Climate Check Trade policy - How climate-friendly is European trade policy?

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introduction

EU external trade: Contribution to climate change

Trade agreements: Drivers of earth heating

Multilateral trade policy: inconsistent

Unilateral trading instruments: Not always climate-friendly

European foreign investment: Lack of steering

Conclusion: Climate protection needs cooperation

Endnotes

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summary

The European Union contributes significantly to climate change through its trade relations. In particular, their import-related emissions are significant: The EU is the world's largest net importer of greenhouse gas emissions.

The European Commission has announced that EU trade policy will contribute to the goal of a climate-neutral global economy. However, its trade policy undermines this objective by continuing to increase trade in high-emission products. In particular, the EU trade agreements promote climate-damaging flows of goods through their undifferentiated tariff reduction.

But also in the context of the World Trade Organisation (WTO), the EU is weakening the fight against global warming, including through its lawsuits against green subsidies and other countries' localisation requirements. The EU is thus hampering the global increase in production of essential climate technologies.

The unilateral climate initiatives of EU trade policy – CBAM and the deforestation regulation – have, in principle, meaningful objectives. However, their effectiveness is weakened by the lack of support for producers in economically weaker countries to meet these new requirements.

The rules for liberalisation and investment protection imposed by EU trade policy also jeopardise climate protection. Undifferentiated investment liberalisation favours the still considerable foreign investment of European companies in fossil industries. In turn, the investor-state arbitration procedures contained in an increasing number of EU trade agreements are jeopardising progressive climate legislation.

A climate-friendly EU trade policy would therefore require a number of reforms, including:

an up-to-date assessment of the emission intensity of EU external trade;
renunciation of climate-damaging trade agreements;
Prioritise leaner partnership agreements with an environmental, climate and development focus;
reorientation of the EU-WTO policy towards the global promotion of climate technologies;
complementing unilateral climate initiatives with technical and financial assistance;
Non-investor-state arbitration and introduction of climate-related screening mechanisms for foreign investments.

introduction

With its Green Deal of December 2019, the European Union has set itself the goal of achieving a climate-neutral and resource-efficient economy by 2050.¹ In its 2021 trade policy strategy, the European Commission announced that its trade policy would also contribute to the Green Deal. The Commission wants to ensure that "trade instruments accompany and support the global transition to a climate-neutral economy". To achieve the transformation towards climate neutrality, EU trade policy will take action at all levels: “multilateral, bilateral and autonomous”.²

However, the EU’s climate ambitions are at odds with the dominant objectives of its trade policy: Market opening for European exporters, unhindered access to raw materials, including fossil fuels, and growth in bilateral trade. At the same time, its trade strategy states that the EU must "ensure open and undistorted access to international markets, including new market access opportunities and open trade flows".³

But what does it mean for the EU’s climate target if the lion’s share of its trade goods consists of goods whose production, transport or consumption is associated with high greenhouse gas emissions – be it fossil fuels such as coal, oil and gas, energy-intensive industrial goods such as steel, cars or chemicals, or agricultural imports that endanger forests? So does EU trade policy really contribute to the Green Deal or does it not rather put obstacles in the way of the goal of a climate-neutral global economy?

The ‘Climate Check Trade Policy’ provides answers to these questions. It sheds light on the contribution of EU trade and individual economic sectors to climate change, analyses the role of EU trade agreements and the EU's activities in the multilateral framework of the World Trade Organization (WTO). In addition, the Climate Check examines two unilateral EU trade instruments – the CBAM and the Deforestation Regulation – as well as European investment policy.

The conclusion, however, is sobering. So far, EU trade policy has not been able to make a substantial contribution to the goal of a climate-neutral global economy. Because their export and competitive orientation repeatedly comes into conflict with the fight against earth heating. The EU would therefore need comprehensive reforms to make its trade policy climate-friendly. Above all, it would have to give preference to cooperative initiatives over its currently dominant competitive instruments.

EU external trade: Contribution to climate change

As one of the largest trading blocs in the world, the European Union contributes significantly to climate change. Their greenhouse gas emissions are not only due to intra-European production for self-consumption, but also to the import and export of goods. In particular, the EU's import-related emissions have been very high since its transnational companies outsourced parts of their production to low-wage countries. When looking at the trade flows of the various sectors of the economy, it is transport and industry in particular that contribute the most to European emissions.

Global trade and the greenhouse effect

The production and transport of goods and services traded on international markets contribute significantly to climate change. It is estimated that between 20 and 30 percent of global carbon dioxide emissions are accounted for by global trade.⁴

Mass-produced goods such as fossil fuels such as coal, oil and gas, which account for the lion's share of physical trade in terms of transport weight, are particularly harmful.⁵ In addition, there are significant emissions from various trade-intensive industrial sectors, especially the metals, automotive, chemical, IT and electronics industries.⁶

Trade in agricultural goods also causes significant emissions of greenhouse gases if forests are cleared or moors are drained for their cultivation. Another problem is the high emissions of methane in factory farming and nitrous oxide through the use of nitrogen fertilisers in arable farming.⁷ The trade in mining commodities such as iron ore, bauxite, copper or gold also affects the climate, whether due to deforestation for the digestion of the mines or the further processing and smelting of the ores.⁸

The transport of goods and services also contributes to the climate crisis. It is estimated that one third of trade-related CO2 emissions are attributable to the transport of goods alone.⁹ This corresponds to between 7 and 10 percent of global CO2 emissions. What's more: The OECD's International Transport Forum (ITF) estimates that there could be a doubling of global freight traffic by 2050. If the previously announced emission reductions to which the states under the Paris Agreement have committed, CO2 emissions from freight transport would increase by 28 percent by 2050.¹⁰ This means: The reduction commitments are completely insufficient to reduce freight transport emissions.

In addition, there is a fundamental problem of world trade: On average, internationally traded goods are more climate-damaging than those produced for consumption on domestic markets.¹¹ International trade therefore favours the circumvention of stricter environmental and climate regulations, which many states have meanwhile enacted for production on their domestic markets.

The EU and global emissions transfer

Corporate relocations and the establishment of foreign branches are an important driver of the climate crisis. This is because the outsourcing of production plants often takes place in areas where not only wages are low, but also environmental requirements, including many emerging economies. For this reason, in recent decades, large amounts of CO2 emissions have also been shifted from north to south together with the farms – a process called carbon leakage.

This global shift in emissions has contributed to the fact that economically weaker countries as a whole have emitted more greenhouse gases than OECD industrialised countries since the mid-2000s (see Chart 1).

The EU and other industrialised countries benefit from the internationally agreed methodology of emissions accounting, which improves their climate accounts. The balance sheets that are reported to the UN Framework Convention on Climate Change only include the emissions that occur in the territory of the reporting state or confederation of states. This means: Emissions from the production and transport of imported goods are eliminated. Climate scientists call this method territorial accounting. This methodology favours the EU in particular, as its consumption generates significant CO2 emissions abroad, but these are not included in its territorial carbon footprint.¹²

However, the result is different for consumption-based accounting. Imported emissions are added to domestic emissions, while emissions from exported products are deducted. Consumption-based accounting thus provides a somewhat more realistic picture of an economy's emissions.¹³

In the case of the EU, for example, territorial emissions amounted to around 2.8 billion tonnes of carbon dioxide in 2021. At 3.5 billion tons of CO2, consumption-based emissions were 20 percent higher than territorial emissions. This year, the EU imported net emissions of 692 million tonnes of CO2 (see Figure 2).

This means: Taking trade flows into account, EU emissions are 20 percent higher than from a purely territorial perspective. The European responsibility for the climate crisis is therefore much greater.

In fact, the EU is the world's largest net importer of CO2 emissions, ahead of the US. China, on the other hand, is by far the largest net exporter of CO2 emissions (see Chart 3).

Since China’s accession to the WTO in 2001, many transnational corporations have established production facilities there, mostly as a joint venture with Chinese companies. Thanks to this flood of investment, the Asian country has now become the world export champion – not only of goods, but also of emissions. In the Chinese climate balance, it is particularly negative that the energy supply of the local industry is largely based on the combustion of the particularly dirty hard coal.¹⁴

Since China is also by far the largest supplier of goods to the European Union, it also tops the list of countries from which the EU imports the most carbon dioxide emissions. Other countries producing significant emissions for EU consumption are Russia, the US, Turkey, India and Canada (see Chart 4).

Image of Mining — Picture: darmau / Unsplash.com

How climate-damaging are the imports and exports of individual industries?

A look at the main product groups that EU countries import and export already provides initial indications of the climate risks of European foreign trade (see Chart 5). For example, energy is the most important import item, most of which is made up of fossil fuels such as coal, oil and gas. In terms of exports, more than 80 percent come from the manufacturing industry. This is where machines, cars and chemicals dominate – and thus those sectors that contribute significantly to the greenhouse effect due to their high fossil energy consumption.

How much greenhouse gas each sector emits through imports and exports can at least be approximated from the OECD's statistics on emissions from trade.¹⁵ EU trade is dominated by the often underestimated emissions from transport. Transport is the largest source of CO2 emissions in exports and the second largest source of CO2 emissions in imports. The OECD identified energy supply as the largest source of emissions on the import side, reflecting, among other things, the large shares of coal, oil and gas (see Chart 6).

It also highlights the great responsibility of the energy-intensive industry for the EU's trade-related emissions. The chemical industry – including pharmaceutical production, the petrochemical industry and oil-processing refineries – is the most burdensome.

High emissions are also accounted for by the metals industry and, especially on the export side, by the automotive, machinery and electronics sectors. EU imports also generate significant CO2 emissions from mining. Europe's high consumption of metallic and mineral raw materials is therefore also one of the important drivers of earth heating, inter alia due to environmentally harmful and emission-intensive cultivation methods in mining.

Aircraft over container ships — Picture: shawnanggg / Unsplash.com

Achilles heel: Transport emissions from EU foreign trade

The importance of transport-related emissions from European trade shows that consideration must be given not only to the climate impact of the production of goods, but also to the services associated with them. In addition to travel services, transport is the largest economic sector in the international trade in services, which at the same time produces considerable quantities of Treihaus gases.

In EU foreign trade, the bulk of transport is carried out by international maritime transport.¹⁶ The proportion of sea freight is particularly high if the weight of the transported goods is taken into account. In terms of transport weight, sea freight accounts for 74 percent of EU foreign trade (imports and exports). In terms of the value of goods transported, the share of ocean freight is 46 percent (see Chart 7).

Conversely, the ratio between values and weight is in the case of air freight, where higher-value goods are transported compared to sea freight. While the transport weight of air freight is only less than one percent of EU trade, around 21 percent of the traded goods are accounted for by extremely climate-damaging air traffic. Road and pipeline transport account for a slightly smaller share of EU foreign trade. The pipelines supply oil and natural gas to the EU.

Looking at the two most important transport modes of EU foreign trade in terms of value, it is clear that emissions from international air transport¹⁷ The increase was particularly long (see Figure 8). Until the coronavirus crisis, they reached the level of international maritime transport. However, the decrease in emissions caused by the coronavirus measures in 2020 was only a temporary phenomenon: Already in the following year they increased significantly again.

