Is the EU’s green policy protecting the planet or European industry?

Is the EU’s green policy protecting the planet or European industry?

Critics argue that co-opting environmental measures into trade policy has more to do with protectionism

For many European governments, saving the world’s forests and halting global warming has been elevated to the moral imperative of a “climate emergency”. Yet for a growing number of developing countries, translating these European ideals into trade policy evokes darker traditions of protectionism and oppression.

High-profile leaders including Jair Bolsonaro, Brazil’s president, his Indonesian counterpart Joko Widodo and Malaysia’s prime minister Mahathir Mohamad, have attacked EU plans to project its environmental values abroad through trade.

The outspoken Mr Bolsonaro and Mr Mahathir — whose countries stand to miss out on access to the EU market because of concerns over their environmental stewardship — have gone so far as to describe it as “colonialism”.

Facing pressure from a big electoral swing to green parties in Europe and climate issues leaping up the political agenda, the new president of the European Commission, Ursula von der Leyen, has pledged that it will be the most environmentally aware administration in history. In a speech at the COP25 climate change conference in Madrid earlier this month, she said: “Our goal is to be the first climate-neutral continent by 2050. If we want to achieve that goal, we have to act now.”

On Wednesday, the commission presents its “Green New Deal” aiming to integrate economic, regulatory, competition and trade policy to help the environment.

But the EU’s own annual climate action progress report says reductions in emissions will have to speed up significantly for the EU to become carbon-neutral by 2050.

Ms von der Leyen’s team have limited tools to reduce carbon emissions and prevent environmental degradation without causing problems in international trade. European industry is resisting being undercut by cheaper, dirtier imports of energy-intensive products like steel, while foreign governments protest that the new policies are simply old protectionism writ large.

In its own region, the commission has more flexibility to cut emissions. Some measures are relatively simple, such as standardising low-energy “ecodesigns” for electrical goods like washing machines, vacuum cleaners and kettles. The rules apply to all products sold in the internal market and so affect domestic and foreign companies alike.

But once the commission starts getting into heavier-duty policies such as extending the EU’s emissions trading scheme to shipping and aviation, it starts to become an international issue. The price of emissions under the ETS, which issues companies with tradable permits to discharge carbon dioxide, will almost certainly have to rise to meet targets under the Paris agreement on climate change. But as it does, so will complaints from business that they are being undercut by imports from countries with low or no taxes on emissions.

Manfred Weber, leader of the centre-right European People’s party — the largest grouping in the European Parliament — says the EU needs “a proper check of the impact” of the commission’s emissions reduction plans and their effect on international competitiveness. “I want to see what it means for SMEs, the steel sector and the chemical industry,” he adds.

Ms von der Leyen, the former German defence minister, has responded to the initial backlash by adopting a proposal — long championed by France — to impose a carbon border tax. An import tariff is charged equivalent to the difference between the EU carbon price and that in the exporting country.

But though widely accepted in theory, a comprehensive CBT covering all imports would be fiendishly difficult to design and enforce. To create the right incentives — and try to comply with World Trade Organization rules, which are unclear on the subject — the EU will have to make an assessment not just of the total carbon footprint of imported goods but also at which stage of the international supply chain the emissions were created. For an imported car, for example, the materials and components — steel panels, tyres, electronics — may come to the country of final assembly from many different economies, all of which have varying regimes of carbon-emission pricing. Putting a fair carbon price on the import would be immensely complex.

In reality the commission will probably start off with a small number of energy-intensive products such as steel, glass and cement to see how the tax works before broadening its coverage.

There are political as well as technical objections. European industry is often divided on the issue. Energy-intensive sectors such as steel have always been enthusiasts for a carbon border tax. The car industry and others, which use imported inputs and are concerned about retaliation against their exports from aggrieved trading partners, are much more cautious.

The pushback has already begun. “The BDI is very concerned about CO2 import tariffs, especially with regard to their WTO compatibility,” says a spokesperson for the German business association. “Tariffs could quickly become a gateway to protectionism.”

Europe’s steel industry — which faces competition from big producers such as China and South Korea — admits it will have to work hard to convince other sectors that such a tax is a good idea. “We need to discuss this more intensively with users including the automotive industry,” says Axel Eggert, director-general of the European Steel Association. “We need policy actions to ensure that carbon border measures benefit everyone.”

Given the technical and political complexities, the odds are against a carbon border tax being in place by the end of Ms von der Leyen’s presidency in 2024. There are more pressing challenges for combining trade and environmental policy. Next year or early 2021, a trade deal signed this summer with the South American Mercosur trade bloc of Brazil, Argentina, Uruguay and Paraguay will come up for ratification.

Mr Bolsonaro, having already angered European governments by his seemingly casual attitude to Amazon forest fires over the summer, has recently doubled down by repealing a ban on growing sugarcane in the vast river basin. Emmanuel Macron, French president and Leo Varadkar, the Irish taoiseach, and the Austrian parliament have all threatened to block ratification of the EU-Mercosur deal, saying Brazil is violating its international environmental commitments. The EU now requires countries to sign up to and meet its commitments under the Paris agreement to get a trade deal.

The trade portfolio is in the pugnacious hands of the Irish politician Phil Hogan, who as EU agriculture commissioner was instrumental in the Mercosur talks. He faces tough negotiations to persuade the Mercosur countries to take environmental concerns seriously and coax EU member states to believe them before a deal can be signed.

