(8) National and regional regulation of emissions II: regulatory strategies and legal resistance
In the last class we argued that the regulation of greenhouse gas emissions cannot be separated from broader political dynamics. They may create “co-benefits” (i.e., beneficial effects other than the reduction of emissions), which may broaden the coalition of groups which support them. However, they may also create opposition from actors that benefit from the current regulatory setup. In this class we look at different examples of how national and European climate change regulation impacts other regulatory areas (and the other way around), and how actors mobilize law for and against climate change regulation.
Example 1: EU ETS, jurisdiction and international aviation
Aviation is responsible for about 2% of global CO2 emissions (about 2/3 of which stem from international aviation). However, the sector grows fast (both passenger and cargo transport); according to the International Civil Aviation Organisation (ICAO), emissions from aviation may increase 300–700% until 2050, and could be responsible for as much as 20% of global emissions by then. Until today, emissions from international aviation remain essentially unregulated.
Continued attempts to develop international regulation remained unsuccessful over the course of the past 20+ years of international climate negotiations. In particular, the ICAO, which is the competent specialized international organization, failed, until recently, to address the issue in a comprehensive form. In reaction, the EU decided in a 2008 Directive to include emissions from international aviation into its emissions trading system (ETS) from 2013 onwards. It required airlines that fly to or from a European airport to acquire emission allowances for the complete journey, unless they were subject to a similar requirement in another country. International airlines opposed the measure, and were able to shore up resistance in at least two ways:
- They successfully lobbied the US lawmakers to adopt a law explicitly prohibiting US airlines from participating in the EU ETS scheme (the “European Union Emissions Trading Scheme Prohibition Act of 2011”). In other words, US law went head to head with European law: US airlines who obeyed European law would breach US law, and the other way around.
- At the same time, US airlines and the Air Transport Association of America (an interest group of airlines) brought a lawsuit against British measures implementing the Directive (the case is discussed below). However, the CJEU found that the inclusion of international aviation did not breach the relevant law.
→ We can thus see that opponents of the measure were active across at least four jurisdictions: they lobbied US federal lawmakers, and challenged European law on the basis of international law in a British court.
CJEU case C-366/10, Air Transport Association of America
The plaintiffs brought a lawsuit against British measures implementing the 2008 Directive including international aviation in the EU ETS. The British court referred the case to the Court of Justice of the European Union (CJEU). The plaintiffs argued that the Directive breached international law; inter alia, they proposed that the Directive would conflict with the following customary law principles:
- “the principle that each State has complete and exclusive sovereignty over its airspace,
- the principle that no State may validly purport to subject any part of the high seas to its sovereignty, and
- the principle which guarantees freedom to fly over the high seas”
The Court, however, held that the Directive did not do that. It argued:
Consequently, the Directive did not infringe international customary law, and was upheld by the CJEU.
Regulation in the ICAO
In response, the EU agreed to temporarily suspend the application of its ETS to international flights to enable the negotiation of a global solution.
The ICAO decided in 2013, in principle, to develop a “global market-based measure”, which was further fleshed out at the ICAO General Assembly in October 2016. The ICAO agreed to implement “Carbon Offsetting and Reduction Scheme for International Aviation” (CORSIA). The approved ICAO resolution holds:
- airlines will have to offset their emissions (paragraph 11)
- Only international aviation is covered. National aviation is subject to national emission requirements alone.
- The requirement to offset emissions will be binding from 2027 onwards.
- However, the program will start already in 2021 with a pilot phase, where country participation is voluntary. According to the ICAO, 66 states have so far committed to voluntarily participate (paragraph 11).
- Only emissions above the 2020 levels are covered (paragraph 5)
- The airlines will offset their emissions through the mechanisms of the UNFCCC (we discussed some of them in relation to the EU ETS).
CORSIA has been heavily criticized (e.g. here or here). In particular, the following points have been made:
- CORSIA does not cap emissions from international aviation or at least require curtailing their growth.
- Because airlines will have to offset only those emissions that exceed the emission levels of 2020, initially only a small amount of emissions will in fact require offsets.
- The offset mechanisms under the UNFCCC (CDM, REDD) are heavily criticized for failing to truly cut emissions and for being widely dysfunctional or even counterproductive.
- the offsets may incorrectly suggest costumers that flying is emission-neutral.
An interesting aspect in this regard concerns the role of environmental NGOs: over the past decades, some NGOs took on significant roles in the governance of emissions regulation. However, many criticize that some of these NGOs have in fact been co-opted in the process, and thereby provide legitimacy to insufficient or even counterproductive policies. Naomi Klein, for example, describes how the “Big Green” NGOs provided support for fracking. Similarly, some NGOs like WWF are involved in the certification of CDM mechanisms (see screenshot on the right), which are heavily criticized by some environmentalists.
