DEPUTY DIRECTOR-GENERAL JEAN-MARIE PAUGAM

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Mr Chair,
Members of the European Economic and Social Committee,
Panelists,
Excellencies,
Ladies and gentlemen,

Thank you for inviting me to speak in the European Economic and Social Committee (EESC) on behalf of the WTO. I am very honoured on behalf of my Organization and very happy as a European.

The European Union has traditionally played a leading role at the WTO in promoting an open, rules‑based multilateral trading system. It now also stands as a leader in the fight against climate change, particularly with the “Fit for 55” package recently proposed by the Commission.

You have been kind enough to seek our views, as the Secretariat of the Organization, on the proposed carbon border adjustment mechanism (CBAM) and its implications for trade from the point of view of multilateral rules.

Above all, I must emphasize that these views are still very preliminary and call for further refinement, involving consultation and alongside the European Union's refinement of its own proposals, during the dialogue that will take place between its governing institutions.

I would therefore like to present a first draft in the form of three points.

1 — First, by recalling some fundamental points of reference on how the WTO architecture incorporates environmental issues.

The most important point to remember is that, in principle, NOTHING in the multilateral trade rules precludes the implementation of an ambitious environmental policy by any WTO Member, provided that it is not discriminatory or does not disguise primarily competitive or protectionist motives.

Environmental consciousness, which was referred to at the time as conservation of natural resources, pre‑existed the construction of the multilateral system under the aegis of the GATT, the predecessor of the WTO. When it was adopted in 1947, the system included an environmental exception to trade rules, that is to say the possibility of taking trade‑restrictive measures on behalf of the environment, subject to good faith and non‑discrimination.

The creation of the WTO as a successor to the GATT in 1994, only two years after the first Earth Summit in Rio, enshrined and amplified this recognition of the primacy of environmental values, and statutorily assigned to the WTO the mission to serve the objective of sustainable development through trade agreements, for which it would have the task of promoting negotiations.

The second major point is that the WTO's approach to environmental issues has matured over time. From a simple exception to trade rules, the environmental issue has become in itself an aspect of trade policy. In other words, the issue has changed from “how to derogate from trade rules in order to serve the environmental cause?” to “how can trade make a positive contribution to the achievement of environmental public goods pursued by international society”?

This issue now represents an important dimension of the European Union's trade policy, particularly in its bilateral agreements. This is also the case for many of its trading partners in their own agreements. The same approach has also emerged in the WTO, where many of our Members seek to identify “win‑win” contributions to the environment from trade.

    • Its most visible embodiment is the reform of fisheries subsidies, which is a sustainable development goal assigned by Heads of State to the Organization. These are negotiations that have lasted for some 20 years and are now in the final phase. We are doing everything possible to conclude them before our Ministerial Conference in December.
    • Other topics have been raised using the same approach, for example through the liberalization of goods and services contributing to the fight against climate change, proposed by the EU; or the fossil fuel subsidy reform, proposed by a group of countries headed in particular by New Zealand and Switzerland; or the dialogue on plastic pollution, proposed by a coalition led by China and Fiji.

2 — My second point will be to describe the current state of play: how has the climate issue and the implementation of the Paris Agreement been addressed within the WTO so far?

I would say that the Organization has so far remained fairly neutral on the subject so far. Its Members have above all asked for the climate issue to be addressed from specific technical perspectives.

Certain environmental policies adopted for the implementation of the Paris Agreement are the subject of information and discussions at the WTO, such as the discussion of technical standards and regulations affecting trade.

Climate policies are also the subject of exchanges of experiences in our Committee on Trade and Environment.

The exchanges have not gone beyond the regular framework of WTO discussions. They have not led to trade friction, at least none of any great intensity. It is in this sense that I suggest that the WTO has remained broadly neutral. So far, therefore, our Members have appeared to consider that the issue of climate change and the implementation of the Paris Agreement are primarily aspects of regulatory, fiscal and industrial policies but ultimately a relatively small aspect of multilateral trade policy.