Sea freight emissions were slightly different. After many years of growth, they have fallen somewhat since the 2008 international financial crisis, but have remained at significantly higher levels than in 1990 and have not seen such a deep decline due to the coronavirus outbreak.

A scenario by the European Environment Agency shows that emissions from EU international maritime and aviation are also expected to increase in the future (see Chart 9).¹⁸ Remains with the few existing measures¹⁹ EU governments' efforts to curb emissions from maritime and aviation will continue to increase, not decrease as needed. The EU authorities expect a particularly strong increase in emissions from aviation over the next two years.

If this scenario materialises, the two main modes of transport for EU external trade – maritime and aviation – will produce growing amounts of greenhouse gases by 2040. In contrast to international maritime and aviation, the European Environmental Bureau expects a reduction in emissions from road transport. One of the reasons for this is that EU governments have taken more decisive decarbonisation measures by promoting e-mobility in this sector.²⁰ For EU trade policy, this means: Its most important modes of transport in terms of value – maritime and air transport – seem to remain an Achilles' heel for meeting Europe's climate targets.

Trade agreements: Drivers of earth heating

The EU boasts the world's largest network of trade agreements. Its 42 agreements with 74 partner countries account for 44 percent of total EU foreign trade. The trade in goods covered by these agreements totalled €2.4 trillion in 2022.²¹ But most of the goods liberalized by the trade agreements put a strain on the climate. With its aim of reducing tariffs and non-tariff measures, the EU is therefore also promoting an increase in trade in emission-intensive goods.

Nevertheless, the European Commission treats the growth of bilateral flows of goods as a key success criterion of its trade agreements. In presenting her latest progress report on the implementation of EU trade policy, she referred to its achievements. Trade with the top 20 partners in their trade agreements grew by an average of 30 percent in 2022.²² However, this is rather bad news for the global climate, as the following look at the treaties with South Korea and Canada shows. Planned agreements, such as those with Mercosur, also pose significant environmental risks, especially as there are hardly any effective risk prevention clauses.

Trade agreement with South Korea: Thrust for combustion engine trade

The European Commission is particularly proud of the trade agreement with South Korea. Since its application, European car exports to the Asian country have increased by 217 percent, according to the Commission.²³ But from a climate perspective, car trade between the EU and South Korea is more of a burden than a success.

The trade agreement between the two partners has been provisionally applied since July 2011 and entered into full force in December 2015, following ratification in all EU Member States. In the automotive sector, tariffs have been largely eliminated in two steps since the contract application of around 8 percent by 2016.²⁴ Since then, both EU exports to South Korea and South Korean exports to the EU have increased sharply (see Chart 10).

However, the lion's share is attributable to fossil-fuelled combustion cars. The more climate-friendly electric cars, on the other hand, have so far played a minor role. Only South Korean companies now export a larger share of e-cars to the EU, which in terms of value recently reached 22 percent of South Korean car exports. In European car exports, however, only a very small proportion of around 4 percent has been accounted for by e-cars. With their combustion engine exports supported by the trade agreement, European car manufacturers can therefore continue to delay the much-needed conversion of their product range.

In addition, EU exports to South Korea are dominated by particularly polluting diesel vehicles, which emit large amounts of nitrogen oxide in addition to carbon dioxide. What's more: In South Korea, European manufacturers also sold diesel cars, the exhaust values of which are said to have been manipulated by the installation of illegal software. For this reason, South Korean authorities have imposed fines on these manufacturers in recent years.²⁵

CETA: Growing EU oil imports

In the EU-Canada agreement CETA, the European Commission also makes it very clear what is the key success criterion for it. In a nutshell, she writes about the contract: "His goal is to increase trade, generate growth and jobs".²⁶ And that objective has been met since its provisional application in September 2017. “CETA works. CETA delivers”, the Commission claims on social media, justifying it as follows: ‘Since CETA’s provisional application, trade has increased by an impressive 66 per cent, adding up to 77 billion euros.’²⁷

However, goods whose exchanges increased in EU-Canada trade also include highly climate-damaging products. For example, European crude oil imports from Canada have increased considerably in recent years, both in terms of volume and value. In 2022, the EU imported 4 million tonnes of 2.5 billion euro worth of crude oil from Canada (see Chart 11).

Although the burning of oil is a key driver of global warming, CETA does not foresee any measures to initiate the exit from the oil trade. On the contrary, the EU has also eliminated the existing tariffs on various processed oil and gas products vis-à-vis Canada. These were up to 8 percent.²⁸

Despite the climate crisis, agreements such as CETA thus contribute to the proliferation of fossil fuels, whether through a lack of commitments to phase out oil or the elimination of existing tariffs on oil and gas products.

EU Mercosur: Emissions from imported deforestation

But not only existing EU treaties are cause for concern, but also the European negotiations on further trade agreements, including those with the South American Mercosur states (Argentina, Brazil, Paraguay, Uruguay).

The Mercosur agreement could generate significant additional greenhouse gas emissions if EU imports increase agricultural expansion in South America, contribute to land use change and deforestation. This risk is very high, as the EU offers Mercosur exporters preferential tariff quotas for beef, chicken, cane sugar and bioethanol, while Argentina wants to reduce export taxes for soy exports to the EU.²⁹

The importance of agriculture and deforestation for the emissions of South American countries is illustrated by a look at Brazil's greenhouse gas balance, by far the largest Mercosur country (see Chart 12).

Unlike in the EU, more than two thirds of Brazil’s emissions are accounted for by agriculture and land use change, which are largely determined by the country’s deforestation rates – mainly through clearing in the Amazon and the Cerrado dry forest region. The Brazilian greenhouse gas balance also shows two things: Emissions from agriculture have increased continuously, while emissions from land use change and deforestation fluctuate very strongly.³⁰

It is precisely against this background that the planned liberalisation of agricultural trade between the EU and Mercosur is so dangerous. They are driving the exports of Brazil's agribusiness, whose emissions are steadily increasing, and thereby increasing the pressure to develop further arable and pasture land. This in turn increases the incentive to deforestation of the important carbon stores in the Amazon and the Cerrado.

It is therefore all the more incomprehensible that the official impact assessment of the EU Commission on the Mercosur agreement excluded land use, land use change and forestry (LULUCF) from its calculation of emissions risk. This is one of the reasons why it comes to the questionable conclusion that the agreement is largely emission-neutral. Even in their ambitious scenario of far-reaching liberalisation, its implementation in the Mercosur countries would lead to a maximum additional emissions of 17.5 million tonnes of CO2 equivalents, which would, however, be offset by emission reductions in the EU and other countries.³¹

However, just how important the land-use changes induced by the agreement can be is illustrated by scenarios calculated by the Brazilian environmental institute Imazon.³² If the EU-Mercosur Treaty is implemented, the conversion of forests into pastures and pastures into fields can therefore generate additional emissions of between 75 and 173 million tonnes of CO2 equivalents (see Chart 13).

Image of forest fire — Picture: Faruk Pants / Pixabay.com

The Imazon scenarios take into account different intensities of deforestation and land use as well as the response to price changes due to the agreed tariff reduction. According to these scenarios, the additional emissions from land use change can be 4-10 times higher than the values calculated by the EU impact assessment without land use.

For comparison: The potential land-use emissions of the EU-Mercosur agreement, with up to 173 million tonnes of CO2 equivalents, would be slightly higher than the total greenhouse gas emissions of Bavaria and Baden-Württemberg combined (around 160 million tonnes of CO2 equivalents in 2020).³³ The entry into force of this agreement therefore threatens a serious setback in the fight against climate change.

Weak climate clauses remain ineffective

Another shortcoming of EU policies is that their trade agreements do not yet contain effective regulations to contain the climate risks of trade. In older agreements, such as with oil and gas exporters such as Norway, Mexico and Algeria, there are no specific climate commitments at all, apart from non-binding cooperation agreements. It is only since 2011 that the EU has enshrined so-called sustainability chapters, which contain differingly wide-ranging environmental policy clauses that often - but not always - address climate protection.³⁴

How differently climate protection is treated can be seen in some of the more recent trade agreements. The first treaty with a sustainability chapter is the 2011 trade agreement with South Korea, in which the parties commit themselves to their obligations under the Framework Convention on Climate Change and the Kyoto Protocol.³⁵ However, the sustainability chapter of the 2017 EU-Canada CETA agreement lacks such a reference to the climate convention. On the other hand, the 2019 EU-Japan Agreement: For the first time, the sustainability chapter also includes an obligation to implement the Paris Agreement.³⁶

However, the key weakness of the sustainability chapters is that they are excluded from the dispute settlement mechanism of the agreements and that trade sanctions cannot be imposed in the event of breaches. As a result, their climate clauses remain largely toothless.

This deficit was addressed for the first time, at least in part, in the EU trade agreement with New Zealand, which could enter into force after the European Parliament's recent approval in mid-2024. According to the sustainability chapter there, at least violations of the Paris Agreement and the core labour standards of the International Labour Organisation can be punished with trade sanctions. However, this does not apply to all other articles of this chapter, such as those on protection against deforestation or species extinction, although these are also indispensable measures in the fight against climate change.³⁷

The EU intends to propose its slightly modified approach to sustainability to all parties in future trade negotiations. Whether they agree, however, is questionable. The EU Economic Partnership Agreement with Kenya, signed in December 2023, for example, does not include a sanction option for breaches of the Paris Agreement – the Kenyan government had blocked this option.³⁸ And in the case of the EU-Canada agreement CETA, it was the EU Commission itself that rejected the Canadian side's demand for a sanctioned sustainability chapter.³⁹ In addition: All existing agreements must continue to operate without the sanction option for climate offences – and thus remain ineffective.

In addition, the agreements do not know of any measures to curb trade in climate-damaging goods. There are no obligations to decarbonise their production nor to disseminate such goods. On the contrary, the agreed reduction of tariffs and non-tariff measures sometimes boosts sales of emission-intensive goods. The sustainability chapters cannot stop or compensate for the resulting increases in production of climate-damaging goods, even if they are sanctioned.

The sustainability chapters also remain largely toothless with regard to the climate-damaging structure of tariffs and non-tariff measures. This structure favours emission-intensive compared to lower-emission goods (see Box 1). While the sustainability chapters sometimes include memoranda of understanding on the liberalisation of greener goods; However, this alone does not change the climate-damaging customs structure.

Box 1
How EU tariffs subsidise CO2 emissions

EU countries subsidise greenhouse gas emissions not only directly through various tax incentives (such as aviation fuel, industrial electricity prices or diesel consumption), but also indirectly by failing to adequately account for the gigantic damage caused by climate change.⁴⁰ Trade policy also subsidises greenhouse gas emissions through its specific structure of tariffs and so-called non-tariff measures, such as product standards or environmental requirements.

