Carbon Reduction Treaties and the World Trade Organization

Executive Summary: Carbon-Reduction Treaties and the WTO

The global effort to address climate change increasingly intersects with the rules of international trade. Carbon reduction treaties, such as the Paris Agreement, are essential for reducing greenhouse gas emissions and limiting global warming. However, these treaties often clash with the World Trade Organization (WTO) framework, which governs international trade. 

This paper explores the complex relationship between carbon reduction treaties and the WTO, highlighting areas of conflict, examining the effects on business and developing economies, and proposing pathways for reconciliation. The aim is to ensure that climate action and trade policy can be mutually reinforcing, supporting both economic growth and environmental sustainability.

Introduction: The Nexus of Trade and Climate Change

Climate change and international trade are deeply intertwined. On one hand, trade liberalisation can drive economic growth and technological innovation, which are crucial for sustainable development. On the other, the expansion of trade can increase carbon emissions, undermining efforts to mitigate climate change. Carbon reduction treaties, such as the Kyoto Protocol and the Paris Agreement, represent global commitments to curb emissions. Yet, the rules of the WTO, designed to promote free and fair trade, sometimes hinder the implementation of ambitious climate policies.

The Challenge of Policy Coherence

The core challenge lies in aligning national and international climate policies with the WTO’s trade rules. Governments face pressure to implement carbon pricing, taxes, or border adjustment mechanisms to meet their climate targets. However, such measures can be perceived as trade barriers, leading to disputes and uncertainty within the multilateral trading system. This tension is particularly acute for developing countries, which may face higher costs and reduced competitiveness if new climate-related trade measures are not designed equitably.

Carbon Reduction Treaties: Scope and Mechanisms

The Paris Agreement and Global Commitments

The Paris Agreement, adopted in 2015 under the United Nations Framework Convention on Climate Change (UNFCCC), is the most significant global carbon reduction treaty. Its goal is to limit global temperature rise to well below 2°C, with efforts to restrict it further to .5°C. Each signatory country determines its own policies and targets—known as Nationally Determined Contributions (NDCs)—and reports progress to the UNFCCC. However, the agreement lacks binding enforcement mechanisms, relying instead on transparency and peer pressure to drive compliance.

Market-Based Instruments

To achieve their targets, countries use various market-based instruments, including:

• Emissions Trading Schemes (ETS): Cap-and-trade systems that set a limit on emissions and allow trading of allowances.
• Carbon Taxes: Direct taxes on the carbon content of fossil fuels.
• Clean Development Mechanism (CDM): Projects in developing countries that earn certified emission reduction credits.

These mechanisms aim to internalise the cost of carbon emissions, incentivising businesses to reduce their carbon footprint.

The Carbon Border Adjustment Mechanism (CBAM)

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a prominent example of a policy designed to address “carbon leakage”—where production shifts to countries with laxer climate regulations. CBAM imposes a carbon price on imported goods from sectors at risk, such as steel, cement, and aluminium, to ensure that domestic producers are not disadvantaged by stricter climate policies.

The WTO and Carbon Reduction Treaties: Role in Trade and Climate

The WTO provides the legal and institutional framework for international trade. Its primary aim is to liberalise trade and prevent protectionism. However, several WTO agreements contain provisions that relate to environmental measures, such as the General Agreement on Tariffs and Trade (GATT) and the Agreement on Technical Barriers to Trade (TBT).

Areas of Conflict

Border Carbon Adjustments

Border carbon adjustments, like CBAM, are designed to level the playing field between domestic and foreign producers. However, these measures risk being challenged under WTO rules if they are seen as discriminatory or as disguised restrictions on trade.

Green Subsidies and Eco-Labelling

Subsidies for renewable energy and other green technologies can also conflict with WTO rules, which restrict certain types of subsidies that distort trade. Similarly, eco-labelling schemes, while promoting sustainable products, may be challenged if they are perceived as barriers to market access for foreign goods.

Unilateral Measures and Green Protectionism

The proliferation of unilateral climate-related trade measures by developed countries has raised concerns among developing nations. These measures are sometimes viewed as arbitrary, exclusionary, or inconsistent with the principle of common but differentiated responsibilities (CBDR) enshrined in the Paris Agreement.

Effects of Climate Change and Carbon Reduction Treaties on Business

Impacts on Global Supply Chains

Climate change poses significant risks to global supply chains. Extreme weather events, rising sea levels, and biodiversity loss threaten the production and transportation of goods. Businesses face increasing pressure to disclose and reduce their carbon footprint, both to comply with regulations and to meet consumer expectations.

Competitiveness and Carbon Leakage

Carbon reduction treaties and associated policies can affect business competitiveness. Firms in jurisdictions with stringent climate regulations may face higher costs than competitors in countries with weaker rules. This creates an incentive for “carbon leakage,” where production shifts to less regulated regions, undermining global emission reduction efforts.

Opportunities for Innovation

Despite these challenges, the transition to a low-carbon economy offers significant opportunities for innovation and growth. Trade in environmental goods and services, such as renewable energy technologies and energy-efficient products, is expanding rapidly. Agreements like the Agreement on Climate Change, Trade and Sustainability (ACCTS) aim to liberalise trade in these sectors and promote sustainable development.

