EU ETS - Not taking off for now

After months of suspense, news of the EU ETS' extension to the aviation sector being postponed is trickling in. I have blogged on this contentious issue here, here, here and here.

NYT reported that the EU had temporarily postponed the measure in an effort to find a global solution. The system, which requires airlines using an airport in Europe to obtain or buy permits corresponding to the amount of gases they emit, had generated intense opposition among foreign governments. The EU had faced increased opposition from China, India and the U.S. which had alleged that unilateral standards were being imposed on an issue that required a multilateral solution. 26 countries had also signed a joint declaration in this regard. Financial reported the move here. Scott Lincicome has captured the latest move succinctly here.

Is this just a temporary reprieve or will this lead to a global solution to the complex question of airline emissions and environment protection? Did trade interests of Airbus (China had threatened to cancel its orders) have any role to play n this reversal of stand by the EU? Is the threat of re-imposition of an airline emission tax sufficient to force countries to forge a multilateral agreement? Will mulitlateralism prevail in an era of growing plurilateral, bilateral and unilateral measures?

Let us wait for April 2014, when the deadline is back in reckoning?

EU-China patch up over EU ETS?

News of a deal between China and the EU regarding emissions is trickling in here and here.

"China, the world’s largest emitter of carbon dioxide, has signed a financing deal with the European Union to reduce greenhouse gases through a variety of projects, including developing an emission trading system to link with the EU’s Emission Trading Scheme (ETS). 

This agreement, announced yesterday at an EU–China summit, includes €25 million ($32 million) in financing and technical assistance for three sustainability and waste reduction pilot projects over four years."

 Implications for international trade? Few thoughts:

1. Does this signify in the end of China's opposition to the EU ETS in the aviation sector? The Joint Declaration that 26 countries had signed against the extension of the EU ETS to the aviation sector included China.

2. One of the main oppositions to the EU ETS was that it was a unilateral measure which was not truly a global effort. With efforts by the EU to link the EU ETS with the Chinese Trading system and the Australian system is it an effort to universalize it and gain international legitimacy and acceptance? 

3. Will China now buy more Airbus aircrafts from the EU rather than Boeing?

Just my wild conjectures without any documentary backing.

China-EU patch up?

Recent news indicated that a trade war between China and the EU was imminent. I had blogged about it here. Many issues like the EU ETS, antidumping measures against Chinese solar panels by the EU were apparent triggers.

However, the recent visit of the Chinese Premier to Brussels seem to have eased the tension. News reports here and here of joint statements by China and EU  to combat protectionism seem interesting:

"At the 15th summit between the world's largest trading bloc and China, the second largest economy,Premier Wen Jiabao played down disputes with Europe over Beijing's export policies and trade practices. 

"We both follow free and open economic and trade policies, reject trade protectionism and work to advance economic globalization," Wen told a business conference on the sidelines of the summit."

What is the reason for the see saw trade relations between the two trading power blocs? Have trade realities caught up with political rhetoric? Will this see a change in attitude of China towards the EU ETS and EU's challenge of "dumping" of Chinese solar products?

A report on EU- China trade relations by European Council on Foreign Relations titled "A Power Audit of EU-China relations" made interesting reading. The Report contends that the EU is disunited in its approach to China and the latter takes advantage of it. Providing an interesting classification of EU Member States consisting of Assertive Industrialists, Ideological Free-Traders, Accommodating Mercantilists and European Followers, their relationship with China is mixed.

"Assertive Industrialists  

The small group of Assertive Industrialists is made up of the Czech Republic, Germany and Poland. These are the only EU Member States willing to stand up to China vigorously on both political and economic issues. The balanced stance of this group could put it at the heart of a stronger EU approach towards Beijing (although Germany, the Member State with the strongest trade relationship with China, has doubts about the usefulness of an integrated European approach). The Assertive Industrialists do not agree that market forces should shape the nature of the EU-China relationship. They stand ready to pressure China with sector-specific demands, to support protective “anti-dumping” measures against unfairly subsidised Chinese goods, or to threaten other trade actions.