For example, the EU imposes lower tariffs on many emission-intensive goods than on lower-emission products. Some particularly climate-damaging raw materials are even largely duty-free, such as crude oil, natural gas, coal, iron ore, soybeans and many wood products. On the other hand, significantly higher import duties are due on numerous low-emission goods, such as solar films 6.5 percent, ball bearings for wind turbines 8 percent, electric cars 10 percent and bicycles even 14 percent.⁴¹ A climate-friendly tariff structure, on the other hand, would have to provide for higher rates for more harmful products instead of subsidising them.

While the EU is not alone in this practice, it is making particularly strong use of it. According to calculations by US researcher Joseph Shapiro, the states subsidize CO2 emissions with the equivalent of 78 to 110 euros per tonne on a global average with their distorted tariff and conditional structure. This corresponds to an annual amount of 500 to 750 billion euros. In EU countries, the subsidy of CO2 consumption via the structure of tariffs and non-tariff measures is sometimes even higher, at 160 euros per tonne. This means: In the EU, tariff-related emission subsidies are sometimes twice as high as the global average.⁴²

The level of subsidies from low tariffs on high-emission goods is also evident in comparison to the carbon price, which has fluctuated by 80 euros per tonne in the EU over the past two years.⁴³ Consequently, the price of CO2 determined in the European Emissions Trading System, which is intended to increase greenhouse gas emissions, was half lower than the subsidies from the environmentally distorted tariffs, which re-cheap the same emissions. In plain language: The climate-blind structure of tariffs and non-tariff measures severely undermines the steering effect of the carbon price.

Multilateral trade policy: inconsistent

The European Union is a traditional advocate of the multilateral trading system, which is monitored in the post-war era by the GATT (General Agreement on Tariffs and Trade) and since 1995 by the World Trade Organisation (WTO). The WTO enjoys great influence not only because of the multilateral trade agreements that are gathered under its umbrella (GATT, GATS, TRIPS, etc.), but above all because of the dispute settlement body.

However, the disputes initiated by the EU under the GATT/WTO system did not always serve climate protection, but primarily the export interests of European companies. For example, the EU had already launched a number of proceedings under the GATT system against environmental and climate action by other countries (see Box 2). With its recent WTO proceedings against green subsidies and localisation requirements, it is also hindering the international dissemination of modern climate-friendly products and processes. This in turn takes place against the background of a strong position of European manufacturers in the international competition for climate technologies.

Box 2
GATT: Early EU lawsuits against environmental and climate action

As early as 1987, the European Community, together with Canada and Mexico, initiated a GATT dispute against the US, which had introduced a countervailing charge (the so-called ‘superfund’ tax) on specific chemicals contained in imported petroleum products. The revenue from the levy was used to rehabilitate hazardous waste landfills that were burdened by these products. However, the EC considered the levy to be a barrier to trade for the exports of its petrochemical industry.⁴⁴

In 1993, the EC initiated another GATT procedure against car taxes levied by the US on cars with high fuel consumption, including luxury tax and gas guzzler tax. The EC criticised that these taxes would affect mainly the exports of European car brands.⁴⁵

However, with both GATT procedures, the EC was unsuccessful. The irony of the story is: Above all, the superfund tax is now regarded as a precursor to WTO-compatible border adjustment, as the EU now introduces itself with its CBAM (see Chapter 5).⁴⁶

EU: Strong position in the export of climate technologies

EU companies are among the most competitive providers of modern low-carbon and climate protection technologies. For global climate protection, it would be important if other countries would also enter into the production and use of such products. The international uptake of climate change mitigation and adaptation technologies should therefore be one of the EU’s key objectives, alongside the fight against poverty and the protection of human rights.

But it all too often does the exact opposite with its trade policy, especially when climate initiatives from other countries stand in the way of EU industry's export interests. In fact, the EU has become one of the driving forces in the increasingly aggressive competition for dominance of climate-friendly technologies. For example, it is actively taking action against policies to promote green industries abroad. In doing so, however, it is hindering the global energy transition and the international industrial transformation. This is all the more questionable given the strong position that European green technologies have acquired on world markets.

After China, the EU is the second largest exporter of low-emission technologies, including a wide range of products such as wind turbines, insulation materials, electric cars, heat pumps and smart meters. In recent years, the EU has significantly increased its global market share of these modern technologies, from 19 to 23 percent between 2019 and 2022 (see Chart 14).⁴⁷ Even stronger, however, was the growth in Chinese exports, which increased from 23 to 34 percent, driven mainly by exports of e-cars, lithium-ion batteries and solar cells – referred to as ‘the new three’ in China.⁴⁸

However, the EU has also gained significant global market shares in important segments of modern climate technologies, especially in the field of wind energy. For example, the EU accounts for 65 percent of global exports of wind turbine rotors (see Figure 15).

It also has a strong export position in hydropower and pumped storage plants. It also has high global market shares in key industrial sectors, such as the production of ‘green steel’ through processes such as hydrogen-based direct reduction (HDRI) or electric propulsion. Equally important are the high export shares for heat pumps, energy management systems (EMS) for power grids, insulation materials and finished buildings.⁴⁹

Many other countries, however, are net importers of these important goods and have a trade deficit in climate technologies. This applies not only to industrialised countries whose governments have neglected to promote decarbonisation, but above all to many emerging economies. The IMF estimates that around 70 percent of low-emission technology exports come from high-income countries.⁵⁰ However, the higher the demand for these goods becomes, the greater the risk of swelling deficits in import-dependent countries.

‘Green trade wars’: EU against local content requirements

The European Union has launched some dubious proceedings before the WTO arbitral tribunal from a climate change perspective. In 2011, for example, it sued Canada for linking its green electricity feed-in tariff to so-called local content requirements for energy producers, which required a certain percentage of local products to be used. The EU considered the subsidy to be discrimination against European suppliers on the basis of these conditions. Their WTO lawsuit was successful and Ontario had to remove the localization requirements in 2014.⁵¹

This is all the more bitter as Ontario's requirements have been quite successful, both in terms of climate impact and employment effects. In addition, foreign companies were not excluded from the Canadian market: A major contract for the construction of wind and solar power plants in Ontario was awarded to a South Korean consortium led by Samsung.⁵²

In March 2022, the EU launched another WTO dispute settlement procedure to address the local content requirements of the contracts for difference, with which the UK subsidises renewable energy producers. These conditions would in particular discriminate against EU wind turbine suppliers, according to the European Commission.⁵³ Already during the first phase of the procedure – the WTO consultations – the UK government agreed to delete the localisation rules. In return, the Commission announced that a continuation of the WTO procedure would no longer be necessary if the UK government implemented the agreement.⁵⁴

When the US finally passed its Inflation Reduction Act (IRA) in August 2022, which provides for several hundred billion dollars in tax breaks and subsidies for the green transformation and renewable energies, EU representatives also threatened a WTO procedure.⁵⁵ The IRA also imposes local content requirements if companies want to take advantage of the tax breaks for products such as e-cars, batteries, wind power or solar systems. There were fears in the EU that these subsidies could lead to the relocation of companies and investments to the US.

And so various think tanks and politicians, including the Bruegel Institute in Brussels and the Chairman of the Trade Committee in the European Parliament, Bernd Lange, voted in the chorus of those calling for a WTO lawsuit.⁵⁶ Some media outlets interpreted the Euro-American dispute as a sign of emerging ‘green trade wars’ over the dominance of new climate-friendly technologies and manufacturing processes.⁵⁷

Meanwhile, civil society organisations on both sides of the Atlantic were alarmed at the risk of further EU action against climate action. In a joint letter to the EU Commission and the US government, 40 organisations called on the EU to refrain from trade policy measures against the IRA. Instead, the US and the EU should commit to a Climate Peace Clause, i.e. a waiver of arbitration in trade or investment agreements against climate protection laws of other states.⁵⁸

In addition, research shows that EU subsidies for the green transformation differ in structure but less in size from those of the US. In some areas, such as renewable energies, they are even far higher than in the USA, as the Franco-German Council of Economic Experts notes.⁵⁹ The economists conclude that the IRA will have little impact on the competitiveness of European industry. On the other hand, the legislative package could significantly advance the much-needed climate-friendly transformation in the US industry.⁶⁰

In addition: There are also various programmes and requirements in the EU that specifically promote local providers. In response to the IRA, the EU and member states such as Germany are also planning various other legislative projects that should support the local industry via localisation requirements (see Box 3).

As the EU itself therefore makes use of specific funding instruments for local providers, its strict rejection of local content requirements is questionable. It clearly sets double standards in this respect. It also integrates localisation bans into its bilateral trade agreements. In doing so, however, it is hindering the development of production capacities for green technologies abroad.⁶¹ Finally, local content requirements – if embedded in realistic development strategies – can also be a proven tool for economically weaker countries trying to overcome their backlog of climate-friendly products.⁶²

Box 3
Planned localisation measures in the EU

The EU and member states are planning various new initiatives to support local industry. For example, the Net Zero Industry Act (NZIA), an EU response to the US Inflation Reduction Act, stipulates that at least 40 per cent of the demand for climate technologies is produced in the EU, with almost 90 per cent of the battery demand to come from EU production.⁶³ These goals are a major challenge, especially in the solar and battery industries.⁶⁴

In the solar sector, EU members are currently planning to link the award of subsidies to increasing proportions of so-called resilience criteria in public tenders, which, among other things, favour the use of European solar cells.⁶⁵ In anticipation of the EU scheme, Economics Minister Habeck advocates a "resilience bonus" in Germany, which grants a higher feed-in tariff for such solar systems that use German or European components.⁶⁶

The planned EU rules for future wind power auctions also hide localisation requirements in award criteria such as ‘energy system integration’ and ‘supply chain resilience’.⁶⁷ Similar goals are foreseen in the Critical Raw Materials Act, another European IRA response. According to this, 40 percent of the EU's demand for strategic raw materials will also be processed in the EU.⁶⁸

EU against green subsidies from other countries

As the Inflation Reduction Act in particular made clear, the EU's fight against local content requirements is closely linked to government subsidies for the green transformation. The European Commission is also taking more and more action in this area if aid from other countries could affect the sales opportunities of European producers on their domestic or foreign markets. These measures are directed not only against financially powerful states such as the US and increasingly China, but also against economically weaker countries.

In 2013, the EU imposed anti-dumping and countervailing duties on imports of solar cells from China, Taiwan and Malaysia, as these would distort the local market through state subsidies, according to the accusation at the time. However, the measure, which was replaced a short time later by a minimum import price, harmed the branches of the European solar industry, which depend on the cheap Asian inputs. Processors and installers in the solar industry suffered from the scarcity and price increase of the modules, which in turn hindered the energy transition. Finally, in 2018, the EU lifted this trade-restrictive measure.⁶⁹

In September 2023, the EU Commission launched an investigation into Chinese subsidies for electric cars, which could also lead to countervailing duties on EU imports. Although some non-governmental organisations welcome this measure for industrial policy reasons,⁷⁰, However, there is still a risk that it could slow down the transformation of the European car industry.

