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Greenhouse Gas Emission Reduction Policy And The “Carbon Footprint” Issue In Determination Of The Legal Regime Applicable To Energy Carriers And Carbon Intensive Industry Products
 
PIIS231243500022328-8-1
DOI10.18572/2410-4396-2020-1-78-83
Publication type Article
Status Published
Authors
Ivan V. Gudkov 
Occupation: Assistant Professor of the Department of Legal Regulation
Affiliation: International Institute of Energy Policy and Diplomacy of the MGIMO University
Address: Russian Federation, Moscow
Journal nameEnergy law forum
EditionIssue 1
Pages78-83
Abstract

The Paris Agreement gave momentum to carbon regulation measures aimed at reduction of man-made greenhouse gas emissions, or decarbonization. In many countries, including the EU, decarbonization is becoming the centerpiece of the current political agenda. Carbon regulation measures applied by states include direct ones aimed at governing greenhouse gas emissions and indirect ones governing other relations, but having emission reduction as their primary or auxiliary goals. The latter include restrictions and prohibition of the use of “dirty” energy carriers; increasing energy efficiency and saving; driving production of renewable energy sources; border carbon adjustments. In this context, the world is experiencing an “energy transition” resulting in the expansion of production and use of renewable energy sources, as well as escalation of competition between “fossil” and “green” energy carriers. The question whether and how environmental and climatic characteristics of energy and other products, technologies, and investments should be considered when determining the conditions of competition between them is becoming ever more urgent, while the state practice shows a tendency towards differentiation of the legal regime depending on the products’ “carbon footprint”. This article answers this question by analyzing the legal regime applicable to energy carriers and carbon intensive industry products. The main conclusion is that there is a conflict between unilateral carbon regulation measures differentiating between the regimes applied to the same products depending on their “carbon footprint” and general WTO regulations on freedom of international trade.

Keywordsenergy law; energy resources legal regime; the Paris Agreement, WTO, GATT
Received06.02.2020
Publication date29.03.2020
Number of characters16151
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1 The universal 2015 Paris Agreement “enforcing” the 1992 Framework Convention on Climate Change gave momentum to various carbon regulation measures aimed at reduction of man-made greenhouse gas emissions, decarbonization.
2 In many countries, decarbonization is becoming the centerpiece of the current political agenda. Thus, in December 2019, the European Commission published a program of the so-called “European Green Deal” [1] aimed at achieving net zero greenhouse gas emissions for EU countries by 2050, while maintaining the European economy competitive.
3 Carbon regulation measures applied by states can be divided into direct ones aimed at governing greenhouse gas emissions and indirect ones governing other relations, but having emission reduction as their primary or auxiliary goals.
4 The key direct carbon regulation measures include introduction of mandatory emission charges via an emissions trading system or carbon taxes; implementation of emission standards, i.e. determining the maximum permissible levels; development of artificial (special facilities) and natural (forests) greenhouse gas sinks.
5 Indirect carbon regulation measures include restriction and prohibition of the use of “dirty” energy carriers, such as coal; promoting energy efficiency and saving; driving production of renewable energy sources (RES), including promotion of investments in “green” technologies and equipment. This category also includes such measures announced under the European Green Deal as energy carrier taxation differentiation depending on their climatic characteristics, prohibition of funding fossil fuels and border carbon adjustments, fees imposed by the European Union on any products imported from countries that do not establish mandatory emission charges unlike the EU.
6 Apart from climate considerations, energy security and industrial policy concerns are driving factors for implementation of indirect carbon regulation measures. Thus, production of RES, as opposed to fossil fuels, has no strict territorial limits, meaning that it helps reduce dependency on energy import and develop national energy technologies, which, from the point of viewof importing states, has a positive social and economic effect. Border carbon adjustments, in their turn, prevent “carbon drains” (carbon intensive productions “escaping” to countries with a less strict climate policy), thereby maintaining the domestic industry competitive.
7 Hence, the question whether and how environmental and climatic characteristics of energy and other products, technologies, and investments should be considered when determining the conditions of competition between them is becoming ever more urgent. The state practice shows a distinct tendency towards differentiation of the legal regime applied to products, technologies, and investments depending on their “carbon footprint”, i.e., the total volume of greenhouse gas emissions occurring during their production and usage.
8 Disputes on the “green energy industry” dominate the list of the WTO Dispute Settlement Body: over the past decade, nine such disputes had been referred to the body, four of which have been settled. [2]
9 All these disputes concern measures of supporting domestic RES production equipment, in particular, this refers to the so-called domestic content requirements according to which the discount rate only applies to the power generated by domestic equipment assembled using domestic components. Introduction of domestic content requirements is caused by sovereign industrial policy considerations: states want to promote production of RES equipment locally in order to create workplaces, localize the corresponding technologies, and negate the dependency on import. However, as these requirements create better conditions for domestic equipment than those for imported equivalents, thereby distorting international competition conditions, they violate the non-discrimination principle, therefore, they are deemed illegal under the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMs). [3] Thus, the WTO’s law enforcement practice clearly delineates states’ industrial policy aimed at development of domestic RES production equipment sectors.
10 Apart from the question about legitimacy of the domestic content requirements which is answered in the negative, the Canada — Renewable Energy Generation Equipment dispute raises the question of whether the discount rate for renewable energy can be considered a subsidy banned under the Agreement on Subsidies and Countervailing Measures. When considering this question, the Appellate Body ruled that, although “green” and “conventional” types of electricity are interchangeable, they belong to different “relevant markets”. The Appellate Body justified its decision to consider “green” energy a separate relevant market by such factors as a structure of generating capacity costs that requires state support as opposed to that of “conventional” electric power, and different production technologies because RES generation is intermittent in nature [4]. At the same time, the Appellate Body highlighted the crucial role of the state in determining the energy balance and sensitivity of the issue that “reflects various political imperatives” such as “reduced dependency on fossil fuels for ensuring longterm stability of electric power markets, as well as attitude toward negative and positive external factors related to generation of conventional and renewable energy”. The Appellate Body also noted that the power balance can be created considering the “buyers’ willingness to purchase electricity produced using a combination of various generation technologies, even if it is more expensive than that generated from only conventional sources”. [5] In this dispute, the narrowest solarand wind-generated electricity market was determined to be the relevant market. Therefore, the discount rate, while deemed “financial assistance”, was not recognized as a subsidy since it was used for all the electricity generated within this narrow market, meaning that no individual investor received any special “benefit”. In literature, this judgment is considered a “shield” protecting the RES generation public support policy and, at the same time, criticized for being politically oriented, vague, and having fundamental errors in the legal and economic analysis. [6]

