The key stone in the carbon tariff wall: the Alberta oil sands and the legality of taxing imports based on their carbon footprint.

• Author: Belleville, Mark L.

1. INTRODUCTION II. THE EUROPEAN UNION'S OIL SANDS PROPOSAL III. WHY BORDER TAX ADJUSTMENTS ARE PROPOSED IN CONJUNCTION WITH DOMESTIC CLIMATE POLICIES A. What Are Border Tax Adjustments? B. Production-Based Carbon BTAs Address Competitiveness and "Leakage" Objections to Domestic Climate Policies 1. Competitiveness 2. Leakage C. Production-Based Carbon BTAs Would Complement Domestic Climate Policies by Encouraging Reduced Global Emissions D. Carbon-Based BTAs Would Fill the Vacuum Caused by the Post-Kyoto Failure of International Climate Negotiations IV. LEGAL ANALYSIS--BOTH THE E.U.'S FUEL QUALITY STANDARD AND A BROADER PRODUCTION-BASED CARBON BTA ARE LEGALLY PERMISSIBLE A. Pertinent GATT Provisions B. A Three-Step Legal Analysis C. Products Are Not "Unlike " Based on Differing Carbon Footprints D. Neither the Proposed E.U. Rule nor a Broader Production-Based Carbon BTA Results in Impermissibly Different Treatment of Imports 1. Framing the Legal Debate 2. Basing the Treatment of Imports on How They Are Produced Is Not Per Se Impermissible 3. A Properly Charges Production-Based Carbon BTA Does Not Result In Charges "In Excess Of Internal Charges Under Article III:2 4. The E.U. Rule Does Not Result In "Less Favourable" Treatment Under Article III:4 5. A Properly Crafted Production-Based Carbon BTA is Specifically Permitted Under Article II:2(a) 6. Neither the E.U. Rule nor a Production-Based Carbon BTA Violates Article I E. The E.U. Rule, But Likely Not A Production-Based Carbon BTA, Would Also Be Permissible Under Article XX 1. Analytical Framework 2. The Proposed E. U. Rule 3. The Broader Production-Based Carbon BTA V. INTERNATIONAL NEGOTIATIONS SHOULD BE PREFERRED OVER THE UNILATERAL IMPOSITION OF BTAS A Avoiding Trade Wars B. Legal Uncertainty C. Fully Counteracting the Effects of Leakage and Competitiveness D. Devil in the Details E. A (Wishful?) Path Forward for International Negotiations VI. CONCLUSION I. INTRODUCTION

   On February 20, 2012, headlines from leading media outlets in England and Canada, in stories that were circulated globally, exclaimed: "Canada threatens trade war with E.U. over tar sands" (1) and "E.U. oil sands policy could spark trade complaint." (2)

   What prompted these blunt and unlikely story lines? The uproar was caused by letters from Canadian officials threatening to file a claim with the World Trade Organization (WTO) should the European Union adopt a rule which treats crude oil derived from natural bitumen differently than conventional crude oil. (3)

   The oil sands of Alberta, Canada, have bitumen in abundance. (4) According to the E.U. and the scientific analyses upon which it rehes, the extraction process for bitumen results in significantly greater greenhouse gas (GHG) emissions than the extraction of conventional crude. (5) As such, the E.U. has proposed classifying oil sands crude and other unconventional petrol in a way that would make them far less attractive to E.U. refineries, and that would likely drive down the global prices for such oil. (6)

   This Article considers the legality of the E.U.'s proposed rule under international trade law. Implications of the policy itself and a finding of permissibility under the General Agreement on Tariffs and Trade (GATT) are likely to be far-reaching. Imposing taxes or charges on imports--Border Tax Adjustments (BTAs)--based on carbon consumed or GHGs emitted during production of the import has long been proposed as a complement to national policies seeking to reduce GHG emissions. (7) The legality of such BTAs has been the subject of considerable scholarly analysis, with no definitive answer emerging. (8) The E.U.'s oil sands proposal, although different from the commonly considered border "tax" or "charge," would be the first to actually implement a policy that bases an import's treatment on emissions in another country. With the development of unconventional crude booming worldwide, including in the U.S., (9) the proposed E.U. rule could lay the groundwork for how such crude is treated on the global market. Moreover, the E.U. rule could foreshadow a much broader policy that is frequently proposed in conjunction with domestic climate change schemes: the imposition of carbon BTAs on all imported products from nations, most notably from the U.S. and China--countries that do not have a national carbon-pricing policy. (10)

   What follows is an analysis both of the proposed E.U. rule and of a broader production-based carbon BTA. Both proposals seek to expand a carbon-pricing system beyond territorial boundaries in order to 1) influence carbon emission behaviors in other countries, and/or 2) minimize the competitive disadvantage to domestic producers in a nation that has such a system.

