Trade and Environment Newsletter: Issue 19, April 2013

EU biofuels policy costly for environment and trade

EU biofuels policy is profoundly flawed, asserts Brussels-based research think tank ECIPE, protecting EU domestic producers of biofuel while discriminating against produce from developing countries such as palm oil-derived biofuel, contrary to WTO rules.

In a recent article, Fredrik Erixon, Director of ECIPE, criticises the EU Renewable Energy Directive (RED) (which sets targets for the share of energy to come from renewable sources in the EU and includes criteria products must meet to be part of this) for being deliberately designed to support European biofuel producers, rather than reduce carbon emissions from energy and fuels consumption.

According to Erixon, the Commission is now taking “big steps” towards introducing emissions savings from ‘indirect land use changes’ (ILUC) associated with particular energy crops in the countries in which they are harvested into European policy. This is problematic because, as Erixon argues, it is simply “impossible to make reliable global assessments on ILUC emissions for a particular crop”. Several attempts to model the ILUC emission effects have delivered significantly different results. Furthermore, steps to incorporating ILUC into EU policy, although not yet advanced enough to have real impacts on market access, would also be problematic under WTO rules.

He points out that the policy has introduced market distortions and restrictions, discriminating against produce from other countries in ways which are contrary to basic trade rules.  He notes “Argentina has already tabled a complaint in the WTO against market access restrictions in Spain. The way this case was resolved illustrates the awareness on the part of EU policymakers that there are elements of the policy that cannot be defended in a dispute-settlement procedure in Geneva. Other countries also have advanced plans to ask the WTO to rule against biofuels access restrictions in Europe.”

The policy has also been costly for the environment. “An estimate in 2009 suggested that for the same amount spent on biofuels subsidies to reduce greenhouse gas emission, the EU could buy carbon offsets twenty times the size of the emission reduction from increased used of biofuels.”

Changes to the RED being contemplated by the EU would reinforce, rather than alleviate these flaws. Plans to regulate to favour special sources of biofuels (like waste and algae) are misguided, based “on the imaginative assumption that Europe’s consumption of biofuels has had a discernible, if not strong, impact on food prices by encouraging farmers globally to shift from food production to fuels production and thus raising the cost of food for the poor.”  As Erixon points out, energy crops represent “such a marginal portion of agricultural production (biofuels production takes up less than 3% of global cropland) that the normal increase in agricultural productivity for one year would almost cover for the total production of energy crops.”

There are better, alternative policies to encourage emissions reductions, help alleviate poverty and help lower food prices. Trade restrictions against products which support viable and growing industries in developing countries and which run afoul of agreed international trade rules are not the way forward.

US moves to make tuna labelling WTO friendly

The US has proposed changes to its regulations on dolphin safe labelling for tuna products. The changes come as a result of a WTO ruling against the US “dolphin safe” label, brought by Mexico in May of last year.

A WTO disputes panel held that the label arbitrarily discriminated against Mexican tuna because, in requiring that certain fish harvesting methods be used, it failed to recognise other fishing methods that were similarly dolphin friendly which were used by Mexican fishermen.  The WTO required the US to modify, but not necessarily remove, the measure.

The US proposed amending the law governing the label to expand, rather than relax, the scope of the rules to include additional fishing methods and techniques. This would permit certifications by ship captains and potentially observers, that the tuna is dolphin safe.  ‘Dolphin safe’ tuna would need to be conveyed and stored separately from other tuna.

The proposal failed to please the Mexican industry. It reportedly claimed the change “doesn’t change the current state of affairs,” which keeps most Mexican tuna fisherman from selling their product in the United States, calling it simply “a whole regime of captain and crew training, equipment standards, restrictions on fishing” and other requirements and practices to minimize dolphin deaths.

Conservationists continue to press for stringent labelling standards, criticising the amendments as not going far enough to regulate fishing practices.

The moves by the US to comply with the WTO ruling illustrate the strength of the rules based trading system in safeguarding against regulatory measures which discriminate in trade. It is likely to be increasingly important in future as more countries impose environmental restrictions on trade. A recent report by CATO demonstrates how “the practice of using domestic environmental or consumer safety regulation as a way to disguise protectionist policy has become a serious and growing problem” which “harms the U.S. economy and violates trade obligations.” It refers to the US dolphin labelling regime, noting that the environmental outcomes could be achieved through better regulation, rather than discriminatory trade measures (see related story “Regulatory protectionism a threat to trade”).

A final rule is expected to be issued by the US in mid July. If Mexico is not satisfied with the changes adopted it may seek an arbitration ruling by a WTO disputes panel, and following that, the possibility of imposing trade sanctions on US products.

US industry seeks bilateral solution to EU biofuel trade barriers

The US soy industry is demanding that a solution to trade barriers arising from the EU Renewable Energy Directive (RED) be specifically addressed as part of a bilateral US/EU trade agreement (Transatlantic Trade and Investment Partnership, or TTIP).

