Oil Sands – The European Challenge

By | August 19, 2013

Joe Oliver, Minister of Natural Resources, fired a shot across the European bow last May over the possible enactment of the proposed EU Fuel Quality Directive (FDQ), saying that if it’s passed, Canada could march the Europeans to the World Trade Organisation.

This came at a delicate time, as Canadian and European negotiators are trying to put final touches on a ground-breaking, comprehensive economic and trade agreement (CETA). A high-profile controversy involving Canada’s oil sands certainly doesn’t help that process.

But the Federal government has no choice in avoiding a fight when it comes to anything that tarnishes the international reputation of Alberta’s oil but to get into the ring and take the gloves off.

In public relations terms, the fight is doubly challenging because of photo images of the physical impact of oil sands production on the Alberta landscape. This has been combined with effective public condemnations by media-savvy environmental groups.

For the Canadian government, this is shaping up as a fight for hearts and minds, not unlike the one Canada has been engaged over the years fighting foreign restrictions on imports of seal products or Quebec-made chrysolite asbestos.

While Oliver was in Brussels and using a European platform to make his comments, he and federal government are most concerned with Washington and the impending decision on Keystone XL.

Anything that looks like Canadian bitumen-made fuel is environmentally harmful plays indirectly into the Keystone file.
The fight over the FDQ, if it comes to that, will involve an air war and a ground war. The air war will be the ongoing PR battle, the fight for public sympathy in Europe and in the United States.

The ground war, the battle for the mind, will be the trade battle and that’s what Oliver’s statement was all about — preventing EU carbon offsets being imposed that differentiate between bitumen-derived products and conventional fuels.

These offsets are effectively a border tax on Canadian imports, to increase the price of Canadian oil-sands-made fuels as compared to conventional fuels.

There’s a fundamental WTO legal issue at stake in the ground war.

It concerns the WTO prohibition against governments discriminating against “like” goods from different countries.

This is the famous most-favoured-nation (MFN) treatment rule. It requires fully equivalent treatment to imports of “like” goods wherever they come from. And the equally famous “national treatment” rule means that you can’t discriminate against imports in favour “like” domestic products. It means that all duties, taxes or other border measures — such as carbon offset requirements –that differentiate between these like goods are WTO-illegal.

The question comes down to what is “likeness” in WTO terms.

Numerous WTO panel decisions have said that “likeness” is based on the intrinsic nature of the goods, not how they are made. Likeness is determined by physical properties, usage and, importantly, whether the goods compete in the same market. It is the direct “competitiveness” of the goods that is normally critical in determining likeness, according to these decisions.

How the goods are made – production and process methods (called PPMs) – is not a differentiating factor when the imported goods are like domestic products and other imports in every other respect. A 2011 WTO Secretariat Working Paper examined the jurisprudence in depth going back many years and concluded that border measures based on production methods that don’t affect the “likeness” of the final product would be in contravention of the WTO Agreement.

Coming back to the Canada-EU dispute, the issue is this: Can the EU apply differential border measures – such as carbon offsets – on fuel from Canada that is produced from bitumen but is “like” conventional fuels in terms of physical and chemical properties, end-usage and, importantly, that competes in the same market?

Canada says definitely not. Admittedly each case must be looked at on its facts but WTO jurisprudence leads to the conclusion that Canada is right.