One of the worst fears that the global economy had to live with in the aftermath of the recent downturn was the spectre of trade protectionism. While several factors prevented protectionism from deepening the crisis, an incontrovertible fact was that the world’s major economies had learnt their lessons from the 1930s.
At the same time, however, another form of protectionism is threatening to assert itself: imposition of trade measures, ostensibly for reducing emissions of harmful greenhouse gases (GHGs). The two dominant economic powers, the US and the European Union (EU), have signalled the introduction of domestic legislation for reducing emissions of carbon dioxide, one of the principal GHGs, by establishing standards for their domestic industries. But, perhaps more importantly, they have also indicated that these standards will be imposed on imported products. A new form of “green protectionism” is, therefore, on the anvil, one that has been aptly described by Prof. Scott Barratt of Columbia University as “eco-imperialism”.
Let us briefly look at the specific proposals. The EU has, since 2005, implemented a policy for reducing the emissions of carbon dioxide in its territory through the emission trading system (ETS). ETS seeks to cap the overall level of carbon dioxide emissions in several energy-intensive sectors: oil refineries, power plants, coke ovens, iron and steel, cement, glass, lime, brick, ceramics, and pulp and paper. Having capped the total carbon dioxide emissions, each EU member allocates emission rights, or allowances for emitting carbon dioxide, among the firms participating in ETS. However, the cap on the total number of allowances allocated has created the conditions necessary for the emergence of a carbon allowances market. Firms whose emissions are less than their allowances can sell excess allowances at the prevailing market price, often determined by supply and demand conditions. Conversely, firms emitting carbon dioxide in excess of their allocations have to buy the extra allowances they need at the market price. The “cap and trade” mechanism introduced by ETS has thus resulted in the creation and transfer of wealth in the form of a tradable property right to emit carbon dioxide, which can also be viewed as a form of subsidy. Thus, by introducing ETS, EU members have introduced emission standards for the region as a whole.
In recent years, the EU has proposed that the cap and trade system be applied to imported products, including those produced by “advanced developing countries” (read: India and China). According to this proposal, exporting foreign firms would have to meet the emission targets set for their counterparts based in the EU. These firms would thus have to “buy” allowances if they are found to be emitting more than the targets. This in effect implies that the exporters would face “carbon tariffs” at the border. Taking a further step in this direction, a recent directive of the European Commission identifies sectors and sub-sectors that are deemed to be exposed to significant risk of “carbon leakage”. This term has been used to describe the increase in carbon dioxide emissions in partner countries as a result of the emission caps introduced by the EU. Through this exercise, the EU appears to have prepared the ground for introducing trade restrictions to counter what they perceive as the “competitive risk” from imports.
Not to be left behind, the US Congress has been deliberating on legislation to introduce measures for reducing emissions of GHGs. In 2009, the US House of Representatives passed the American Clean Energy and Security Act (also known as the Waxman-Markey Bill after the senators who co-sponsored it—Henry A. Waxman and Edward J. Markey) and is awaiting consideration in the Senate. Another Bill, the American Power Act, which has the same intent, has recently been introduced in the Senate by senators John Kerry and Joe Lieberman.
These two Bills include a cap and trade scheme similar to ETS. And like the proposals made by the EU, the Bills also include provisions that would result in the imposition of carbon tariffs on exporters not meeting the emission standards set by the US. The Waxman-Markey Bill, which elaborates on this issue, provides that carbon tariffs would be introduced if the “negotiating objectives of the United States with respect to multilateral environmental negotiations are not realized” by 2017. The key element of the US’ negotiating objectives is to “reach an internationally binding agreement in which all major greenhouse gas-emitting countries contribute equitably to the reduction of global greenhouse gas emissions” (emphasis added).
This objective is in complete contradiction with the principle agreed to under the United Nations Framework Convention on Climate Change, which recognized that countries would take actions to obviate the problems arising from global warming “in accordance with their common but differentiated responsibilities and respective capabilities and their social and economic conditions” (emphasis mine). The convention has further clarified that “developed countries should take the lead in combating climate change and the adverse effects thereof”.
The two major economic powers have thus taken significant steps towards a shifting of goalposts both in the global multilateral trade and environment regimes, causing serious uncertainties that India will have to contend with.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi
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