The EESC takes stock of the emergence of carbon emissions markets to better prevent a “green” trade war

Since the signing of the Kyoto Protocol, various jurisdictions throughout the world have implemented Emissions Trading Systems (ETSs). The EU ETS is the largest and oldest one and it is going to be overhauled in line with the EU’s 2030 Climate and Energy Policy Framework. In an opinion adopted at its September plenary session, the EESC provides an overview of the EU ETS and of other ETSs globally and outlines approaches to regulate trade in this new deal of carbon markets.

The European Union is committed to mitigating the effects of climate change and to reducing emissions of greenhouse gases (GHG). In order to tackle this critical problem, the Commission set up in 2005 the EU Emissions Trading System (ETS), a 'cap and trade' system meant to reduce emissions over a number of years. In accordance with the current strategy for 2030, emissions from sectors covered by the EU ETS will be cut by 43% from 2005 levels, as part of the EU's current 2030 climate and energy framework. Under the European Green Deal, the Commission will present an impact-assessed plan to increase the EU’s greenhouse gas emission reduction target in a responsible way, including for the EU ETS.

In this opinion, the European Economic and Social Committee reaffirms its support for the European Green Deal, calls for the Commission to monitor local carbon markets across the globe to identify the best practices that could be useful for revising the ETS, and contemplates the advantages and disadvantages of implementing an EU carbon adjustment mechanism, both in terms of the environment and of trade.

The challenge of asymmetric carbon markets

One of the key points in the opinion is that the EESC is concerned with asymmetrical carbon price levels between different jurisdictions and markets. A level playing field between industries in the EU and abroad can indeed be undermined because of the development of different emissions trading systems but also because of competition from third markets belonging to countries that do not have ambitious climate policies. It therefore asks the Commission to table in the coming months the Carbon Border Adjustment Mechanism which would shield EU energy-intensive companies from cheaper imports from third countries with no or weaker climate policy. The EESC advocates implementing carbon border adjustments in compliance with World Trade Organisation rules, so as to prevent a trade war. It also envisages the technical feasibility, in energy-intensive sectors, of implementing globally accepted accounting and measurement standards to assess their CO2 footprint.

Emmanuelle Butaud-Stubbs, the rapporteur of the opinion from the Employers' Group, recalled that: The EU ETS is certainly the first and largest cap-and-trade system for reducing greenhouse gasses emissions but 21 other emission trading systems operate across four continents and 24 are currently being developed. That means that the EU is not working in isolation!

Addressing the challenges for international trade of the co-existence of various carbon markets across the world, she added: The EESC supports opening up dialogue with third countries in order to discuss the content and the impact of carbon border measures on their exports to the EU. We need to do all we can to avoid a “green” trade war in the aftermath of the Covid crisis.

The EU ETS in the day of COVID-19, Brexit, the Paris Agreement and CETA

The opinion also looks into other challenges and opportunities currently faced for the future of carbon markets.

Firstly, the drop in GHG emissions observed because of the COVID-19 pandemic is only circumstantial. The EU ETS should however include market stabilisation measures that are adequate to withstand the impact of the pandemic, so that carbon prices do not drop under a certain level.

Secondly, the United Kingdom leaving the EU (Brexit) should not jeopardise the prospects of future partnerships with the UK on carbon emissions reduction. The future trade agreement between the EU and the UK should ensure a level playing field and a non-regression clause on the commitments already pledged by the UK.

There are however also opportunities, such as the possibility to invoke Article 6 of the Paris Agreement, so that within a multilateral approach, countries could cooperate on implementing Nationally Determined Contributions (NDCs) through market-based approaches, in this instance emissions trading systems, as well. This would provide a path towards linking up different ETSs and the creation of international credits.

Other opportunities are those arising from the Comprehensive Economic and Trade Agreement (CETA) with Canada, which includes a provision reaffirming the shared commitment of the EU and Canada to the implementation of multilateral agreements on the environment, such as the Paris Agreement.

Finally, the EESC also identified inspiring experiences in North American ETS and climate policies, notably in the way that American and Canadian authorities have extended their coverage to other economic sectors, such as transportation, in order to reduce GHG emissions.