German car manufacturers in particular produce significantly more large, heavy and energy-inefficient models than their Chinese competitors, not only for combustion engines, but also for electric cars.⁷¹ The majority of Chinese e-car models, on the other hand, rely on smaller batteries that are more climate-friendly than many of the heavy batteries in European cars, especially as long as the electricity mix is not yet fully decarbonised.⁷²

What is even more worrying, however, is that the EU wants to tighten international trade rules on allowable subsidies. Together with the US and Japan, it drafted proposals to further narrow the scope for WTO-compliant subsidies. The trio intends to add several categories of prohibited aid to the WTO Agreement on Subsidies and Countervailing Measures (ASCM).⁷³

Although this initiative is primarily directed against China, it also affects all economically weaker countries that wish to promote the development of low-emission technologies with government support. It is also problematic in view of the fact that the ASCM has no exceptions for environmentally necessary subsidies.⁷⁴

The group of African countries, among others, resisted this narrowing of their scope of action. In a document to WTO members in May 2023, it called for a comprehensive reform of the ASCM, giving economically weaker countries the necessary flexibility to use government subsidies and local content requirements to promote the development of green industries and integration into climate-friendly supply chains. In its current form, the ASCM is unsuitable for global challenges. When it was adopted, states had ‘underestimated the scale of the climate crisis’.⁷⁵

Unilateral trading instruments: Not always climate-friendly

EU trade policy has a significant impact on global warming not only through its bilateral and multilateral activities, but also through some of its unilateral measures. Among the autonomous trade policy instruments recently adopted by the EU, the Carbon Border Adjustment Mechanism (CBAM) and the Deforestation Regulation are of particular climate policy importance. Both instruments have attracted some criticism, especially in countries of the South, because their consequences for local producers have not been adequately addressed, according to the accusation. However, both legislative proposals should also be improved in terms of their effectiveness for climate protection.

CBAM: Relocation protection at the expense of poor countries?

The EU's trade policy climate initiatives, which are particularly controversial at international level, include measures aimed at external protection for European industry, which could be more affected by a rising carbon price of the EU Emissions Trading System (ETS) in the future. With its Fit for 55 package, the EU has decided to phase out the free allocation of emission allowances to the energy-intensive industry to zero by 2034. The free certificates are one of the tools (in addition to various subsidies, in particular industrial electricity prices) to prevent emission-intensive production processes from being outsourced to countries with weaker climate conditions – the so-called ‘carbon leakage’.⁷⁶

However, to the extent that the free certificates are melted down, the production costs of the industries concerned are increasing, so that their competitiveness could potentially suffer. As compensation, the EU has therefore decided to introduce a carbon border adjustment, i.e. an import levy on emission-intensive goods. This so-called Carbon Border Adjustment Mechanism (CBAM) initially covers five product groups (iron and steel, aluminium, cement, fertilizer, hydrogen) as well as electricity.

Since October 2023, importers have been subject to reporting obligations on the introduction of these products, and from 2026 onwards, they will have to purchase additional CBAM certificates, the price of which will be based on the EU ETS carbon price. The amount of allowances to be purchased depends on the emission intensity of the imported goods as well as the free allowances. The fewer free certificates the EU allocates to European industry, the greater the number of CBAM certificates that importers have to purchase.⁷⁷

Importers may be able to request a deduction from the CBAM price if a carbon price has already been paid for the imported goods in the country of production, for example under an emissions trading scheme or a carbon tax. However, as only 39 countries have national carbon prices so far – including the 30 participants in the EU Emissions Trading System – such a deduction cannot be claimed for the majority of exporting countries, including the US.⁷⁸ In addition, the CO2 prices of the different national systems are extremely different in height. In China's emissions trading system, for example, it fluctuated last year around 8 euros, in Europe around 80 euros. The deduction would therefore be correspondingly low.⁷⁹

The World Bank developed an index to identify the countries whose exports are most affected by the CBAM levy (see Chart 16). The index weights the impact based on the emission intensity of the sectors covered by CBAM and the dependence of the producing countries on the EU as a sales market.

It is clear that exporters from economically weaker countries will be most affected by CBAM. Zimbabwe tops the list, as its iron and steel production is very emission-intensive and it sells 87 percent of its exports to the EU. In Ukraine, the cement and steel industries are the most affected sectors; in Georgia it is mainly fertilizer production and in Mozambique aluminium production.⁸⁰

It is therefore unsurprising that the CBAM has triggered strong criticism among the countries concerned. Many express doubts about its WTO compliance.⁸¹ India is even planning to take action against border adjustment with a WTO lawsuit.⁸² At the climate conference in Dubai at the end of 2023, Brazil, South Africa, India and China jointly called for unilateral measures that violate trade law, such as carbon border adjustment, to be collectively rejected. Such initiatives would also violate the principle of ‘common but differentiated responsibility’ of developed and economically weaker countries for climate change.⁸³

Although it makes sense in principle to prevent carbon leakage to countries with weak environmental regulations, the protest of those affected nevertheless points to weaknesses of the CBAM. For example, there is a lack of linking of border adjustment to concrete aid for financially weak countries in order to support the decarbonisation of their affected industries.

But not only the modernization of industrial plants is extremely expensive. The introduction of carbon pricing schemes to reduce CBAM levies also requires significant resources. The same applies to the determination of the emission intensity of the affected production sites and their verification by audits. Finally, there is no CBAM exemption for the group of economically weakest countries, the Least Developed Countries, to which the EU has so far granted duty-free access to the EU market.⁸⁴

On the other hand, the EU generates additional revenue through the melting of the free certificates and the income from the CBAM certificates. Depending on the level of the carbon price, the emission intensity of imports and the amount of free allowances still available, these additional revenues could amount to between EUR 9 and 14 billion in 2030, according to the Commission’s rather conservative estimates.⁸⁵ With a further increase in CO2 prices, more than 80 billion euros per year will also be considered possible from the end of the 2030s.⁸⁶

Finally, and this is often overlooked, the energy-intensive European industry is gaining competitiveness in the future thanks to CBAM and the wide range of government subsidies for its decarbonisation, be it investment aid, credit guarantees or capped electricity prices. The more climate-friendly the products and processes of European industry become, the greater the sales opportunities in the new green markets. For this reason, more and more studies predict that CBAM will bring trade and welfare gains to the EU, while many economically weaker countries face losses.⁸⁷

Deforestation Regulation: Towards Effective Enforcement

With its imports, the EU is making a massive contribution to global deforestation, especially in tropical countries. Between 2005 and 2017 alone, the EU imported agricultural commodities such as soybean, palm oil, beef and wood, for the production of which tropical forests of the order of 280,000 hectares had been cleared each year (see Chart 17).

Over the period, deforestation for EU consumption amounted to over 3.5 million hectares, one tenth of Germany’s area. The EU accounted for 21% of total tropical deforestation over the period, generating 1.8 billion tonnes of carbon dioxide emissions alone.⁸⁸

To address this maladministration, the EU has adopted a deforestation regulation, which entered into force at the end of June 2023. From 2025, all importers of a range of agricultural raw materials will have to demonstrate that they do not originate from previously deforested land or are related to forest degradation. These raw materials include soy, palm oil, beef, coffee, cocoa, rubber, wood and some processed products such as leather, chocolate, tires, paper or furniture. The guarantees of origin must use geolocation to trace the exact origin of these raw materials. With this measure, the EU hopes to reduce the CO2 emissions caused by the production and consumption of these goods by 32 million tonnes per year.⁸⁹

Image of deforestation — Picture: Matt Palmer / Unsplash.com

However, whether the deforestation regulation actually leads to progress on climate protection depends on several factors, such as whether it is possible to conclude effective partnership agreements with forest-rich countries. These would have to rule out various unintended side effects and also financially support the necessary capacity building in forest-rich export countries.

One of the major risks of the Regulation is its restriction to forests. While it could certainly improve forest protection, this may lead to evasive movements into other sensitive ecosystems. For example, additional fields and pastures could be developed through clearing in dry forest savannas, wetlands or moors. This risk is high, as the Regulation aims to review the extension to forest-like land within one year of its entry into force and to other ecosystems after two years. However, it remains to be seen whether these areas will actually be included in the scope and when this could happen. This gap is fatal, as savannas, wetlands and bogs are also important CO2 stores.⁹⁰

Another risk is that only five years after the entry into force of the regulation, the effects on smallholders will be examined. The participation of smallholder farms in the production of export goods endangering forests varies depending on the product being considered. They play a small role in soy exports from Mercosur, for example, as large agribusiness plantations dominate exports to the EU. However, their share is higher for beef from Brazil, palm oil from Indonesia and Malaysia, cocoa from Ghana and Ivory Coast or coffee from Vietnam and Brazil. Smallholder farmers account for 25 to 30 percent of global palm oil production, 60 percent of coffee and 95 percent of cocoa.⁹¹

In the eight most important export countries of the goods covered by the deforestation regulation alone, 2.8 million smallholder farmers could be directly affected by their requirements.⁹² However, guarantees of origin, geolocation and certification usually exceed their financial and human resources. If they lose their sales opportunities in the EU, they will have to sell their products in other less regulated markets. Or, in their distress, they pursue alternative activities that lead to deforestation: Cultivation of less strictly controlled agricultural products, illegal timber trade or small-scale mining. The EU would then have cleaned up its own supply chains, but deforestation-related emissions would still increase.⁹³

Last but not least, EU trade agreements also affect the effectiveness of the deforestation regulation. If, for example, the EU agreement with Mercosur were to be concluded, it would boost demand for forest-endangering products such as beef or soya, increase the incentive to develop further pastures and arable land through deforestation and undermine the success of the deforestation regulation. The planned EU-Mercosur agreement alone shows that the climate policy coherence of the individual EU trade policy instruments is rightly called into question.

Image of forest fire with firefighting plane — Picture: Yuri Meesen / Pexels.com

European foreign investment: Lack of steering

EU trade policy also has significant blind spots in the area of foreign investment, which weaken global climate protection. This applies both to the investment liberalisation arrangements contained in their trade agreements and to investment protection. For example, the liberalisations sought by the EU are not linked to a prior assessment of the climate impact of foreign investment. This regulatory gap puts the EU at risk of costly bad investments in fossil infrastructure. The investment protection rules, in turn, allow foreign investors exclusive access to international arbitration tribunals, which can significantly increase the costs of advanced climate legislation in the event of a complaint – and sometimes also lead to the cancellation of planned projects.

Investment liberalisation:
Disincentives favour stranded assets

The main problem with EU trade agreements in the area of investment is that they are almost entirely devoid of the nature of the projects and their climate impact. EU-based companies are still investing billions in the exploration, exploitation and trade of fossil fuels, including some of the world’s most climate-damaging projects, the so-called carbon bombs.⁹⁴

EU companies have invested in Kazakhstan's Kaschagan oil and gas field⁹⁵, in Alberta's oil sands in Canada⁹⁶, in oil wells off the coast of Mexico⁹⁷, to the deep-sea oil deposits of Brazil⁹⁸ or the shale gas area of Vaca Muerta in Argentina.⁹⁹ The EU has already concluded trade agreements with Kazakhstan, Canada and Mexico with investment rules, and is negotiating them with Brazil and Argentina. In the case of Canada and Mexico, these rules include investment liberalisation as well as investment protection.¹⁰⁰

But instead of mitigating the risks of fossil-fuel investments and phasing out fossil-fuel trade, these agreements remove potential barriers to investment for Europe's oil, gas and coal industries. This is done both through obligations to make it easier for European energy companies to access government tenders for exploration and development rights, and through investment rules that restrict government investment requirements.

