Compliance Of Carbon Border Adjustment Of European Green Deal With The Wto Law

“’… We are faced with a challenge that is truly existential and what we need to do would be truly transformational… If we do this well in Europe, it will have an effect on the rest of the world …” (Frans Timmermans, Executive Vice-President of the EU Commission)

With the European Green Deal (EGD) strategy, the European Union (EU) prepares its member economies for the biggest economic system transformation after the 1929 Great Depression and 1944 Bretton Woods System. The main objective of the EGD has been explained in terms of the EU’s 2050 climate targets and sustainability principles. However, there are signs that the EGD strategy will evolve into an overall transformation strategy towards strengthening the competitiveness of the EU in response to the tectonic power shifts that occurred in the world economy as a result of the 2009 global financial crisis. EGD has already led to a serious dynamism in its international trade policies, and as of the autumn of 2020, the issue has started to be discussed more intensively in a new atmosphere in the WTO’s Trade and Environment Committee. In addition to these developments, the EGD developments are expected to bring some innovations to the content and frameworks of the new regional trade agreements to be signed by the EU and other countries.

It is seen that the EU does not only target an environment, or an international trade strategy focused on carbon pricing and border taxation but is also preparing for a total transformation in the commercial and economic system. In the EGD, it is seen that the focus is on the effective pricing of carbon in order to reduce leakages. However, considering the magnitude of the planned public expenditures, the size and intricateness of the scope of the changes envisaged in the commercial and economic system, it is seen that the threats along with the potential opportunities created by the mentioned strategy of the EU, the largest export market of Turkey, are too great to ignore. In addition to the huge subsidy and support programs that the EU will provide to its sectors with the EGD, it is understood that import, new taxes, and non-tariff barriers and export tax refund practices will be implemented very intensely and systematically.

In addition to the competitive disadvantages of Keynesian expenditures expressed in trillions of Euros, the EU’s potential CBA adjustment brings along some risks and uncertainties for the export of our sectors with high carbon footprints to the EU and global markets. Turkey should seriously follow both the issue in an offensive perspective in terms of export market entry policies and the competition externalities in a defensive perspective in terms of imports.

So, to what extent will the EGD and specifically, the carbon border tax adjustment (CBA) be implemented autonomously by the EU in line with the WTO law and principles?

It is stated that the CBA is designed both to prevent the problem of carbon leakage and to require the adoption of the EU’s global greenhouse gas reduction target by trade stakeholders. However, there are serious legal constraints arising from WTO regulations in terms of the realization of the CBA option.

European Commission President Ursula von der Leyen suggested that “the implementation of the Carbon Border Tax should be in full compliance with WTO rules, should start with a number of selected sectors and be gradually expanded” (von der Leyen, 2019). However, in the WTO, where every member has veto power, many countries question how the CBA will be harmonized with the WTO rules by the EU and express their objections to the Commission officials.

In the preamble of the Marrakech Agreement that established the WTO, the provisions of the main objectives of the organization “in accordance with the sustainable development goals, the optimal use of the world resources, and the realization by protecting the environment” are included. Because the decisions in the organization require unanimity and there is no jurisprudence in the WTO law that allows tax implementations to the trade due to climate changes, the CBA does not have the opportunity to be a simple and autonomous adjustment due to the possibility of judicial remedy against the issue.

Since the issue has the potential of leading to the removal of the disparities in competitiveness, which will be caused by an environment-based action in production processes, through international trade, it ceases to remain merely as a sustainability problem, and fits on the axis of environment-competition and becomes controversial on the WTO platform.

In fact, Articles I, II, and III of the GATT 1994 regulating the Trade in Goods of the World Trade Organization, allow the implementation of customs tax as a trade policy tool and trade policy measures in this context. Besides, it requires that this be carried out in accordance with MFN and National Treatment Rules. In addition, the general exception rules in most WTO agreements, including Articles XX and XXI of GATT 1994, are rules that do not allow deviation from the Non-Discrimination Principle. However, in practice, these rules are abused and subject to lawsuits, as is the case with Trump’s Taxes. When the EU attempts to implement the CBA principles, it does not seem to have many grounds from a WTO law perspective.

In this context, the point that should be underlined in terms of WTO law is that if border taxation is applied in a way that discriminates between domestic and imported products, the application may constitute a violation of the Second Sentence of Article Three (III:2 of the GATT), regulating the National Treatment Principle of GATT 94. It is also strictly and clearly regulated that no member country, including the EU, will apply this fictitious tax differently between countries within the framework of the “Most Favoured Nation (MFN) Treatment” regulated in Article I of GATT 94. In this context, while discussing whether the implementation of CBA can be performed within the scope of the general exceptions (XX) and security exceptions (XXI) of GATT 1994, it is seen that the current WTO DSB precedents regarding these articles does not deem the subject that permissible.

On the other hand, whether the applicable tax will constitute a subsidy through all the other GATT 94 Legislation and Principles, especially within the scope of the Agreement on Subsidies and Countervailing Measures, or even the issue should be evaluated together with the GATS is a topic that needs to be underlined as well. Because the subsidies to be transferred through the financial sector are loosely regulated under the WTO regime, the Turkish industry and agriculture sector may face serious competition losses due to huge support programs.

It is expected that the EU will not refer to the regulation that grants exceptions to the security-based trade policies laid down in Article XXI of GATT 94. However, there are studies in the literature that advise the EU to refer to this article as well. Therefore, examining whether the environmental issue can be included under this article regulating nationality and security requires a separate comprehensive legal study on its own.

In summary, even though the EU Commission resolves its declaration of intent on the EGD and CBA issues at the Parliament level, it has not made any technical explanation as to how it will harmonize the implementation with WTO Law in practice. In any case, it is also possible that the issue will be resolved at the WTO platform through international negotiations, as there is a dynamism observed towards taking an action on global climate change. Therefore, Turkey should follow its international rights and interests in detail in line with the international law and particularly WTO law, principles, and negotiations, as well as the technical dimension of the issue, and the Turkish public sector, private sector, academic units, and NGOs should collaborate on the axis of a national strategy.

World Trade Organization Specialist Şahin Yaman