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1. Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions “The European Green Deal” // COM(2019) 640 final 11.12.2019.
2. DS412, DS426 Canada –Renewable Energy/Canada – Feed-in Tariff Program; DS456 India – Solar Cells; DS510 United States – Certain Measures related to Renewable Energy. No rulings have been adopted on the following disputes: DS419 China – Measures concerning wind power equipment; DS443 EU and a Member State – Certain Measures Concerning the Importation of Biodiesels; DS452 EU and certain Member States – Certain Measures affecting the Renewable Energy Generation Sector; DS459 EU and certain Member States – Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry; DS563 United States – Certain Measures related to Renewable Energy. For a review of some of these disputes, see M. Wu, J. Salzman, The Next Generation of Trade and Environment Conflicts: The Rise of Green Industrial Policy // 108 Nw. U. L. Rev. 401. 2014.
3. DS412, DS426 Canada –Renewable Energy/Canada – Feed-in Tariff Program; DS456 India – Solar Cells; DS510 United States – Certain Measures related to Renewable Energy.
4. Appellate Body Report, para 5.175. 5.
5. Ibid. Paras 5.177; 5.189.
6. L. Rubini What Does the Recent WTO Litigation on Renewable Energy Subsidies Tell us about Methodology in Legal Analysis? The Good, the Bad, and the Ugly // EUI Working Paper RSCAS 2014/05.
7. WTO, European Union and its Member States – Certain Measures Relating to the Energy Sector (EU Energy Package), Report of the Panel, WT/DS476/R, 10 August 2018, para. 7.1294.
8. K Talus, R.D. Ripple, M. A Wustenberg False Dichotomy Between LNG and Natural Gas? A Comment on Recent Practices at the World Trade Organization // Oil, Gas & Energy Law Intelligence. October, 2018. The European Commission admitted the existence of competition between pipeline and liquefied gas when approving a merger of several energy companies: COMP/M.6477 BP/Chevron/ENI/Sonangol/Total/JV of 16 May 2012, para. 18. In addition, a conclusion on competition between liquefied and pipeline gas was made in a study commissioned by the European Commission: “Quo vadis EU gas market regulatory framework – Study on a Gas Market Design for Europe”, February 2018, P. 42.
9. See C. Saldarriaga, Sustainable production and trade discrimination: an analysis of the WTO jurisprudence // Anuario Colombiano de Derecho Internacional (acdi), 2018, 11; S. Charnovitz The Law of Environmental PPMs in the WTO: Debunking the Myth of Illegality // (2002) 27 Yale Journal of International Law.
10. WT/DS2/AB/R United States Standards for Reformulated and Conventional Gasoline.
11. P. Low, G. Marceau, J. Reinaud The Interface between the Trade and Climate Change Regimes: Scoping the Issues // World Trade Organization Economic Research and Statistics Division Staff Working Paper ERSD-2011-1. 1/12/2011. Pp. 16–17.
12. P. Low, G. Marceau, J. Reinaud The Interface between the Trade and Climate Change Regimes: Scoping the Issues // World Trade Organization Economic Research and Statistics Division Staff Working Paper ERSD-2011-1. 1/12/2011. R. 18.
13. S.A Abbasi, Naseema Abbasi The likely adverse environmental impacts of renewable energy sources // Applied Energy. Volume 65, Issues 1–4, April 2000, Pages 121-14; Environmental Impacts of Renewable Energy Technologies Ewa Klugmann-Radziemska 2014 5th International Conference on Environmental Science and Technology IPCBEE vol.69 (2014) © (2014) IACSIT Press, Singapore DOI: 10.7763/IPCBEE. 2014. V69. 21. Thomas Gibon, Edgar G Hertwich, Anders Arvesen, Bhawna Singh and Francesca Verones Health benefits, ecological threats of low-carbon electricity // Environmental Research Letter 12 (2017) 034023.
14. J. Stern Narratives for Natural Gas in Decarbonising European Energy Markets // Oxford Institute for Energy Studies. February, 2019. Pp.18–19. https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/02/Narratives-for-Natu-  ral-Gas-in-a-Decarbonisinf-European-Energy-Market-NG141.pdf
15. S. Charnovitz The Law of Environmental PPMs in the WTO: Debunking the Myth of Illegality // (2002) 27 Yale Journal of International Law. Pp. 108–110.

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