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European Yearbook of International Economic Law 2010 pp 205–224Cite as

Mitigating Climate Change Through Price Instruments: An Overview of the Legal Issues in a World of Unequal Carbon Prices

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Part of the book series: European Yearbook of International Economic Law ((EUROYEAR,volume 1))

Abstract

Politicians all over the world have recognised1 that anthropogenic climate change, despite the vociferous protests by a few climate sceptics, can now be taken for granted.2 Mere adaptation to climate change most likely will not be sufficient: in particular, there is a risk that feedback loops lead to accelerated and unforeseeable changes. Moreover, the poorest regions and within them the most deprived people probably will be disproportionately affected. All this arguably means that mitigation of climate change will be the greatest challenge for the next decades.

The author thanks Karsten Neuhoff and the participants in the Climate Strategies project “Tackling leakage in a world of unequal carbon prices” and Gudrun Oram. The usual caveat applies.

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Notes

  1. 1.

    See, e.g. the G8 summary statement, Joint declaration by the G8-Presidency and Brazil, China, India, Mexico and South Africa, 2008, downloadable under http://www.bmu.de/files/pdfs/allgemein/application/pdf/g8_toyako_declaration_energy_security_climate_change.pdf.

  2. 2.

    For recent summaries of the state of research cf. the 4th Assessment Report (4AR) by the three working groups of the Intergovernmental Panel on Climate Change, Climate Change, 2006 and 2007 as well as the Synthesis Report, 2007; Stern, Economics of Climate Change, 2006.

  3. 3.

    For a starting point see, e.g. Neuhoff, Tackling Carbon. How to Price Carbon for Climate Policy, 2008, downloadable under http://www.electricitypolicy.org.uk/TSEC/2/neuhoff230508.pdf.

  4. 4.

    Tuerk et al., Linking of emissions trading schemes – Synthesis report – draft, Climate Strategies, Draft February 2009, downloadable under http://www.climatestrategies.org/our-research/category/33/126.html.

  5. 5.

    Generally on these cf. e.g. Barr, The Economics of the Welfare State, (4th ed.) 2004, pp. 74 ff. For the case of Carbon Emissions, the large number of emitters and the wide range of emitting activities imply that the transaction costs are too high for the market to implement a solution on its own, as proposed by Coase, The Problem of Social Cost, Journal of Law and Economics 3 (1960), p. 1 ff.

  6. 6.

    For a more rigorous analytical discussion of the concept of externalities cf. e.g. Cowell, Microeconomics, 2006, pp. 441 ff.

  7. 7.

    Pigou, The Economics of Welfare, (4th ed.) 1932.

  8. 8.

    See, e.g. Hope/Newbery, Calculating the Social Cost of Carbon, in: Grubb/Jamasb/Pollitt (eds.), Delivering a Low-Carbon Electricity System, 2008, pp. 31 ff.; Stern Review, 2007, p. 323; Tol, The Marginal Damage Costs of Carbon Dioxide Emissions. An Assessment of the Uncertainties, Energy Policy 33 (2005), 2064.

  9. 9.

    This debate was reraised by the Stern Review. For an overview cf. Hepburn, Valuing the far-off future, in: Atkinson/Dietz/Neumayer (eds.), Handbook of Sustainable Development, 2007, p. 109 (112).

  10. 10.

    For corresponding doubts see Sen, Approaches to the choice of discount rate for social benefit–cost analysis, in: Lind (ed.), Discounting for Time and Risk in Energy Policy, 1982, p. 325.

  11. 11.

    Baumol/Oates, The Use of Standards and Prices for Protection of the Environment, Swedish Journal of Economics 73 (1971) 1, p. 42.

  12. 12.

    Lübbe-Wolff, Instrumente des Umweltrechts. Leistungsfähigkeit und Leistungsgrenzen, Neue Zeitschrift für Verwaltungsrecht 2001, p. 481 (487).

  13. 13.

    Hepburn, Regulation by Prices, Quantities, or Both. A Review of instrument Choice, Oxford Review of Economic Policy 22 (2006) 2, p. 226 (228 f.).

  14. 14.

    Weitzman, Prices vs. Quantities, Review of Economic Studies, 41 (1974) 4, p. 477.

  15. 15.

    Neuhoff, Tackling Carbon, 2008, pp. 8 ff.

  16. 16.

    Neuhoff, Tackling Carbon, 2008, p. 10

  17. 17.

