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?

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!