The EU has also integrated energy and raw materials chapters into recent trade agreements, which require targeted liberalisation in the mining and energy sectors, including coal, oil and gas. Forerunners of these chapters already exist in the trade agreements with Georgia, Moldova, Ukraine and Kazakhstan. More comprehensive variants can be found in the recent trade agreements with New Zealand, Chile and Mexico.¹⁰¹

Both the investment rules and the energy and raw material chapters provide disincentives, as they do not differentiate between climate-friendly and climate-damaging investments. Comparative studies, however, show that foreign direct investment in particular is associated with higher greenhouse gas emissions than domestic investment. This risk is particularly high in emerging markets, which have lower regulatory capacity than industrialised countries.¹⁰²

In principle, direct investment that takes place in economically weaker countries is often of a lower quality than in wealthier countries, which apply stricter standards to the entry of foreign corporations into the market. For example, industrialised countries are now moving towards targeted support for the establishment of green technologies through investment management measures.¹⁰³

EU trade and investment agreements therefore also need rules for consistent investment management in order to channel international capital into the energy transition, decarbonisation of industry or adaptation to climate change. In this respect, however, they have a significant vacancy. They do not include any agreement by trading partners to jointly set up an environmental ‘investment screening’ that examines planned investments for their climate impact.

Under such a mechanism, both the countries of origin and the destination countries of foreign direct investment would commit to assessing the climate impact of capital flows, designing appropriate governance measures and supporting each other in their implementation.¹⁰⁴ The EU could offer the joint development of such a verification mechanism to all interested partner countries, regardless of their traditional trade and investment agreements.

The investment rules of the trade agreements contain further deficits. This is because they are also putting obstacles in the way of partner countries that want to redirect investments specifically into the green transformation. For example, the investment rules of the EU treaties with Mercosur, Chile and Mexico prohibit so-called performance requirements, which oblige branches of European corporations to transfer technology for the benefit of domestic companies.¹⁰⁵ Such technology transfer could concern, for example, modern climate change mitigation technologies or low-emission production processes, which are often severely lacking in EU partner countries.

Data from the International Energy Agency show how important government investment management mechanisms are for the energy transition. Accordingly, despite an increase in global investment in clean energy, significant investments are still being made in fossil fuels, which have been rising again since 2020 (see Chart 18).

In addition, the majority of global investment in renewable energy is limited to a handful of countries such as China, EU members and the US. Especially in economically weaker countries, which often still depend heavily on fossil energy supply, there is a significant investment deficit in the energy transition (see Chart 19).

This deficit of transitory investment can even reinforce the undifferentiated liberalisation obligations of EU trade agreements. This is because they increase the risk that target countries of European oil, gas and coal companies will allow investments that prolong their fossil dependency and jeopardise their international climate commitments.

In addition, fossil-fuel investments have a disproportionate risk of loss, as their profitability vis-à-vis renewable energies is declining in the future. The risk of devalued assets, so-called stranded assets, is extremely high for fossil investments.¹⁰⁶ As many consequential costs of devalued investments are passed on to the state budgets, the fiscal leeway for economic modernisation is also being reduced away from fossil industries.¹⁰⁷

Arbitration tribunals:
Risk insurance for fossil investments

Finally, passing on the losses from stranded assets to the public sector is also made possible by the investment protection rules, which the EU is integrating into an increasing number of trade agreements. The EU has already enshrined its Investment Court System (ICS) in the treaties with Canada, Singapore, Vietnam, Chile and Mexico; in others it shall follow.

The ICS is a variant of the Investor-State Dispute Settlement (ISDS) contained in numerous bilateral investment treaties (BITs). This grants foreign investors the exclusive right to sue states before international tribunals for compensation should their regulations affect their profit prospects.¹⁰⁸ More and more lawsuits have recently been filed under the ISDS system against climate protection measures, such as decisions to phase out coal or to stop oil and gas exploration. Of the more than 1,200 known ISDS lawsuits worldwide, about 38 percent are directed against regulations in the environmental protection and energy sector.¹⁰⁹

The compensation payments, to which investment tribunals condemn governments, are often several hundred million or even several billion euros, especially for energy investments. Against this background, threats of lawsuits can have a deterrent effect, so that, above all, financially clammy governments refrain from planned regulations – the so-called chilling effect.¹¹⁰

As the ICS also does not provide for clear limits on the level of compensation payments, it therefore poses major risks to climate change mitigation in the EU and its partner countries. In turn, it provides a kind of free risk insurance to EU companies investing in the exploitation of fossil fuels in non-European countries. With the compensation option, they reduce the risk of loss if the investments devalue faster than the companies hoped.¹¹¹

In the EU, however, there has been a partial rethinking in recent years. In May 2020, 23 EU countries signed an agreement to terminate the BITs they had concluded with each other. In doing so, they followed a ruling by the European Court of Justice, which had found the arbitration clauses in intra-EU BITs to be contrary to European law.¹¹²

Image of oil platform — Picture: Bernardo Ferrari / Unsplash.com

A similar development is emerging in the Energy Charter Treaty (ECT), a treaty signed by 53 countries and the EU to protect foreign energy investments. Following a flood of ISDS lawsuits under the ECT, the European Commission presented a proposal for a coordinated withdrawal of the EU in July 2023. The treaty is no longer compatible with the European climate goals.¹¹³ In this case, too, the CJEU had previously ruled that intra-EU proceedings based on the ECT infringed EU law. In addition, ten EU members had already announced their ECT exit, including Germany.¹¹⁴

While in the EU BITs and ISDS procedures between member states are now considered illegal, the EU maintains investment protection vis-à-vis third countries - another double standard of its trade policy. The danger that the ISDS system poses to the legal system and climate protection is even greater in economically weaker states, which have greater difficulties in adequately regulating transnational companies.

In this context, the German Association of Judges points out that it is easy for companies to stop their projects and deduct assets after a failed investment with high damage in the host state. ‘Actions against the subsidiary in the host State can no longer be served, titles can no longer be enforced, criminal investigations can no longer be carried out.’ Trade agreements therefore need rules on international legal assistance for foreign investments.¹¹⁵

Instead of ISDS procedures, the EU should provide legal assistance to its partners in order to support them in enforcing ambitious climate protection measures also vis-à-vis EU companies and their subsidiaries. This legal assistance could also be offered independently of their trade and investment agreements, for example in the form of specific partnership agreements.

Picture of Oil Refinery — Picture: Patrick Hendry / Unsplash.com

Conclusion: Climate protection needs cooperation

As has been shown, the European Union's trade relations contribute significantly to climate change. The production of the goods it imports and exports is associated with high greenhouse gas emissions. In particular, their import-related emissions have been considerable since European companies set up many production facilities abroad. In terms of sectors, in addition to manufacturing, the transport sector is mainly responsible for a large share of EU trade emissions. However, the EU's trade policy, which would actually have to reduce these climate risks, still contributes to increasing greenhouse gas emissions. This is why it needs fundamental reforms.

The European Commission has announced that trade policy will play its part in achieving a climate-neutral global economy. However, these ambitions repeatedly clash with the dominant claim of their trade policy to enforce market openings for European exporters, to ensure access to raw materials and fossil fuels, and to increase bilateral trade flows. Their key success criterion – increasing trade – remains incompatible with climate protection as long as the lion's share of goods are produced, transported and consumed in an emission-intensive manner.

Added to this is the strong competitive orientation of European trade policy, which repeatedly comes into conflict with the demands of climate change, which requires more cooperative rather than competitive global solutions. EU trade policy has so far failed to clearly prioritise climate protection over the interests of influential companies, especially the export industry.

This is particularly evident in their trade agreements, which cover around 44 percent of EU foreign trade. By reducing tariffs and non-tariff regulations, these mainly promote an increase in trade in emission-intensive goods. A key deficit of these agreements lies in the lack of commitments to decarbonise production and reduce trade in emission-intensive goods.

The multilateral initiatives of European trade policy are also not always in line with the requirements of the climate crisis. Particularly questionable are the GATT and WTO procedures that the EU has initiated against climate policy measures taken by other countries. With its WTO lawsuits against green subsidies and localisation requirements, it is also hindering the international spread of modern climate technologies. Only if there is sufficient global production capacity for these goods will it be possible to effectively combat global warming, a finding that the EU is still blocking.

The unilateral climate initiatives of EU trade policy – however justified they may be in principle – also have some shortcomings. For example, the criticism that countries in the Global South in particular have of the CBAM and the deforestation regulation is at least partly justified. Both measures lack sufficient support for producers in economically weaker countries. In order to increase their effectiveness, complementary support from the EU would therefore be needed, on the one hand for the industrial transformation in emerging countries and, on the other hand, for the traceability of potentially forest-endangering products.

Finally, the rules on liberalisation and investment protection contained in EU trade agreements also pose major risks to climate protection. Given the still considerable foreign investment by European companies in fossil fuels and other polluting sectors, it is a key deficit that the agreements do not include agreements for a joint climate-related investment assessment. Because of this gap, they increase the risk of costly bad investments in fossil industries. The investor-state arbitration procedures contained in more and more agreements, in turn, endanger progressive climate legislation through the disproportionately high compensation to which governments can be sentenced.

Image by Klimademo — Picture: Markus Spiske / Unsplash.com

The EU would therefore have to undertake fundamental reforms to make its trade policy climate-friendly. These reforms would require, above all, a strengthening of cooperation vis-à-vis the now dominant competitive instruments. This includes in detail:

Emission intensity of EU external trade needs to be better and more systematically captured in order to develop targeted measures for its decarbonisation. This requires publicly available up-to-date data on emissions from imports and exports, broken down by sector and partner country.
New EU trade agreements that do not make an effective contribution to reducing or even increasing greenhouse gas emissions must be dispensed with. Existing EU trade agreements must be redesigned in line with environmental, climate and human rights.
In principle, the EU should prioritise less extensive partnership agreements with a strong focus on solving specific environmental and development problems over its traditional trade agreements. Such partnership agreements could focus on forest protection, mining reforms, the energy transition, technology transfer, industrial decarbonisation, circular economy or the removal of fossil subsidies.
The EU's multilateral activities in the framework of the WTO must be linked to clear guidelines aimed at a socio-ecological transformation in the partner countries. It is imperative that the EU refrain from any tightening of WTO law or arbitration procedures that impede the climate-friendly transformation of production structures. Instead, it should actively support green subsidies, localisation requirements and technology transfers that enable global production expansion of modern air-conditioning technology.
Its unilateral climate-related trade instruments, such as CBAM and the Deforestation Regulation, need to be complemented by cooperative mechanisms. Economically weaker countries affected by these instruments also need targeted financial support in order to be able to implement the decarbonisation of their industry and export production.
Investor-state arbitration in EU trade and investment agreements must also be waived. They weaken national legal systems and impede the climate-friendly restructuring of trade and production structures through high compensation. Instead, the EU should offer its partner countries the development of a climate-related ‘investment screening’ to target foreign investment in projects to decarbonise production and adapt to climate change.

