News and Analysis • Volume 1 • Number 1 • October 2007
Border measures to address climate change-related competitiveness concerns: EU and US interests
This article describes developments in the EU and US concerning border measures, which could be imposed on imports from countries with policies that are considered insufficiently responsive to the need for climate change mitigation.
Abstractly, the underlying problem - in the terminology of political economy - is that there can be “free riders” on international agreements, including, as in this case, multilateral climate change agreements. The problem, in short, is that any given country can benefit from such an agreement without incurring the costs of participating in it. In particular, countries, industries and firms may fear that their international competitive position would be undermined by lower energy prices in non-participating countries. In the EU, these issues have arisen from time to time during the past several years with regard to US non-participation in the Kyoto Protocol. In the US, they have become salient during the past year with regard to emerging economy countries (especially Brazil, China and India).
This article considers these issues in three sections: activities in the EU, activities in the US, and scenarios for the future.
European Union
The European Parliament has passed resolutions calling upon the European Commission to consider the possibility of imposing offsetting tariffs on imports from countries that are not parties to the Kyoto Protocol – i.e. in effect, the US and Australia.
The Commission’s reaction has been to oppose such measures on the grounds that they risked exacerbating tensions in trade relations with the US, particularly at a time when trade relations were already strained and trans-Atlantic relations more generally were unusually conflicted over a broad range of issues. In addition, there were concerns that such measures would undermine support in the US for increased EU-US cooperation on climate change issues. Finally, there were concerns that such a tariff might be challenged in a WTO dispute settlement case, and the outcome of such a case would inevitably be uncertain.
However, before leaving office in 2007, French President Chirac and Prime Minister deVillepin suggested again that such measures be undertaken. European Trade Commissioner Mandelson responded, however, that this would not be helpful. For now, the issue is quiescent at least in public. However, since it is of continuing concern to the European cement industry and other greenhouse gas-intensive industries, the issue is not likely to go away.
United States
Similar issues appeared in 2007 on the agenda in the US in the context of the introduction of climate change bills in the Congress. As in the EU, it is a combination of international competitiveness and climate change free-rider concerns that have put the issue on the active agenda in the US Congress.
As of the beginning of September 2007, the prospects for the many climate bills under consideration in the House and Senate were uncertain. However, whatever the outcome of votes in the two houses on these bills and any Presidential action that might ensue, it is clear that there is much political support for some kind of border measure provision in climate legislation that includes a mandatory cap-and-trade system.
There is a key difference in the form of the measure that is on the agenda in the US, as compared with the tariff proposal in Europe. In particular, the proposal in the US is to require US importers in some circumstances to purchase GHG emission allowances. Such a measure could be less vulnerable than a tariff to challenge in the WTO, because it could more clearly be considered an environmental measure that would qualify as an exception under GATT Article XX(g), which allows measures “relating to the conservation of exhaustible natural resources.”1
One US legislative proposal of special interest that was under consideration in September 2007 was Senate bill S. 1766, which is commonly know as the Bingaman bill or Bingaman-Specter bill after its sponsors. It includes Title V, “Periodic Review and International Leadership,” which requires reviews every five years of “whether each of the five largest trading partners”2 of the US has taken “comparable action” to limit GHG emissions (section 501(2)(B)(i)). “Comparable action” is defined as “greenhouse gas regulatory programs, requirements, and other measures adopted by a foreign country that are determined by the President to be, in combination, comparable in effect to the action taken by the United States to limit greenhouse gas emissions pursuant to this Act, after taking into account the level of economic development of the foreign country” (section 502(a)(2)). US importers of “covered” GHG-intensive goods from countries that have been found not to have taken comparable actions must purchase “international reserve allowances” (i.e. GHG emission credits) to be issued by the US government. A “covered good” is one “that the President identifies, by rule, as a greenhouse gas intensive good that is closely related to goods, the cost of production of which in the United States is affected by this Act” (section 502(a)(5)).3
These and many other technicalities of the bill are of course subject to revision in Congressional deliberations and in any negotiations that may occur between members of Congress and the President. However, it is significant that quite specific and extensive language already has been formulated and is under active consideration in the Congress. It is also noteworthy that there would be much flexibility in how the provisions of the bill would be applied to particular circumstances. Further, the bill would require negotiations with countries before the import measures were implemented.
Perhaps more important than the legal technicalities or procedural issues at this point, is the political support already expressed for the concept of border measures on imports from countries deemed by the US government to be deficient in terms of actions to mitigate climate change in the future. Indeed, the proposal was first vetted jointly by one of the country’s largest electricity producers, American Electric Power, and one of the largest labor unions, The International Brotherhood of Electrical Workers. It has subsequently been endorsed by other major business and labour organisations. In short, the issue is now a significant item on the climate policy agenda in the US, and with much domestic political appeal.
Scenarios for the Future
As this article was being finalised in early September 2007, the US Congress was returning from a late summer recess, with a widespread expectation that at least some of the proposed climate legislation would progress to votes by the end of the year. Though not entirely out of question, the prospects were not promising for passage of such measures and acceptance by the President by the end of 2007. A more likely scenario is that there will be such legislation passed, signed and entering into effect in 2009 or 2010.
It is also likely that pressures to put in place some kind of import measures in the EU will grow as the debate and legislative process in the US progress. Ironically, the debate in the US will tend to legitimise any similar measures by the EU. Furthermore, the international competitiveness concerns in the EU are more advanced than in the US because the EU’s Emission Trading Scheme is already in operation, while any US national cap-andtrade system is still years from being operational. The precise form that such a measure would take in the EU, however, is uncertain. On the one hand, as noted above, there has already been movement towards the establishment of offsetting tariffs; on the other hand, certain features of the possible US measures, particularly in regard to challenges in the WTO, may make it more appealing to require GHG allowance purchases rather than to impose a tariff.
A third possibility that could emerge from present circumstances is that the EU and US would join together in an effort to develop border-measure provisions to be included in the post-2012 climate regime. Now that the concept has become part of the climate change dialogue in Washington as well as in Brussels, it would be natural for a trans-Atlantic dialogue, whether explicitly and officially endorsed or not, to expand as ideas for the post-2012 agenda become increasingly tangible and detailed.
Finally, the emergence of these issues makes abundantly clear that climate change issues and international trade issues have intersected. They will have to be addressed in a variety of climate and trade forums. One hopes they would be addressed in a way that is constructive for both climate change mitigation and international trade relations.
Thomas L. Brewer is Associate Professor, Georgetown University, Washington, DC and Associate Fellow, Centre for European Policy Studies (CEPS), Brussels.
1 There are a variety of technical legal issues, which are beyond the scope of this short article, but which have been the subject of extensive analysis.
2 In 2006, the top five US trade partners, as measured by total trade (imports plus exports) of goods, were: Canada, China, Mexico, Japan and Germany (“US Foreign Trade Statistics” of the US Census Bureau, accessed at www.census.gov/foreign-trade/statistics/highlights/top/top0706.html on 31 August 2007). In its present form, the bill provides for the first such review to be completed by January 1, 2016, from an inter-agency group to be established by January 1, 2013, by which time the trade partner rankings may obviously be different.
3 A second Senate bill, the Lieberman-Warner “America’s Climate Security Act” - as described by an “Annotated Table of Contents” released by the Senators on August 2, 2007 - was also expected to contain a border measure that would require US importers to purchase GHG allowances in some circumstances. However, because the bill had not yet been formally introduced as this article was being written, the details of the proposal were not yet known.
Thomas L. Brewer is Associate Professor, Georgetown University, Washington, DC and Associate Fellow, Centre for European Policy Studies (CEPS), Brussels.