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Carbon Border Measures, Environmental Effectiveness and WTO Law Compatibility: Is There a Way Forward for the Steel and Aluminium Climate Club?

Published online by Cambridge University Press:  24 June 2022

Giulia Claudia Leonelli Open the ORCID record for Giulia Claudia Leonelli [Opens in a new window]
Giulia Claudia Leonelli*
Affiliation:
Lecturer in Law, Birkbeck College, University of London
*
Email: g.leonelli@bbk.ac.uk
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Abstract

With its narrow focus on price-based policies and ‘explicit’ carbon prices, the EU carbon border adjustment mechanism (CBAM) aims to prevent carbon leakage by ensuring that imported products ‘bear’ the same exact economic costs ‘borne’ by EU products. The proposed US border carbon adjustment (BCA) and the recent proposal for a global steel and aluminium arrangement (GSAA), by contrast, reflect a broader focus on environmental equivalence and recourse to punitive or quasi-punitive remedies. All recently proposed carbon border measures suffer from specific limitations. Further, albeit to a different extent, they are all associated with problematic aspects in terms of WTO law compatibility. This research note enquires whether the GSAA could be fine-tuned at the regulatory design stage in such a way as to provide an environmentally effective and WTO law compatible way forward. The analysis illustrates that recourse to an installation-based approach, emission limit values and product standards would achieve these goals. Nonetheless, the implementation of this ambitious strategy would be fraught with political obstacles.

Keywords

Carbon Border Measures‘Global Steel and Aluminium Arrangement’‘Green Steel Deal’Climate ClubsGATT 1994CBAM
Type
Research Note
Information
World Trade Review , Volume 21 , Issue 5 , December 2022 , pp. 619 - 632
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press

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References

1 For more information and the text of the Glasgow Climate Pact, see https://ukcop26.org/ and https://unfccc.int/documents/310475 (accessed March 2022).

2 Paris Agreement to the United Nations Framework Convention on Climate Change, Dec. 12, 2015, T.I.A.S. No 16-1104, Articles 2(1)(a), 3 and 4.

3 Carbon border measures have also been the object of analysis and discussion in the Sixth Assessment Report of the Intergovernmental Panel on Climate Change; see IPCC, Climate Change 2022. Mitigation of Climate Change. Working Group III Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (April 2022), chapter 14.

4 For an overview, see Campbell, E. and Pizer, W. (2021) ‘Border Carbon Adjustments without Full (or Any) Carbon Pricing’, Resources for the Future, 29 July 2021Google Scholar.

5 European Commission, Commission Staff Working Document, Impact Assessment Report Accompanying the Document Proposal for a Regulation Establishing a Carbon Border Adjustment Mechanism, SWD(2021) 643 final, part 2/2, Annex 11.

6 Ibid.

7 European Commission, Proposal for a Regulation of the European Parliament and of the Council Establishing a Carbon Border Adjustment Mechanism, COM(2021) 564 Final.

8 FAIR Transition and Competition Act, S. GAI21718 59G, 117th Cong. (2021).

9 Steel & Aluminium, EU–US Joint Statement of 31 October 2021, https://trade.ec.europa.eu/doclib/docs/2021/october/tradoc_159890.pdf (accessed March 2022).

10 See Nordhaus, W. (2015) ‘Climate Clubs: Overcoming Freeriding in International Climate Policy’, American Economic Review 105(4), 1339Google Scholar.

11 A focus on steel and aluminium products is a central aspect of all the carbon border measures under analysis. The steel industry, in particular, is the most carbon-intensive and trade-exposed sector of the economy: see Impact Assessment Report, supra note 5.

12 US Joint Statement, supra note 9, section 3.

13 Ibid, section 1.

14 Ibid, section 2.

15 See T.N. Tucker and T. Meyer (2021) A Green Steel Deal: Towards a Pro-Jobs, Pro-Climate Cooperation on Carbon Border Measures, Roosevelt Institute.

16 eu-us Joint Statement, supra note 9, section 2.

17 S. Lester (2022), ‘Prospects for the Green Steel Deal’, International Economic Law and Policy Blog, March 2022; see also Lester, S. (2021), ‘How Exactly Would the US–EU Section 232 Deal Affect Carbon Emissions?’, International Economic Law and Policy Blog, November 2021Google Scholar.

