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POSITION PAPER
June 2020
What trade can do for climate
Introduction
European businesses support the EU ambition to reach net-zero greenhouse gas
emissions (climate neutrality) to reach the objectives of the Paris Agreement.
BusinessEurope published its energy and climate strategy1 in April 2019 to explain the
five key framework conditions and related actions on how this could be achieved by
around mid-century, the last condition of which concerns the climate actions taken by
other major economies.
The publication came amidst intense ongoing discussions on how the EU could better
leverage its trade policy to achieve its climate policy objectives. Not only should this be
seen in the context of the potential effects that global trade can have on emission levels2;
it is essential to also promote the positive contributions from bilateral and multilateral
trade on reaching climate objectives. This paper lists several ways in which trade
agreements could contribute to the global climate agenda. European businesses support
high standards in the environmental area and pursuing these standards also in our trade
agenda can boost the competitiveness of European businesses and make trade more
climate-friendly.
That said, it is important that the European Green Deal takes a systematic and holistic
approach to the trade and climate agenda. The sustainability triangle of climate action,
competitiveness, and security of supply of energy and critical resources remains central.
Furthermore, in order to enable the distribution of European state-of-the-art technologies
globally, the market access element in trade policy is of paramount importance. It is
therefore essential that the design of policy options linking the trade and climate agendas
strike a careful balance between ensuring a global level-playing field to support
European competitiveness and enhancing access to foreign markets while effectively
complementing domestic climate-related measures.
The risk that production is transferred from the EU to other countries with lower ambitions
for emission reduction, or because EU products are replaced by more carbon-intensive
imports (“
carbon leakage”) as well as the threat of more companies deciding to
gradual y favour investments outside of the EU (‘
investment leakage’) is real as long as
global actions are not aligned and is impacting the European economy and the labour
market. Such leakage effects also have a negative impact on overall global emissions,
given that production standards in many other regions are not as high as in Europe.
1
BusinessEurope, 2019.
2 Increased production levels and market distortions, impact on land-use and natural resources,
transport emissions
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Therefore, it is crucial to maintain well-functioning flanking measures such as the system
of free allowances for best performers and indirect cost compensation under the EU
Emissions Trading System (EU ETS) in order to protect competitiveness and minimise
the risk of carbon/investment leakage.
While trade agreements can help incentivise a level playing field in the environmental
area, an overburdening of the EU`s trade agenda could come at the expense of the EU`s
negotiation leverage on its core economic interests. Therefore, a sensitive balance has
to be found on how to use trade as leverage for climate goals while not scaling back on
the economic purpose of the trade agenda.
Recommendations for policy action
How?
There are a number of options that can be explored at multilateral, bilateral and unilateral
level. Given the global nature of the climate challenge and the highly integrated global
supply chains, multi- and plurilateral solutions are expected to have the most significant
impact on global emission levels and are thus preferable over other options. However,
decision-making on international level takes time and often entails a high degree of
compromise. Furthermore, what now becomes a more pressing issue is the urgent
reform and modernisation of the WTO, which could also represent an unprecedented
opportunity to update and coordinate the global trade and climate and environment
agendas with other major economies.
Bilateral agreements can reach more tailored ambitions depending on the specifics of
the relationship and the economic development of the countries. For example, they can
focus on technology exchange when it comes to developed nations such as Japan, or
technical assistance, capacity building and funding of sustainability projects with
developing nations such as Vietnam (e.g. through the European Fund for Sustainable
Development). They can also function as building blocks towards a plurilateral and finally
a multilateral agreement.
Unilateral action can be used to lead the global environmental agenda by example and
incentivise global partners to join the ambition. That said, possible unilateral measures
will have to be carefully designed. They should comply with existing international rules
and commitments (e.g. under the WTO), avoid trade distortions and consider potential
risks for competitiveness and the economic interests of the EU in case of retaliation or
other negative consequences if global partners do not align their ambition.
What trade can do for climate
2
Multilateral and Plurilateral
a.
