Introduction

On 23 January 2008, the European Commission (“Commission”) introduced the "Climate action and renewable energy package" (“the package”)[1] aimed at achieving the two major targets of the European Union’s (“EU”)[2] climate policy, namely[3]:

  1. a reduction of at least 20% in greenhouse gases by 2020 – rising to 30% if there is an international agreement committing other developed countries to "comparable emission reductions and economically more advanced developing countries to contributing adequately according to their responsibilities and respective capabilities"; and
  2. a 20% share of renewable energies in EU energy consumption by 2020.

Carbon Import Tax

As follows from the first target, the EU has set a unilateral target of a 20% reduction in greenhouse gases with a possible increase to 30% if an international post-Kyoto agreement is reached. Agreement on such a continuation of the Kyoto Protocol and its concomitant reduction targets for greenhouse gas emissions will therefore be out of the Commission’s hands.

It is for this reason that the EU has decided to take separate action in order to achieve the aforementioned targets on reduction of the greenhouse gas emissions. This separate action, the so-called “go-it-alone” scenario, consists of, inter alia, the imposition of “border adjustment measures” such as a “Carbon Import Tax” on products imported into Europe, the aim of which is the establishment of a level playing field with countries not subject to the same carbon restrictions.

Some argue that this Carbon Import Tax would, at least to a certain extent, prevent the harmful effects of “carbon leakage”, coming from countries where carbon restrictions do not apply, whilst securing the competition position of the EU undertakings which are subjected to these carbon restrictions.

Others, including the former EU Trade Commissioner Peter Mandelson and WTO Director-General Pascal Lemy, take a different stance on this issue.

They are of the opinion that the issue of ‘carbon leakage’ should be addressed through the conclusion of an international agreement and not by a ‘back door policy’ of the EU. The reason being that whilst the border adjustment measures may provide some relief to energy intensive industries, they would also have a negative impact on other sectors as well as consumers. Moreover, the administration and, even more so, the enforcement of these measures will most likely lead to serious problems.

Besides these practical issues, another point that should not be overlooked is whether the ‘Carbon Import Tax’ is in line with the rules set by the World Trade Organization (“WTO”).

It could perhaps be argued that the ‘Carbon Import Tax’ falls within the scope of measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”, as stated in Article XX(g) of GATT (The General Agreement on Tariffs and Trade)1994, one of the exceptions to the ‘most-favoured-nation treatment’ as set out in Article I.1 of GATT 1994.

Conclusion

The possible introduction of border adjustment measures, such as the Carbon Import Tax, will only take place once the conclusion of a post-Kyoto agreement is off the table.

However, the mere possibility of imposing a measure such as the Carbon Import Tax, might be sufficient for non-EU countries to be ‘convinced’ into adopting a proposal for an international post-Kyoto agreement. The possible introduction of the Carbon Import Tax can, therefore, be seen as the ultimate tool for the EU to reach its environmental targets.

It would be interesting to see whether non-EU countries are simply going to accept the EU’s ‘Carbon Import Tax’ or whether they will argue the non-compatibility of this measure with the EU’s WTO requirements.