Green campaigners have long been sceptical of globalisation, protesting against not just the fossil fuels used in transport but also what they say is the transfer to poorer nations, via trade, of the environmental damage caused by the developed world.

Environmentalism has a particularly strong influence in the European Parliament. The recent elections delivered not just an increased Green grouping — its 74 MEPs are almost 10 per cent of the assembly and increasingly difficult to ignore — but also more environmentalist rhetoric from other factions.

The Greens in parliament have rarely supported an EU trade deal. They set very high bars for backing agreements, including far-reaching powers to block imports they say would have negative social and environmental consequences, and declined to support both Mr Hogan’s and Ms von der Leyen’s recent confirmations.

Philippe Lamberts, a Belgian MEP and co-president of the European parliamentary Green grouping, says exporting European standards is more important than encouraging cross-border trade. “If we are serious about sustainable development, trade deals need to be less focused on trade flows and more on converging legislation internationally,” he adds.

Critics of that approach say a confederacy of radical environmentalists and European farmers, last seen during the failed Doha round of trade talks in 2015, is coalescing once more. Hosuk Lee-Makiyama, fellow at the European Centre for International Political Economy think-tank, says their professed philosophies may be different but their interest is the same — restricting cheap agricultural imports.

“The unholy alliance of protectionists is back in business,” he says.

He gives the example of the European Parliament effectively banning the use of palm oil in biofuels in 2018 by excluding it from renewable energy targets. The measure followed intense campaigning in Europe by environmentalists pointing at the role palm oil cultivation plays in encouraging deforestation. But singling out palm oil for a ban, Mr Lee-Makiyama says, reflected the lobbying weight of Europe-based rival oilseed growers rather than a rigorous scientific assessment of environmental impact. The International Union for the Conservation of Nature says banning palm oil will probably displace rather than reduce the loss of biodiversity.

Indonesia and Malaysia, two of the world’s biggest palm oil producers, are threatening to bring a WTO case against the EU. Palm oil production makes up 10 per cent of Indonesian exports and 4 per cent of Malaysia’s. Mr Mahathir described the move as “a form of modern colonialism that has no place in today’s world”. Aliasak Bin Haji Ambia, president of Malaysia’s association of palm oil smallholder farmers, refers to the measure as “crop apartheid”.

The move has severely endangered EU trade talks with the two countries. Mari Pangestu, a former Indonesian trade minister, says the EU is increasingly careless of the development impacts of its environmental policies. “We are finding out that the environment side of the EU isn’t co-ordinating or even consulting with the trade side,” she says. “The EU’s trade policy has become less coherent over time.”

Lourdes Catrain, a partner in the trade practice at the law firm Hogan Lovells in Brussels, says: “It does not seem that the interests of EU trade policy were given anything like enough weight in the consideration of the renewable energy directive to address the adverse effects on trading relations.”

Echoing the sentiments in Malaysia, Mr Bolsonaro also thinks there is a less honourable motive in Europe’s concerns about the Amazon. He suspects Mr Macron and Mr Varadkar are mainly concerned about their cattle farmers, who will face tougher competition after the Mercosur deal admits 99,000 tonnes a year of South American beef into the EU at a low tariff.

How the parliament and commission handle environmental sensitivities will be critically important over the next five years. Bernd Lange, the German Social Democrat who chairs the parliament’s international trade committee, is aware of the need to stress the EU’s internationalist credentials rather than appearing unilateral and heavy-handed. “Protecting the Paris climate agreement and [labour] standards are not European values but the universal values of mankind,” he told a recent Brussels conference held by the think-tank Bruegel.

His centre-left grouping is likely to be the swing constituency on agreements that come up for a vote. Many of its MEPs have pressed hard for less radical versions of the safeguards on social and environmental standards that the Greens want.

The commission, which negotiates trade deals, has over the past five years responded by beefing up “trade and sustainable development” chapters to its agreements requiring certain levels of environmental stewardship and labour standards from partners.

In the eyes of campaigners, however, these chapters have less bite than other parts of the same trade agreements. A country reneging on commitments on market access for EU exports can be taken to a dispute settlement panel which can authorise retaliation in the form of tariffs or other tools. The sanction for breaching a sustainable development chapter is merely to open talks.

The commission’s trade directorate believes that cutting off trade with a country because of lax environmental and social standards is counterproductive. Rather than improving standards, it is likely to encourage them to divert trade to economies with less demanding criteria. Brussels has requested arbitration over South Korean labour standards, for example.

The potential for European trade policy in the next five years to be wrecked by an upsurge in environmental campaigning remains acute. The EU’s dealmaking capacity has almost been derailed by a surge in protests against the previously obscure issue of investor-state dispute settlement mechanisms.

EU officials privately admit, that if a far bigger campaign led by the likes of the Swedish activist Greta Thunberg turns its attention to trade, political resistance to deals may become insurmountable. Trade is seen as a relative success of an otherwise rocky past five years in the governance of the EU.

The new commission’s ambition to tinge its trade policies a deeper green may prove more challenging, with the potential to cause diplomatic conflicts across the world. Ms Catrain says: “Unless the environmental demands the von der Leyen commission makes of trading partners are practical and proportionate, it will achieve neither its trade nor its environmental goals.”

Additional reporting by Sam Fleming in Brussels

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