Ideological Free-Traders
The Ideological Free-Traders – Denmark, the Netherlands, Sweden and the UK – are mostly ready to pressure China on politics and mostly opposed to restricting its trade. Their aversion to any form of trade management makes it very difficult for the EU to develop an intelligent and coherent response to China’s carefully crafted, highly centralised, often aggressive trade policy. For these countries, free-trade ideology is an expression of economic interest: their economies and labour markets – oriented towards high technology and services, particularly finance – benefit, or expect to benefit, from Chinese growth rather than being threatened by cheap Chinese imports.

Accommodating Mercantilists
The Accommodating Mercantilists are the largest group, comprising Bulgaria, Cyprus, Finland, Greece, Hungary, Italy, Malta, Portugal, Romania, Slovakia, Slovenia and Spain. The assumption these countries share is that good political relations with China will lead to commercial benefit. These Member States feel that economic considerations must dominate the relationship with China; they see anti-dumping measures as a useful tool and oppose awarding China market economy status. They compensate for their readiness to resort to protectionist measures by shunning confrontation with China on political questions. As with the Ideological Free-Traders on trade, the Accommodating Mercantilists’ refusal to bring pressure to bear on Beijing on political issues weakens a key component of the EU’s China policy: these countries have often kept the EU from developing a more assertive stance on issues like Tibet or human rights. At the extremes, some effectively act as proxies for China in the EU. 

          ....

European Followers
The fourth group, the European Followers, is made up of those Member States who prefer to defer to the EU when managing their relationship with China. As such, Austria, Belgium, Estonia, Ireland, Latvia, Lithuania and Luxembourg are the most “European-spirited” of the four groups, but they are followers rather than leaders. Many of the European Followers do not consider their relationship with China to be central to their foreign policy. They rely on EU support to protect them from Chinese pressure on issues like Taiwan or Tibet. While their readiness to support EU policy is positive, their reluctance to participate more actively in the debate feeds the perception that China is not a key EU priority. "

Is the see saw relationship between the EU and China a result of one of these groups gaining ascendancy or asserting in the EU? Does China have different negotiating tactics against each of these camps? Do these camps exist at all? Can the world be divided into such camps of Aggressive Industrialists and Accommodating Mercantilists?

EU ETS, policy and unilateralism - what next?

The controversy over the EU ETS covering the aviation sector has not died down yet. I have blogged about it here, here, here and here. Are there benefits for other countries to comply with the scheme? Does a cost-benefit analysis indicate that compliance is better than non-compliance? The scheme raises, inter alia, issues relating to the extraterritoriality of domestic legislation, balance between environmental goals and development, unilateral national measures vis a vis global efforts to combat climate change.

Joshua Meltzer has recently written about how it is more beneficial for the U.S. to comply with the EU ETS in the aviation sector rather than defy it. Arguing the prohibiting US airlines from complying with the EU ETS is a bad policy, he posits that costs of compliance as compared to non-compliance is much lower. Further, the burden of compliance would be the "rich" airline traveller while the cost of non-compliance would be on the tax payer. And finally, that it would be good geopolitically to comply since non-compliance creates a precedent for countries not to comply with environmental measures of other states.

"So what are the costs of the ETS? Analysis by Merrill Lynch concludes that the costs to airlines of purchasing the carbon permits needed to comply with the ETS will add approximately $5.00 to ticket prices. However, failure to comply leads to a €100 penalty per ton of CO2, plus the ongoing obligation for airlines to submit permits that cover their CO2 emissions. Whatever the final costs for complying with ETS are for airlines, the costs of non-compliance includes an additional €100 per ton of CO2 , and should the airlines fail to comply the EU can seize airline’s assets. 

Secondly, there is the question of who will bear the costs of the ETS. In the event that the airlines comply, the costs can be expected to be reflected in ticket prices. Conversely, in the event that airlines are prohibited from complying with the ETS, the costs will not only be higher, but they would be borne by all taxpayers. In this sense, the Prohibition Act is also regressive as while airlines passengers tend to be more affluent, all taxpayers will be responsible for the costs of airlines non-compliance. 

