Legal hurdles facing a green and just transition

The irony of genuinely ‘free trade’ is only regulation enables it. Europe cannot lead the ecological transition without recognising this.

The alarming news items related to global warming should shock us to the bone and permeate all aspects of life. Yet, tucked away in pockets of specialised expertise, a lot of law continues to operate rather undisturbed, privileging growth over sustainability.

That is so for much of the law relating to trade. While the European Union embraces the European Green Deal, it recommits to laws which are at odds with it. A first step to change that would be strengthening the ties between the European Commission’s trade arm and its group dedicated to the EGD.

It is a year since the commission presented the EGD. Its ambitions and rhetoric should be valued, even if a powerful critique subsists: Europe’s green and just transition is plagued by the right hand seemingly not knowing what the left is doing. The EGD demands policies in tension with trade laws. But the commission’s trade arm reaffirms the EU’s commitment to those laws, and even wants to tighten them.

Subsidies

Take subsidies, which will be a key policy tool to mobilise industry ‘for a clean and circular economy’, as the commission puts it. In a recent joint communication with his Japanese and American counterparts, the former trade commissioner, Phil Hogan, said current international regulation was ‘insufficient to tackle market and trade distorting subsidization’. He argued that ‘new types of unconditionally prohibited subsidies need to be added’.

The list of examples of such prohibitions reads like a brutal response to what might be required to support a green and just transition. Among other things, Hogan and his counterparts sought to prohibit ‘subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan’ and ‘to enterprises unable to obtain long-term financing’. Precisely such subsides might not only be valuable in support green investments, but also for social-justice interventions during the pandemic and beyond.     

The Agreement on Subsidies and Countervailing Measures was negotiated in the 1990s when industrial policy was officially out of fashion (even if many states continued to support their industries, as ever). At the outset, the agreement struck a sensitive balance between policing trade-distorting subsidies and allowing exceptions for research, development and regional assistance. The exceptions were however temporary and expired at the end of 1999, as it was impossible to find a new consensus on them. The commission’s trade team felt no regret though and moved towards stricter policing.

Public procurement

Consider too green public procurement. The commission’s environmental department recently issued a handbook, ‘Buying green!’ It highlights, for instance, that three million tonnes of CO₂ would be saved if Dutch public authorities applied this principle.

Yet, around the same time, the directorate for the internal market was pushing to complete the Revised Agreement on Government Procurement at the World Trade Organization, which was then implemented in the EU. It clearly prohibits preferences for local products and may work against considering products’ characteristics—such as associated emissions—in procurement decisions. That is also the case for the commission’s recent, still more ambitious, International Procurement Instrument.

These regulations of subsidies and procurement point to deeper issues with the trade law—the latter has the principle of non-discrimination written into its DNA. Its underlying idea remains that non-discrimination ensures growth through the efficient allocation of recourses.

Elusive ideal

A lot gets lost in this logic. Above all, the allocation of resources through an undistorted market is an entirely elusive ideal. Every market is structured through a series of interventions and where to draw the line to identify these as corrective or distorting is contingent.

The good thing is that the commission also knows that, and it seems to put this knowledge into practice. The commission considers lower environmental and labour standards outside the EU to be an unfair, trade-distorting advantage for foreign producers. Such standards are not part of the game in struggling for a competitive advantage. The commission is thus considering so-called carbon tax adjustments at the EU’s border if other jurisdictions do not do their fair share under the Paris agreement.

That is right, in principle. But Europe must not be oblivious to its historical climate debt. Nor should its environmental measures increase power imbalances in relation to the global south. Otherwise charges of neo-imperialism are likely to stick.

If such a carbon tax is not unheard of, the commission did certainly create a stir when it recently suggested that it might react should the United Kingdom slash its corporate taxes. Any free-trade agreement, the commission said, must ‘encompass safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices’. Tax competition could prompt border adjustments (similar to those for carbon).

That broke a taboo in trade circles. It also made abundantly clear that the line between a supposedly free and a regulated market defies definition.

Fragmentation of policy

These are good signs. But fragmentation of policy is generally a problem for democratic decision-making and for the EU a specific obstacle to a green and just transition. Particular priorities dominate in the commission’s distinct departments: the world looks different when viewed from DG Environment as compared with DG Trade.

It is good when the Court of Justice of the EU affirms that sustainable development is an integral part of the common commercial policy—good but insufficient. And sustainability chapters in trade agreements will not do the trick, even if well-meant and well enforced. As long as these are negotiated and implemented as part of a trade regime, a particular hierarchy of priorities will prevail: concerns for environmental and social justice will then continue to be subject to market rationality.

The commission’s readiness to consider carbon taxes and retaliation against lower corporate taxes signals its willingness to break with that rationality. Those policies have come from new institutional arrangements that cut through pockets of specialised expertise: the group on the EGD led by the commission’s vice-president Frans Timmermans and Michel Barnier’s ‘Brexit’ taskforce.

Why not learn from these examples? Trade law, old and new, continually strikes balances between growth and sustainability. It should therefore not be left to trade lawyers, with their particular priorities, alone. New institutional arrangements are needed to ensure trade serves society—not the other way around.