Wednesday, November 23, 2011

Of Tar Sands and Oil

The issue of the European Union's decision to rank oil from Tar Sands of Canada as environmentally more harmful than crude oil is brewing into a major trade dispute with a possibility of knocking the doors of the WTO Dispute Settlement mechanism.

Jimmy Jeong/Bloomberg

As Reuters reported today, "The European Union proposes legislation to label crude oil derived from Canada's vast reserves of tar sands, as well as from other sources of unconventional oil, as highly carbon intensive. Canada has fought the proposal vigorously, with help from its EU ally, Britain, and through political and industry lobbying. European Climate Commissioner Connie Hedegaard has said she will stand firm and EU government officials meet for further discussion of their plans in early December."

Alberta in Canada is one of the largest tar sands oil producing areas in the world. It is a vital economic resource for Canada, especially in the context of international trade. Canada has the world's third largest oil reserves behind Venezuela and Saudi Arabia. The bulk of Canada's and Venezuela's oil wealth is unconventional crude, whereas Saudi Arabia's is mostly conventional oil that is very easy to extract.

The European Commission approved in October a proposal (Fuel Quality Directive) to include tar sands in a ranking designed to enable fuel suppliers to identify the most carbon-intensive options.The ranking essentially assigns Tar sands a default greenhouse gas value of 107 grams of carbon per megajoule, informing buyers it has more climate impact than conventional crude with 87.5 grams.
According to the Financial Post"Natural Resources Minister Joe Oliver on Tuesday warned the European Union against singling out Canadian oil as a dirtier form of energy in new fuel quality standards, saying the action would be “discriminatory” and could trigger a challenge before the World Trade Organization."
Terming it as discriminatory and unjustified, it is seen by the Canadian political establishment as an effort to stigmatize "Oil sands" vis a vis other crude oils. Several environmental groups support this measure as they view oil from tar sands as environmentally hazardous. A sustained campaign calls for stopping the "world's most destructive project". "Keep Europeans out of Tar Sands" they assert. They  assert that developing Canada's oil sands, the world's third largest crude deposit, emits unacceptably high volumes of greenhouse gases because the extraction methods and processing needed to allow refineries to use the heavy oil require far more energy than conventional oil production.
Al Gore called it the dirtiest fuel on the planet. He stated " As I wrote in Our Choice two years ago, gasoline made from the tar sands gives a Toyota Prius the same impact on climate as a Hummer using gasoline made from oil. This pipeline would be an enormous mistake. The answer to our climate, energy and economic challenges does not lie in burning more dirty fossil fuels – instead, we must continue to press for much more rapid development of renewable energy and energy efficient technologies and cuts in the pollution that causes global warming."
The pipeline Al Gore was referring to was the Keystone XL project which is an ambitious project to bring tar sand oil from Canada to the U.S Coast. Throwing light  on an interesting geo-political aspect of US-Canada trade ties, a Congressional Research Service Report titled "United States - Canada Trade and Economic Relationship: Prospects and Challenges" stated,"Canada is the United States’ largest supplier of energy—including oil, uranium, natural gas, and electricity—and the energy relationship has been growing. Canada is the world’s fifth largest petroleum producer, and its reserves are believed to be the third largest in the world only after those of Saudi Arabia and Venezuela; Canada’s sources of oil include traditional and offshore wells and, increasingly, Alberta’s oil sands. In 2010, the value of U.S. petroleum and natural gas imports from Canada reached $82.2 billion from $63.7 billion in 2009. Canada provides 22% of U.S. crude oil imports and supplies 85% of U.S. natural gas imports. Canada is particularly valued because it is considered a reliable source of energy, as it is not a member of OPEC. The two countries are also cooperating on the development of pipeline construction projects. China has shown interest in Canada’s oil sector, and has recently bought stakes in the Alberta’s oil sands projects. Canada also a net exporter of electricity to the United States, and the North American electricity grid is closely interconnected."

Is there a violation of WTO obligations? 

The issue I am looking at in this blog is whether the proposed regulation of the EU is violative of its WTO obligations? Is a ranking on environmental grounds on imported Tar Sand oil discriminatory and in violation of the of the national treatment principle of the WTO agreements?
As per the National treatment principle, imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements (GATT, GATS and TRIPS).

As per Article 3 of the GATT,
Article III: National Treatment on Internal Taxation and Regulation
1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.
2.       The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

3.       With respect to any existing internal tax which is inconsistent with the provisions of paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10, 1947, in which the import duty on the taxed product is bound against increase, the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time as it can obtain release from the obligations of such trade agreement in order to permit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax.

4.       The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product."

The mandate of these provisions is to ensure that an imported product is not discriminated vis a vis a locally produced one. The treatment should be no less favourable that that accorded to "like products" of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. One issue is whether oil from tar sands and conventional crude oil are "like products"? Further, are rankings based on environmental considerations informing fuel suppliers and consumers about the environmental impact of the product "less favourable treatment" as per the provision? Further, are there enough scientific studies and basis for such an analysis and ranking?

Another issue is whether the proposed regulation of the EU would be in violation of the Technical Barriers to Trade Agreement (TBT). 

The TBT Agreement mandates in Article 2 as follows,

Technical Regulations and Standards

Article 2: Preparation, Adoption and Application of Technical Regulations by Central Government Bodies

With respect to their central government bodies:
2.1        Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country.
2.2        Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade.  For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create.  Such legitimate objectives are, inter alia:  national security requirements;  the prevention of deceptive practices;  protection of human health or safety, animal or plant life or health, or the environment.  In assessing such risks, relevant elements of consideration are, inter alia:  available scientific and technical information, related processing technology or intended end-uses of products."
Does the ranking accord less favourable treatment to imported sand tar oil as compared to other conventional oil? Would this Regulation determining the environmental ranking be considered a technical regulation that creates unnecessary obstacles to international trade? Are they more trade restrictive than necessary? Are they necessary to fulfil the "legitimate objective" of protection of the environment? Does the "protection of the environment" have to be location specific in terms of the importing country's environment or the environmental concerns in general?
The dispute, if it enters into the WTO domain, promises to produce another 'COOL" Panel report like magnum opus, albeit not immediately!

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