Trade and Environment Newsletter: Issue 15, December 2012

Spain’s biofuel laws to be tested in the WTO

Argentina has mounted a challenge to a Ministerial Order of Spain governing the importation of biodiesels in the WTO.

The Order regulates the allocation of biofuel production volumes for calculating compliance with the objectives set by the EU Renewable Energy Directive (EU – RED). EU-RED requires EU member countries to implement a mandatory target for renewable energy sources. Argentina contends the Order restricts imports of biodiesel produced outside the EU by requiring that the supply of biofuels used in Spain be totally produced in plants located within the EU, contrary to WTO rules. 

Argentina initiated consultations with Spain and the EU over the matter in August. This followed serious concerns raised in June about the “prohibitive and distorting trade impacts of measure.” The Spanish government reportedly amended the order in October, but failed to remove its trade restrictive effects. A WTO panel will now judge the dispute.

The measure affects Argentina in particular because it is Spain’s principal supplier of biodiesel – Spain takes approximately 50% of Argentina’s biofuel exports, worth about US$982.3 million in 2011.

Relations with the EU have been strained since the Argentine government seized a majority stake in the energy company YPF from Spanish oil major Repso, and following WTO action by the EU (among others) against Argentina’s import licensing regime.

The dispute also comes amid wider concerns from WTO members about the trade impacts of the EU RED. Argentina contends that RED requirements – compliance and certification of sustainability criteria and fulfilment of emissions reduction levels – are “unnecessarily excessive, cumbersome, arbitrary and unjustified, without any scientific evidence.” The US has attributed the EU-RED with “creating considerable uncertainty in global biofuel and biofuel feedstock markets and trade,” its implementation “negatively affecting” imports of US soybeans into the EU. Indonesia has also expressed concern about the EU RED over its assessment of palm oil based biofuels.

WTO members have called for RED requirements to be based on science and for sustainability goals to be met in a manner that does not present unnecessary barriers to trade and reduce the potential for growth.

EU-Peru FTA contemplates sustainability controls on timber trade 

A free trade agreement between the EU, Peru and Colombia contemplates the use of certification systems and mechanisms for the control of timber production to encourage “sustainable trade” in forest products. It will enter into force next year, following acceptance by the Peruvian Congress in mid December.

The agreement includes a separate chapter on ‘Sustainable Trade’, which deals specifically with trade in forest products. Although it falls short of prescribing enforceable commitments, it affirms intent to regulate trade on the basis of legality and sustainability. Implementation of Multilateral Environmental Agreements (MEA) such as CITES; legality certification through the marketing chain; voluntary certification mechanisms which are recognised internationally, and; control mechanisms for timber product and forest management, are listed as practices by which the parties are to improve forest governance and promote timber trade in ‘legal and sustainable’ forest products.

The list is consistent with the long held aim of the EU, supported by environmental NGOs, to restrict trade in forest products based on environmental and legality criteria. The EU has negotiated bilateral “voluntary partnership agreements” with timber exporting countries which limit market access to legally certified trade. The EU’s new Timber Regulation (EUTR), due to come into effect from March next year, requires importers to fulfill technical and legal arrangements required by the EU on the importation of timber products, like legality verification. WTO rules do not generally permit controls on trade related to the compliance of a product with the laws of another country.

Peru’s FTA with the US, in effect since 2009, includes enforceable provisions for the implementation of CITES as well as prescriptive forest governance obligations to ensure legality.

The treatment of timber trade in FTAs poses interesting questions for negotiation of the Trans Pacific Partnership Agreement and the US/EU FTA. Will there be enforceable provisions for legality and sustainability? How will this impact on trade? What does it mean for WTO rules which protect open trade in forest products? This is important to many developing countries, not only Peru, in which timber trade makes a positive contribution to growth and welfare.

WTO rules against Ontario’s Green Energy Act

The WTO has ruled that Ontario’s local content rules for renewable energy under its Green Energy Act are barriers to trade. The EU and Japan challenged  the rules on the grounds that they favoured the domestic industry at the expense of foreign suppliers

The WTO disputes panel agreed. The decision is not unexpected – local-content requirements are not permissible under WTO rules because they cause discrimination in trade.

Japan also argued the rules amounted to an ‘illegal subsidy’. In a divided ruling, the WTO disputes panel found that no subsidy had been established.