18 Lester, ‘Prospects for the Green Steel Deal’ and Lester, ‘How Exactly Would The US–EU Section 232 Deal Affect Carbon Emissions?’, supra note 17.

19 J. Hillman and A. Tippett (2021) ‘A New Transatlantic Agreement Could Hold the Key to Green Steel and Aluminium’, Council on Foreign Relations Blog, November 2021.

20 Section 2. The US–Japan and US–UK Joint Statements, however, follow a much vaguer approach; both Statements provide that the states ‘will confer on entering into discussions on global steel and aluminium arrangements to address both global non-market excess capacity as well as the carbon-intensity of the steel and aluminium industries’. See US–Japan Joint Statement, 7 February 2022, www.commerce.gov/sites/default/files/2022-02/US-Japan-Joint-Statement.pdf and Steel and Aluminium, US–UK Joint Statement, 22 March 2022, www.commerce.gov/sites/default/files/2022-03/UK232-Joint-Statement.pdf (accessed March 2022).

21 EU–US Joint Statement, supra note 9, points (iii) to (vi).

22 EU–US Joint Statement, supra note 9, point (ii).

23 Lester, ‘How Exactly Would the US–EU Section 232 Deal Affect Carbon Emissions?’, supra note 17; Meyer, T. and Tucker, T. N. (2021), ‘Response from Tim Meyer and Todd Tucker: How Exactly Would The US–EU Section 232 Deal Affect Carbon Emissions?’, International Economic Law and Policy Blog, November 2021Google Scholar; Hillman and Tippett, supra note 19; Kleimann, D. (2021), ‘The Worst of Two Worlds: Why the US Blueprint for a Transatlantic Climate Club Authored by Todd Tucker and Tim Meyer Must be Binned Immediately’, International Economic Law and Policy Blog, December 2021Google Scholar.

24 Tucker and Meyer, supra note 15. The GSD policy proposal involves the application of a common external tariff on steel products originating from non-members of the club. Members of the club would take on decarbonization commitments, while maintaining full margins of manoeuvre as regards recourse to a different mix of (price-based and non-price-based) policy tools.

25 Kleimann, supra note 23.

26 Lester, ‘How Exactly Would The US–EU Section 232 Deal Affect Carbon Emissions?’, supra note 17; and Lester, S., ‘More on the US–EU Section 232 Deal Affecting Carbon Emissions: A Response to The Response by Tim and Todd’, International Economic Law and Policy Blog, November 2021Google Scholar. These points have been made in the context of an analysis of the proposal for a GSD.

27 Different options might be taken into consideration during the GSAA negotiations. Punitive tariffs or quotas could be calibrated to the level of ambition of the decarbonization policies of non-members, or their prevailing modes of production. Alternatively, punitive tariffs or quotas could be calibrated to the GHG emissions embedded in products originating from non-members, or be only addressed to specific categories of products with high levels of embedded emissions. Other variations along this spectrum are likely to be taken into consideration.

28 For more details, see section 3 below.

29 Section 9904(b)(2)(B). An additional condition is that the relevant countries must not impose any carbon border measures on US products. For a detailed analysis, see G.C. Leonelli (2022) ‘Practical Obstacles and Structural Legal Constraints in the Adoption of “Defensive” Policies: Comparing the EU Carbon Border Adjustment Mechanism and the US Proposal for a Border Carbon Adjustment’, Legal Studies, DOI: https://doi.org/10.1017/lst.2022.20.

30 Section 9902.

31 Section 9904(a).

32 Section 9905(c).

33 Section 9904(b)(2)(A).

34 For an overview of relevant methodological obstacles, see Campbell and Pizer, supra note 4.

35 See Articles 3(15) and (20), 4, 5, 6, 7(2), and 8 in the European Commission's proposed Regulation, supra note 7.

36 Articles 21(1) and 31.

37 Article 3(23). For a recent detailed analysis of the CBAM proposal, see A. Cosbey, O. Sartor, and A. Shawkat (2022) Getting the Transition to CBAM Right: Finding Pragmatic Solutions to Key Implementation Questions, Agora.

38 Article 2(5).

39 For an analysis of the same point from a product-based perspective, i.e. with reference to the CBAM's failure to take the ‘implicit’ carbon prices ‘paid’ by imported products into account, see section 3 below. For a detailed analysis of the CBAM, see Leonelli, supra note 29.