    IPCC, 4AR WG III, p. 260. In Germany, 37% of carbon emissions can be attributed to electricity generation (excluding combined heat and power plants), BMU, Revidierter Nationaler Allokationsplan 2008–2012, 2007, p. 19; the corresponding figure for the USA is 40%, see Choi, Global Climate Change and the Use of Economic Approaches. The Ideal Design of Domestic Greenhouse Gas Emissions Trading with an Analysis of the European Union’s CO2 Emissions Trading Directive and the Climate Stewardship Act, Natural Resources Journal 45 (2005), p. 865 (866).

  18. 18.

    IPCC, 4AR WG III, pp. 254 f.

  19. 19.

    DIRECTIVE 2003/87/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, Official Journal, L 275/32.

  20. 20.

    German Electricity Tax Act (Stromsteuergesetz) as of 24.3.1999, Bundesgesetzblatt 1999 I, p. 378, last amended by Article 2 of the law of 18 December 2006, Bundesgesetzblatt 2006 I, p. 3180.

  21. 21.

    COUNCIL DIRECTIVE 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity, Official Journal, L 283/51. On the directive, see Bongartz/Schröer-Schallenberg, Ein systematischer Überblick über die beabsichtigten Änderungen auf dem Gebiet des Energiesteuerrechts, Zeitschrift für Zollrecht 2006, p. 82; Jatzke, Neue gemeinschaftsrechtliche Rahmenbedingungen für die Energiebesteuerung, Betriebsberater 2004, p. 21; Leitgeb/Pilz, Energiebesteuerung – nationale und gemeinschaftsrechtliche Umsetzung, Österreichische Steuerzeitung 2004, p. 322.

  22. 22.

    Such feed-in tariffs are the most widespread in Europe for the promotion of renewables, see COM (2005) 627 final, pp. 4 f. On the different instruments for the promotion of renewables, see Coenraads/Voogt, Promotion of Renewable Electricity in the European Union, Energy & Environment 17 (2006) 6, p. 835 (839); Held/Haas/Ragwitz, On the Success of Policy Strategies for the Promotion of Electricity from Renewable Energy Sources in the EU, Energy & Environment 17 (2006) 6, p. 849. The promotion of electricity from renewables and from combined heat and power plants is, again only partially harmonised in the EU, see DIRECTIVE 2001/77/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 27 September 2001 on the promotion of electricity from renewable energy sources in the internal electricity market, Official Journal L 283/33; DIRECTIVE 2004/8/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 February 2004 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/EEC, Official Journal L 52/50.

  23. 23.

    Gesetz zur Neuregelung des Rechts der Erneuerbaren Energien im Strombereich und zur Änderung damit zusammenhängender Vorschriften (Erneuerbare-Energien-Gesetz, EEG 2009), Bundesgesetzblatt 2008 I, p. 2074.

  24. 24.

    Gesetz für die Erhaltung, die Modernisierung und den Ausbau der Kraft-Wärme-Kopplung, Bundesgesetzblatt 2002 I, p. 1092, last amended by Article 1 of the law of 25 Oktober 2008, Bundesgesetzblatt 2008 I, p. 2101.

  25. 25.

    However, there is a lively debate with respect to the incidence of the scheme, see Ragwitz/Sensfuß/Genoese, The Merit-order Effect: A Detailed Analysis of the Price Effect of Renewable Electricity Generation on Spot Market Prices in Germany, Energy Policy 2008, p. 3086; Wissen/Nicolosi, Ist der Merit-Order-Effekt der erneuerbaren Energien richtig bewertet? Energiewirtschaftliche Tagesfragen 2008/1/2, p. 110.

  26. 26.

    IPCC, Climate Change 2001 – Working Group III: Mitigation, 2001, p. 11, fn. 22: Leakage is “the increase in non-Annex [I] emissions divided by the reduction in Annex [I] emissions”. For a similar definition specifically in the context of environmental taxes see Barker et al., Carbon leakage from unilateral environmental tax reforms in Europe, 1995–2005, Energy Policy 35 (2007) 12, p. 6281. A different understanding is proposed by Peters/Hertwich, CO2 embodied in international trade with implications for global climate policy, Environmental Science and Technology 42 (2008) 5, p. 1401 (1402 f.).

  27. 27.

    Gerlagh/Kuik, Carbon Leakage with International Technology Spillovers, 2007, downloadable under http://www.feem.it/NR/rdonlyres/DA90131F-7766-4698-9934-7FFE44FA8239/2298/3307.pdf, p. 7 with further references.

  28. 28.

    The importance of this effect again depends on the degree to which consumers consider foreign and domestic products as substitutes. A measure for this is the so-called Armington elasticity, proposed by Armington, A Theory of Demand for Products Distinguished by Place of Production, International Monetary Fund Staff Papers, XVI (1969), p. 159.

