Submitted by Andrew Lord
Reuters News reports that the European Commission is debating whether to implement a carbon tariff on imports from countries that have taken insufficient steps to tackle their greenhouse gas emissions. Reminiscent of GATT/WTO disputes over US environmental policies in the 1990s, a carbon tariff would almost certainly trigger trade disputes on the basis that the EU was attempting to impose extraterritorial environmental laws.
Europe continues to lead the world by unilaterally setting mandatory emissions reductions targets for its Members. While other countries like Canada dither on a way to price carbon, the EU's ETS cap-and-trade system rolls into its second phase this year. As discussed in an earlier posting, the EU has adjusted the allocations in Phase II to ensure that the market for EUAs is strong from 2008-2012. Assuming that EU Members will continue to pay a meaningful price for their emissions, a carbon tariff on imports would help level the playing field with companies in countries that have yet to put a price on carbon. The tariff could take the form of a requirement that importers buy EUAs.
Previous environmental disputes under the GATT and WTO trade regimes have demonstrated that countries do not respond kindly to such measures. The "tuna-dolphin" and "shrimp-turtle" cases in the 1990s concerned efforts by the United States to impose its environmental standards for catching tuna and shrimp on foreign fisherman by restricting imports of products caught in ways that killed dolphin and sea turtles. The exporting nations objected on the basis that the US's trade measures were a disguised extraterritorial application of domestic environmental law. The trade panel decided against the US in both cases (although those decisions were never formally adopted). It is therefore likely that a nation subjected to an EU carbon tariff could mount a case before the WTO.
An article in IDEAcarbon on January 4, 2008 (available by subscription only) points out that tariffs are not the only means of addressing the competitive distortion produced by asymmetrical international emissions regulations. In setting allocations for Phase II of the EU ETS, some nations are doling out more allowances to industries that must compete globally than to those that focus on the domestic market. For example, the UK caps for the cement and steel sectors will be close to business-as-usual, while the cap for domestic power producers will be over 30% below business-as-usual.