Ontario’s Green Energy Act provides solar, wind and other renewable energy companies with long-term guaranteed revenue contracts. Under the “feed in tariff” program, firms selling premium priced renewable energy to Ontario must buy a proportion of their equipment and services in the province – projects coming on-stream in 2012 must be at least 50 percent ‘made in Ontario’.

The WTO finding on local content, although not controversial, could have ramifications for other jurisdictions with similar rules – such as Brazil, South Africa and India – in energy and other sectors – such as telecoms, mining, oil and gas. Some countries have also embraced local-content “bonuses”, which see developers receive a higher payout if they use locally-made equipment.

The treatment of subsidies is more interesting. Many countries now have in place programs to support their domestic energy industry in order to comply with national policies for cleaner energy.

While such policies may seek to foster new and cleaner industries, create local jobs and boost manufacturing, they can be misguided. Those which restrict trade and divert resources to less productive activities can hinder, rather than encourage growth and innovation. Canada will appeal the WTO ruling.

EU backdown on airline emissions a victory for sovereignty

In November the European Commission announced it would delay imposing requirements on foreign airlines under its emissions trading scheme (ETS) for a year, pending the outcome of a “global solution” to aviation and climate change. This will be pursued in the International Civil Aviation Organisation (ICAO), the specialized agency of the United Nations created to set global standards and regulations for the aviation sector. The law will automatically be re-imposed if no progress is made at the ICAO.

The decision follows intense pressure from the US, as well as China, India and Russia, opposing the application of the scheme to the aviation industry.  It is a victory for national sovereignty and the rule in international law that internal regulations not be applied to foreign countries. It is a blow to attempts by the EU and environmental NGOs to impose climate policy in other countries.

As reported in the September Trade and Environment Newsletter, the aviation sector was phased into the EU’s Emission Trading Scheme (ETS) from the beginning of 2012. Under the ETS, ‘polluters’ in relevant industries are given allowances to emit greenhouse gases. Companies that exceed their allowances must buy extra permits; those that cut emissions can sell their surplus allowances. Over time, the total number of allowances is scaled back.

The US aviation industry pushed back against the ETS, charging the EU with imposing a foreign tax on U.S. airlines, aircraft operators and citizens. China, a large buyer of Airbus planes, reportedly threatened to withhold its orders. There are reports Britain, France and Germany, concerned about potential jobs losses and threats of retaliation against their domestic industries, later pushed the European Commission to abandon the inclusion of aviation in the ETS altogether.

While a global, rather than unilateral solution to controlling airline’s emissions is preferable, it will be politically very difficult to achieve. The ICAO requires the approval of all 190 members to seal any deal. The US airline industry continues to press the Administration to open a formal dispute with the EU over the matter in the ICAO.

Despite the EU decision, the U.S. Congress still approved the EU Emissions Trading Scheme Prohibition Act, which can be used to shelter U.S. airlines from having to pay for carbon emissions under the ETS. It was reportedly signed by US President Obama on November 27.

French say no to “nutella tax”

A tax to increase the cost of palm oil by 300 percent has failed to pass the lower house of the French parliament, after earlier being approved by the Senate. The French government had proposed increasing the tax on certain oils in foods, principally palm oil and coconut oil, allegedly on health grounds. The tax impacted particularly on the food spread ‘nutella,’ which uses palm oil as a key ingredient.

The proposed tax caused an international furore. It was widely criticized by palm oil producing countries, such as Indonesia, Malaysia and Ivory Coast, for threatening the livelihoods of farmers. The adverse health claims were disputed by leading French health experts at Le Fonds Français pour l’Alimentation et la Santé (FFAS) who confirmed in a report that palm oil is a relatively healthy product compared with substitute oils in comparative products. The food manufacturer of nutella, Ferrero, made it clear that the tax would increase the cost of the product – very popular in France – which outraged consumers.

The proposal was also likely to have been problematic under WTO rules. While the stated health purpose of the tax was clear, it did not appear to be based on sufficient scientific evidence. It could have restricted trade by discriminating between palm oil and other products – also containing high levels of saturated fats, or trans-fats or other elements – which represented the same alleged health risks.

WTO rules permit countries to take measures for human health and safety, provided they are based on sufficient scientific evidence. They prevent those which amount to disguised restrictions on trade. Environmental NGOs have an ongoing but unfounded campaign to restrict production and trade in palm oil, despite its contribution to alleviating poverty in developing countries.

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