  29. 29.

    Di Maria/van der Werf, Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change, Environmental and Resource Economics 39 (2008) 2, p. 55; Gerlagh/Kuik, Carbon Leakage with International Technology Spillovers, 2007; Grubb et al., The Economics of Changing Course – Implications of Adaptability and Inertia for Optimal Climate Policy, Energy Policy 23 (1995) 4/5, p. 417; Grubb, Journal of Economic Studies 27 (2000) 1/2, p. 111; Grubb et al., Climate Implications of the Kyoto Protocol: the Contribution of International Spillover, Climatic Change 54 (2002), 11.

  30. 30.

    This research builds on previous, more general work undertaken with respect to so-called pollution havens, see, e.g. Brunnermeier/Levinson, Examining the Evidence on Environmental Regulations and Industry Location, The Journal of Environment Development 13 (2004) 1, 6; Copeland/Taylor, Trade, Growth, and the Environment, Journal of Economic Literature, 42 (2004) 1, 7; Levinson/Taylor, Unmasking the Pollution Haven Effect, International Economic Review 49 (2008) 1, 223; Porter/van der Linden, Toward a New Conception of the Environment Competitiveness Relationship, Journal of Economic Perspectives 9 (1995) 4, 97.

  31. 31.

    Hourcade et al., Differentiation and dynamics of EU ETS industrial competitiveness impacts, 2008, downloadable under www.climatestrategies.org/our-research/category/17/37.html; Graichen et al., Impacts of the EU Emissions Trading Scheme on the industrial competitiveness in Germany, 2008, downloadable under http://www.umweltdaten.de/publikationen/fpdf-l/3625.pdf.

  32. 32.

    Graichen et al., Impacts of the EU Emissions Trading Scheme on the industrial competitiveness in Germany, 2008, pp. 8 ff., in particular p. 12.

  33. 33.

    Hourcade et al., Differentiation and dynamics of EU ETS industrial competitiveness impacts, 2008, pp. 61 f. who also discuss further factors explaining the observed heterogeneity in cement prices around the world.

  34. 34.

    Grubb/Neuhoff, Allocation and Competitiveness in the EU Emissions Trading Scheme: Policy Overview, Climate Policy 6 (2006) 1, p. 7 for the distortions from free allocation of allowances.

  35. 35.

    The author wishes to thank Sadeq Bigdeli who initially drew the author’s attention to the problem. On a related point see Bigdeli, Will the “Friends of Climate” Emerge in the WTO? The Prospects of Applying the “Fisheries Subsidies” Model to Energy Subsidies, Carbon and Climate Law Review 2 (2008) 1, p. 78.

  36. 36.

    On this see Cordewener, Europäische Grundfreiheiten und nationales Steuerrecht, 2002, in particular pp. 25 ff.

  37. 37.

    Appellate Body, WT/DS108/AB/R – United States – Tax Treatment for “Foreign Sales Corporations”, paras. 90 and 98.

  38. 38.

    Panel, WT/DS 108/RW – United States – FSC (21.5), paras. 8.25–8.26; Appellate Body WT/DS 108/RW – United States – FSC (21.5), paras. 98–106.

  39. 39.

    Appellate Body, WT/DS108/AB/R – United States – Tax Treatment for “Foreign Sales Corporations”, para. 88; WTO Analytical Index, 2nd ed. 2007, Art. 1 SCMA para. 18.

  40. 40.

    Appellate Body, WT/DS108/RW – United States – FSC (21.5), para. 90. Italics added by the author.

  41. 41.

    For a discussion of questions relating to Benchmarking cf. Wagner, Direkte Steuern und Welthandelsrecht, 2006, pp. 110 ff.

  42. 42.

    On this Adamantopoulos, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 1 SCMA para. 63.

  43. 43.

    Adamantopoulos, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 1 SCMA para. 67, according to whom a mere omissal is not sufficient.

  44. 44.

    Adamantopoulos, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 1 SCMA para. 83.

  45. 45.

    ECJ, C-379/98, PreussenElektra, [2001] ECR I, 2099, para. 54.

  46. 46.

    Different view held by Oschmann, in Altrock/Oschmann/Theobald (eds.), Erneuerbare Energien Gesetz –Kommentar, (2nd ed.) 2008, Einleitung paras. 100 ff.

  47. 47.

    Appellate Body, WT/DS257/AB/R, United States – Softwood Lumber IV, adopted on 17.2.2004.

  48. 48.