Environmental Goods Agreement (EGA)
The negotiations on the Environmental Goods Agreement were launched in the
WTO in July 2014 and involve 46 nations. The aim is to eliminate tariffs on products
that can help achieve environmental and climate goals (e.g. renewable energy,
waste management, resource and energy efficiency, air pollution etc.). If agreed,
the benefits would extend to the entire WTO membership. Despite its rather limited
scope on goods and tariffs (e.g. neither services nor non-tariff barriers are included)
and disagreements on the conceptualization, progress on this agreement would be
an important first step on the way to a broader compromise. Currently the
negotiations are stalled among others due to the inability to agree on a list and
definition of “green goods”. An agreement is not easy as developing countries are
sensitive to opening their markets to imports from developed countries while at the
same time, they try to include in the list certain goods that are not recognised as
being “green” by developed economies. Furthermore, some products and sectors
are excluded from preferential treatment despite contributing to environmental
protection.
Other initiatives can also be supported by the EU, such as the Agreement on Climate
Change, Trade and Sustainability (ACCTS)
3 that, among other things, aims to
eliminate tariffs on environment goods and generate new commitments on
environmental services. As a first step, WTO members could bind tariffs sending
an important policy signal to businesses and investors that governments are
committed to increase the uptake of such goods and related technologies.
⇒
Renewed efforts should be focussed on resolving the conceptual and
political deadlock in the negotiations of the WTO Environmental Goods
Agreement. Furthermore, including services embedded in environmental
goods would make a future EGA more efficient and should therefore be
seriously explored. The design of the EGA must avoid new administrative
burden for companies, e.g. in customs procedures and in view of rapid
technological development. The list should therefore be regularly
reviewed.
⇒
As the scope of the WTO Environmental Goods Agreement is rather
limited and only targets tariffs, parallel discussions should also continue
on other issues critical for this sector like non-tariff barriers, standards
and rules in key areas like Intellectual Property. The removal of non-tariff
3 Launched by New Zealand, Costa Rica, Fiji, Iceland and Norway in September 2019. URL:
https://bit.ly/2SfmPSE
What trade can do for climate
3
barriers is absolutely key in ensuring a level-playing field and market
access even after tariff removal.
⇒
In view of a broader WTO Agreement, initiatives such as the Agreement
on Climate Change, Trade and Sustainability (ACCTS) should be closely
followed and potentially supported also by the European Union.
⇒
The WTO Committee on Trade and Environment should be used more
systematically and formally, and should explicitly facilitate cooperation
between the WTO and the UNFCCC. For example, national trade policy
reviews could assess whether such policies are helping or hindering the
respective climate commitments.
b.
Industrial subsidies and overcapacities
Europe should look for ways to appropriately deal with overproduction and market
distortions created by subsidies and State-Owned Enterprises (SOEs) by
modernizing its own legal framework and working towards effective multilateral
rules. Diverging rules on subsidies not only create significant global market
distortions but also has a big impact on local production intensities and consequently
emissions. There are ongoing trilateral talks between the EU, the US and Japan to
agree on stricter definitions and rules on subsidies and SOEs at WTO level. There
are also sectoral initiatives such as the OECD Global Forum on Steel Excess
capacity that should continue despite low commitment from key players like China.
Ultimately, success will depend on the ability to include major world trading partners
and producers in the scope of action, in particular China.
⇒
Industrial subsidies and the role of SOEs as one of the main factors
leading to overcapacities need to be well framed and effectively
disciplined at WTO level. Sectoral negotiations, e.g. in the steel and
aluminium sectors, are welcome to address the most critical sectors.
c. UNFCCC - Article 6 of the Paris Agreement on emission trading and carbon
markets
The move towards climate neutrality will need to see the worldwide introduction of
a robust carbon price signal reflecting ambitious decarbonisation trajectories
worldwide (such as the ETS). European business is behind the EU ambition of net-
zero greenhouse gas emissions (climate neutrality) and sees international carbon
markets as one key essential element for this vision to become reality. Binding rules
What trade can do for climate
4
and procedures that are respected by all participants in international carbon markets
need to be laid down in the rulebook of Article 6 of the Paris Agreement. Preferably,
all carbon pricing mechanisms should be harmonised over time to create a global
carbon price. This is important, because international cooperation under a well-
functioning Article 6 could save at least US$250 billion annually by 2030.4 It would
also contribute to creating a global level-playing field and make discussions about
carbon/investment leakage less relevant. What will be important for such
convergence is to establish binding accounting rules that reflect the fact that
economies are highly interlinked and strengthen the awareness that climate
mitigation is a global effort.