This is a state of affairs that tends to evolve rapidly and the climate issue is increasingly important within the Organization:

  • Because for a number of years several of our Members have undertaken to boost discussions on trade and environment and wish to address climate issues as part of that, in the "win‑win" terms that I referred to previously. The European Union is also very involved, since it announced its intention to promote negotiations on the liberalization of goods and services as part of the fight against climate change;
  • Because this year the major players in the global economy have adopted carbon neutrality (net zero) goals and made commitments to reduce their emissions by 2030 (by comparison with 2005): China (‑65%), United States (‑52%), India (‑35%), Japan (‑46% by comparison with 2013), EU (‑55%). These figures are not directly comparable but they are a clear illustration of the major players' commitment to reducing their greenhouse gas emissions;
  • Because the European Union's announcement of the “Fit for 55” package, accompanied by a proposed CBAM, represents a breakthrough, if not an actual break with the past. In any case, it is the most important announcement on climate change from the perspective of the trading system. This project has already given rise to many questions from a number of our Members, and initial discussions have taken place in several WTO forums, including the Council for Trade in Goods, the Committee on Trade and Environment, and even our General Council.

3 — I will now move on to my third and final point, which is more specifically concerned with the proposed carbon border adjustment mechanism (CBAM) from a WTO perspective.

First, what is the issue that we are trying to resolve?

Today carbon prices vary widely, from less than US$1 in Ukraine to US$130 in Sweden. It is clear to many that carbon prices are generally still not aligned with those that would be required to achieve the Paris Agreement objectives. Apart from carbon prices, more generally, the recently released partial report from the Intergovernmental Panel on Climate Change (IPCC) clearly indicates that more climate ambition is needed if we are to reach the Paris Agreement goals. I have in mind a World Bank estimate that quotes a price of US$100 per tonne to achieve the Paris Agreement targets. So how do we do that?

The best solution for pricing carbon would be a global agreement. This has been said by the heads of the IMF, OECD and WTO. Such an approach would be both economically and environmentally effective while being the least disruptive to global trade, in particular because climate change is a global environmental problem.

While awaiting this best solution, a whole series of theoretical proposals have been put forward, including “climate clubs”.

If no course of international cooperation is launched, a number of countries are going to explore unilateral proposals on the carbon pricing issue and consider a CBAM to address the potential risk of carbon leakage. Why?

The chief concern raised is that the more the price is raised in one part of the world, the greater the risk of carbon leakage into other parts of the world where the price would remain lower if no other climate measures to reduce carbon emissions were in place.

So far, the available analyses have not definitively established that carbon leakage has occurred to any significant extent, but these findings derive from a context of low carbon prices. The fear is that if the leading economies diverge significantly in their climate ambitions, leakage could occur as a result. Hence the pressure to establish a CBAM to prevent potential leakage of this sort.

The EU announcement has raised a lot of questions and concerns, especially from developing countries, which are worried that the CBAM could be both WTO‑incompatible and contrary to the Paris Agreement principle of common but differentiated responsibilities. What can we say about that from a WTO perspective?

At least this is how we understand the rationale underlying the EU proposal. So what can we say about it from a WTO perspective?

First, I reiterate, it should be clear that nothing in the WTO rules prevents the adoption of such a mechanism by a Member if it does not constitute unjustifiable discrimination or disguised protection.

Second, as always, the “devil will lie in the details”, in many respects.

  • For instance, the reference used to calculate the carbon content of the imports concerned will be looked at very closely by third countries.
  • Another example is the taking into account of the policies adopted and efforts made by third countries from which imports originate to mitigate climate change. For instance, if they have adopted strict emission standards and regulations or created carbon sinks rather than an emission trading scheme.

These are the kind of issues which make any such CBAM contentious and complicated in the WTO context. So the potential for trade friction is real.

The question here is the following: will countries choose cooperation or disputes? One very positive element in the EU proposal is the contemplated transition period. If I understand correctly, the CBAM will be tested for three years without generating major costs for importers. This period should make it possible to resolve any issues regarding details. I take this as a very important sign of the EU's openness to discussion.

I think that the WTO can offer a forum for resolving differences peacefully and constructively, while also seeking solutions to enlist trade in the fight against climate change. Our Members can decide this at any time. We encourage them to use the WTO for these discussions. Our Director‑General, Dr Okonjo‑Iweala, has been very clear on this matter.

I also encourage your assembly to use its influence for making the WTO a forum for discussing cooperative trade solutions, where trade policy will be able to act as a force for mitigating climate change and adapting to it.

I thank you again for this opportunity to speak to you. I will be very happy to reply to your questions.

Thank you very much.

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