Prohibiting U.S. airlines from complying with the ETS might also have geopolitical implications. For instance, it could set a precedent for other countries to imitate when faced with an environmental scheme that places additional burdens on foreign businesses. And in this regard, India and China have already indicated they will prevent their airlines from complying with the EU ETS."

R.V.Anuradha in this policy brief for the South Centre argues that the EU's measure is a unilateral step that is not founded on the principles of multilateralism and consensus. She argues that though a legal challenge to the extension of the EU ETS to the aviations sector is on weak grounds, the measure does not augur well for multilateralism.

"To state the obvious, any unilateralism would make a mockery of the multilateral processes. Under the United Nations Framework Conven- tion on Climate Change (UNFCCC), any unilat- eral action would run contrary to the principle that only Annex I (i.e. developed) countries have quantitative legally-binding emission reduction targets, while other countries have no binding quantitative targets of any kind. This principle - also referred to as the principle of ‘common but differentiated responsibilities’ (CBDR), is clearly violated by EU’s ETS requirements which effec- tively treats Annex I and non-Annex I countries (or at least their airlines) in the same way. The Kyoto Protocol to the UNFCCC required Annex I countries to pursue reduction of aviation emis- sions by working through the International Civil Aviation Organization (ICAO). ICAO resolu- tions in 2007 and 2010 emphasized that countries should undertake market-based measures (MBMs) relating to aviation emissions only sub- ject to multilateral or bilateral agreements. Such a mandate essentially means that measures such as the EU’s Aviation Directive can be enforced against an aircraft operator from a third country only if the EU has entered into an agreement with such country. EU’s move under the ETS however ignores this principle."

She calls for a "graceful suspension" of the measure by the EU and a  consensus for a multilateral solution to the problem.

How will countries take this forward? Will there be increasing instances of non-compliance from the U.S., China and India? Will that lead to imposition of penalties by the EU which would have to be borne by the tax payers or airline operators? Further, will countries impacted but the EU ETS measures undertake unilateral measures against EU airlines or will the tit for tat policy spread to other sectors? Will China decide to stop buying Airbus aircrafts? WIll that lead EU to agree to a negotiated settlement? What will the compromise to this long pending stalemate be?

Is a WTO challenge to the EU ETS feasible?

The extension of the EU ETS to the aviation sector has been a subject matter of intense debate and criticism over the past few months. I have blogged extensively about it here, here, here, here and here. Legal analysis of the measure was discussed in detail here.

Joshua Meltzer recently discusses the issue threadbare in an ASIL Insight. Tracing the rationale and background of the measure he opines that the EU ETS extension to the aviation sector may be incompatible with WTO law.

"Requiring non-EU airlines to purchase emission allowances affects services trade and could therefore also be challenged under the WTO General Agreement on Trade in Services (“GATS”). Requiring non-EU airlines to purchase emissions allowances could also indirectly affect trade in goods, where airlines pass through the cost of the Aviation Directive in their cargo rates. Indeed, approximately 50% of air cargo is still carried on passenger flights.This could raise questions about the consistency of the Directive with the General Agreement on Tariffs and Trade 1994 (“GATT”). That the same regulatory scheme can affect trade in goods and services has been confirmed by the Appellate Body in for example EC—Bananas.

A threshold question regarding GATS is whether the Aviation Directive falls within the GATS Annex on Air Transport Services (“AATS”), which excludes “traffic rights” from GATS. The AATS definition of “traffic rights” may be affected by the scope of traffic rights regulated under the Chicago Convention and more recent bilateral air services agreements such as the U.S.-EU Open Skies Agreement. The European Court of Justice 2011 decision that the Aviation Directive is not a tax or charge on fuel indicates that the Aviation Directive does not regulate matters subject to the Open Skies Agreement. Accordingly, the Aviation Directive does not deal with traffic rights as defined in the AATS and is subject to GATS.

...

The EU Aviation Directive is a cost to airlines based on their CO₂emissions, and the cost varies directly with the distance flown. Although the Directive applies equally to all airlines arriving in and departing EU airspace, it imposes a higher cost on goods and services coming from countries that are further away from the EU than on like goods and services from within the EU or countries closer to the EU. This is a form of de facto discrimination, which could violate the EU’s MFN and national treatment commitments under the GATS and the GATT."

