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Info Service on WTO and Trade Issues (Nov21/04) Geneva, 3 Nov (D. Ravi Kanth) – Under the seeming pretext of addressing climate change, the United States and the European Union could push the issue of carbon tariffs into the global trading system, posing the biggest challenge yet for developing countries at the upcoming WTO’s 12th ministerial conference (MC12) taking place in Geneva from 30 November. On the same day that the UN Climate Change Conference (COP26) got underway in Glasgow on 31 October, the United States and the European Union reached a bilateral agreement ostensibly to end a tariff war triggered by the Trump administration’s decision to impose tariffs under Section 232 of the Trade Expansion Act of 1962 (dealing with national security) on European steel and aluminum products. The bilateral agreement includes several elements, particularly the idea of bringing the issue of carbon tariffs into global trade. “This marks a milestone in renewed EU-US partnership,” the European Commission President Ursula von der Leyen remarked, in a joint appearance with US President Joseph Biden in Rome on 31 October. According to a White House fact sheet issued after the meeting in Rome on 31 October, the two sides said that they have reached an “agreement to cooperate on trade remedies and customs matters and development of additional actions.” According to the fact sheet, “both sides agreed to expand their coordination involving both trade remedies and customs matters, and to meet regularly to consult and develop additional actions to address non-market capacity in these sectors.” More importantly, the trans-Atlantic climate/trade agenda highlighted “negotiations of global steel and aluminum arrangements that restore market-oriented conditions and address carbon intensity.” Without mentioning carbon tariffs that would signify “carbon intensity”, it says that “the US and EU resolved to negotiate future arrangements for trade in the steel and aluminum sector that take account of both global non-market excess capacity as well as the carbon intensity of these industries.” Further, “the US and EU agreed to form a technical working group to enhance their cooperation and facilitate negotiations on these arrangements, and will invite like-minded economies to participate in the arrangements.” The “like-minded economies” are drawn from the Ottawa Group of countries led by Canada at the WTO and other developed countries that are likely to join forces with the US and the EU, to bring this issue to the WTO apparently under one pretext or the other for allegedly fighting climate change. It may come under the ongoing initiative concerning trade and environmental sustainability structured discussions (TESSD) being coordinated by Australia. The WTO director-general Ms Ngozi Okonjo-Iweala has already lent her support for considering carbon tariffs to address the worsening climate change. Writing in the Financial Times on 14 October, Ms Okonjo-Iweala argued that fears among developing countries that carbon border adjustment measures – tariffs or equivalent measures – would lead to protectionism seem somewhat misplaced. “This is no argument against carbon pricing,” she said, suggesting that “the most straightforward solution would be a global carbon price aligned with the Paris Agreement. This would help achieve our collective climate goals, and bring stability and fairness for cross-border business. Unfortunately, we are not yet there. Leaders gathering in Glasgow at COP26 should make solving this problem a priority.” In an article in the Wall Street Journal on 2 November, titled “Tariffs to tackle climate change gain momentum – the idea could reshape industries,” reporters Yuka Hayashi and Jacob M Schlesinger cautioned that “the proposals come with risks, including undermining world trade rules and triggering trade disputes.” Commenting on the US-EU bilateral deal, the two reporters wrote that “governments in the US, Europe and other developed nations are embarking on a climate change experiment: using tariffs on trade to cut carbon emissions. The idea has the potential to rewrite the rules of global commerce.” Carbon tariffs are the basis for carbon border adjustment measures which aim to impose customs duties on imported steel or aluminum products that are allegedly produced with higher carbon emissions. UNCTAD RAISES SERIOUS CONCERNS OVER CBAM In part two of the flagship Trade and Development Report (TDR), where issues concerning trade and environment and other trade agreements figured prominently, the UN Conference on Trade and Development (UNCTAD) cautioned developing countries about the escalating dangers of carbon border adjustment measures (CBAM) or carbon tariffs. The TDR drew attention to the ongoing trade and environmental sustainability structured discussions (TESSD) where the participants are expected to submit a report to the trade ministers at MC12. The TDR says that some developed countries including the EU are considering establishing a Carbon Border Adjustment Mechanism (CBAM) which entails taxing imported goods at a rate commensurate with the amount of carbon emitted (CO2 emissions) in their production. This is done to avoid “carbon leakage”. According to the TDR, the developed countries argued, without much evidence and data, that since more carbon- intensive goods are produced in countries outside the Organization for Economic Cooperation and Development (OECD) and shipped into the OECD countries, CBAMs will help in reducing global carbon emissions. The report says that given the interconnectedness of the global economy and fragmented production processes, CO2 emissions in developing countries are largely generated to produce goods consumed in other countries. It is well documented that the excessive push by the North in the past two decades to form global value chains (GVCs) has led to outsourcing of many carbon-emitting production activities to developing countries, while associated low-carbon pre-production and post-production activities have been retained in the Northern countries. Little wonder that the comparative energy efficiency in the North is therefore closely linked to the energy inefficiency in the South. According to data published by the OECD, “of the total global CO2 emitted in 2015, around 27 per cent is linked to international trade, mainly in seven industries, namely, Mining and extraction of energy producing products; Textiles, wearing apparel, leather and related products; Chemicals and non-metallic mineral products; Basic metals and fabricated metal products; Computers, electronic and electrical equipment; Machinery and equipment; and Motor vehicles, trailers and semi-trailers.” The TDR says that “these are also the industries with a high proportion of their trade in GVCs.” According to the TDR, from the analysis based on the OECD dataset, three interesting observations have emerged, namely: 1. Share of non-OECD countries in global CO2 emissions embodied in global domestic final demand and in global gross exports is 57 per cent and 69 per cent respectively. 2. However, removing China’s share (25 percent) from non-OECD aggregates, it is seen that the share of non- OECD countries (32 per cent) in CO2 emissions embodied in global final demand is lower than that in the OECD countries (43 per cent). 3. Similarly, the share of non-OECD countries (minus China) in CO2 emissions embodied in global gross exports is almost half of that in the OECD countries, i.e., only 16 per cent as compared to 31 percent. Interestingly, “most of the developed countries like Australia, Canada, European Union, Germany, Japan, and the United States, have higher CO2 emissions per capita compared to developing countries like China, India, Indonesia, and Malaysia”, according to the TDR. Also, “CO2 emissions in gross exports of OECD countries to non-OECD countries have grown much faster than CO2 emissions in their imports from non-OECD countries in the period 2005-2015.” The report stresses that this trend indicates that the “growing interconnectedness in the global economy” makes it impossible to disentangle high-carbon and low-carbon emitters in global value chains. The TDR said that notwithstanding the legal challenges that are bound to arise from the implementation of CBAMs, the underlying principle on which these mechanisms are based “is to impose on developing countries the environmental standards that developed countries are choosing.” In short, the CBAMs and other similar trading schemes strike at the heart of the core principle of common but differentiated responsibilities enshrined in the Paris Agreement. “Worse still, if the revenues collected from CBAM and other such schemes are used in developed countries, rather than invested in climate adaptation in developing countries, they would turn the basic principles of climate finance on their head,” the TDR warned. In the past, the United States had used the Byrd Amendment (1971) to facilitate the distribution of import duties collected through anti-dumping or countervailing duties. The WTO’s Appellate Body had repeatedly condemned such a practice as WTO-illegal, but the US continues to implement this controversial provision.
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