    Ohlhoff, Verbotene Beihilfen nach dem Subventionsabkommen der WTO im Lichte aktueller Rechtsprechung, EuZW 2000, p. 645 (648 ff.).

  49. 49.

    Evtimov, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 2 para. 14.

  50. 50.

    WT/DS257/R, para. 7.120; WT/DS267/R, paras. 7.1140–1142- US – Upland Cotton.

  51. 51.

    WT/DS257/R, para. 7.120; WT/DS267/R, paras. 7.1140–1142- US – Upland Cotton.

  52. 52.

    WT/DS257/R, para. 7.120; WT/DS267/R, paras. 7.1140–1142- US – Upland Cotton.

  53. 53.

    Evtimov, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 2 para. 18.

  54. 54.

    ECJ, C-143/99, Adria-Wien Pipeline GmbH, [2001] ECR I, 8384, para. 40. However, given that under the EU State aid rules, a justification is possible, while this arguably is not the case for the SCM, it cannot be excluded that the WTO dispute settlement body will construe the specificity criterion under the SCM more narrowly.

  55. 55.

    WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, Indonesia – Autos, para.14.202.

  56. 56.

    For more details see Durling, in: Wolfrum/Stoll/Koebele (eds.), WTO – Trade Remedies, 2008, Art. 5 SCMA para. 8.

  57. 57.

    Baron, Sectoral Approaches to GHG Mitigation: Scenarios for Integration, OECD/IEA Information Paper, 2006, downloadable under http://www.iea.org/textbase/work/2006/cop12/ghg.pdf; Baron et al., Sectoral Approaches to Greenhouse Gas Mitigation – Exploring Issues for Heavy Industry, IEA Information Paper, 2007, downloadable under http://www.iea.org/textbase/papers/2007/Sectoral_Approach_Info_WEB.pdf; Bodansky, International Sectoral Agreements in a Post 2012-Climate Framework, PEW Working Paper, 2007, downloadable under http://www. pewclimate.org/docUploads/International%20Sectoral%20Aggreements%20in%20a%20Post-2012%20Climate%20Framework.pdf; Egenhofer/Fujiwara, Global Sectoral Industry Approaches to Climate Change – The Way Forward, 2008; Ellis/Baron, Sectoral Crediting Mechanisms: An Initial Assessment of Electricity and Aluminium, OECD/IEA Working Paper, 2005, downloadable under http://www.iea.org/textbase/papers/2005/rb_sectoral.pdf2005; Kulovesi/Keinänen, Long-term Climate Policy: International Legal Aspects of Sector-based Approaches, Climate Policy 6:3 (2006), 313; Philibert/Pershing, Considering the Options: Climate Targets for All Countries, Climate Policy 1 (2001), 211; Philibert/Reinaud, Emissions Trading: Taking Stock and Looking Forward, OECD/IEA Information Paper, 2004, downloadable under http://www.oecd.org/dataoecd/58/59/32140134.pdf, pp. 38 f.

  58. 58.

    Under the CFC legislation, income from corporate entities in low tax-legislations are directly attributed to the controlling shareholders. An actual distribution by the corporation is not necessary. For more details see, e.g. Lang et al. (eds.), CFC Legislation – Domestic Provisions, Tax Treaties and EC Law, 2004; Rust, Die Hinzurechnungsbesteuerung, 2007.

  59. 59.

    Border Tax Adjustments, Report of the Working Party adopted on 2 December 1970, para. 4.

  60. 60.

    Wiers, French Ideas on Climate and Trade Policies, Carbon and Climate Law Review 2 (2008) 1, p. 18 (30).

  61. 61.