As long as there is no agreement on the Article 6 rulebook, the EU can also consider
entering into more bilateral talks with regions and countries on linking carbon
markets. For example, the EU has recently concluded its negotiations to link with
Switzerland’s ETS and wil hopefully do so also with the UK if and once they
establish their own system.
In addition to cooperating on carbon markets, the UNFCCC offers a unique stage
for Europe to exchange good practices on its climate policy frameworks and
standards with its global trading partners.
⇒
An agreement on Article 6 under the Paris Agreement’s Rulebook on
carbon markets should be concluded as soon as possible. The UNFCCC
negotiations should also continue to be used by the European
Commission to share experiences on other aspects such as policy
frameworks and standards.
⇒
The EU should also continue exploring ways to cooperate and link its
carbon market with those of other regions.
d. International standards and environmental labels
Environmental standards, product declarations and labelling have a significant
potential to function as tools of competitiveness for Europe. More information on
production processes could support Europe's green competitive edge and inform
consumers about the true environmental footprint of imported goods. European
businesses stand ready to trade environmentally friendly technologies, expertise and
other solutions to the rest of the world. As many value chains are global, well-
4
IETA, 2019. The economic potential of Article 6 of the Paris Agreement and implementation
challenges
What trade can do for climate
5
functioning markets require common standards and certificates for green products
and services, as well as mutual recognition of said standards and procedures.
The European Commission can export – by means of diplomacy and trade
discussions – the many potential benefits of Europe’s regulatory frameworks,
standards and labels to third countries to harmonise them along clear, objective
criteria based on scientific evidence, while taking into account local specificities.
⇒
The EU should work together with third countries to harmonise standards,
labels and regulatory frameworks in order to boost the functioning of
global value chains and facilitate the commercialisation of green products
and services.
e. CO2 pricing on international transport
CO2 pricing should encourage the deployment of the most efficient and least pollutant
energy carriers used for the international transportation of people and freight. Ideally,
CO2 pricing initiatives on carbon emissions of transport are coordinated at the
international level in order to maintain a level playing field, especially between
developed nations. That said, if European institutions will explore more unilateral
measures, it is important that any agreed EU legislation on CO2 pricing for transport
is immediately discussed with trading partners and other third countries through
diplomacy and bilateral negotiations. Upscaling EU legislation to the plurilateral or
multilateral level would be most effective for reducing global transport emissions.
Bilateral – Free Trade Agreements
a. Tariff reduction schedules and non-tariff barriers on environmental goods and
services
In the absence of a multilateral/plurilateral agreement on the liberalisation of
environmental goods and services the EU could use its Free Trade Agreements to
further support trade of environmental goods under certain conditions. The process,
including current considerations on a possible fast-track tariff dismantling for
environmental goods or priority to specific goods that are needed to achieve more
ambitious climate goals, must be discussed in close cooperation with EU business.
Any tariff liberalisation process should be accompanied by an elimination of non-tariff
barriers and strong regulatory cooperation. Furthermore, there are many practical
implementation questions that arise and first need to be thoroughly assessed. A
facilitated
trade of state-of-the-art technology would not only support climate
What trade can do for climate
6
ambitions around the world but would also create significant opportunities for
European businesses to provide their highly innovative and competitive goods and
services.
The ambition and scope of the provisions that can be included in an agreement have
to adjust to the needs and economic development of the negotiating partner. In
addition, as was already done in the EU-Japan EPA and is foreseen for the EU-
Mercosur agreement, trade agreements can be used to refer to climate commitments
such as those under the Paris Agreement, provided that they incentivise trading
partners to adopt more ambitious climate objectives. In general, BusinessEurope
supports an approach that rewards trading partners to enhance their climate action.
⇒
Future bilateral agreements could explore options on targeted provisions
on trade in “environmental goods and services”, including non-tariff
barriers, and aim to reach more ambitious commitments in this area
providing that these measures go hand in hand with a guarantee of
effective market access and an environmental level playing field. The
scope of such provisions should adjust to the needs of the negotiating
partner, work on the basis of rewarding rather than punitive actions, and
reflect their real level of economic development and climate ambition.
