'Green protectionism' and Europe's coming trade wars
by Fredrik Erixon
14 March 2012
European Union environmental policies relating to carbon emissions, tar sands and biofuels could propel Europe into trade wars with its key trading partners - warns think-tank
This year has started badly for European Climate Commissioner Connie Hedegaard and those of us who consider it important that European Union's legislation to reduce carbon emissions does not conflict with its obligations at the World Trade Organisation - and, more generally, its stewardship of open trade. The EU's extraterritorial use of carbon fees for aviation, which kicked in early this year, has sparked very strong reactions from China, the United States and other countries that now have coalesced around a programme to fight the charges on traffic outside European air space. Hedegaard's proposal to introduce sustainability criteria for oil sands recently backfired as member states, after heavy lobbying from Canada, bottled the discriminatory way that the proposal described for how to assess carbon emissions in the production of oil sands. Similarly, the EU is now edging closer to the day when its sustainability criteria for the production of biofuels will take effect. It will, most likely, restrict access to the EU market for those producers that are competitors to producers of rapeseed-based biodiesel in Europe.
Consequently - foreign producers in Latin America, Southeast Asia and the US are preparing for a legal battle at the WTO to eliminate the elements of the legislation that is discriminatory.
Few contest the desirability to cut carbon emissions. But it is also just a few that would support a carbon-emission policy that would throw Europe into trade wars with its key trading partners – increasing the cost for the carbon-reducing policy and, in effect, contradicting the ambitions that climate policy is set to serve. Sadly, key wings of the European Commission are part of that small minority. These policies are not only poorly and irrationally designed. They also rest on the flawed assumption that the EU possesses the power to force other countries to change their own policies. In effect, an assumption that other countries just will swallow what the EU decides without circumventing those decisions or retaliating against them.
Furthermore, and at least as far as its new biofuels policy is concerned, the green ambitions on which the legislation was sold have been corrupted by industrial policy. The union's biofuels policy is a classic example of green protectionism. Such protectionism is not about a green policy objective, or environmental legislation - but about governments hiding behind such legislation protectionist or discriminatory policies with no direct connection to the initial environmental purpose. Biofuel production in Europe is heavily subsidised through tariffs, direct cash support, and other forms of subsidies. Competition is stifled by these market interventions and imports represent only a small part of biofuel consumption in Europe, despite the fact that it is cheaper to produce it elsewhere. It has been an article of faith in the EU's programme for agricultural subsidies in the past 10 years to move farmers to energy crops that are more market conducive – and, consequently, away from the surplus production of food. Under those conditions, the expansion of investment in biofuel production has grown rapidly and many investments have been made on the premise of a continued rapid increase in demand for biofuel produced in Europe.
But here is the snag: it is impossible for Europe to continue with current levels of subsidy intensity as production volume grows, and without government support to cover the extra costs that EU producers have vis-à-vis foreign producers - many of them cannot compete. And with less than 50 per cent of installed production capacity being used, many producers are desperate to increase volumes as they otherwise would waste their invested capital. This is partly why many local producers of biofuel in Europe embraced the Renewable Energy Directive that, in late 2009, ushered the EU into establishing sustainability standards for biofuels that would enjoy the tax-excise exemption and be part of the national targets set for the share of energy and fuels that will come from renewable sources in 2020. Already from the start, the RED was engineered to qualify European biofuels while restricting access for some other biofuels, unsurprisingly those biofuels that are in direct competition with the dominant biofuel in Europe – rapeseed-based biodiesel. Naturally, this is not how the legislation was presented, but the fingerprints of green protectionism were all over the directive. That also came to the fore when the European Parliament demanded even stricter criteria in the directive – a demand that was resoundingly rejected because it would have disqualified much of the biofuel produced in Europe.
The problem for the EU is that the design, history and consequences of this legislation are unlikely to stand up in a WTO dispute. A discrimination of foreign biofuels on the basis of RED will violate core rules of the WTO and the strong influences of industrial policy in the legislation will invalidate attempts to defend discrimination on the basis of its positive environmental effects. Furthermore, if the EU moves to introduce so-called indirect land-use change – which is now heatedly debated in Brussels – in its sustainability criteria, it is glaringly obvious that the policy would be ruled against. Legal complications aside, it is also highly doubtful that such a policy would serve the ambition of substituting fossil fuels with biofuels. Basic economics will tell you that if supply is restricted – which is the consequence of restricted market access – prices will go up. And if prices go up, fewer consumers will make the switch to greener fuels. In other words, the EU's ambition to promote its local production corrupts the green ambition in its biofuel policy.
And it is a contestable notion that the policy will promote biofuel production that emits lower amounts of greenhouse gases. Those foreign producers that cannot meet the standards set by Europe can always turn to other markets in the world. Demand for biofuels is increasing at a faster speed outside the EU than inside Europe. If the consequence of the legislation is just that foreign producers will shuffle its production from one market to another, one has to ask the basic question: what is the point of the law? Green policy can nicely mix with openness to trade and respect for international trade rules. Those who have portrayed the emerging dispute over biofuels as a conflict between those ambitions are profoundly misguided and espouse a policy that simply will not work. What neither green policy nor trade rules can sit comfortably with is promotion of local production at the expense of foreign production.