1
European Commission: The European Green Deal, Communication from the Commission, Brussels, 11.12.2019, COM(2019) 640 final: https://eur-lex.europa.eu/resource.html?uri=cellar:b828d165-1c22-11ea-8c1f-01aa75ed71a1.0021.02/DOC_1&format=PDF
2
European Commission: COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Trade Policy Review – An open, sustainable and determined trade policy, Brussels, 18.2.2021, COM(2021) 66 final: https://eur-lex.europa.eu/resource.html?uri=cellar:5bf4e9d0-71d2-11eb-9ac9-01aa75ed71a1.0003.02/DOC_1&format=PDF
3
European Commission: COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Trade Policy Review – An open, sustainable and determined trade policy, Brussels, 18.2.2021, COM(2021) 66 final: https://eur-lex.europa.eu/resource.html?uri=cellar:5bf4e9d0-71d2-11eb-9ac9-01aa75ed71a1.0003.02/DOC_1&format=PDF
4
Glen P. Peters et al.: Growth in emissions transfers via international trade from 1990 to 2008, PNAS, May 24, 2011, Volume 108, No. 21, pp. 8903-890: https://www.pnas.org/doi/full/10.1073/pnas.1006388108; Sylvain Weber et al.: CO2 embedded in trade: trends and fossil fuel drivers, CESIFO Working Papers, 7562, March 2019: https://www.cesifo.org/en/publications/2019/working-paper/co2-embedded-trade-trends-and-fossil-fuel-drivers; Brian R. Copeland et al.: Globalization and the Environment, National Bureau of Economic Research, Working Paper 28797, May 2021: https://www.nber.org/papers/w28797; WTO: The carbon content of international trade, WTO, Trade and Climate Change, Information brief No. 4, Geneva, 2022: https://www.wto.org/english/news_e/news21_e/clim_03nov21-4_e.pdf
5
UNEP/International Resource Panel: Sustainable Trade in Resources, Global Material Flows, Circularity and Trade, Nairobi 2020: https://www.unep.org/resources/publication/sustainable-trade-resources-global-material-flows-circularity-and-trade
6
Norihiko Yamana and Joaquim J. M. Guilhoto: CO2 Emissions Embodied in International Trade and Domestic Final Demand: Methodology and results using the OECD Inter-Country Input-Output Database, OECD Science, Technology and Industry Working Papers 2020/11: https://www.oecd.org/industry/co2-emissions-embodied-in-international-trade-and-domestic-final-demand-8f2963b8-en.htm
7
FAO: Emissions due to agriculture. Global, regional and country trends 2000-2018. FAOSTAT 2020, Analytical Brief Series, No 18, Rome: https://www.fao.org/3/cb3808en/cb3808en.pdf
8
WWF et al.: Extracted forests: Unearthing the role of mining-related deforestation as a driver of global deforestation, 2023: https://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/Wald/WWF-Studie-Extracted-Forests.pdf; Tshin Ilya Chardayre/Michael Reckordt/Hendrik Schnittker: Metals for the energy transition – Why we should think together the raw materials and energy transitions, PowerShift, November 2022: https://power-shift.de/wp-content/uploads/2023/05/Metalle-fuer-die-Energiewende_web02_230523.pdf
9
“International freight transport is also estimated to represent, on average, 33 per cent of the carbon emissions generated by trade during the production and transport of goods traded indirectly”, see: WTO: The carbon content of international trade, WTO, Trade and Climate Change, Information brief No. 4, page 8, Geneva, 2022: https://www.wto.org/english/news_e/news21_e/clim_03nov21-4_e.pdf. Trade-related emissions are the direct and indirect emissions generated by the production and transport of goods and services that are imported or exported.
10
The ITF scenario takes into account the entire global freight transport by air, sea, road and rail. The share of international freight transport is 42% (in 2019) or 41% (in 2050) of total global freight transport. See: International Transport Forum: ITF Transport Outlook 2023, OECD: https://www.oecd-ilibrary.org/transport/itf-transport-outlook-2023_b6cc9ad5-en
11
According to a study by Weber et al. (2019) Globally, the emission intensity of export goods is significantly higher than that of final consumption, which includes imported and domestic emissions. Production for the internal market is therefore less emission-intensive than that for exports. See Sylvain Weber et al.: CO2 embedded in trade: trends and fossil fuel drivers, CESIFO Working Papers, 7562, March 2019: https://www.cesifo.org/en/publications/2019/working-paper/co2-embedded-trade-trends-and-fossil-fuel-drivers
12
European Parliament: Economic Assessment of Carbon Leakage and Carbon Border Adjustment, Briefing, April 2020: https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/603501/EXPO_BRI(2020)603501_EN.pdf
13
Steven J. Davis and Ken Caldeira: Consumption-based accounting of CO2 emissions, PNAS, 23 March 2010: https://www.pnas.org/doi/epdf/10.1073/pnas.0906974107
14
Lauri Myllyvirta: Contradictory coal data clouds China’s CO2 emissions rebound in 2022, Carbon Brief, 15.2.2023: https://www.carbonbrief.org/analysis-contradictory-coal-data-clouds-chinas-co2-emissions-rebound-in-2022/
15
OECD: Carbon dioxide emissions embodied in international trade, 2021: https://stats.oecd.org/Index.aspx?DataSetCode=IO_GHG_2021
16
See European Commission: EU transport in figures, Statistical Pocketbook 2023, September 2023: https://transport.ec.europa.eu/facts-funding/studies-data/eu-transport-figures-statistical-pocketbook/statistical-pocketbook-2023_en
17
In the following, the total commercial aviation emissions are considered, i.e. from both freight and passenger traffic. Although freight transport accounts for only an estimated 19 percent of aviation emissions globally, 81 percent of passenger traffic is also part of a climate policy assessment of foreign trade. The revenue from international air transport as a whole is included in the balance sheet of trade in services, be it travel or air freight. For the share of emissions from freight and passenger transport in commercial aviation, see: Brandon Graver et al.: CO2 emissions from commercial aviation, 2018, International Council for Clean Transportation (ICCT), Working Paper 2019-16, September 2019: https://theicct.org/wp-content/uploads/2021/06/CO2-commercial-aviation-oct2020.pdf
18
European Environment Agency: Greenhouse gas emissions from transport in Europe: 24.10.2023: https://www.eea.europa.eu/en/analysis/indicators/greenhouse-gas-emissions-from-transport
19
These measures include, for example, the gradual extension of the EU emissions trading scheme to international maritime transport on 1 January 2024. In extra-EU transport, 50 percent of emissions from large ships arriving at or leaving EU ports will be covered by emissions trading in the future. See: European Commission: Reducing emissions from the shipping sector: https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en
20
European Environment Agency: Greenhouse gas emissions from transport in Europe: 24.10.2023: https://www.eea.europa.eu/en/analysis/indicators/greenhouse-gas-emissions-from-transport
21
European Commission: REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on the Implementation and Enforcement of EU Trade Policy, Brussels, 15.11.2023, COM(2023) 740 final: https://ec.europa.eu/transparency/documents-register/detail?ref=COM(2023)740&lang=en
22
European Commission: Value of EU trade deals surpasses €2 trillion, Brussels, 15.11.2023: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_5742
23
European Commission: Value of EU trade deals surpasses €2 trillion, Brussels, 15.11.2023: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_5742
24
IFO/Civic: Evaluation of the Implementation of the Free Trade Agreement between the EU and its Member States and the Republic of Korea, Final Report, May 2018: https://policy.trade.ec.europa.eu/analysis-and-assessment/ex-post-evaluations_en
25
Süddeutsche Zeitung: Court in South Korea: Fine against VW for emissions scandal, 6.2.2022: https://www.sueddeutsche.de/wirtschaft/auto-seoul-gericht-in-suedkorea-bussgeld-gegen-vw-wegen-abgasaffaere-dpa.urn-newsml-dpa-com-20090101-200206-99-802999; Time online: Mercedes-Benz to pay millions penalty in South Korea, 6.2.2022: https://www.zeit.de/news/2022-02/06/mercedes-benz-soll-in-suedkorea-millionen-strafe-zahlen
26
European Commission: CETA chapter by chapter: https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/canada/eu-canada-agreement/ceta-chapter-chapter_en
27
See the European Commission’s Mastodon post of 23.11.2023: https://social.network.europa.eu/@EU_Commission/1114587616625630
28
Government of Canada: Opportunities and Benefits of CETA for Canada’s Oil and Gas Exporters, 26.9.2022: https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/ceta-aecg/business-entreprise/sectors-secteurs/OGE-EPPG.aspx?lang=eng
29
Thomas Fritz: EU-Mercosur Agreement – Risks to climate change and human rights, Misereor/Greenpeace/Three Kings Action, June 2020: https://greenwire.greenpeace.de/Fritz-Studie-EU-Mercosur
30
SEEG: Sistema de Estimativas de Emissões e Remoções de Gases de Efeito Estufa, 2023: https://plataforma.seeg.eco.br/
31
LSE Consulting: Sustainability Impact Assessment in Support of the Association Agreement Negotiations between the European Union and Mercosur, Final Report, December 2020, 86f.: https://policy.trade.ec.europa.eu/news/commission-publishes-final-sia-and-position-paper-eu-mercosur-trade-agreement-2021-03-29_en
32
Farzad Taheripour/Angel H. Aguiar: The impact of the EU-Mercosur trade agreement on land cover change in the Mercosur region, in: Imazon (ed.): Is the EU-Mercosur trade agreement deforestation-proof? Belém, November 2020: https://www.researchgate.net/publication/346498739_Is_the_EU-MERCOSUR_trade_agreement_deforestation-proof
33
Statistical offices of the Federal Government and the Länder: Environmental economic accounts of countries, greenhouse gas emissions, 2023: https://www.statistikportal.de/de/ugrdl/ergebnisse/gase/thg
34
Marc Jütten: Trade and sustainable development in EU free trade agreements, European Parliamentary Research Service, November 2023: https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2023)754613
35
Thomas Fritz: Environmental protection in the sustainability chapters of EU trade agreements. State of play, effectiveness and reforms, PowerShift (ed.), Berlin, May 2019: https://power-shift.de/wp-content/uploads/2019/08/Umweltschutz-in-den-Nachhaltigkeitskapiteln-der-EU-Handelsabkommen.pdf
36
T&E et al: From CETA to JEEPA: The variations in the ‘trade & sustainable development’ provisions in EU free trade agreements, Eurogroup for Animals/Transport & Environment/Fern/Concord (ed.), September 2018: https://www.transportenvironment.org/discover/ceta-jeepa-have-sustainability-safeguards-improved-eus-trade-deals/
37
Thomas Fritz: On track for sustainable trade? The EU-New Zealand trade agreement from a sustainability perspective, Vienna Chamber of Labour, 2023: https://emedien.arbeiterkammer.at/viewer/image/AC16906200/
38
Leila van Rinsum: Secretary of State for Agreements with Kenya: “We want local value creation”, taz, 19.6.2023: https://taz.de/Staatssekretaer-ueber-Abkommen-mit-Kenia/!5938846/
39
Hendrick Kafsack: Sustainable trade: Commission blocks enforcement of environmental and labour standards in CETA, Frankfurter Allgemeine Zeitung, 15.4.2023: https://www.faz.net/aktuell/wirtschaft/eu-kommission-blockiert-umsetzung-von-umweltstandards-in-ceta-18821750.html
40
CAN Europe: Fossil Subsidies in the EU, March 2023: https://caneurope.org/how-to-stop-the-never-ending-nightmare-new-report-tracks-fossil-fuel-subsidies-in-the-eu/
41
The rates given here refer to the most-favoured-nation duties, which are indicated as third country duties (Erga Omnes) in the EU tariff database TARIC: https://taxation-customs.ec.europa.eu/customs-4/calculation-customs-duties/customs-tariff/eu-customs-tariff-taric_de
42
Joseph S. Shapiro: The Environmental Bias of Trade Policy, National Bureau of Economic Research, NBER Working Paper 26845, November 2020: https://www.nber.org/papers/w26845
43
EMBER: Carbon price tracker: https://ember-climate.org/data/data-tools/carbon-price-viewer/
44
GATT: UNITED STATES – TAXES ON PETROLEUM AND CERTAIN IMPORTED SUBSTANCES, Report of the Panel adopted on 17 June 1987: https://www.wto.org/english/tratop_e/dispu_e/gatt_e/87superf.pdf
45
GATT: UNITED STATES – TAXES ON AUTOMOBILES, Report of the Panel, 11 October 1994: https://www.wto.org/english/tratop_e/dispu_e/gatt_e/93autos.pdf
46
Michael A. Mehling and Robert A. Ritz: Going beyond default intensities in an EU carbon border adjustment mechanism, Cambridge Working Papers in Economics 2087, September 2020: https://www.jstor.org/stable/resrep30315?seq=1
47
John Springford and Sander Tordoir: Europe can withstand American and Chinese subsidies for green tech, Policy Brief, Centre for European Reform (CER), June 2023: https://www.cer.eu/sites/default/files/pbrief_JS_ST_green_tech_9.6.23.pdf
48
You Xiaoying: The ‘new three’: How China came to lead solar cell, lithium battery and EV manufacturing, China Dialogue, 7.11.2023: https://chinadialogue.net/en/business/new-three-china-solar-cell-lithium-battery-ev/
49
Joint Research Centre: European Climate Neutral Industry Competitiveness Scoreboard 2022, European Union 2023: https://publications.jrc.ec.europa.eu/repository/handle/JRC134503
50
IMF: Data for a greener world: A guide for practitioners and policymakers, International Monetary Fund, Washington 2023, p. 169: https://www.imf.org/en/Publications/Books/Issues/2023/04/04/Data-for-a-Greener-World-A-Guide-for-Practitioners-and-Policymakers-522462
51
WTO: DS 426: Canada – Measures Relating to the Feed-in Tariff Program: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds426_e.htm
52
Public Citizen/Sierra Club: Ontario’s Feed-in Tariff: Will the WTO Trump Climate Imperatives?, June 2013: https://www.citizen.org/wp-content/uploads/ontario-feed-in-tariff-briefing-paper.pdf
53
European Commission: EU challenges discriminatory practices of UK’s green energy subsidy scheme at WTO, Brussels, 28.3.2022: https://policy.trade.ec.europa.eu/news/eu-challenges-discriminatory-practices-uks-green-energy-subsidy-scheme-wto-2022-03-28_en
54
European Commission: EU and UK agree on way forward in WTO dispute concerning UK’s green energy subsidy scheme, Brussels, 1.7.2022: https://policy.trade.ec.europa.eu/news/eu-and-uk-agree-way-forward-wto-dispute-concerning-uks-green-energy-subsidy-scheme-2022-07-01_en
55
Jorge Valero: EU broadens concerns on subsidies in Biden’s climate law, 30.9.2022: https://news.yahoo.com/eu-broadens-concerns-subsidies-biden-095638376.html
56
David Kleimann et al.: How Europe should answer the US Inflation Reduction Act, Bruegel, Policy Contribution 4/23, February 2023: https://www.bruegel.org/sites/default/files/2023-02/PB%2004%202023_0.pdf; Daily show: EU Committee Chair for WTO Action, 4.12.2022: https://www.tagesschau.de/ausland/europa/eu-usa-subventionen-101.html
57
Faisal Islam: The green trade row dividing the Davos elite, BBC News, 16.1.2023: https://www.bbc.com/news/business-64296229
58
