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TWN
Info Service on WTO and Trade Issues (Jun23/10) Washington DC, 15 Jun (D. Ravi Kanth) — China has called for dedicated multilateral discussions at the World Trade Organization to enhance the understanding of controversial trade-related unilateral environmental measures such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) and other impending border adjustment tariff schemes being considered in the United States Senate, with “significant implications for developing countries and the multilateral trading system,” said people familiar with the proposal. Significantly, China’s proposal, circulated on 12 June, could not have come a day too soon, said a trade official, who asked not to be identified. It comes close on the heels of new bipartisan legislation that is being introduced in the US Senate on 14 June. The US legislation would lay the groundwork for tariffs on imports from countries with allegedly “looser environmental rules” such as China, India, and Russia among others. The seven-page restricted document (Job/TE/81) submitted by China to the WTO’s Committee on Trade and Environment (CTE) on 12 June is pursuant to the mandate agreed upon by trade ministers at the WTO’s 12th ministerial conference (MC12) last June. China has called for dedicated multilateral discussions at the WTO to enhance the understanding of controversial trade-related unilateral environmental measures such as the EU’s Carbon Border Adjustment Mechanism (CBAM). Moreover, the EU’s CBAM and the US legislation seem to be specifically targeted against developing countries like China, India, and Russia among others, who are being labelled as “climate laggards” in the US media. Such measures would have “significant implications for developing countries and the multilateral trading system,” China has argued. According to paragraph 14 of the MC12 Outcome Document (WT/MIN(22)/24), trade ministers entrusted the WTO’s Committee on Trade and Environment as a standing forum to hold “dedicated dialogue among Members on the relationship between trade measures and environmental measures.” The proposed dedicated sessions at the WTO must enhance “the understanding of the policy objectives, means of implementation and potential impacts of the relevant measures, with a view to clarifying understandings, identifying controversies, and diffusing trade tensions by way of enhancing the inclusiveness of such measures and improving their conformity with WTO rules and basic principles of international law,” China stated in its proposal. As a first step in the dedicated multilateral discussions, China has proposed “taking the recently enacted EU Carbon Border Adjustment Mechanism (CBAM) as an example.” Several trade officials welcomed the Chinese proposal on grounds that it would multilateralize the discussions of what are seen to be unilateral measures. UNDERLYING RATIONALE Proposing several ideas for the multilateral discussions, China said, “Border carbon adjustment (BCA) is a type of measure that extends emission reduction measures within one’s jurisdiction to the border, thereby creating a link between such domestic measures and international trade.” The CBAM, which came into force in May this year, “is the first border carbon adjustment measure with global impact introduced by a major WTO member,” it noted. China said it “extends the EU Emissions Trading System (EU-ETS) to imported goods, by way of imposing a surcharge on imports based on their associated carbon emissions at a price determined by the EU-ETS. The CBAM Regulation came into force on 17 May 2023.” Without naming countries like the US that are on the verge of adopting their own carbon border adjustment measures, China said it has now become the emerging trend that “climate measures are crossing over to the trade regime.” By bringing the issue to the center stage at the CTE, China argued that the CBAM and other measures which are replete with significant impacts on international trade must be subjected to thoroughgoing discussions at the WTO. Such discussions, according to China, must be “informative, evidence-based, well-structured, with the view of enhancing understanding and promoting cooperation.” According to China, the discussions should be in line with the following perspectives: (1) The basic operating mechanism, focusing on the underlying methodologies. China said, for example, that the CBAM is an extension of the EU-ETS to imports. But the EU-ETS covers greenhouse gas (GHG) emissions from installations, while the CBAM covers emissions associated with imported goods. Therefore, it is “methodologically challenging to attribute carbon emissions by facilities to different types of products in a fair and reasonable way.” China pointed out that “the complexity of the EU-ETS further exacerbates the challenge of this mirroring exercise.” China said “several high-level issues have been identified, including the delimitation of system boundaries of the production processes, the criterion to include precursors and the methodology for calculating free emission allowance for CBAM products.” Recalling “the GATT discussions on the border adjustability of direct taxes,” China said “the methodology of transposing installation emissions (analogous to direct taxes) to products emissions (analogous to indirect taxes) requires further multilateral discussions.” More importantly, China said that another fundamental issue relates to the so-called “carbon leakage” and how it can be objectively quantified. (2) The policy design, focusing on elements of implementation, seems to pose numerous difficulties and the process appears to be strewn with complexities. According to China, the implementation of the CBAM, for example, “involves the authorization of CBAM declarants and accreditation of verifiers, the calculation, declaration, verification, and review of emission data, the pricing of CBAM certificates, the administration of the CBAM registry, as well as the sale, surrender, repurchase, and cancellation of CBAM certificates.” Therefore, it said that there is a need for “in-depth and interactive information-sharing (that) could be useful to learn more about the policy design and operation.” Further, “in addition to the multiple elements and steps, the complexity of the policy design also lies in the need to bridge different regimes, including the coordination of the CBAM with the EU-ETS, and the interface between the EU regime