Climate Neutral Production, Free Allocation of Allowances under Emissions Trading Systems, and the WTO: How to Secure Compatibility with the ASCM

20 Pages Posted: 3 Jun 2021

See all articles by Roland Ismer

Roland Ismer

German Institute for Economic Research (DIW Berlin)

Harro van Asselt

affiliation not provided to SSRN

Jennifer Haverkamp

affiliation not provided to SSRN

Michael Mehling

Massachusetts Institute of Technology (MIT)

Karsten Neuhoff

German Institute for Economic Research (DIW Berlin)

Alice Pirlot

University of Oxford - Said Business School; Catholic University of Louvain (UCL)

Date Written: May 2021

Abstract

To reach climate neutrality, carbon emissions from the production of basic materials need to be significantly reduced. For governments’ support measures to be consistent with their World Trade Organization obligations, they need to be compatible with the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). This paper analyzes the ASCM consistency of three selected support schemes, namely: (1) free allocation under emissions trading systems such as the European Union Emissions Trading System (EU ETS) to operators of installations deemed to be at significant risk of carbon leakage; (2) a combination of a charge on carbon-intensive materials with free allocation; and (3) carbon contracts for differences (CCfDs) for operators of climate-neutral installations, in which governments pay out the incremental costs of climate neutral-production processes relative to the costs of conventional primary material production. The analysis reveals that the current system of carbon leakage protection through free allocation is vulnerable to challenges under the ASCM. By contrast, a transition to a combination of free allocation and a charge on carbon-intensive materials would implement consistent carbon-pricing and thus would very likely not amount to a subsidy under the ASCM. In a similar vein, support for climate-neutral installations through CCfDs could be designed in such a way that it confers no benefit, so that it would also not constitute a subsidy.

Keywords: WTO, ASCM, Carbon Pricing, Free allowance allocation, Climate Contribution, Carbon Contracts for Difference

JEL Classification: K32,F13,Q54,Q56

Suggested Citation

Ismer, Roland and van Asselt, Harro and Haverkamp, Jennifer and Mehling, Michael and Neuhoff, Karsten and Pirlot, Alice, Climate Neutral Production, Free Allocation of Allowances under Emissions Trading Systems, and the WTO: How to Secure Compatibility with the ASCM (May 2021). DIW Berlin Discussion Paper No. 1948, Available at SSRN: https://ssrn.com/abstract=3857616 or http://dx.doi.org/10.2139/ssrn.3857616

Roland Ismer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Harro Van Asselt

affiliation not provided to SSRN

Jennifer Haverkamp

affiliation not provided to SSRN

Michael Mehling

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Karsten Neuhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Alice Pirlot

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

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