Fabian Flues: EU and U.S. Advocates Call on EU to Stand Down on Threats to Inflation Reduction Act, PowerShift, 5.3.2023: https://power-shift.de/pm-inflation-reduction-act/
59
Camille Landais et al.: The Inflation Reduction Act: How should the EU react? Franco-German Council of Economic Experts, Joint Statement, September 2023: https://www.sachverstaendigenrat-wirtschaft.de/en/start/news/the-inflation-reduction-act-how-should-the-eu-react.html
60
Camille Landais et al.: The Inflation Reduction Act: How should the EU react? Franco-German Council of Economic Experts, Joint Statement, September 2023: https://www.sachverstaendigenrat-wirtschaft.de/en/start/news/the-inflation-reduction-act-how-should-the-eu-react.html
61
Laurens Ankersmit/Enrico Partiti: Alternatives for the “Energy and Raw Materials Chapters” in EU trade agreements – an inclusive approach, PowerShift, Berlin, May 2020: https://power-shift.de/wp-content/uploads/2020/05/Alternatives-for-the-Raw-materials-and-Energy-Chapters-in-EU-trade-agreements-web.pdf
62
UNCTAD: Local Content Requirements and the Green Economy, Geneva 2014: https://unctad.org/publication/local-content-requirements-and-green-economy
63
European Commission: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on establishing a framework of measures for strengthening Europe’s net-zero technology products manufacturing ecosystem (Net Zero Industry Act), Brussels, 16.3.2023: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52023PC0161
64
Giovanni Sgaravatti et al.: Cleantech manufacturing: Where does Europe really stand? Bruegel, 17.5.2023: https://www.bruegel.org/analysis/cleantech-manufacturing-where-does-europe-really-stand-0
65
Jonathan Packroff: EU countries want to continue using green tech from China, Euractiv, 8.12.2023: https://www.euractiv.com/section/economy-jobs/news/eu-countries-want-to-continue-using-green-tech-from-china/
66
Andreas Niesmann: Habeck wants to strengthen German solar manufacturers with a “resilience bonus” against China producers, RND, 17.12.2023: https://www.rnd.de/wirtschaft/resilienzbonus-habeck-will-deutsche-solar-hersteller-gegen-china-konkurrenz-staerken-Z5TFDQ5FN5FFDIL6SXX5PNIE54.html
67
Eduardo Garcia: EU turbine factory growth hangs on permitting action, Reuters, 30.11.2023: https://www.reuters.com/business/energy/eu-turbine-factory-growth-hangs-permitting-action-2023-11-30/; European Commission: European Wind Power Action Plan, Brussels, 24/10/2023: https://energy.ec.europa.eu/publications/european-wind-power-action-plan_en
68
European Commission: Critical raw materials: ensuring secure and sustainable supply chains for EU’s green and digital future, Brussels, 16.3.2023: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1661
69
Christiane Kühl: Solar Flood from China: Large parts of the industry reject punitive tariffs, Frankfurter Rundschau, 18.12.2023: https://www.fr.de/wirtschaft/eu-strafzoelle-arbeitsplaetze-photovoltaik-solarzellen-china-fotovoltaik-solarschwemme-zr-92721729.html
70
See for example: William Todts: How German auto arrogance brought about Europe’s Kodak moment, Transport & Environment, 29.9.2023: https://www.transportenvironment.org/discover/how-german-auto-arrogance-brought-about-europes-kodak-moment
71
IEA: Global EV Outlook 2023 – Catching up with climate ambitions, International Energy Agency, 2023: https://www.iea.org/reports/global-ev-outlook-2023
72
Benjamin Gehrs: Size Matters – How do the top 30 car brands in Europe deal with resources? Greenpeace, 8/2023: https://presseportal.greenpeace.de/229452-greenpeace-vergleicht-wirtschaftlichkeit-deutsche-automarken-schneiden-besonders-schlecht-ab
73
USTR: Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union, United States Trade Representative, 14.1.2020: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/january/joint-statement-trilateral-meeting-trade-ministers-japan-united-states-and-european-union
74
David Kleimann: Climate versus trade? Reconciling international subsidy rules with industrial decarbonisation, Bruegel, Policy Contribution 2/2023: https://www.bruegel.org/policy-brief/climate-versus-trade-reconciling-international-subsidy-rules-industrial
75
African Group: A CASE FOR REBALANCING THE AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES (ASCM) – POLICY SPACE TO PROMOTE INDUSTRIALISATION IN DEVELOPING COUNTRIES, Communication from the African Group, 22.5.2023, WTO, WT/GC/W/880
76
Sean Healy et al.: Introduction of a Carbon Border Adjustment Mechanism (CBAM) in the EU, Umweltbundesamt, 30.5.2023: https://www.umweltbundesamt.de/sites/default/files/medien/11850/publikationen/cbam_factsheet_0.pdf
77
European Commission: Carbon Border Adjustment Mechanism: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
78
There are also different carbon pricing systems at the sub-national level of states or provinces (e.g. in the USA, Canada, Mexico, China and several EU countries), see: The World Bank: Carbon pricing dashboard: https://carbonpricingdashboard.worldbank.org/
79
Hanh Duong et al.: Unveiling Carbon Border Adjustment (CBAM) Challenges: The Potential Dispute Between China and EU, The SAIS Review of International Affairs, 24.7.2023: https://saisreview.sais.jhu.edu/unveiling-carbon-border-adjustment-mechanism-cbam-challenges-the-potential-dispute-between-china-and-eu/
80
The World Bank: Relative CBAM Exposure Index, 15.6.2023: https://www.worldbank.org/en/data/interactive/2023/06/15/relative-cbam-exposure-index
81
Oliver Rumble and Andrew Gilder: WTO review of EU trade policies highlights significant unease about CBAM, African Climate Wire, 13.6.2023: https://africanclimatewire.org/2023/06/wto-review-of-eu-trade-policies-highlights-significant-unease-about-cbam/
82
Manoj Kumar/Neha Arora: India plans to challenge EU carbon tax at WTO, Reuters, 16.5.2023: https://www.reuters.com/world/india/india-plans-challenge-eu-carbon-tax-wto-sources-2023-05-16/
83
Zia Weise: Brazil’s anger over EU carbon tax infiltrates COP28, Politico, 5.12.2023: https://www.politico.eu/article/brazil-anger-eu-carbon-tax-infiltrates-cop28-luiz-ignazio-lula-da-silva-china-india-south-africa/
84
Samuel Pleeck and Ian Mitchell: The EU’s carbon border tax: How can developing countries respond? Center for Global Development, 15.11.2023: https://www.cgdev.org/blog/eus-carbon-border-tax-how-can-developing-countries-respond
85
European Commission: COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism, Brussels, 14.7.2021, SWD(2021) 643 final: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52021SC0643
86
S&P Global: EU Carbon Border Adjustment Mechanism to raise up to $80b per year by 2040, 24.2.2023: https://www.spglobal.com/esg/insights/featured/special-editorial/eu-carbon-border-adjustment-mechanism-to-raise-80b-per-year-by-2040
87
Timothé Beaufils et al.: Assessing different European Carbon Border Adjustment Mechanism implementations and their impact on trade partners, Communications Earth & Environment, 4, 131, 23.4.2023: https://www.nature.com/articles/s43247-023-00788-4; UNCTAD: A European Union Carbon Border Adjustment Mechanism: Implications for developing countries, Geneva 2021: https://unctad.org/publication/european-union-carbon-border-adjustment-mechanism-implications-developing-countries
88
Béatrice Wedeux/Anke Schulmeister-Oldenhove: Stepping up? The Continuing Impact of EU Consumption on Nature Worldwide, WWF, April 2021: https://www.wwf.eu/?2965416/Stepping-up-The-continuing-impact-of-EU-consumption-on-nature
89
European Commission: Regulation on Deforestation-free Products: https://environment.ec.europa.eu/topics/forests/deforestation/regulation-deforestation-free-products_en
90
Distance: What is the EU Regulation on deforestation-free products and why should you care? Brussels, 2023: https://www.fern.org/publications-insight/what-is-the-eu-regulation-on-deforestation-free-products-and-why-should-you-care/
91
Solidaridad: Palmoil Barometer 2022: https://www.solidaridadnetwork.org/wp-content/uploads/2022/09/Palm-Oil-Barometer-2022_solidaridad.pdf; Sustainable Cocoa Forum: Cocoa producing countries: https://www.kakaoforum.de/en/news-service/country-profiles/cocoa-producing-countries/; Fairtrade: Realistic and fair prices for coffee farmers are a non-negotiable for the future of coffee, 1.8.2023: https://www.fairtrade.net/news/realistic-and-fair-prices-for-coffee-farmers-are-a-non-negotiable-for-the-future-of-coffee
92
Eline Blot/Nora Hiller: Securing the position of smallholders in zero-deforestation supply chains, Briefing, Institute for European Environmental Policy, October 2022: https://ieep.eu/wp-content/uploads/2022/11/Securing-the-position-of-smallholders-in-zero-deforestation-supply-chains-IEEP-2022-1.pdf
93
Solidaridad/CPOPC/MVO: Implications of the EU Deforestation Regulation (EUDR) for oil palm smallholders, Briefing Paper, 12.4.2023: https://www.solidaridadnetwork.org/wp-content/uploads/2023/04/Briefing-paper-EUDR-and-palm-oil-smallholders.pdf; Fairtrade International: A just transition for cocoa and coffee smallholders to access a deforestation-free and forest degradation-free European market, February 2022: https://files.fairtrade.net/Fairtrade_position_and_recommendations_deforestation_regulation.pdf
94
CAN Europe et al.: Defusing Carbon Bombs – How climate due diligence can put an end to European companies’ involvement in projects that trigger climate catastrophe, November 2023: https://caneurope.org/carbon-bombs/
95
Offshore technology: Oil & gas field profile: Kashagan Conventional Oil Field, Kazakhstan, 1.8.2023: https://www.offshore-technology.com/data-insights/oil-gas-field-profile-kashagan-conventional-oil-field-kazakhstan/?cf-view
96
Primeval forest: Global Oil & Gas Exit List: Alberta tar sands: https://gogel.org/alberta-tar-sands
97
S&P Global: Wintershall Dea makes progress in Mexican shallow waters, 25.5.2023: https://www.spglobal.com/commodityinsights/en/ci/research-analysis/wintershall-dea-makes-progress-in-mexican-shallow-waters.html
98
Offshore technology: Brazil: TotalEnergies to invest $1bn in Lapa south-west project, 16.1.2023: https://www.offshore-technology.com/news/brazil-totalenergies-to-invest-1bn-in-lapa-south-west-project/?cf-view
99
Primeval forest: Global Oil & Gas Exit List: Vaca Muerta: https://gogel.org/vaca-muerta
100
The EU-Canada CETA agreement has been provisionally applied since September 2017. In contrast to investment liberalisation, however, the investment protection rules do not enter into force until national ratification has been completed in all EU member states, which is not yet the case. See: European Council: Comprehensive Economic and Trade Agreement between Canada, on the one part, and the European Union and its Member States, of the other part: https://www.consilium.europa.eu/en/documents-publications/treaties-agreements/agreement/?id=2016017. The EU-Mexico agreement, on the other hand, is still under negotiation, see: European Commission: EU-Mexico Trade Agreement: https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/mexico/eu-mexico-agreement_en
101
Bettina Müller: Globally just green transformation? The role of trade agreements for European raw materials security, PowerShift, December 2023: https://power-shift.de/global-gerechte-gruene-transformation
102
Yanyan Huang et al.: The Impacts of FDI Inflows on Carbon Emissions: Economic Development and Regulatory Quality as Moderators, Frontiers in Energy Research, Volume 9, January 2022: https://www.frontiersin.org/articles/10.3389/fenrg.2021.820596/full; António Cardoso Marques/Rafaela Caetano: The impact of foreign direct investment on emission reduction targets: Evidence from high- and middle-income countries, Structural Change and Economic Dynamics, Vol. 55, 2020, pp. 107-118: https://doi.org/10.1016/j.strueco.2020.08.005
103
Binyam Afewerk Demena/Sylvanus Kwaku Afesorgbor: The effect of FDI on environmental emissions: Evidence from a meta-analysis, Energy Policy, Volume 138, March 2020: https://doi.org/10.1016/j.enpol.2019.111192
104
António Cardoso Marques/Rafaela Caetano: The impact of foreign direct investment on emission reduction targets: Evidence from high- and middle-income countries, Structural Change and Economic Dynamics, Vol. 55, 2020, pp. 107-118: https://doi.org/10.1016/j.strueco.2020.08.005
105
See EU-Chile agreement: Advanced Framework Agreement, Article 17.8, Market access and Article 17.12, Performance requirements; EU-Mexico Agreement: Modernised Global Agreement, Chapter XX, Investment, Article 7, Market Access and Article 9, Performance Requirements
106
Dawud Ansari/Franziska wood: Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055, World Development 130, 2020: https://doi.org/10.1016/j.worlddev.2020.104947
107
Pia Andres et al.: Stranded nations? Transition risks and opportunities towards a clean economy, Environmental Research Letters 18, 2023: https://doi.org/10.1088/1748-9326/acc347
108
Thomas Fritz: Investment protection in EU trade agreements with Chile and Mexico: Impacts on sustainability and the energy transition, Umweltinstitut München/Institute for Macroeconomics and Business Cycle Research of the Hans Böckler Foundation, November 2023: https://umweltinstitut.org/wp-content/uploads/2023/11/ICS-Chile-Mexiko-Gutachten_Thomas-Fritz_2023-11-web.pdf
109
UNCTAD: Treaty-Based Investor-State Dispute Settlement Cases and Climate Action, IAA Issues Note, Issue 4, September 2022: https://unctad.org/system/files/official-document/diaepcbinf2022d7_en.pdf
110
Tienhaara, Kyla: Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement, Transnational Environmental Law, Volume 7, Issue 2, 2018, pp. 229-250: https://doi.org/10.1017/S2047102517000309
111
Kyla Tienhaara/Lorenzo Cotula: Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets, International Institute for Environment and Development, 2020: https://www.iied.org/sites/default/files/pdfs/migrate/17660IIED.pdf
112
European Commission: EU Member States sign an agreement for the termination of intra-EU bilateral investment treaties. 5.5.2020: https://finance.ec.europa.eu/publications/eu-member-states-sign-agreement-termination-intra-eu-bilateral-investment-treaties_en
113
European Commission: European Commission proposes a coordinated withdrawal from the Energy Charter Treaty, 7.7.2023: https://energy.ec.europa.eu/news/european-commission-proposes-coordinated-eu-withdrawal-energy-charter-treaty-2023-07-07_en
114
Lukas Schaugg et al.: United We Leave or Divided We Stay? Why it’s time for the EU to speak with one voice regarding the Energy Charter Treaty, IISD, 20.7.2023: https://www.iisd.org/articles/deep-dive/united-we-leave-divided-we-stay-energy-charter-treaty
115
German Association of Judges: Opinion of the German Association of Judges on the Recommendation for a Council Decision authorising the opening of negotiations on an Agreement establishing a multilateral court for the settlement of investment disputes (COM (2017) 493 final), Opinion, No 21/17, November 2017: https://www.drb.de/positionen/stellungnahmen/stellungnahme/news/2117/