    On this topic cf. e.g. Biermann/Brohm, Implementing the Kyoto Protocol without the United States: The Strategic Role of Energy Tax Adjustments at the Border, Climate Policy 4 (2005), p. 289; De Cendra, Can Emissions Trading Schemes Be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law, Review of European Community and International Environmental Law 15 (2006) 2, p. 131; Genasci, Border Tax Adjustments and International Emissions Trading: The Implications of International Trade Law for Policy Design, Carbon and Climate Law Review 2 (2008) 1, p. 33; Goh, The World Trade Organization, Kyoto and Energy Tax Adjustments at the Border, Journal of World Trade 38 (2004) 3, p. 395; Ismer/Neuhoff, Border Tax Adjustment. A Feasible Way to Support Stringent Emission Trading, European Journal of Law and Economics 24 (2007), p. 137; Pauwelyn, US Federal Climate Policy and Competitiveness Concerns, 2007; Sindico, Climate Taxes and the WTO: Is the Multilateral Trade Regime a further Obstacle for Efficient Domestic Climate Policies? EcoLomic Policy and Law, 3 (2006) 8, p. 1; Syunkova, WTO – Compatibility of Four Categories of US Climate Change Policy, 2007, downloadable under http://www.nftc.org/default/trade/WTO/Climate%20Change%20Paper.pdf, pp. 22 ff.; Wiers, Carbon and Climate Law Review 2 (2008) 1, p. 18; Zhang, Greenhouse Gas Emissions Trading and the World Trading System, Journal of World Trade 32 (1998) 5, p. 219. On border adjustments for carbon taxes Demaret/Stewardson, Border Tax Adjustments under GATT and EC Law and General Implications for Environmental Taxes, Journal of World Trade 28 (1994) 4, p. 5; Düerkopf, Trade and Environment: International Trade Law Aspects of the Proposed EC Directive Introducing a Tax on Carbon Dioxide Emissions and Energy, GATT/WTO Rules for Border Tax Adjustment and the Proposed European Directive Introducing a Tax on Carbon Dioxide Emissions and Energy, Common Market Law Review (1994), p. 807; Petersmann, International Trade Law and International Environmental Law, in: Revesz/Sands/Stewart (eds.), Environmental Law, the Economy and Sustainable Development, 2000, p. 127; Pitschas, Georgia Journal of International and Comparative Law 24 (1994), p. 479. Generally on border tax adjustments Hufbauer, Fundamental Tax Reform and Border Tax Adjustments, 1996.

  62. 62.

    Neuhoff/Ismer, International cooperation to limit the use of border adjustments, 2008, downloadable under http://www.econ.cam.ac.uk/eprg/TSEC/2/BA%20Workshop%20Report_Nov%206%202008.pdf, p. 3.

  63. 63.

    Neuhoff/Ismer, International cooperation to limit the use of border adjustments, 2008, p. 5.

  64. 64.

    Ismer/Neuhoff, European Journal of Law and Economics 24 (2007), p. 137.

  65. 65.

    Panel, BISD 34S/136 – United States – Taxes on Petroleum and Certain Imported Substances (“Superfund”), adopted 17 June 1987.

  66. 66.

    Appellate Body, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R – Japan – Taxes on Alcoholic Beverages, adopted 1 Nov. 1996, p. 20.

  67. 67.

    Ismer/Neuhoff, European Journal of Law and Economics 24 (2007), p. 137.

  68. 68.

    Wiers, Carbon and Climate Law Review 2 (2008) 1, p. 18 (21 ff.).

  69. 69.

    Appellate Body, WT/DS2/AB/R – United States – Standards for Reformulated and Conventional Gasoline, adopted 20 May 1996, p. 21; Appellate Body, WT/DS58/AB/R – United States – Import Prohibition of Certain Shrimp and Shrimp Products, adopted 6 November 1998.

  70. 70.

    Appellate Body, WT/DS332/AB/R – Brazil – Retreaded Tyres, adopted 17 December 2007, para. 159.

  71. 71.

    Quick/Lau, Environmentally motivated tax distinctions and WTO law – The European commission’s green paper on integrated product policy in light of “Like Product” and “PPM”-debates, Journal of International Economic Law 6 (2003) 2, p. 419 (440 ff.).

  72. 72.

    Ismer/Neuhoff, European Journal of Law and Economics 24 (2007), p. 137 (152).

  73. 73.

    Ismer, Klimaschutz als Rechtsproblem, forthcoming. Doubts are expressed by Fauchald, Environmental Taxes and Trade Discrimination, 1998, pp. 188 ff.; Genasci, Carbon and Climate Law Review 2 (2008) 1, p. 33 (36).

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  1. Friedrich Alexander University Erlangen-Nuremberg, Erlangen-Nuremberg, Germany

    Roland Ismer

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  1. Chair for Constitutional and Administrative Law European Law, European and International Economic Law, Passau University, D-94030, Passau, Germany

    Christoph Herrmann LL.M

  2. Department of European Law, Hamburg University, Schlüterstraβe 28, 20146, Hamburg, Germany

    Jörg Philipp Terhechte (Assistant Professor of Law, Faculty of Law) (Assistant Professor of Law, Faculty of Law)

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Ismer, R. (2010). Mitigating Climate Change Through Price Instruments: An Overview of the Legal Issues in a World of Unequal Carbon Prices. In: Herrmann, C., Terhechte, J.P. (eds) European Yearbook of International Economic Law 2010. European Yearbook of International Economic Law, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-78883-6_9

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