Does the general exception of Article XX GATT save the measure? Joshua doesn't seem to think so.

"However, the key challenge for the EU would be demonstrating that the Aviation Directive complies with the chapeau to GATS Article XIV and GATT Article XX. The chapeau ensures that trade measures are not exempt from compliance with GATT/GATS obligations if they are applied in ways that constitute arbitrary or unjustifiable discrimination or a disguised restriction on trade, raising the following issues:  

• Is the price signal from the Aviation Directive consistent with the policy justification of reducing CO₂ emissions? Arbitrary and unjustifiable discrimination could arise by applying the Aviation Directive to goods from outside the EU that have a lower CO₂lifecycle than like domestic goods.

• The Aviation Directive could create an incentive for long-haul flights to land in countries close to the EU to limit their liability under the Directive to the final flight into the EU. Arbitrary and unjustifiable discrimination could arise if using these transit points leads to longer flights and increased CO₂ emissions.

• The EU cannot condition application of the Directive to non-EU airlines based on whether the other country has adopted the same policies to reduce emissions from aviation.The EU will instead need to demonstrate that it takes into account the different situations that exist in different countries."

The initial euphoria of a joint declaration against the measure and the Chinese challenge seems to have short-lived. Are we going to see a WTO challenge to this EU measure? This could perhaps happen when a tit for tat situation arises. And that is happening quite often these days in international trade relations. 

China and EU ETS - Time for action?

News of the EU ETS impact on the aviation sector is back again. With time for submitting data on emissions running out, the EU is preparing to initiate action for non-compliance. China, which has opposed the coverage of the aviation sector in the EU ETS, has issued a veiled threat of impounding EU airlines in China which has been reported here, here, here and here. A tit for tat?

We are seeing increasing instances of a tit for tat situation in world trade: the string of US China trade disputes, Spanish biodiesel Ministerial order in response to Argenitina's nationalisation of its biggest oil company which had a majority Spanish stake as well as India US trade tensions with respect to poultry restrictions and US visa fee hike issue.

Are we going to see more of these retaliatory domestic measures? What signal does this give to the multilateral dispute resolution system of the WTO? Is this an indication that domestic retaliatory measures are preferred as a negotiating tool rather than adjudicating a violation in the dispute settlement system? Does it indicate the real political economy of trade where decisions are not taken purely on the basis of international law but international politics? Signs of a compromise were reported here between ICAO and the EU regarding a globally accepted emission trading system. Will it ultimately be a retaliatory path or one of compromise, only time will tell.

The resistance to the EU ETS is not only from China. In the U.S. there are moves to enact a legislation that ensures non-compliance with the EU ETS for aviation. The Bill titled the "European Union Emissions Trading Scheme Prohibition Act of 2011"prohibits civilian aircraft of the U.S. from participating in the EU ETS scheme. Would it spark off a trade war between the U.S. and the EU? This provocative post in the Lenz Blog suggests that a trade war, after all, is good for the climate as there will be less flights landing and taking off!

EU takes Argentina to the WTO - Legal battle or political settlement ahead?

News of the EU filing a complaint in the WTO against Argentina's import licensing procedures started trickling in. The WTO website announced that EU had filed a formal complaint. The details of the complaint are awaited and will be available on the WTO website soon. The EU is essentially complaining against the import licensing requirements which it alleges violates the WTO Agreement. News reports in Buenos Aires Herald, Chicago Tribune carried the broad contours of the dispute.This has not come as a surprise. I had blogged about this issue here and here. 

The Agreement on Import Licensing Procedures would  need to be interpreted for clarity on the matter. There have been 34 cases at the WTO on this subject. The gist of the complaint against Argentina which was earlier raised by many countries in the Import Licensing Committee meeting in April 2012 was as follows:

"Australia, Turkey, the EU, Norway, Thailand, the US, New Zealand, Costa Rica, Colombia, Peru, Chinese Taipei, Japan, Rep. Korea, Switzerland and Canada said their producers and traders reported that their exports to Argentina have declined or been delayed by Argentina’s licensing processes and requirements, which some described as “protectionist”.