and other members’ emission control regime in the process of its extraterritorial application,” China pointed out. Given the different interfacing measures in different jurisdictions, China said that “issues that remain to be discussed multilaterally include: how to reflect principles such as transparency, cooperation, proportionality, and trade facilitation in the CBAM regulation and its implementing acts.” (3) Environmental effects, focusing on the contribution of the measure to the intended environmental objectives. China suggested that “information could be shared on CBAM’s contribution to the EU’s obligation under the Paris Agreement in general and, more specifically, to its nationally determined contributions (NDCs).” As the Paris Climate Change Agreement of 2015 emphasizes the importance of equitable implementation and “the principle of common but differentiated responsibilities and respective capabilities”, China sought to know “how [the] principles of “common but differentiated responsibilities and respective capabilities” and “equitable transition” could be reflected in the CBAM Regulation and the implementing acts.” (4) Trade impacts, focusing on the overall impact on international trade and potential impact on developing countries. Based on the exploratory studies done on the CBAM, China said: “Preliminary findings indicate two channels of trade impact: first, the level of the carbon price, that is, members that have lower domestic carbon prices will likely face higher carbon tariff; and second, the export structure, that is, members that export a greater share of carbon-intensive products will likely face stronger shocks.” Therefore, according to China, “the trade impact of the CBAM can be measured in two steps.” It said the first step is the micro-economic and sectoral impact, and the second step is “the macro-economic and global impact.” In addition to the increasing costs to EU downstream sectors, China said that “preliminary studies suggest that the extra-territorial economic costs of the CBAM are mainly borne by developing countries for two reasons.” It said, “first, developing countries tend to be more carbon intensive per unit output due to their status of development, stages in energy transition and limited access to financial support and technology.” Second, the economies of developing countries are “more sensitive and vulnerable to higher carbon prices.” Furthermore, China said: “Should an exclusive carbon club be formed along with the CBAM, the output and welfare of developing countries could incur greater losses and the global trade could experience a notable decline, leading to greater trade distortions and global inequality.” Therefore, the major policy issues need to be further discussed at the WTO, China emphasized. “The main variables associated with the micro and sectoral impacts of the CBAM are sectors covered, emissions covered, inclusion of indirect emissions, carbon price determination and reduction mechanisms, free allowance benchmarks, etc,” it said. (5) Inclusiveness, focusing on how the measures could be implemented in a more open, non-discriminatory and non-arbitrary manner. According to China, the UN Framework Convention on Climate Change (UNFCCC) has explicitly stated that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.” In the case of the CBAM, China said several questions remain to be discussed, including: (1) how to ensure that members will not be unduly discriminated because of their different stages of development, different NDCs, and different pathways of emissions reduction; (2) how to take into account different types of carbon pricing, such as implicit carbon price generated by other climate, energy and environment related mitigation policy instruments; (3) how to make it more open and inclusive in terms of determining emission factors, accreditation and verification, reduction, etc; (4) whether capacity building and technical assistance could be provided to developing countries in need; and (5) how could members at different stages of development effectively participate in the subsequent legislative process on an equal footing. Against this backdrop, China urged members at the WTO “to raise questions, to seek information and to identify major policy issues, along the above dimensions in an objective and evidence-based manner.” Noting that the EU intends to launch a global information campaign (on the CBAM), China sought “in-depth multilateral exchanges with the EU in the subsequent EU law-making process.” Beijing has made several suggestions for dedicated multilateral discussions at the WTO. China said that its proposal “puts forward specific ideas for dedicated multilateral discussions on BCA (border carbon adjustment), taking the CBAM as an example.” China said that due to the likely significant impact of the above trade-related environmental measures “on international trade, supply chains, development and climate change,” they should be subjected to dedicated multilateral discussions on the following issues: * First, dedicated multilateral discussions be held with respect to specific environmental measures that could significantly impact trade; * Second, discussions should be carried out in a structured manner, covering five parts at the initial stage, i.e., the basic operating mechanism, various elements of policy design, environmental contribution, trade impact and the inclusiveness of the measures. * Third, when topics have been identified, members implementing the measures are encouraged to submit written reports that include information related to the five parts above; and members affected are encouraged to submit pertinent questions or studies along similar dimensions. A working program could be set up to facilitate such dedicated multilateral discussions. While China’s proposal has raised many pertinent issues underlying the implementation of the EU’s CBAM, Beijing must also clarify its overall policy of “walking on two legs” on environmental issues, said a trade official, who asked not to be quoted. On the one hand, the official said, it is good that China has brought the issue of the EU’s CBAM to the WTO, which must discuss all the underlying issues raised by China in an inclusive framework. On the other hand, China needs to clarify whether its participation in the plurilateral Environmental Goods Agreement is beneficial for developing countries, the official said. +
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