Institute (GGI) and the Peterson Institute for International Economics (PIIE).

The following questions are addressed in this paper: is it possible to design a carbon trading scheme that is both administratively feasible and justifiable under WTO law? Does the inclusion of aviation in the EU ETS violate the unconditional most-favoured nation obligation in Article I:1  GATT?  Is  the  scheme  exempt  from regulation  because  of  the  GATS  Annex  on  Air  Transport  Services? Does the scheme violate the most favoured nation and national treatment obligations under Articles II and XVII GATS? And can the scheme be justified under the environmental exceptions of Article XX GATT and Article XIV GATS, respectively?

In order to put this legal analysis in the context of a broader political and strategic landscape, this paper includes a commentary written by Professor Robert Howse of the New York University School of Law.

Recently, the topic has generated considerable tension. This relates particularly to the decision by the European Union to include aviation into its Emissions Trading System (ETS), applicable to all flights that take off from and land in the EU. Indeed, more than 26 countries have joined forces against the EU’s policy and have proposed, amongst others, exploring the compatibility of the measure with WTO law. Against this backdrop, it is crucial to recall the wider challenge of how to effectively address climate change in a manner that is consistent with the legal obligations of countries, without unnecessarily restricting prospects for growth and development through trade.

The objective of the Dialogue is to offer a platform for exchange of views between experts and stakeholders on the regulation of aviation and in particular its effects on trade and the trading system. The meeting will highlight the economic, legal and political aspects of the issue, with the ultimate purpose of contributing to identifying constructive and non-confrontational solutions to the challenges discussed.

With one of the fastest economic growth rates in Europe, Polish policymakers are hesitant to implement any major changes - particularly given current economic conditions in Europe. Officials point to dire economic predictions as evidence against the one-size-fits-all solution.

Pitor Jezowski, a professor at the Warsaw School of Economics, projects that adopting the proposed roadmap would cost Poland one percentage point of economic growth every year until 2030. Polish officials say fellow member states Czech Republic, Hungary, Slovakia, and Romania are also second-guessing their original support for the new milestones.

In 2008 the EU unanimously agreed to reduce carbon-emissions by 20 percent from 1990 levels by 2020. The expanded roadmap - championed by Connie Hedegaard, the European Commissioner for Climate Action - seeks to establish additional milestones every decade. The new plan would recommend a 40 percent reduction in emissions by 2030, a 60 percent reduction by 2040, and an 80 percent reduction by 2050.

Poland’s dependence on coal for some 94 percent of its electricity generation has fuelled opposition to the new measures. Marcin Korolec, Poland’s Environment Minister, argued in a recent editorial that the proposed roadmap is too simplistic.

“Our economies differ,” Korolec writes. “Our long-term climate policy should reflect these differences, by providing member states with a flexible set of tools from which to choose those that are acceptable and fitted to their policy needs.”

The minister argues that energy policy independence is an important element of bloc membership.

“We need a framework that respects the treaty-guaranteed right of each member state to design its energy mix according to its needs,” he said.

Climate friction

Warsaw’s opposition to EU carbon reduction goals has been ruffling feathers in Brussels for some time now. In June 2011, Poland was the only EU member state to oppose a more ambitious 25 percent 2020 emissions reduction target. Poland also broke from the rest of the EU at the recent climate talks in Durban, refusing to back a plan that would reduce the surplus of Kyoto carbon permits.

This latest move has triggered the ire of some fellow member states who insist that even coal reliant countries like Poland will benefit from a greener approach to European energy.

“The outcome shows how we must redouble our efforts in explaining to Poland that shifting to a low-carbon economy is part of long term growth in Europe,” said Ed Davey, Britain’s Energy and Climate Change Secretary. The UK has committed to slashing emissions by 30 percent by 2020.

Jo Leinen, a German Social Democrat expressed similar sentiments.

“Poland is not only slowing down their own country, but also the aspirations and opportunities for sustainable growth in the other 26 Member States.”

Several industrial groups, however, have noted that further European commitment to emission-reduction schemes would be foolish in absence of a global agreement.

“Setting unilateral more ambitious EU emissions targets for 2030 and 2040 while ignoring at the same time the limited - if any - mitigation efforts third countries are prepared to make will not help investment in the EU,” the European Alliance of Energy Intensive Industries said in a statement.

A similar line of thinking has been at the centre of criticism over the inclusion of aviation - and possible inclusion of shipping - under the bloc’s Emissions Trading Scheme.

“Competitive disadvantage”

Korolec has also pointed to the rising level of emissions from developing nations, like India and China, arguing that an agreement that is not binding to all nations puts Europe at a distinct competitive disadvantage. In a letter to his fellow environment ministers, Korolec argued that all reduction proposals - beyond the existing 20 percent reduction by 2020 - should be handled under the umbrella of the global UN Framework Convention on Climate Change (UNFCCC).

“Europe should still lead the process,” he conceded. “We should, though, be very conscious of our relatively small contribution to global emissions.”

ICTSD Reporting; “Poland blocks EU efforts on carbon limits,” REUTERS, 9 March 2012; “Poland tries to block EU emission goal,” WALL STREET JOURNAL, 12 March 2012; “Poland blocks EU’s low-carbon roadmap,” EUROPEAN VOICE, 10 March 2012; “Climate roadmap at a crossroads,” EUROPEAN VOICE, 8 March 2012; “Poland opposes EU environment ambition,” REUTERS, 7 March 2012.

G20 countries have pledged to eliminate fossil fuel subsidies, and negotiations are ongoing in the WTO, APEC and elsewhere to reduce barriers to trade in environmentally friendly goods and services.  However, progress on each of these efforts is halting due to many challenges and obstacles. Could a like-minded group of countries breathe life into green growth cooperation by agreeing on the Sustainable Energy Trade Agreement?  What is such an agreement most likely to include?

Moderator

Mr. Ricardo Melendez-Ortiz, International Centre for Trade and Sustainable Development (ICTSD)

Discussion Leaders:

H.E. Bark Tae-ho, Minister for Trade, Ministry of Foreign Affairs and Trade, Republic of Korea
Dr. Peter Brun, Senior Vice President, Vestas Wind Systems

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