⇒
In the case of Turkey, a modernisation of the Customs Union would offer
a valuable opportunity to achieve a multiplier effect in combatting climate
change alongside with supporting supply chains, including provisions on
sustainability and a reference to the Paris Agreement, as well as
appropriate support programmes and mechanisms.
b.
Targeted provisions under Economic Partnership Agreements with ACP
economies
The Economic Partnership Agreements between the European Union and African,
Caribbean and Pacific countries currently include a varying degree of provisions on
climate and the environment and their enforcement, as these were not specifically
included in the original mandate of 2002. The same is also true for specific chapters
on investment, which are part of the “rendezvous clauses” for most EPAs. Given the
big potential in ACP markets for green and sustainable goods and services to
accompany their economic growth, the right path should be laid out to decouple
economic growth from greenhouse gas emissions, as has been done in Europe.
This can include a wide range of provisions from tariff reductions, reduction of non-
tariff barriers, technical assistance, capacity building and “green” investment.
⇒
In the ongoing process towards an update of the negotiating mandates
and broadening of the agreements a trade and sustainable development
What trade can do for climate
7
chapter should be foreseen with specific attention to the needs of the
respective partner countries.
⇒
The broadening of the agreements should aim to include an investment
chapter and can, in that framework, also foresee incentives for “green”
investment under certain conditions, e.g. specific sectors or activities.
c.
Capacity building / technical assistance
Capacity building and technical assistance are a crucial part of Europe’s trade
relations, especially with developing countries. There is still a large scope to extend
these actions and specifically target climate-related and environment-related issues.
This can take place in the form of classic workshops and trainings for policymakers,
businesses and social partners, or for instance business-to-business workshops on
best practices and the benefits of environmentally sustainable business models. In
addition, it is important to start educating children at an early stage about
environmental and climate impacts. Therefore, collaboration with educational
bodies and authorities should be strengthened with a particular focus on increasing
female participation in STEM (science, technology, engineering and mathematics)
competences.
Green investments in the form of grants, guarantees and other financial instruments
can be promoted in the framework of the European Fund for Sustainable
Development.
⇒
Businesses stand ready to explore possibilities on how companies can be
involved in specific capacity building exercises and projects for technical
assistance in developing countries.
⇒
The EU should publish its overall priorities and approach on capacity
building on climate and consult stakeholders on how these could be
further developed, complemented and monitored.
d.
Enforceability of sustainability chapters
The new generation of EU Free Trade Agreements always includes a chapter on
Trade and Sustainable Development (TSD). Its aim is to promote the uptake of high
labour, environmental and human right standards by the partner country through
close cooperation and strong engagement from civil society organisations. There
are discussions on how to improve the enforceability of the sustainability chapter
namely what actions can be taken in case any of the trading partners breeches the
agreement. BusinessEurope recognises the need to improve effectiveness in the
What trade can do for climate
8
enforcement of the TSD chapter. This could be done by streamlining procedures
and including specific timelines for each of the actions in the chapter. However, we
believe that economic sanctions are not the most effective approach due to
shortcomings relating to the triggering requirements, the scope of the sanctions and
the resulting limitation of EU negotiating leverage with third countries.
⇒
BusinessEurope supports the strengthening of enforcement of existing
scope and content in TSD chapters. A dialogue and incentive-based
approach with the established system of dedicated government bodies
(TSD Committee and Trade Committee) and the civil society structures
(Domestic Advisory Groups and Civil Society Forums) should be
maintained. Further efforts can be made to make the procedure more
effective by including specific timelines for each of the actions.
Unilateral
a.
Public procurement
As around 14% of the EU’s GDP is spent on public procurement, it can be a key
monetary tool for the European Commission and the member states to boost
innovation and production in low-carbon technologies. However, the public sector
still very often chooses proposals based on the lowest price, not least due to a lack
of clear and objective methods and standards on how to assess and weigh the
environmental performance of a product over its lifecycle or a service.
