Energy Related Border Adjustment Measures: Will it Lead to Trade War?

Ms. Shebonti Ray Dadwal, Research Fellow, presented her paper titled “Energy Related Border Trade Measures: Can it lead to trade war?” on 12 March 2010. Dr. Arvind Gupta chaired the session. Dr. Nityananda and Prof. V.G. Hegde were external discussants. Col. P.K. Gautam and Dr. Uttam Sinha were internal discussants.

Shebonti Ray Dadwal highlighted the key aspects of the topic under consideration:

• Trade protectionism in the name of climate change is a hot topic. Already several countries have imposed carbon taxes while others are passing bills that authorise application of such taxes.
• The question to be asked is if this is a disguised method to retain trade superiority.
• The American Clean Energy and Security Act (ACESA) and similar measures undertaken by the European countries aim to tax imports that are carbon-intensive in the name of prohibiting competitive distortions.
• It has been criticised as being against the development plans of the developing countries and it is argued that measures like financial assistance and technology transfers will be more effective.
• Developing countries, worried at the prospects of facing fresh trade barriers, had made their approach clear at the Copenhagen Summit in December 2009 and earlier in Bonn in August 2009, arguing against any such unilateral measures.
• Such measures, it is argued, would amount to passing of the mitigation responsibilities to the developing countries by the developed countries. Moreover, such measures go against the principle of “common but differentiated responsibilities”.
• WTO as well as UNFCCC rules are not exactly specific on this subject. Moreover, the subject is extremely complex because of its multilayered nature. There are loopholes that allow exceptions for such policies.

Discussion:

• Trade, security and wars are interlinked. Historical evidence also proves this fact. In recent times, trade and terrorism have become linked.
• At different times, different groups of countries have focussed on carbon taxes, and this issue will keep coming up in the future also.
• Energy industry itself is the most energy-intensive industry. Moreover, due to diversity in the quality of production, assessment is going to be extremely complex; understanding the global impact is going to be even more difficult.
• Technology is not the solution for addressing climate change; technology diffusion is more important than technology transfer. In a way the present debate is also about increasing the returns on the present IPRs.
• The question to be asked here is whether India is ready for such a war? Do we have the expertise to fight or anticipate the circumstances?
• Since imposition of tariffs is a sovereign right and the WTO is being used by developed countries for pursuing their security agendas, policy options for developing countries are getting shrunk. Therefore, anticipation and capacity building to face the potential changes is extremely critical.
• Individual countries have their agenda clearly worked out, but it becomes problematic when one has to act as part of groups. It is better to develop consensus based on common interests which can help in setting important negotiating stands.
• In all likelihood, carbon taxation will take place and climate change will be used as a non-tariff barrier. Therefore preparing in advance is necessary.
• It is important to see how the energy mix impacts trade and carbon taxation policies. Geopolitics, trade and environment are linked. Thus, there is interplay of politics and bargaining strategies.
• Sometimes cap and trade policies can create incentives for efficient industries and can force non-efficient ones to change their methods of operations.

Report prepared by Avinash Godbole, Research Assistant, IDSA.