Among the complaints were:

• Almost 600 products are now covered either explicitly or in practice, each requiring individual approval in order to be imported

• Non-automatic licences are issued as part of a “trade-balancing” policy, on condition that the importer also exports or invests in local production

• Processing an application can take considerably longer than the 30-60 days maximums for non-automatic licensing set in the agreement’s Art.3.5(f)

• The licensing is more burdensome than necessary and raises problems under other agreements such as those on technical barriers to trade, sanitary and phytosanitary measures (food safety and animal and plant health), and customs valuation, as well as the General Agreement on Tariffs and Trade (the umbrella agreement for trade in goods)

• Argentina as a member of the G-20 group of leading economies is not living up to the group’s declarations against increasing protectionism."

It would be interesting to see whether the EU has raised some additional points in the request for consultations. Interestingly, one of Argentina's main English newspaper Buenos Aires Herald carried a report of the meeting of Argentina's Foreign Minister with WTO Director General Pascal Lamy to complain about "protectionist" measures by developed countries in the guise of "protecting the planet". Was he referring to the EU ETS scheme of the EU which was extended to the aviation sector recently? Argentina was one of the 26 signatories in Moscow to the joint declaration against the EU ETS scheme coverage of the aviation sector. I have blogged about the EU ETS controversy here, here, here and here. 

As per the Observatory of Economic Complexity, around 15 % of Argentina's exports and imports  in 2010 were to and from the EU respectively.There are substantial trade interests between the two parties. Will this dispute go the whole way to the Panel and AB or will a "political compromise" be worked out? Did the recent events in Argentina of the nationalisation of YPF which affected Spain aggravate this complaint? Are we in for a prolonged legal battle or a negotiated, political settlement. After all, international trade is not all about legal rules and judicial interpretation. The political economy of trade is equally influential.

EU ETS and International Trade Law - Some scholarly analysis finally!

The IELP Blog  had references to scholarly analysis of the EU ETS Scheme by Lorand Bartels, Robert Howse and Henri Joel Nkuepo. I have blogged about this issue (with my limited understanding) ad nauseum here, here, here and here. They were "generalist" blog pieces which had not deep dived into the legal ramifications of scheme in the context of WTO Agreements. Finally some scholarly analysis of the EU ETS scheme is available. Does the EU ETS Scheme contravene WTO Agreements, especially the GATT and GATS obligations?

Lorand Bartels' study titled  " The Inclusion of Aviation in the EU ETS - WTO Law considerations" and Robert Howses' comments analyse threadbare the scheme in the light of the GATT and GATS provisions. Lorand Bartels comes to the conclusion that though the Scheme may violate provisions mainly related to Article XI 1 (being a quantitative restriction) and Article I 1 (Most Favoured Nation treatment), the exceptions provided in Article XX (b) and (g) of GATT related to protection of human, animal and plant life and conservation of exhaustible natural resource justified the scheme. Detailing the applicability  of the Chapeau in Article XX of GATT, the piece provides a glimpse of the complexity of interpretation of the provision in relation to discrimination and regulation. As regards GATS obligation it concludes that assuming that the Scheme is covered by GATS and is justiciable it would be most likely to be justified under Article XIV (b) of GATS related to environmental exceptions.

Robert Howse in his commentary agrees with the above analysis and states:

" The WTO is the one international regime that has addressed specifically in its jurisprudence the legality of unilateral measures to protect the environmental commons. In the landmark Shrimp/Turtle ruling the Appellate landmark Shrimp/Turtle ruling the Appellate Body held that such measures are in principle compatible with the legal framework of the World Trade Organization; in practice, to be legal, they must be applied in a non arbit- rary, non-discriminatory and non-protectionist manner. Thus, I cannot but agree with the ultimate conclusion of Dr. Bartels’ article that the coverage of non-European carriers under the ETS is compatible with WTO law, assuming that its application to those carriers is operated in an even-handed and non-protectionist fashion."