Furthermore, third country bidders, who are able to participate in Europe’s
procurement market, are not always subject to the same standards or state aid rules
as those applicable to domestic bidders. This creates competitive distortions, and
so the European Commission has recently published a relevant guidance5 for
member states on how to deal with bidders from outside the EU, e.g. by not only
taking the price but also Europe’s high standards into account. At the end of the day,
governments should practice what they preach when implementing agreed policies
and help create a critical mass for new ideas. European Commission proposals like
the International Procurement Instrument (IPI) could also potentially offer additional
impetus by providing the EU with greater leverage to level the playing field.
5
European Commission, 2019. New guidance on the participation of third country bidders in the
EU procurement market
What trade can do for climate
9
The role of public procurement in stimulating climate action outside Europe will only
be effective if access to third countries ‘public procurement markets is guaranteed
and implemented.
⇒
The Commission should also consider additional options on how to use
public procurement to boost climate action both inside and outside of
Europe and assess criteria on how environmental and climate standards
in procurement offers can be taken into account in a coherent approach
also within Europe. The initiative to develop instruments to calculate the
lifecycle costs for certain products is welcomed.
⇒
Activities on further professionalization of public procurement, especially
also with a view to increased information and training regarding green
public procurement, should be intensified both on EU and national level.
⇒
Member States should ensure that third country bidders respect the same
environmental standards as domestic bidders to ensure a level-playing
field for products and services.
b.
Generalised Scheme of Preferences (GSP)
The GSP+ mechanism already foresees a tool for the EU to move beneficiaries to
protect forests and sustainably manage natural resources.6 However, current GSP
tools limit the EU’s power to influence beneficiaries. The possibility to increase the
EU’s options to do so through the GSP tool should be foreseen through the current
review of the GSP regulation.
⇒
Climate change and sustainable development aspects should be enhanced
in the upcoming revision of the EU GSP Regulation, together with
measures to strengthen implementation of existing provisions.
⇒
In accordance with the European Parliament resolution on the matter7, the
Commission should move to include the Paris Agreement in the 27 core
international conventions list that GSP+ beneficiaries should comply with,
and incentivise them to converge with the EU’s ambition over time.
6 For more info, see
EPRS, 2019. Using trade policy to tackle climate change
7
European Parliament, 2019. Resolution of 14 March 2019 on the implementation of the GSP
Regulation (EU) No 978/2012
What trade can do for climate
10
c.
Carbon border adjustments (CBA)
Carbon Border Adjustments are a sensitive measure and BusinessEurope at this
point does not take a position neither for nor against it. It is however essential that
the exact goals, guiding principles and open questions formulated in annex to this
paper feed into the design of the upcoming impact assessment on whether a CBA
is needed, desirable and feasible over the longer term and how it should be
designed for the EU as a net exporting continent.
In terms of goals, a CBA if designed and implemented efficiently could offer an
effective way to convince other world economies to
converge with the climate
objectives of Europe so as to reduce global GHG emissions. By doing so, a CBA
should also aim at minimising the threat that production is transferred from the EU
to other countries with lower ambition for emission reduction, or because EU
products are replaced by more carbon-intensive imports (‘
carbon leakage’) as well
as the threat of them deciding to gradually shift more investments outside of the EU
(‘
investment leakage’) depending on the carbon price. These two goals are
intrinsically related with each other: The threat of investment leakage and carbon
leakage cannot be fully mitigated as long as others are not also aiming to move to
a climate neutral economy at the same speed as Europe. Therefore, the priority
should be given to establishing well-functioning international carbon markets and a
global carbon price in line with Article 6 of the Paris Agreement, which would
eventually render the CBA discussion obsolete.
Designing a CBA will be politically challenging and subject to many risks, practical
problems and uncertainties. Nevertheless, it is pivotal that the impact assessment
considers any CBA option along the following guiding principles:
A. WTO-compliant
The impact assessment should look at how each CBA option is compliant with the
current WTO rulebook. Compliance with the WTO rulebook is not only crucial to
avoid risky dispute procedures and improve regulatory predictability for the
implementation, but also to minimise the risk of retaliatory measures by our major
trading partners. Transparency and close dialogue with trading partners will be very
important to minimise any risks.