Example 2: US Supreme Court in EPA v Massachusetts (2007), the Clean Air Act and the Clean Power Plan (2015)
Different to the EU, the US failed to adopt comprehensive federal measures against climate change in the 1990s and 2000s. During the government of George W Bush (2000–2008), executive or legislative action on the federal level was not to be expected. However, proponents of climate-friendly policies identified — apart from action e.g. at state or regional level — alternative avenues to further climate change measures, most notably under the Clean Air Act.
In the 1970s, the US had developed the maybe most comprehensive and robust system of environmental regulation. Back in the 1970s, Republicans frequently supported environmental action (for example, the Environmental Protection Agency EPA was created under Republican president Richard Nixon). One of the most important regulations that was passed was the Clean Air Act. It enables the Environmental Protection Agency (EPA), a federal administrative agency, to regulate air pollution. For example, Section 202(a)(1) — on emissions from cars and trucks — holds:
“The [EPA] Administrator shall by regulation prescribe (and from time to time revise) in accordance with the provisions of this section, standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare …”
→ you can see that the definition is very broad (“any air pollutant … which may be reasonably be anticipated to endanger public health or welfare”).
According to US administrative law, interested persons have the right to petition the EPA to issue a rule, and the EPA has to formally react to the petition. A negative response allows parties to sue in court.
→ remember our discussion of human rights and climate change? It was argued that procedural rights in environmental regulation may be one of the strongest tools in relation to climate change.
A number of US states (governed by Democrats), regional governments (such as NYC) and NGOs requested a ruling from the EPA to regulate greenhouse gas emissions. When the EPA rejected the petition, the petitioners sued the EPA, and the case ultimately went to the US Supreme Court. The court found in the decision EPA v Massachusetts (2007) that greenhouse gases were covered by the Clean Air Act’s definition of “air pollutants”, and that the EPA was indeed in breach of its legal obligation: while the court acknowledged that regulatory agencies like the EPA have broad discretion in what they do and that courts usually lack the scientific insight to scrutinize their decisions, it ruled that the EPA had manifestly failed to provide convincing reasons to justify its inaction.
→ the case illustrates the “transnational” dynamics of climate change regulation: regional governments mobilized a law that had not specifically been designed to combat climate change, and appealed to courts in order to force the hand of a federal administrative agency. In its judgment, the Supreme Court also discusses the scientific facts and addresses international regulation of climate change (the judgment is very easy to read — maybe you want to check it out for yourself?)
The Obama administration proposed comprehensive greenhouse gas regulation in the form of a cap-and-trade program in 2009, which, however, failed to pass Congress (despite a Democratic majority in both the House of Representatives and the Senate). In consequence, the EPA (now under an Obama-nomiated leadership) started to regulate greenhouse gases on the basis of the Clean Air Act. This included regulation for cars, industry and energy production. The latter was addressed by the 2015 Clean Power Plan. The Clean Power Plan constituted a key element in the Obama government strategy to fulfill its emission reduction pledge submitted for the Paris Agreement ( → this illustrates the transnational implications of national measures). However, the Clean Power Plan was in turn challenged in court by a coalition of (Republican-led) states, businesses and lobby groups, and its enforcement was halted by the US Supreme Court until a lower federal court decides on the constitutionality of the measure. Many other cases have been lodged by both sides over the past decade, which shows that litigation plays an important role. The Trump administration EPA has ended the Clean Power Plan in 2017.
Example 3: feed-in tariffs + international trade law challenges
Feed-in tariffs (FITs) are systems to encourage production of renewable energy. Many countries have enacted a version of this measure; while they differ from country to country, they usually have the following common characteristics:
- long-term contracts with producers, who receive a higher price than the “regular” electricity market price (e.g. based on a general evaluation of the costs of renewable energy production + a certain profit)
- guaranteed access to the electricity grid (i.e., their power is always bought, regardless of whether it is currently needed);
The idea is that such schemes will encourage investment in renewable energy, which will in turn push down its price over time. Feed-in tariffs are often considered to be among the most successful climate change-related measures, and many countries have adopted such measures.
Feed-in tariffs may have an interesting distributive dimension: depending on how the program is structured, it may subsidize the decentralized production of energy with small installations, such as solar panel on private homes, or by small producers or collectives (this is the case in Germany). This poses technical challenges, as — depending on the region — wind or solar installations do not produce energy continuously. Both a drop and a surge of electricity fed into the grid in a certain region (e.g. on a sunny day) may be the consequence. This must be outbalanced by other energy sources that are “on stand-by” (e.g. hydroelectric dams or gas), or requires a strong grid that connects regions with different weather conditions. Beyond that, it challenges the existing market structure, which until now has been characterized by a few large companies.
→ do you see benefits in supporting de-centralized energy production even though it is less efficient than large-scale projects such as offshore wind-farms?
