EU's Green Deal must be backed up by tougher trade policy

20 December 2019 12:37

World leaders' failure to agree on international commitments at the recent UN climate summit in Madrid may encourage the EU to beef up its policies and take a harder stance with its trade partners.

The lack of momentum globally on tackling climate change also suggests that the EU must be prepared to follow through on any new trade policies — such as a carbon tariff on imports or a refusal to strike deals with climate laggards — as it appears that the threat alone won't be enough to bring other countries into line with the bloc's ambitions.

It's far from an ideal scenario for Ursula von der Leyen's new European Commission, whose preferred approach is to "lead by example." But a tough stance appears necessary to protect the EU's own industry as it goes through a disruptive climate transition, as well as to encourage other countries to do their bit for the planet.

At this year's two-week UN climate conference — hosted last-minute by Spain after Chile pulled out due to popular unrest — national delegations returned to the question of international carbon markets, left unfinished last year in Poland.

In particular, negotiators were expected to mold rules on a new mechanism for the sale of carbon credits generated from individual projects. The existing system dates back to the 2005 Kyoto Protocol, the predecessor of the 2015 Paris Agreement.

But negotiations faltered over requests from big polluters such as Australia and Brazil, which have been advocating for the carry-over of old carbon credits under the Kyoto Protocol as well as for the double-counting of emission reductions — two elements which the EU had clearly set out as red lines that would prevent it from endorsing a deal.

With the US due to withdraw from the Paris Agreement next year, as formally notified on Nov. 4, the foot-dragging from other important countries suggests that the momentum to tackle climate change at a global level falls far short of the EU's ambition to achieve carbon neutrality by 2050.

Going it alone

The EU's determination to act on climate change is at an all-time high. The new commission, which took office this month, has made climate its top priority for its first 100 days in office, and Von der Leyen has appointed Frans Timmermans, a well-regarded commission veteran, to oversee all climate policymaking.

The political conditions are also right to take on the task. Large numbers of EU citizens, particularly the young, are supportive of decisive action even if it entails disruption — as shown by widespread protests and "climate strikes," as well as the strong showing for the Greens at the recent European Parliament elections.

National leaders at the EU Council — who, with industries to protect, often act as a brake on the more idealistic ideas coming out of the commission and the parliament — have endorsed the goal of reaching net-zero emissions by 2050, in spite of a Polish temporary opt-out from its implementation.

That suggests that they believe the commission, through the Green Deal announced by Von der Leyen last week, can deliver a "new growth strategy" for Europe to develop its economy sustainably.

The idea is to for the EU to achieve its climate goals while maintaining its economic competitiveness globally. That requires either other countries to commit to similar standards, or for the EU to take steps to level the playing field.

The lackluster results of the Madrid summit suggest that those steps will indeed be necessary for the EU.

Trading emissions

One idea is to link the EU's carbon-trading system to international trade. The Emissions Trading System — the world's first and largest multinational carbon market — has since 2005 required polluters such as power stations and steelworks to buy permits for their emissions above a certain level.

The EU's calls for a global carbon market have largely fallen on deaf ears with the bloc's international partners, and look unlikely to bear fruit for the foreseeable future.

Many large economies lack carbon markets entirely. Australia scrapped plans to put a price on emissions in 2014, while in North America, only the states of California and Quebec have carbon markets in place.

The EU's best achievement in this regard has been linking its ETS to that of Switzerland. But Switzerland has a unique trading relationship with the EU — it is landlocked by EU countries and is closely aligned to the single market. Even so, the process of ETS alignment took 10 years of negotiations. Clearly, this is not easy to replicate with other trade partners.

Carbon border adjustment

A more recent idea, which the EU could impose unilaterally, is to impose a tariff on imports of manufactured goods from countries with lower environmental standards. This would guard against "carbon leakage" where, for example, carmakers might buy cheap steel from outside the EU, rather than more expensive steel produced to higher environmental standards within the bloc.

The idea, known formally as the "carbon border adjustment mechanism," has gained new traction after the commission included it in its work plan, suggesting that it could formally propose such a policy in the coming months.

Under current EU rules, energy-intensive industries are granted large emissions allowances for free under the ETS, as well as compensation for increases in electricity prices, to help them compete with foreign rivals with greater emissions.

A carbon tariff would remove this threat — meaning, potentially, that European industry could face tougher environmental conditions even while having better protection from overseas competition.

Trade deals

On top of that, EU officials are also expected to maintain tougher climate standards when negotiating trade agreements.

This process has already started under the previous commission through the inclusion of "sustainable development" chapters in trade deals. These aim to ensure high social and environmental standards worldwide and prevent trade partners from backtracking on their commitments.

Under the current rules, countries that break their sustainable development commitments under a trade deal with the EU face a conciliatory dispute settlement process, but many see it as ineffective.

The new commission, and the environmentally-minded parliament that also took office this year, are likely to push for a stricter approach.

The new attitude is already beginning to show on the Mercosur trade deal, which has been fully agreed by the commission and its Latin American partners, but still needs to be ratified by the European Parliament. The commission's trade chief, Phil Hogan, has been forced to defend the agreement's compatibility with the Green Deal.

Future "comprehensive" trade deals should be negotiated with the Green Deal in mind, Von der Leyen has said. She wants the EU's trade partners to sign up to the Paris Agreement — which already excludes the US, based on President Trump's decision to withdraw from it — and to be held accountable for meetings their commitments.

The wording suggests that more limited deals, including one under negotiation with the US, might be spared.

There will of course be political and technical hurdles, including compliance with international rules under the World Trade Organization.

But the direction of travel is clear. With the EU running in a higher gear than any other major economy on climate change, it will need more robust trade policy to protect its industry.

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