B. EU ETS-compliant
The EU Emissions Trading System (EU ETS) is and should remain the key market-
based instrument for Europe’s industries and power sector to cost-effectively reduce
their GHG emissions. This includes the system of free allowances that provides the
key stimulus for industry installations under the EU ETS to be amongst the best in
What trade can do for climate
11
class8 and the compensation of indirect ETS costs. For example, if the CBA is
designed and implemented as an import-ETS system, maintaining the existing free
allowances system next to a CBA would not necessarily amount to double
protection. In fact, if importers can demonstrate with verified data that their imports
are at least as efficient as the best in class, they can avoid a CBA charge. This
would be the equivalent for importers to receiving free allowances. To avoid new
market distortions between EU producers and importers, the existing system of free
allowances should then also be maintained for EU producers.
Replacing the existing carbon leakage measures by an untested mechanism could
create considerable uncertainties and risks for the European industry. For example,
shifting to a system of full auctioning when a CBA is in place would:
•
Increase the risk of retaliation. Under the current EU ETS Directive, free
allowances will gradually decline over Phase IV (2021-2030). This can be
reflected towards importers through a CBA charge that gradually increases over
time. Through this approach, importers will have time to adjust to a system where
the CBA charge rises gradually. However, if the CBA replaces the free
allowances system for EU producers overnight, then importers should also be
faced with a CBA no matter how efficient their imports are produced, in order to
avoid market distortions with EU producers. In this case, the “pain” of the CBA
measure will be considerably high even for importers importing products from the
most efficient installations in the world. Consequently, the risk of retaliatory
measures by trading partners will increase significantly.
•
Create significant investment uncertainty. Firstly, the EU ETS Directive
including free allocation and indirect cost compensation has only very recently
been revised for the period until 2030. Changing this recently adopted legislation
by scrapping free allocation and indirect cost compensation would disrupt long-
term investment decisions already taken. Secondly, EU producers not only face
compliance costs (the EU ETS costs), but also abatement costs since they make
investments in breakthrough technologies to reduce emissions. A CBA fully
replacing existing carbon leakage measures would significantly impact a
company’s financial ability and wil ingness to invest in such breakthrough
technologies in Europe.
•
Decrease European companies’ cost-competitiveness in third markets. A
CBA mechanism could encourage foreign companies to produce more
8 The EU identifies the 10% most efficient installations for each sector on the EU ETS carbon
leakage list. Based on the average of these best in class, product benchmarks are designed. If a
domestic installation beats the benchmark, that installation in theory receives all its allowances
for free, otherwise it has to buy part of all of its allowances on the market, depending how far it is
removed from the benchmark.
What trade can do for climate
12
environmentally friendly if they want to enter the EU market, but not necessarily
if they want to access their own market or third markets without carbon pricing.
EU companies losing free allowances would therefore be at a disadvantage vis-
à-vis these foreign companies when competing for third markets access. This is
the reason for continuing the system of free allowances for the best in class as is
currently the case under the EU ETS Directive.
C. Comprehensive, transparent and manageable (administratively & financially)
The design and WTO-compatibility of any CBA option will be difficult to assess with
certainty. Therefore, while analysing the effectiveness of the CBA in tackling carbon
and investment leakage, the impact assessment should look at how each CBA
option would fare in terms of ensuring fairness, additionality, transparency and
predictability, also at a sector level. This needs to consider both European
businesses that could potentially bear the additional administrative requirements
and see their value chains impacted, as well as Europe’s trading partners that need
full clarity from the EU as to which objective criteria will be used to assess their
exports to the EU. Depending on the options, access to reliable and sound
information from third countries and companies would be the preferred option,
though Europe could consider other options when there is a particular issue
concerning the ability of third countries and companies to provide reliable data (e.g.
provide capacity building or use global fallback benchmarks). As said before, full
transparency and early dialogue with trading partners will be key for implementation.
D. Initially limited in scope
Uncertainty must further be addressed in the impact assessment by looking at how
any CBA option could initially be started with only one or a few (sub-)sectors, and
what are the likely risks of legal challenges and retaliation for doing so. If other
sectors are to be included gradually, quantitative and qualitative assessments
should be carried out in order to capture certain sectorial specificities and needs.
Furthermore, the design of any CBA has to avoid that carbon leakage is just
transferred to the next level of the value chain.