Reconciling Carbon Reduction Treaties and the WTO: Legal Pathways for Reconciliation

General Exceptions under GATT

WTO law allows for certain exceptions to trade rules for environmental protection. Article XX(b) and (g) of GATT permit measures necessary to protect human, animal, or plant life, or relating to the conservation of exhaustible natural resources. However, these exceptions are subject to strict conditions: measures must not be applied in a manner that constitutes arbitrary or unjustifiable discrimination or a disguised restriction on international trade.

The Presumption of Conformity

Some scholars propose a “presumption of conformity” framework, where climate measures adopted under the Paris Agreement are presumed to be consistent with WTO rules. This approach would recognise the division of competence between the WTO and the climate regime, reducing legal uncertainty and encouraging ambitious climate action.

WTO Climate Waiver

A more radical proposal is the adoption of a WTO climate waiver. Under Article IX:3 of the WTO Agreement, members can grant waivers from certain trade obligations in exceptional circumstances, such as the global climate emergency. A collective climate waiver would provide legal certainty for national climate measures, including carbon pricing, border adjustments, and green subsidies, as long as they are not disguised forms of protectionism.

Policy Coordination and Multilateral Solutions

Global Carbon Pricing Framework

The WTO, in collaboration with other international organisations, is exploring the development of a global carbon pricing framework. Such a framework would set a global average carbon price, adjusted for historical emissions, economic development, and the costs of climate change. Revenues from carbon pricing could be allocated to support lower-income economies and those facing higher transition costs.

Liberalising Trade in Environmental Goods

Negotiations to eliminate tariffs on climate-friendly goods and services are ongoing. Removing trade barriers to renewable energy technologies, energy-efficient products, and environmental services would accelerate the global transition to a low-carbon economy.

Reforming Fossil Fuel Subsidies

Phasing out fossil fuel subsidies is a key priority for aligning trade and climate policies. Government support for fossil fuels distorts markets, encourages overconsumption, and undermines investment in clean energy. The WTO’s Agreement on Subsidies and Countervailing Measures (SCM) could be used to discipline fossil fuel subsidies and promote green subsidies that support innovation and sustainability.

Special Considerations for Developing Countries

Equity and Common but Differentiated Responsibilities

Developing countries face unique challenges in implementing climate policies. They often lack the financial and technological resources to transition to low-carbon economies. The principle of common but differentiated responsibilities (CBDR) requires that developed countries provide support, technology transfer, and capacity building to developing nations.

Capacity Building and Technical Assistance

The WTO, World Bank, and other organisations are working to help developing countries identify new trade opportunities in the climate economy, build capacity for carbon pricing, and access green technologies.

Case Studies and Recent Developments

The EU’s Carbon Border Adjustment Mechanism

The EU’s CBAM, set to take effect in phases, is a test case for reconciling carbon reduction treaties and the WTO. Designed to be WTO-compatible, CBAM charges importers for the carbon content of certain goods, mirroring the costs faced by EU producers under the Emissions Trading Scheme. The mechanism aims to prevent carbon leakage and incentivise global decarbonisation, but its implementation has sparked concerns among trading partners, particularly developing countries.

The UK’s CBAM

The UK will introduce its own CBAM in 2027, applying a carbon price to imports from emissions-intensive sectors. The policy aims to ensure that UK decarbonisation efforts lead to genuine global emission reductions, rather than simply shifting emissions abroad.

The Agreement on Climate Change, Trade and Sustainability (ACCTS)

ACCTS, signed by Costa Rica, Iceland, New Zealand, and Switzerland, is a pioneering agreement that integrates trade and environmental policy. It addresses fossil fuel subsidies, liberalises trade in environmental goods and services, and sets standards for eco-labelling. While ACCTS is limited in scope and membership, it provides a model for future agreements that align trade and climate objectives.

Plausible Solutions and Future Directions

Modernising WTO Agreements

To reconcile carbon reduction treaties with the WTO, it is essential to modernise WTO agreements to accommodate contemporary climate measures. This includes clarifying the application of general exceptions for environmental protection, adapting rules to allow for carbon border adjustments and green subsidies, and fostering greater flexibility for national climate policies.

Enhanced Multilateral Cooperation

Greater cooperation between the WTO and climate bodies such as the UNFCCC is critical. Plurilateral agreements—where a subset of WTO members agree on specific climate-related trade measures—can serve as laboratories for innovation and build momentum for broader reforms.

Promoting Innovation and Technology Transfer

Encouraging the development and diffusion of green technologies is vital for both climate and trade objectives. The WTO can facilitate technology transfer through intellectual property flexibilities, support for research and development, and the removal of barriers to trade in environmental goods and services.

Ensuring a Just Transition

A just transition to a low-carbon economy must address the needs of workers, communities, and countries most affected by the shift. Trade and climate policies should be designed to create new opportunities, support reskilling, and ensure that the benefits of the green transition are shared equitably.

Conclusion

Reconciling carbon reduction treaties with the WTO is both a challenge and an opportunity. The transition to a low-carbon global economy requires coordinated action across trade, climate, and development policies. While conflicts between climate measures and trade rules are inevitable, they can be managed through legal innovation, policy coordination, and multilateral cooperation. 

By modernising WTO agreements, supporting developing countries, and promoting sustainable trade, the international community can forge a path that supports both economic growth and environmental stewardship. The stakes are high—not only for current generations but for the future of the planet.