Economists and EU ETS - Time for International Trade Lawyers to comment?

In an interesting development on the EU ETS Scheme, a few Nobel Economists from Universities including  Harvard, Stanford, Columbia, Princeton, and Berkeley wrote a letter to the U.S. President requesting the U.S. administration to support the global adoption of the EU ETS Scheme and to also not oppose the Scheme in the present form. The EU ETS is essentially a carbon emission reduction scheme applied to airline emissions. I have blogged about it here, here, here, here and here.

The gist of the letter is here:

"We implore you to support the European Union’s innovative efforts to place a price on carbon from aviation through the emissions trading system (EU ETS), or, at the very least, to stop actively opposing these efforts.  The aviation sector represents a large and growing global source of carbon emissions.  Addressing emissions in this sector by negotiating a global pricing system through the International Civil Aviation Organization (ICAO) would send an important signal that carbon pricing is an effective way to correct a major market failure—the growing concentration of greenhouse gases in the atmosphere.

As you know, the uncontrolled flood of carbon emissions into the atmosphere is driving climate change and increasing the risk of catastrophic outcomes. It is time we recognize this risk by putting an appropriate price on carbon emissions, in aviation and in all other sectors. The EU’s ETS is a first step in that direction. Your administration should endorse the EU’s efforts, not oppose them.

          ...

Today the US is leading a coalition of unwilling countries on a course of refusing to price this risk in the commercial aviation sector.  Rather than opposing the EU, we urge your administration to support their efforts to price carbon in the context of the ICAO.  In order for the world to achieve its climatic objectives at tolerable cost, a cooperative approach among nations is essential. While we recognize that there are numerous obstacles to setting a uniform, global price on all carbon emissions, pricing them in the aviation sector would be a good start.  In particular, we urge you to drop the US opposition and to support the EU’s efforts to deal with this global problem." 

 Some of the eminent signatories include Professors Kenneth Arrow and William F.Sharpe. I found it quite surprising that leading economists had written on this issue to the President. Issues like the Boeing-Airbus subsidies imbroglio or Canada's tar sands oil or seal trade did not receive similar treatment.

The U.S Administration is a signatory to a rather strong joint declaration undertaken by 26 countries in Moscow recently against the EU ETS scheme. The declaration was categorical in its rejection of the scheme and explored options of taking the EU to an international fora to undo the measure.

"Considering that the inclusion of international civil aviation in the EU-ETS leads to serious market distortions and unfair competition;

Decided to:

a) Adopt this Joint Declaration as a clear manifestation of their unanimous position that the EU and its Member States must cease application of the Directive 2008/101/EC to airlines/ aircraft operators registered in third States;

b) Strongly urge the EU Member States to work constructively forthwith in ICAO on a multilateral approach to address international civil aviation emissions;

c) Consider taking actions/ measures set forth in Attachment A to this Joint Declaration including, for example, a proceeding under Article 84 of the Chicago Convention and barring participation by their respective airlines/aircraft operators in the EU ETS;

d) Exchange information on the measures adopted and to be adopted, particularly to ensure better coordination, by each non-EU Member State after this Meeting in future;

e) Continue their intensified common efforts to make progress at ICAO to address international civil aviation emissions;

f) Request the Russian Federation, on their behalf, to communicate this Joint Declaration to the EU and its Member States; and

g) Invite any other State to associate itself with this Joint Declaration and, in this connection, request the Russian Federation to extend this invitation."

The primacy of the  issue of environmental concerns in international trade is at the core of the debate. While the opponents of the scheme, inter alia, argue that the EU ETS in the aviation sector leads to serious "market distortions" and unfair competition, the above economists have argued that if climate change is to be slowed appreciably at tolerable cost, it is wise to use the market to provide incentives for individuals and firms to reduce greenhouse gas pollution. In addition to the economic perspective, there is an issue of international law - whether the measure is consistent with EU;s international obligations irrespective of the economic rationale of the measure. Again, a heady mix of environmental economics and international law at play! Would be interesting to see an open letter to the U.S President from the leading lights in international trade law with regard to the way forward.