E. Only climate-related
Part of the risk of any CBA measure is that it sets a precedent for further restrictions
on trade in the future based on other, non-climate related matters. It will already be
extremely challenging to reliably measure and verify the carbon content of traded
materials, especially if full consideration is given to life cycle CO2 emissions.
Therefore, the EU should oppose calls for broadening the goals of any CBA option
to anything else other than global climate action and the risk of carbon/investment
leakage.
What trade can do for climate
13
F. Limited in duration
As CBAs are in principle trade restrictive, the impact assessment should look into
the ease with which CBAs could be adjusted or removed once breakthrough
technologies reach global marketability, global climate ambitions are converged,
and /or when retaliation occurs.
What trade can do for climate
14
Annex: Open questions
In addition to addressing the aforementioned points, further questions need to be
discussed, including but not limited to the following:
Q1. How to collect the necessary carbon data and verify it in a reliable and
transparent way?
The collection and disclosure of carbon content data will be decisive for the success
of measures relating to the carbon intensity of production worldwide. The system
and procedure that will be applied for this must be an internationally recognised
certification system that is objective and independent. How would information on
carbon emissions in complex value chains with transforming products be gathered
and processed? As part of implementation of the Paris Agreement, work on common
Monitoring, Reporting and Verification (MRV) of emissions is under development.
How to make progress faster? Digital solutions such as blockchain could be a
potential solution to collect the necessary carbon intensity data in a transparent and
efficient manner. Could the uptake of such solutions be accelerated via plurilateral
channels and FTAs?
Q2: How could the revenues generated with the CBA be used most effectively?
The impact assessment should look into how the CBA’s revenues can be used to
achieve the two main goals, i.e. minimise carbon and investment leakage, as well
as converging global climate ambitions. For example, should the revenues flow into
EU internal climate funds, such as the EU ETS Innovation Fund to help bring the
costs down of EU-based low-carbon RDI, or should it be used to fund low-carbon
investments in third countries? An additional layer of complexity arises here in the
form of additionality: For example, how to make sure that a third country doesn’t
simply reduce its domestic climate action expenditures by the same amount as it
stands to receive from the EU’s CBA revenues, thereby annul ing the additionality
effects of the CBA?
Q3: How to measure additionality of the CBA?
In a hypothetical situation, producers in China or elsewhere could reorganise their
trade flows in such a way that the products produced in their cleanest installations
are exported to Europe, thereby minimising any CBA charge, whereas the products
from their dirtiest installations are sold domestically or to other parts of the world.
Similarly, if the CBA is only charged on the imports of basic materials, it might
encourage importers to move away from such materials and import more semi-
finished products instead, which would not be subject to a CBA. In this situation, the
CBA would simply transfer the risk of carbon and investment leakage to the next
level of the value chain, and the net effect of a CBA on pushing other major
What trade can do for climate
15
economies to increase their climate actions (and thus the net effect on global
emission reductions) would be significantly diminished. This would surely still put
European producers exporting to other parts of the world at a significant cost
disadvantage.
Q4
: How does the Commission take the impact on the value chain into account and
how will we avoid that the competitiveness of the EU industry including its export
capacity is eroded?
Assuming the CBA is not applied to finished goods but more upstream goods of
activities, it will be important for the impact assessment to calculate the estimated
increased costs of the CBA throughout the value chain, and whether this in turn
would result in increased costs of imported goods in Europe and potentially
undermine the EU’s export capacity.
Q5: How wil the CBA be aligned with existing customs’ regimes and how wil it be
calculated?
The EU has an external tariff that includes in some cases preferential rates, for
instance for countries that have a free trade agreement with the EU or countries that
are GSP-Generalised System of Preferences beneficiaries. The applied duties are
collected when the products are imported into the EU with some exceptional
regimes, such as outward or inward processing. It will be important to define how
the CBA will be calculated and how it will be collected from importers. For example,
will it be added to the normal tariff of an imported product, or will it be based on an
average amount paid on an annual/monthly basis?
Q6: How will technological progress/innovation be considered?
Technological progress is extremely fast in some sectors and areas, meaning that
the carbon footprint of a product may change over time either because new
production methods are established or the use of the product becomes less energy-
intensive. This has to be taken into account, for example by means of a regular re-
assessment to avoid discrimination and unfair treatment of products.
What trade can do for climate
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