   In the two preliminary Parts, this Article explains the proposals both for the E.U.'s treatment of tar sands oil and for a broader production-based BTA--one based on the carbon footprint of an imported product. The legal analysis in Part IV concludes, contrary to other uncertain academic analyses, that such policies would pass muster under international law. Nonetheless, despite the likely legality and effectiveness of these proposals, Part V identifies practical and political concerns that render an internationally negotiated approach preferable to the unilateral imposition of a carbon-based BTA.

2. THE EUROPEAN UNION'S OIL SANDS PROPOSAL

   The E.U. and its member-states have been more aggressive than most in adopting policies that reduce GHG emissions. The E.U. Emissions Trading System (E.U. ETS), a multi-nation cap-and-trade program, has been in place for several years now. (11) Other nations adopting similar domestic policies have taken steps to link with the E.U. carbon market, and the E.U. has endeavored to broaden the influence of its emission reduction efforts. (12) Recently, it adopted an aviation emissions policy that requires all airlines arriving at or departing from E.U. airports to buy emission allowances as part of the E.U. ETS. (13) The E.U. continues to advocate for a post-Kyoto international treaty that sets binding and aggressive emission reduction commitments. (14) Its oil sands proposal would further expand the reach of the E.U. ETS. (15) Unlike some smaller nations, the E.U. is a large enough consumer market that it could affect behavior in other nations, including major emitters like the U.S. and China. In other words, the E.U. has the economic power to extend the reach of its emission reduction policies, and has shown a willingness to do just that.

   As a way of meeting its commitments under the Kyoto Protocol, the E.U. has developed a separate emission reduction strategy for each sector of its economy, including transportation. (16) Part of its transportation strategy is to get more energy out of a fuel for the same amount of GHG emissions. (17) Towards that end, it adopted the Fuel Quality Directive (FQD). (18) A 2009 Amendment to the FQD introduced a requirement to improve the energy efficiency of transport fuels. (19) Article 7a(2) of the FQD now requires fuel suppliers in each member state to reduce the life-cycle GHG emissions (the so-called "wells to wheels" emissions) of the total mix of fuels they supply by 6% below a to-be-determined 2010 baseline level by 2020. (20)

   Implementing the FQD thus requires the E.U. to determine the life-cycle GHG emissions of the various fuels that may be used for transport purposes in the E.U. Importantly, "life-cycle GHG emissions" is denned in Directive 2009/30/EC as "all net emissions of C[O.sub.2], C[H.sub.4], and [N.sub.2]O that can be assigned to the fuel (including any blended components) or energy supplied. This includes all relevant stages from extraction or cultivation, including land-use changes, transport and distribution, processing and combustion, irrespective of where those emissions occui[.]" (21) In other words, determining whether member states are sufficiently reducing GHG emissions from their transport fuels requires consideration of the GHGs emitted during extraction of the fuel, including the associated land use changes that cause emissions or reduce carbon sinks.

   In February 2012, the E.U. proposed rules that attempted to quantify the default "wells to wheels" emissions of various fuel sources so that suppliers would have the information necessary to comply with their reduction obligations. (22) Each crude oil source would be assigned a value that reflects the amount of GHGs emitted in relation to the amount of energy the crude generates; the higher the number, the greater the greenhouse gas effect of a particular crude source. For instance, petrol from conventional crude received by E.U. refineries was assigned an emissions default value of 87.5. (23) Crucial to the Canadian oil sands dispute, petrol from natural bitumen, such as that found in the Alberta oil sands--commonly, if somewhat inaccurately, called "tar sands oil"--was assigned a default value of 107. (24) Other assigned values included 131.3 for petrol from shale oil, and 172 for petrol from coal-to-liquid. (25) What this means is that for E.U. refineries obligated to meet the emission-reduction goals of the FQD, crude oil derived from bitumen, shale oil, or coal would be far less attractive.

   Canada has by far the world's largest known quantity of bitumen, located in its oil sands in Alberta. (26) In recent years, Canada has begun exploiting this massive amount of oil sands crude. Not surprisingly, it objected to, and lobbied hard against, the E.U.'s proposed rule. (27) While there are policy arguments and economic arguments against the proposed rule, (28) the focus here is on the legality of the E.U. proposal and its implications for other "border adjustments."

   Canada's preliminary legal position has been framed in letters from its Natural Resources Minister and its Ambassador to Europe. (29) Initially, when the proposed rule was first announced in October 2011, Canada's Minister of Natural Resources...