Feed-in tariffs may encounter a variety of legal challenges:
- they have been challenged as illegal subsidies under European law and international trade law, in particular if they have domestic content requirements;
- lawsuits may also go into the other direction: over the past years, a number of countries have cut or adapted their feed-in tariff programs, partly related to the economic crisis (e.g. in Spain). This has led to challenges by investors in renewable energy and NGOs.
We will look at challenges under WTO law.
Feed-in tariffs in international trade law
Feed-in tariffs are a form of subsidy for a specific energy source. This brings them into potential conflict with regulation aimed at preventing subsidies that distort the market (at the same time, however, fossil fuels are still subsidized to a much greater extent). Beyond their distorting effect, subsidies are costly for the taxpayer, and often undesirable (think of businesses that extort subsidies from national or local governments by threatening relocation).
The only cases decided so far under WTO law both relate to the feed-in tariff enacted by the Canadian province Ontario, and were brought by Japan and the EU, respectively (Canada — Certain Measures Affecting the Renewable Energy Sector and Canada — Measures Relating to the FIT). The measure was challenged because of its domestic content requirement: only those renewable energy projects could qualify for the program which spent at least 50%-60% of the project costs in Ontario (i.e., on solar panels made in Ontario). This was supposed to foster the development of renewable energy businesses and green jobs in the region.
→ Do you find “domestic content requirements” justifiable , e.g. in order to mobilize sufficient political support?
The WTO encompasses a number of agreements; relevant for our case are the GATT (General Agreement on Tariffs and Trade) and the SCM Agreement (Agreement on Subsidies and Countervailing Measures). The feed-in tariff program was challenged under both — we will consider them in turn.
The applicable rules of the GATT agreement are complex in detail, but the general idea of international trade law is simple: imported goods should not be treated worse than domestic goods — this is called “national treatment”. The relevant provision (Article III:4) holds:
“The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”
This requirement prohibits de jure discrimination (i.e., when foreign products are explicitly discriminated against) as well as de facto discrimination (if a rule is neutral at its face, but puts imported products at a disadvantage in comparison to “like” domestic products, i.e., domestic products that are essentially the same). National measures — e.g. environmental measures — will usually not conflict with this requirement if they do not differentiate between domestic and imported products. However, the domestic content requirement does precisely this, as it requires the acquisition of a certain percentage of domestic goods. Consequently, the WTO Panel and the Appellate Body (i.e., the first and second instance of the WTO “judicial system”) both decided that the domestic content requirement breached Article III.4 GATT (i.e., it discriminated against imported goods, e.g. imported solar panels).
It could be argued, of course, that local production is essential for environmental measures. In principle, even discriminatory measures can be justified under GATT Article XX (which is a general exceptions clause) on environmental grounds; however, according to Article XX it must be shown to be “necessary” to achieve that objective, and cannot be applied in a way that “constitutes a means of arbitrary or unjustifiable discrimination.” This may be too high a hurdle, and (as far as I understand it) Canada did not seriously attempt to justify the measure on these grounds.
We now turn to the SCM Agreement, which prohibits certain subsidies. According to the agreement, subsidies are financial contributions (understood broadly) by the state, which confer a benefit (i.e., the company or industry benefits in some form) and which are “specific” (i.e., they are granted only to specific companies or industry sectors) (Articles 1+2 SCM Agreement). More specifically, two types of subsidies are distinguished:
- Two types of subsidies are always prohibited: export subsidies (not relevant for our case) and domestic content requirements (i.e., when a measure prescribes the use of domestic goods) — Article 3
- Other subsidies may be prohibited (they are “actionable”) if they have adverse effects on other states, most notably when they injure their industry (Article 5)
The WTO bodies did not find the FIT to be a subsidy under the SCM Agreement. The reason is that a subsidy must, as we just saw, grant a specific benefit; however, Japan and EU could not substantiate their claim. They argued that the feed-in tariff paid was higher than the price that could be achieved on a (fictional) electricity market free of government intervention. However, the Panel and Appellate Body found this to be an unfair comparison, as the electricity market would likely not run at all without any government support. In this regard, the AB held:
“where a government creates a market, it cannot be said that the government intervention distorts the market, as there would not be a market if the government had not created it”
This is interesting, because the Appellate Body refuses to follow the misleading arguments forwarded by the EU and Japan. The electricity market is created and upheld by the government is characterized by numerous distortions (most notably the subsidies for fossil fuels). It simply cannot be argued that there is a “correct” electricity price to be found.
Consequently, the legal situation of feed-in tariff measures under WTO law is the following: domestic content requirements will be difficult to justify (even though, in principle, a case could be made under Article XX GATT); by contrast, the support of renewable energy via a guaranteed feed-in tariffs paid to producers may be acceptable.
