FAIR’s fair?

1. FAIR’s fair? Eight Annual WTO Conference London, May 13-14, 2008 Dr. Jochem Wiers, Netherlands Embassy Paris

2. FAIR’s fair? • How to address ‘carbon leakage’ if not all major emitters involved in international agreement? • Europe looking at (combination of) • Free allowances for energy-intensives • Border adjustment • Including importers in ETS (my focus today) • Legal discussions focus on Article XX. But Article III also raises interesting questions.

3. FAIR’s fair? • Draft Commission ETS proposal included FAIR: ‘Future Allowance Import Requirement’. • FAIR would apply to goods posing significant risk of carbon leakage, to be determined by EU • Importers of goods covered would surrender allowances equivalent to average level of emissions from production of those goods in EU.

4. FAIR’s fair? • FAIR would not apply to countries (or administrative entities) taking binding and verifiable action to reduce emissions comparable to the action taken by the EU [to be determined by EU]. Subject to common but differentiated responsibity. • Countries that ratify post-Kyoto agreement or are linked to ETS may be determined [by the EU] to be taking comparable action.

5. FAIR’s fair? • Article III:4 requires that there be no ‘less favourable treatment’ (LFT) of ‘like products’. • Traditional ‘diagonal’ test: any imported product covered by FAIR from a factory producing lower emissions than the EU average will result in LFT • Appellate Body suggested new approach in Asbestos: comparing treatment of group of imported products v. group of domestic products.

6. FAIR’s fair? • New approach not yet tested in disputes. Idea seems that there is no LFT if the ratio of favoured and disfavoured like products is roughly the same for imports and domestic products. • That ratio is 1 for EU products as the emissions level is based on their average. So if the ratio goes (well) below 1 for imports from a complainant, there will be LFT.

7. FAIR’s fair? • Importers will have to pay for allowances on the basis of EU emission levels, regardless how much CO2 was actually emitted in production. • What will the effect be? Will industries send the cleanest products to the EU and dirtier products elsewhere? Where is the incentive for foreign producers to produce in a cleaner way? • But perhaps these questions (on aims and effects…) are more for Article XX.

8. FAIR’s fair? • Application of average EU emissions level to imports also reminds of Gasoline: individual v statutory baselines. • In Gasoline, the panel (Article III not appealed): • Found LFT based on characteristics of producer and the nature of the data held by it not allowed • Rejected a comparison of imported gas with gas from ‘similarly situated’ domestic parties • Rejected balancing of more and less favourable treatment (that seems obsolete since Asbestos)

9. FAIR’s fair? Gasoline panel (ctd.): • Held that even for imported gas on the whole, there was LFT, as importers had to adapt to an assigned average standard not linked to the particular product imported, while refiners of domestic gas had only to meet a standard linked to their own product.

10. FAIR’s fair? • Even if Gasoline imposed a product standard and FAIR lets the requirement to buy allowances depend on a production ‘standard’ (average emission level), there is a parallel. • The average Union emissions level as a ‘standard’ may also cause problems in the Chapeau of Article XX: a discrimination not rationally connected to the objective under paragraph (g) or (b).

11. FAIR’s fair? • In conclusion: intellectual challenge to design system able to pass the Article III test (Articles I, XX remain relevant too of course). • Doubt whether ‘FAIR’ would do so and wonder whether alternatives are possible for the average Union emissions level standard. • Is it really unfeasible to base the allowance requirement for imports on CO2 emitted when produced in their country of origin? Some American proposals do this…