Climate Change and Trade – The EU Aviation Directive and the WTO

Editor’s Note: This article is published in the Journal of International Economic Law, Volume 15, Issue 1, March 2012.

ABSTRACT

With limited progress in the UN climate change negotiations, the EU has been looking at ways to further reduce global CO2 emissions by extending the scope of its cap and trade system, most recently by including flights entering and leaving EU airspace. With the EU Aviation Directive entering into force on 1 January 2012, all airlines will need to hold permits to cover their CO2 emissions for flights operating in EU airspace. For instance, Singapore Airlines will be required to hold permits for CO2 emissions for its flights from Singapore to Frankfurt, which will include all CO2 emissions over Singapore, third countries, the high seas and EU airspace. As climate change is a global challenge, national and regional efforts to reduce CO2 emissions have an international impact by nature, particularly on trade. With the World Trade Organization (WTO) responsible for regulating world trade, this article analyses the consistency of the EU Aviation Directive with WTO rules.
 
The EU’s decision to include both non-EU and EU airlines under its cap and trade system is a response to the so-called carbon leakage and competitiveness issues that would have arisen if the scheme had been limited to EU airlines only. Carbon leakage arises when a carbon price leads domestic businesses to relocate to countries not pricing carbon or to increased imports of goods from countries not pricing carbon, resulting in no net reduction in global CO2 emissions. Competitiveness issues occur when a carbon price increases the price of domestically produced goods, causing consumers to substitute with cheaper imports from countries not pricing carbon, ultimately harming domestic industry and undermining support for these policies. With airlines providing an important international services trade, including CO2 emissions from aviation under the EU cap and trade system has important implications for international trade, particularly since air transport functions as an enabler of other forms of trade such as just-in-time manufacturing strategies, tourism, and business links. Despite the number of ways in which the Aviation Directive is in conflict with WTO rules, the article demonstrates that the type of WTO rules that the EU Aviation might violate are useful disciplines on how countries develop and apply climate change action that impedes international trade. Developing climate change measures consistently with WTO rules strikes an appropriate balance between giving WTO Members the policy space to take action to reduce CO2 emissions while maintaining an open and non-discriminatory trading system that supports economic growth and global welfare.

Read the full article on the Journal of International Economic Law website (subscription required) »