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emission, EU, The fossil industry, trade policy, climate, Climate crisis, mitigation, commodities, economy

14 June 2024

Thomas Fritz

Picturesque view of Bromo in East Java, Indonesia

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Climate Check Trade policy - How climate-friendly is European trade policy?

summary

introduction

EU external trade: Contribution to climate change

Global trade and the greenhouse effect

The EU and global emissions transfer

How climate-damaging are the imports and exports of individual industries?

Achilles heel: Transport emissions from EU foreign trade

Trade agreements: Drivers of earth heating

Trade agreement with South Korea: Thrust for combustion engine trade

CETA: Growing EU oil imports

EU Mercosur: Emissions from imported deforestation

Weak climate clauses remain ineffective

Box 1 How EU tariffs subsidise CO2 emissions

Multilateral trade policy: inconsistent

Box 2 GATT: Early EU lawsuits against environmental and climate action

EU: Strong position in the export of climate technologies

‘Green trade wars’: EU against local content requirements

Box 3 Planned localisation measures in the EU

EU against green subsidies from other countries

Unilateral trading instruments: Not always climate-friendly

CBAM: Relocation protection at the expense of poor countries?

Deforestation Regulation: Towards Effective Enforcement

European foreign investment: Lack of steering

Investment liberalisation: Disincentives favour stranded assets

Arbitration tribunals: Risk insurance for fossil investments

Conclusion: Climate protection needs cooperation

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Box 1
How EU tariffs subsidise CO2 emissions

Box 2
GATT: Early EU lawsuits against environmental and climate action

Box 3
Planned localisation measures in the EU

Investment liberalisation:
Disincentives favour stranded assets

Arbitration tribunals:
Risk insurance for fossil investments