40 On the conditions for the application of Article III:4, see Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, para. 133. The measures applied to domestic and imported products need not be identical: see Panel Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/R, adopted 5 April 2001, paras. 8.94 ff. For different analyses and conclusions regarding the CBAM, see J. Bacchus (2021), Legal Issues with the European Carbon Border Adjustment Mechanism, Cato Institute Briefing Paper no. 125; and I. Venzke and G. Vidigal ‘Are Trade Measures to Tackle the Climate Crisis the End of Differentiated Responsibilities? The Case of the EU CBAM’, Amsterdam Law School Research Paper 2022-02.

41 Bacchus has laid emphasis on the incompatibility of the free allowances system with Article III:4, see supra note 40. Hufbauer has highlighted that CBAM certificates are not tradable, unlike ETS allowances; this may also result in a breach of Article III:4. See G. C. Hufbauer et al. (2021), Can EU Carbon Border Adjustment Measures Propel WTO Climate Talks?, PIEE Policy Brief.

42 In so far as it indirectly places products originating from ‘environmentally virtuous’ countries in an advantageous situation, the CBAM may also result in a de facto violation of the MFN principle; see Bacchus, supra note 40.

43 The question is still controversial in the literature; for different views, see Pauwelyn, ‘J. (2007) ‘US Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law’, Duke University Working PaperGoogle Scholar; R. Howse (2015), ‘Non-Tariff Barriers and Climate Policy’, in C. Herrmann, M. Krajevski and J.P. Terhecte (eds.), European Yearbook of International Economic Law, Springer; G. Marceau (2016), ‘The Interface between Trade Rules and Climate Change Actions’, in D.Y. Park (ed.), Legal Issues on Climate Change and International Trade Law, Springer; J.P. Trachtman (2016), WTO Law Constraints on Border Tax Adjustment and Tax Credit Mechanisms to Reduce the Competitive Effects of Carbon Taxes, Resources for the Future.

44 Article II:2(a) stipulates that the relevant charge shall be equivalent to an internal tax imposed consistently with the provisions of Article III:2 GATT.

45 On the qualification of ‘clean air’ as an exhaustible resource, the requirement of a ‘close and genuine relationship of ends and means’, and even-handedness, see Panel Report, United States – Standards for Reformulated and Conventional Gasoline (US–Gasoline), WT/DS2/R, adopted 20 May 1996, paras. 6.36–6.38; and Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, pp. 20 and 21.

46 The CBAM's reference to national average baselines or to the emissions of the worst performing EU installations, in the absence of verification, is more difficult to justify.

47 Impact Assessment Report, supra note 5, part 1/2, 26.

48 I.e., products originating from countries with non-effective price-based policies are still likely to be more polluting and pay ‘more’ than products originating from countries with effective non-price-based policies.

49 For an analysis of this point from a product-based perspective, see Meyer, T. and Tucker, T. N. (2022), ‘A Pragmatic Approach to Carbon Border Measures’ World Trade Review 21, 109–120Google Scholar. This could result in arbitrary or unjustifiable discrimination against products originating from countries that have adopted non-price-based policies vis-à-vis EU products, and vis-à-vis imported products originating from countries that have adopted price-based policies.

50 On the question of coercive effects, see Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products (US–Shrimp), WT/DS58/AB/R, adopted 6 November 1998, paras. 161 and 164, laying emphasis on the promotion of measures that are comparable in effectiveness to (rather than essentially the same as) the ones of the regulating Member. See also para 165, regarding consideration of the appropriateness of the regulatory program for the conditions prevailing in exporting Members.

51 Meyer and Tucker, supra note 49.

52 By analogy, see Appellate Body Report, US–Shrimp, paras. 180 and 181.

53 By analogy, see the findings in Appellate Body Report, US–Shrimp, para. 165 (on the application of the US ban to shrimp harvested with turtle excluder devices originating from countries that the US had not certified); and Appellate Body Report, European Communities – Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R, WT/DS401/AB/R, adopted 18 June 2014, paras. 5.324 ff (on the possibility for seal products to illegitimately qualify for the indigenous community exception).

54 By analogy, see Appellate Body Report, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted 17 December 2007, paras. 226 to 232 and para. 242 (on the effects of the MERCOSUR exception).

55 By analogy, see Appellate Body Report, US–Gasoline, p. 27. While a petition procedure is provided for, it may be considered insufficient.