The American Soy Bean Association (ASA) has publicly raised concerns about the discriminatory trade impacts of the EU biofuels policy under the RED. ASA noted in its submission to the U.S.‐EU High Level Working Group on Jobs and Growth in February, “the RED inaccurately represents the greenhouse gas emissions reduction attributable to the use of biodiesel derived from U.S. soybeans, which would disqualify biodiesel from the EU’s biofuel use mandate and tax benefits provided by EU Member States.” It also requires “that U.S. soybeans and other biodiesel feedstocks be certified to have been produced in compliance with an arbitrary set of sustainability standards. This requirement fails to take into account the compliance of U.S. crop production systems with national conservation laws that meet or exceed the RED standards.”

He contends this “severely disadvantages the competitiveness of U.S. soybean exports to the EU”, noting that U.S. soy exports have declined by an astonishing 70% in quantity and 44% in value since 1998,” largely attributable to such policies.

The industry has sought to resolve the problem through negotiation of a bilateral agreement with the EU “under which documented producer compliance with US conservation laws would be deemed as achieving the RED’s sustainability requirements.”

Speaking at a High Level EU-US Regulatory Cooperation Forum on the trade negotiations, Executive Committee Member of ASA, Richard Wilkins, demanded that the TTIP negotiations guarantee that such a bilateral agreement go forward. According to the submission, the industry is “presenting information relative to U.S. conservation laws and practices to industry and government officials in key EU Member States and requesting that imports from the U.S. continue to be accepted on an interim basis” until such an agreement is reached.

While US soy should enjoy greater access to the EU renewable energy market if this is achieved, it will not alter the discriminatory impact of the EU RED on biofuels from other countries, nor address the wider trade concerns arising from  EU biofuel policy (see related story above EU bioefuels policy costly for environment and trade).

Should the WTO address energy subsidies?

The WTO will for the first time hold a workshop to discuss the application of trade rules to energy policy and regulation. Trade disputes over domestic support programs of WTO members for renewable energy have proliferated– five have been initiated in the last three years.

Currently there are no WTO rules which specifically address energy, though it has disciplines which apply to all kinds of industrial subsidies that adversely impact on trade.

In an article in the Globe and Mail, Professor Robert Howse of New York University calls for the WTO to conclude a pact that deals with energy, setting out special sectoral disciplines for energy subsidies. He suggests these could be similar to current rules applicable to agricultural support in the WTO Agreement on Agriculture. “WTO members could be required to notify the organization of their energy subsidies; then they would be obliged to reduce them by a minimum percentage over specific period of time.” He refers to a recent IMF report estimating that subsidies removal would lead to significant reductions on total global carbon emissions.

Notably Howse advocates exempting renewable energy subsidies from reduction commitments. Green groups have similarly pushed for “green subsidies” to be free from WTO disciplines. They have urged the US to halt its challenge to Indian solar subsidies on grounds that it will limit the ability of countries to implement policies to reduce carbon emissions.

Provisions which permitted “green subsidies” under general WTO subsidy rules lapsed under the current agreement and have not since been reinstated. Countries have been slow to reduce subsidies under the WTO Agreement on Agriculture.

Carving out broad exemptions for green subsidies from rules which prevent trade distortions can be misguided – even government support for environmental reasons should be disciplined to ensure it does not adversely impact on global competition. As trade commentators point out, protectionism is just as bad for renewable energy as it is for steel or clothing or sugar.  For example, “making it more difficult to use imported solar cells just makes it more difficult to build solar power plants.”  WTO members already have a wide range of policy tools available to support clean energy which do not distort trade.

But there is a long way to go before any rules are agreed. The aim of the WTO Workshop is to “shed light on the application of existing international rules embodied in WTO and the ECT to trade and investment in energy” and to raise awareness of “current challenges the energy sector faces and the implications of such challenges for the regulatory framework.”

Regulatory protectionism a threat to trade

A new report by Cato trade experts reveals that growing environmental regulation in the US is violating trade rules and harming consumers.

The report, by Sallie James and K. William Watson, reveals how “the practice of using domestic environmental or consumer safety regulation as a way to disguise protectionist policy has become a serious and growing problem in the United States”. It costs the US economy billions of dollars. It undermines WTO trade rules that trade should not be unfairly restricted to protect domestic industries from competition.

The paper refers to a number of recent examples of high profile environmental regulation  - including “labelling rules for dolphin-safe tuna that are stricter for Mexican tuna” (see story above US moves to make dolphin –safe labelling rules WTO friendly), and “record-keeping requirements meant to prevent illegal logging that are im­possible for lumber importers to follow” (The Lacey Act Amendment) – to demonstrate how “social welfare activists and special commercial interests have joined together to promote regulatory regimes that unfairly and unnecessarily restrict imports.”

The WTO provides adequate safeguards against regulatory protectionism and its rules must be respected. While many of its disciplines “are embedded in the rules U.S. administrative agencies follow when setting new regulations,” James and Watson note “the U.S. government must take its WTO obligations more seriously.” They point out that “the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure.”

They suggest that “Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism.”

This is welcome. A close look at protectionist environmental regulation is long overdue. For several years other countries, such as the EU, have sought to justify trade restrictions on environmental grounds. The EU Renewable Energy Directive for example, (see related story “US industry seeks bilateral solution to EU biofuel trade barriers”) has raised the concern of WTO members for its trade impacts. The trend is for more of this regulation in future, not less.

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