 Henri Joel Nkuepo strikes a slightly divergent note in his working paper "EU ETS Aviation Discriminates Against Developing Countries" where he argues that by treating the airlines of developed and developing countries on the same footing, the EU ETS Directive actually discriminates against the developing countries. Though Article XX of GATT allows for environmental concerns it cannot be discriminatory or arbitrary. Henri argues that the Scheme by not recognising the differences in circumstances of the developing and developed world in terms of their technological capabilities in the aviation sector has in fact discriminated against the developing countries of the WTO. Treating unequals on an equal footing is also discrimination.

The two papers and comment offer interesting, contrasting insights into the complex nature of EU ETS obligations in the context of international trade law. To what extent can the concerns of the environment "distort" trade? What measures can be considered adequate, reasonable and not being restrictive of international trade? Who decides this crucial question? Is it within the realm of WTO jurisprudence at all? Is it the preserve of domestic decision making? As long as the measure is not discriminatory and arbitrary, can it be justified on the grounds of the environment? Is this principle extendable to other non-trade issues - labour rights, human rights, democracy? For example, if a few developed countries, hypothetically, impose a tax on imported goods not complying with certain labour standards (equally applicable to local goods, hence non-discriminatory) which in effect cannot be complied with in the developing world or if complied with will lead to the imported good being non-competitive or inefficient, would this be justifiable under the Article XX exception of "public morals"? Is it opening the window to "disguised" protectionism? Are non-discrimination, non-arbitrariness and reasonableness the only tests to justify the measure? How should one interpret the Chapeau text of Article XX, GATT - "unjustifiable discrimination between countries where the same conditions prevail (emphasis added)"? Does it imply that when there are different conditions (including working conditions, technological advancement, cultural mores) a measure in a country, even on grounds of public morals or safety to human health, will be considered unjustifiably discriminatory? As Simon Lester said these are extremely complex issues and would, in all probability, require, a WTO dispute to get resolved!

EU ETS - Protectionism in the High Skies?

Some more on EU ETS:


A brief informative study titled "EU ETS and Aviation" for the Members of Parliament of U.K. on EU ETS and its impact makes interesting reading. It narrated the history of the scheme as well as its implementation mechanism. Reports of Airlines deciding to fall in line with the EU ETS directive have been reported. On the other hand, aviation industry also has asked for a roll back.


A well argued piece in Project Syndicate by Jean Pisani-Ferry titled "Sky-High Protectionism?" captures the essence of the dispute rather well. While discussing the various arguments for and against the EU ETS, he concludes:

"The really important argument against Europe’s decision is the one about hidden agendas. The EU’s trade partners do not want to give ground, because they suspect that in the coming years, climate change will serve as a pretext for protectionist policies. Indeed, climate change is in many ways the perfect crutch that opponents of open trade have long sought, and there is a real risk that it will be used in a mischievous way.

So caution is fully justified. But the problems arising from the incoherence of national climate policies are real. They emerge as soon as domestic emissions are taxed in some part of the world (or, equivalently, as soon as quotas are imposed), because domestic producers then claim that they are at a disadvantage in international trade.

Moreover, rejecting Europe’s arguments out of hand, owing to a suspected protectionist agenda, is not without risk. If the controversy comes to be perceived by the European public as a conflict between free trade and the environment, free trade is likely to lose.

Europe’s partners should not assume that trade automatically takes precedence over climate concerns. Instead, they should focus public attention on valid arguments. For example, it is much easier for advanced countries to reduce emissions without any effort, simply by outsourcing the production of emission-intensive goods to emerging and developing countries. In this way, they can meet strict targets without reducing the carbon content of their consumption.

The trade vs. climate debate is fundamental for the global economy. Europe’s air-transport tax provides an opportunity to launch it in a concrete and rational way. It is an opportunity that should not be missed."

Is the EU ETS a protectionist tool, a technical barrier to trade which restricts international trade? Does it symbolise the environment-trade dichotomy? Is it a developed world-developing world dispute? Are concerns of climate change inapplicable to international trade rules, to be fought and chalked out in different fora? Does the EU ETS throw open the flood gates for more intrusive, non-trade related standards to be imposed by the developed world to restrict international trade - labour, human rights, etc.? Is there a middlepath?