56 See note 53.

57 See also section 2 above. In theory, questions surrounding the even-handed application of the GSAA regulatory arrangements may fall for analysis under sub-paragraph (g) of Article XX GATT. However, it is fair to suggest that they are more likely to come under scrutiny as part of the practical application of the GSAA, i.e. under the Chapeau requirements.

58 On this point see also Lester, ‘Prospects for the Green Steel Deal’, supra note 17.

59 Appellate Body Report, US–Shrimp, para. 166; Appellate Body Report, United States – Import Prohibition on Certain Shrimp and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/AB/RW, adopted 21 November 2001, paras. 123 and 124. As confirmed by the AB, there is no duty for the Parties to conclude an agreement.

60 Appellate Body Report, US–Shrimp, para. 172; Appellate Body Report, US–Shrimp 21.5, para. 122.

61 Appellate Body Report, US–Shrimp, paras. 164 and 166.

62 Montreal Protocol on Substances that Deplete the Ozone Layer, 26 I.L.M. 1541, 1550 (1987). The 2016 Kigali Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer targets hydrofluorocarbons (HFCs).

63 As broadly defined in Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on Industrial Emissions (Integrated Pollution and Prevention Control) [2010] OJ L 334/17, Article 3(10).

64 See e.g. United States EPA, PSD and Title V Permitting Guidance for Greenhouse Gases (2011), Part III.

65 Differences between jurisdictions may emerge at the regulatory as well as regulatory implementation level. For more details on the US procedures, see 40 CFR 51.166(a)(12).

66 This was caused by the decision of the US Supreme Court in Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427 (2014). The Supreme Court's interpretation of the relevant Clean Air Act provisions has restricted the possibility for the EPA to set emission limit values for GHGs.

67 For plenty of data, see the information available on the International Energy Agency website, <https://www.iea.org> (accessed March 2022).

68 United States EPA, Available and Emerging Technologies for Reducing Greenhouse Gas Emissions from the Iron and Steel Industry (2012), 2 ff.

69 Ibid, 8.

70 Ibid.

71 All emission limit values would have to be ‘output-based’, i.e. calibrated to the dimensions and the scale of production of the relevant facilities.

72 This process would have to be quite different from (e.g.) the EPA's traditional case-by-case assessment and practice to include economic cost–benefit effectiveness considerations (i.e. considerations relating to the balance between the environmental benefits and economic costs associated with GHG emission reductions) when setting emission limit values and granting permits to specific facilities.

73 Stringent regulatory standards are simply likely to reduce the revenues from the collection of carbon taxes or auctions in emission trading schemes, in so far as GHG emissions decrease. For an acknowledgment that the GSAA arrangements would complement rather than substitute the EU CBAM, see the declarations by EU officials reported on the Financial Times, ‘Fudgy Fixes and Fuzzy Vision in Transatlantic Trade’, www.ft.com/alan-beattie (accessed March 2022).

74 As already seen, regulatory measures such as the CBAM and the BCA have already created incentives for producers/importers to ensure that all GHG emissions embedded in their products are verified.

75 For the same point, see Lester, ‘How Exactly Would The US–EU Section 232 Deal Affect Carbon Emissions?’, supra note 17.

76 By way of example, the complete elimination of Section 232 tariffs would be extremely beneficial. The question of anti-dumping and countervailing duties is more complex. From a decarbonization perspective, the ‘environmental’ component should prevail over the ‘unfair trade’ one. The application of anti-dumping and countervailing duties may discourage the production in non-members of ‘green’ products compliant with the club's standards; on these grounds, excluding the application of these duties against ‘green’ products would be beneficial. At this very early stage, however, it is impossible to predict what steps the members of the club would take. For an analysis of the interactions between the current high tariff environment and prospective climate club arrangements, with a particular focus on Section 232 duties and anti-dumping and countervailing duties, see Lester, ‘How Exactly Would The US–EU Section 232 Deal Affect Carbon Emissions?’, supra note 17, and Lester, supra note 26.

77 For a brief reference to the different case of ozone-depleting substances, see supra in this section and note 62.

78 It is also worth noting that economic, social, and political costs will be considerably higher in cases where action must be taken to retrofit existing sites, as opposed to cases where new facilities are being planned.

79 For a reference to this point in the context of the discussion on the GSD, see Tucker and Meyer, supra note 15.