EU notebook: WTO rules give Europe’s climate ambitions a reality check

Plus, why gas is over, according to European Investment Bank chief

By Vish Gain

(Vish Gain is a journalist based in Dublin. In addition to Callaway Climate Insights, he is a correspondent for AML Intelligence covering the financial crimes sector in Europe and beyond.)

DUBLIN (Callaway Climate Insights) — Richard Branson might have once said business opportunities are like buses — there's always another one coming. But if you’re in Europe, you’d hope it was a climate-friendly green bus. You might have to pay the EU carbon border levy otherwise.

While all eyes are on the U.S. after President Joe Biden’s election, Europe is undoubtedly the most ambitious bloc for climate change in the world right now. And one of the manifestations of this uninhibited ambition is the so-called carbon border fees, a charge on polluting imported goods that will initially apply to steel, cement and electricity, but could expand to more sectors later.

This would apply to both domestic industries as well as EU competitors, but as with all international trade policies, it’s a complex system that warrants tough negotiation and planning. Complications include how to decide the value of charge for non-EU businesses, what to do with the funds raised, and how to ensure universal compliance with EU rules.

But perhaps the most palpable of all hurdles in this quagmire of policymaking is navigating between EU regulations and WTO rules.

While the EU’s objective is to ensure all industries operating in Europe do business on a level playing field, WTO watches out for protectionist tendencies in blocs. EU’s insistence on compliance and ‘notional’ calculations of the carbon border charges may not be palatable to WTO officials.

French MEP Pascal Canfin recently argued that the new carbon border levy “is not a tax” but a charge imposed on imports that is the exact mirror of the carbon price on the Emissions Trading Scheme. Canfin, who chairs the European Parliament’s environment committee, told Euractiv that if deemed to be a tax, the levy would risk being rejected by the WTO on protectionist grounds.

However, if tax is ruled out, the only remaining option is the murky territory of notional charges — calculated by the EU by comparing a competitor business with its European counterpart and estimating a value to be levied.

There’s no avoiding this cost unless a business is covered by a carbon trading system similar to the EU ETS, according to Canfin, who believes notional charges are easily measurable.

“For example, we can take the electricity mix of the country, that of the group targeted by the mechanism, or the electricity mix of the production site itself. That remains to be seen,” he told Euractiv in an interview.

“With a notional ETS, you buy an allowance; it’s not a tax,” said Benjamin Angel, a senior official at the European Commission. “We would calculate a benchmark of carbon consumption for a given product corresponding to the EU average,” he explained at a recent conference.

“When we import this product, we apply this benchmark and we multiply it by the ETS price as observed on the market, he said, adding that the only difference is that it would not be tradeable on the regular ETS market because the number of carbon allowances there is limited and “that would be a restriction to trade.”

The industries projected to bear the heaviest brunt of the new scheme are cement, steel and chemical industries, to name a few. These energy-intensive industries face tough international market competition and find it hardest to transform manufacturing processes to minimize carbon emissions.

“It’s likely that we will start with raw materials,” said Angel. “If you deal with complex products the level of complexity that you need to handle is higher.” The system will later be extended to more complex supply chains. 

Finding a fair and reasonable way to get everyone on board with the carbon charge is half the battle. The other half is figuring out how to spend the funds collected.

The WTO will be interested to know how the EU handles the large funds it is set to receive from the carbon border levy — the idea of fair competition, after all, needs to apply on both sides of Europe’s borders.

 “If those duties go back into general revenues to support the EU in general, of course, no problem,” said Alan Wolff, deputy-director general at the WTO, at a recent webinar. “But if they go back and change the competitive equation for a particular industry or particular companies,” that would probably create “a fair amount of conflict.” 

WTO’s understanding of ‘fair’ use is if Europe decides to invest the money in developing countries’ energy transitions or reinvest it in its own. It’s all good in WTO’s ‘hood as long as the funds don’t give European companies a competitive edge.

Gas pipeline is closing off 

A new statement by European Investment Bank chief Werner Hoyer about fossil fuels has some of Europe’s oil and gas companies on edge.

“To put it mildly, gas is over,” Hoyer said while announcing EIB’s annual results last week. “This is a serious departure from the past, but without the end to the use of unabated fossil fuels, we will not be able to reach the climate targets.”

Last year, EU climate chief Frans Timmermans had said that while fossil fuel projects are in theory excluded from EU funding, natural gas will continue to play a key role in replacing coal while helping to build a hydrogen infrastructure at least cost. “In some areas of transition, the use of natural gas will probably be necessary to shift from coal to sustainable energy,” he said. 

“I think this is a caveat I have to add.”

But it looks like things are set to change this year as the EIB plans to use 50% of its activity to support climate and environmental sustainability, unlocking €1 trillion ($1.2 trillion) for green funding by 2030 — and ensuring complete alignment with the Paris Agreement.

Gas has limited support under the EIB’s climate roadmap. Instead, more finance will go towards energy efficiency projects, renewable energy projects, green innovation and research, as outlined in the EIB climate bank roadmap published in 2020. This includes investment in green hydrogen and “low-carbon hydrogen” produced either from nuclear power or natural gas with carbon capture technology.

But not everyone is satisfied with the urgency of the bank’s plans. Anna Roggenbuck, policy officer at CEE Bankwatch, told Euractiv that in the transport sector EIB could support motorways and expressways “at a time when private vehicles with internal combustion engines urgently need to be restricted, not encouraged.”

 The EIB has also been under fire for its selection of clients and financial intermediaries in the past. One Bankwatch analysis showed that between 2013 and 2019, the EIB provided €4.7 billion of EU public money to companies with high shares of coal in power and heat generation.

Looking ahead, things don’t look all that grim for climate action in Europe, all things considered. Despite harsh winds of the pandemic blowing on the coffers of Europe’s economy, climate financing seems to have increased over the past year.

Interestingly, the pandemic may have inadvertently caused it — challenging Europe’s bank in its ambition to become “Europe’s climate bank.” The share of climate and environmental financing rose from 34% to 40% of the EIB’s total, bringing the bank closer to its 50% target.

“We have achieved unprecedented impact on climate, preparing the ground for much more. But the risk of a recovery that neglects climate and the environment remains,” said Hoyer. “The fight against climate change cannot wait until the pandemic is over.”

With the U.S. and China making slow but steady strides in the climate leadership race, Europe needs to stay ahead of the game to keep its position and impel others to follow suit. There may be other buses coming along, but Europe needs to take the first bus it gets.