EU ETS - The controversy refuses to die down

The controversy around the EU ETS scheme never seems to die. The Huffington Post had this piece by Gerard Wynn that captured the contours of the dispute. Attributing the measure of the EU as a result of a failure of international agreement, it states,

"The EU will almost certainly stand firm and foreign carriers will pay up. The main prospect for compromise would be for the EU to relent and not count emissions outside its airspace, which at present seems unlikely.

The EU says it must include all emissions on a flight because it's impractical to measure those only from the moment a plane enters European airspace. And that would also dilute the environmental purpose of the scheme since a large part of emissions are on take-off.

Regarding the notion that its charges are a tax on jet fuel (not allowed under the 1944 Chicago Convention on aviation), it says emissions permits are not the same thing because an airline can avoid paying at all if it undercuts its free quota by becoming more efficient.

On both these counts the bloc won a landmark case at the European Court of Justice in a judgment favouring Brussels against U.S. carriers last December.

The bloc of countries most wedded to a multilateral approach at the United Nations, the European Union, now feels compelled to use unilateral action.

The present spat could be a sign of things to come in climate politics, where progressive countries unite from the bottom up, at least until an over-arching treaty comes into force at the end of the decade."

The coming together of  "progressive countries" was highlighted in the joint declaration of 26 countries against the EU ETS in Moscow. It was not only this group of countries opposing the scheme. Recently Airbus along with eight other airlines also opposed the scheme on the ground that it hurt its trade interests with reports of China reconsidering its options of purchasing Airbus carriers due to the EU measure. The opposition to the scheme found strange bedfellows. Boeing supported Airbus' stand on the EU ETS but refused to come to an agreement on the WTO dispute related to subsidies. India also joined the opposition by asking its  airlines not to adhere to the emission scheme.

It would be interesting to see where this dispute goes. Will the EU temporarily suspend the scheme subject to more international negotiations? Will the business interests of Airbus and other European airlines prevail over the climate concerns of the EU? Will the joint signatories of the declaration against the EU ETS be able to diplomatically persuade the EU to reconsider the scheme till international consensus is arrived at? Will the threat of Chinese "business" retaliation force the EU to step back? Will it lead to a WTO dispute? Testing times for the interplay of international climate rules, international trade, national sovereignty and business interests in the aviation sector.

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.

EU ETS, China and retaliation - Boeing the beneficiary?

An interesting report from Al Jazeera points to the political economy of trade.The EU ETS has generated a lot of criticism also prompting a joint declaration from 26 countries in Moscow recently. I had blogged about it here and here. The report said,

"The chief executive of the Airbus parent company, EADS, has accused European Union officials of starting a fight with China over aircraft emissions that threatens to cost the jet manufacturer $12bn in orders.

Louis Gallois said on Thursday that EADS is a "hostage" to the dispute between Beijing and Brussels, which has put the fate of 45 unbuilt large aircraft in question.

"China is putting on hold orders already agreed with airlines but not approved. ... We are worried that this conflict is becoming a commercial war," he said.

As Airbus could lose $12bn in orders, Gallois announced EADS reported a 72 per cent increase in profits for the fourth quarter to $810 million.

With some analysts warning of a brewing trade war, Stefan Schaffrath, Airbus spokesman, said they were seeing "retaliation threats" from 26 countries, "in particular from China".

Speaking to the Associated Press news agency, he said 35 orders by Chinese airlines for A330 aircraft are on hold because China's government is refusing to approve them.

He said orders for another 10 A380 superjumbos are also under threat, and that the combined list prices of the aircraft is $12bn."

China has been one of the prominent opponents of this scheme. What is highlighted here is that China is leveraging its international "purchasing power" to have an impact on Airbus in a bid to influence EU officials to reconsider the scheme. Will China reconsider it's decision and purchase from Boeing? This possibility was brought out in International Political Economy Zone Blog in this piece. This "trade retaliation", it seems, does not need any WTO sanction and depicts the realities of the political economy of trade.

EU ETS again and again - Trade war or international consensus?

