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

Roland Ismer, Harro van Asselt, Jennifer Haverkamp, Michael Mehling, Karsten Neuhoff () and Alice Pirlot

No 1948, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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 (search for similar items in EconPapers)
JEL-codes: F13 K32 Q54 Q56 (search for similar items in EconPapers)
Pages: 18 p.
Date: 2021
New Economics Papers: this item is included in nep-ene, nep-env, nep-int, nep-law and nep-reg
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Citations: View citations in EconPapers (1)

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