Fredrik Erixon is director and co-founder of the European Centre for International Economy think-tank, which is based in Brussels
This year has started badly for European Climate Commissioner Connie Hedegaard and those of us who consider it important that European Union's legislation to reduce carbon emissions does not conflict with its obligations at the World Trade Organisation - and, more generally, its stewardship of open trade. The EU's extraterritorial use of carbon fees for aviation, which kicked in early this year, has sparked very strong reactions from China, the United States and other countries that now have coalesced around a programme to fight the charges on traffic outside European air space. Hedegaard's proposal to introduce sustainability criteria for oil sands recently backfired as member states, after heavy lobbying from Canada, bottled the discriminatory way that the proposal described for how to assess carbon emissions in the production of oil sands. Similarly, the EU is now edging closer to the day when its sustainability criteria for the production of biofuels will take effect. It will, most likely, restrict access to the EU market for those producers that are competitors to producers of rapeseed-based biodiesel in Europe.
Consequently - foreign producers in Latin America, Southeast Asia and the US are preparing for a legal battle at the WTO to eliminate the elements of the legislation that is discriminatory.
Few contest the desirability to cut carbon emissions. But it is also just a few that would support a carbon-emission policy that would throw Europe into trade wars with its key trading partners – increasing the cost for the carbon-reducing policy and, in effect, contradicting the ambitions that climate policy is set to serve. Sadly, key wings of the European Commission are part of that small minority. These policies are not only poorly and irrationally designed. They also rest on the flawed assumption that the EU possesses the power to force other countries to change their own policies. In effect, an assumption that other countries just will swallow what the EU decides without circumventing those decisions or retaliating against them.
Furthermore, and at least as far as its new biofuels policy is concerned, the green ambitions on which the legislation was sold have been corrupted by industrial policy. The union's biofuels policy is a classic example of green protectionism. Such protectionism is not about a green policy objective, or environmental legislation - but about governments hiding behind such legislation protectionist or discriminatory policies with no direct connection to the initial environmental purpose. Biofuel production in Europe is heavily subsidised through tariffs, direct cash support, and other forms of subsidies. Competition is stifled by these market interventions and imports represent only a small part of biofuel consumption in Europe, despite the fact that it is cheaper to produce it elsewhere. It has been an article of faith in the EU's programme for agricultural subsidies in the past 10 years to move farmers to energy crops that are more market conducive – and, consequently, away from the surplus production of food. Under those conditions, the expansion of investment in biofuel production has grown rapidly and many investments have been made on the premise of a continued rapid increase in demand for biofuel produced in Europe.
But here is the snag: it is impossible for Europe to continue with current levels of subsidy intensity as production volume grows, and without government support to cover the extra costs that EU producers have vis-à-vis foreign producers - many of them cannot compete. And with less than 50 per cent of installed production capacity being used, many producers are desperate to increase volumes as they otherwise would waste their invested capital. This is partly why many local producers of biofuel in Europe embraced the Renewable Energy Directive that, in late 2009, ushered the EU into establishing sustainability standards for biofuels that would enjoy the tax-excise exemption and be part of the national targets set for the share of energy and fuels that will come from renewable sources in 2020. Already from the start, the RED was engineered to qualify European biofuels while restricting access for some other biofuels, unsurprisingly those biofuels that are in direct competition with the dominant biofuel in Europe – rapeseed-based biodiesel. Naturally, this is not how the legislation was presented, but the fingerprints of green protectionism were all over the directive. That also came to the fore when the European Parliament demanded even stricter criteria in the directive – a demand that was resoundingly rejected because it would have disqualified much of the biofuel produced in Europe.
The problem for the EU is that the design, history and consequences of this legislation are unlikely to stand up in a WTO dispute. A discrimination of foreign biofuels on the basis of RED will violate core rules of the WTO and the strong influences of industrial policy in the legislation will invalidate attempts to defend discrimination on the basis of its positive environmental effects. Furthermore, if the EU moves to introduce so-called indirect land-use change – which is now heatedly debated in Brussels – in its sustainability criteria, it is glaringly obvious that the policy would be ruled against. Legal complications aside, it is also highly doubtful that such a policy would serve the ambition of substituting fossil fuels with biofuels. Basic economics will tell you that if supply is restricted – which is the consequence of restricted market access – prices will go up. And if prices go up, fewer consumers will make the switch to greener fuels. In other words, the EU's ambition to promote its local production corrupts the green ambition in its biofuel policy.
And it is a contestable notion that the policy will promote biofuel production that emits lower amounts of greenhouse gases. Those foreign producers that cannot meet the standards set by Europe can always turn to other markets in the world. Demand for biofuels is increasing at a faster speed outside the EU than inside Europe. If the consequence of the legislation is just that foreign producers will shuffle its production from one market to another, one has to ask the basic question: what is the point of the law? Green policy can nicely mix with openness to trade and respect for international trade rules. Those who have portrayed the emerging dispute over biofuels as a conflict between those ambitions are profoundly misguided and espouse a policy that simply will not work. What neither green policy nor trade rules can sit comfortably with is promotion of local production at the expense of foreign production.
Fredrik Erixon is director and co-founder of the European Centre for International Economy think-tank, which is based in Brussels
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COMMENTS
The rules of RED do not discriminate against foreign biofuels. For example, the best-performing biofuel according to RED default emissions is Brazilian ethanol. Of course, palm oil producers will say this. But they would, wouldn't they?
Milan - Lombardia, Italy
This article unfortunately does not state facts but rather opinions. Trade distortions in the global biodiesel market exist at multiple levels including the differential export taxes in Argentina and Indonesia that in fact subsidize biodiesel exports and favor them over vege oil exports. Subsidised exports from the US - so-called "splash-and-dash" - have also caused distortions and the fairness of these practices in light of international trade rules are questionable. Unfortunately, the article above is very opinionated. While the risk of trade wars is real, the drivers are much more complex and involve policy making in exporting countries too.
Basel - Switzerland