The controversy over the EU ETS refuses to die down. I have blogged about it here, here,   here and here. In a defiant tone in an interview, the EU Climate Chief Connie Hedegaard defended the EU ETS by saying that the lack of a global scheme to address the issue of airline emissions led to the unilateral EU measure.

" We're not surprised by the hostility, but it's clear that some countries don't like it. They say they would prefer a global scheme. But the European Union has been fighting for a global scheme since 1997. It was only after we saw that there was no global agreement that we made our own, regional scheme. If we could reach global consensus at the level of the International Civil Aviation Organization (ICAO), it would be a very happy ending.

... 

The official EU line is that once a global system is enforced, the EU system will no longer be relevant. But we are not changing our scheme just because some countries say they would like to discuss a global system. That is why I am challenging these countries that can unite against the European system to come up with an alternative within ICAO. We'll see what happens. 

I am absolutely sure that most passengers flying with me from Munich to Brasilia would say that paying a couple of euros for the pollution caused by this long-distance flight was fair. The amount we are talking about is less than what a cup of coffee at the Munich airport would cost."

In another interview to Reuters she reportedly said,

 "Nobody has an interest in a trade war and everybody knows that," she added. "It's not that you can threaten us to change the law."

While domestic legislation can definitely be challenged on the ground that it violates international treaty obligations, whether the EU ETS does infact go contrary to EUs WTO obligations is a debatable issue. With the Moscow declaration against the EU ETS, commentators are predicting a long drawn trade war over the issue which includes a possible WTO dispute. The EU Climate Chief seems to be suggesting that a lack of an international agreement has forced the EU to enact the scheme and could withdraw if a more constructive alternative is forwarded. The legality of the measure in the context of WTO obligations has not yet been tested but the DSM would then need to address the issue of a whether the measure is a legitimate use of domestic policy space in the context of reduction of barriers to trade. Would the EU ETS stand the test of the General Exceptions in Article XX of the GATT or be considered a technical regulation applied with a view to create unnecessary obstacles to international trade as per Article 2.1 of the Agreement on Technical Barriers to Trade. Further, is a non-conclusion of an international understanding on any issue ipso facto sufficient for member countries to go ahead with a unilateral measure in the anticipation of a better global alternative. This approach may raise contentious issues in the context of the Doha round of negotiations wherein international agreement on a number of issues has failed. Would this then justify to certain countries to go ahead with individual measures as per their positions, leaving the multilateral system to accept them or come up with alternatives? A new way of proceeding with international trade rule making n the context of conflict?

Trouble brewing for EU ETS?

Trouble seems to be brewing for the EU ETS scheme regarding allowance of emission of greenhouse gases in the airline industry.The scheme levies a charge on flights landing and taking off in any aerodrome in the European Union based on its carbon emissions.  In a Joint declaration, 26 countries, including India, have condemned this scheme. I had earlier blogged here that China had expressed serious reservation against the scheme.

In the joint declaration signed in Moscow the signatories affirmed:

" 

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."

Amongst the basket of measures that were intended to be taken was to assess "whether the EU ETS is consistent with the WTO Agreements and taking appropriate action".

It would be interesting to see if the EU shows sign of being flexible to suspend the operations of the scheme till a consensus is reached. Would the scheme force nations to go for a "global agreement " on emissions in the aviation sector? Would it lead to a retaliatory trade war? Would it lead to a WTO dispute?

An interesting counter-insight is provided in this comment by Jeffrey Gazzard, Board member of the Aviation Environment federation. 

"Time for a reality check to offset the notion that the entire aviation industry is a collection of anti-environment ETS-refuseniks. They aren’t: there are already a significant amount of global airlines in full compliance with the EU Aviation ETS regulations.

In fact, “significant” in this case means 100%, as every single airline that flies in and out of the EU has already registered under every aspect of the ETS with their respective regulator in each EU member state; they have met every deadline along the way; and many are active in carbon markets. They have effectively already surrendered."

Is the opposition only rhetorical with international airlines (except China) falling in line? Another issue that is raised by the opponents of the EU ETS scheme is the unilateral nature of the EU measure that has an international impact. Another thumbs up for the need for multilateralism in trade and issues revolving around them?