The Role of WTO in Climate Change Policies

UNFCCC and Trade

The United Nations Framework Convention on Climate Change (1993) (UNFCCC) is the international regime on climate change. This present day, 195 states are parties to it. The UNFCCC mandates largely unspecified coordinated actions to reduce CO2 emissions as well as five additional GHG into the atmosphere. In 1997, the Kyoto Protocol was adopted at a conference of the parties which mandates specific reductions of GHG emissions for five industrialised parties to be achieved by 2012.[1] Albeit it was largely unsuccessful, parties of both the UNFCCC and the Kyoto Protocol continue to hold annual conferences to formulate policies to try and control GHG emissions as well as achieve a nationwide transition to a lower-carbon economy. In preparation of a new binding agreement to reduce GHG emissions to be established, many countries are considering new laws to implement GHG reduction pledges. Various policy instruments are being introduced such as ‘economic incentive and regulatory measures, subsidies of ‘green’ energy sources, and price and market mechanisms’[2] to internalise the environmental costs of GHG emissions.

These climate change laws and CO2 emission control measures may have severe effects on trade.  Most notably, trade may be affected by the possible adoption of new carbon-based taxes or charges on imported products.[3] A nation adopting a law that requires domestic industries to limit their GHG emissions may adopt a scheme for carbon-based charges on imported products. The idea behind these charges is to prevent carbon ‘leakage’, to undermine domestic reduction measures by countries that do not prescribe comparable reductions, and equalising competitive disadvantages that are the result of the implementation of domestic climate change measures. There are two different types of domestic laws likely to impose corresponding carbon based import charges on imported products, namely carbon taxes and cap-and-trade laws. In case of the former, domestic products pay a tax based upon the amount of carbon emitted into the atmosphere during production of the product. Under this regime, an equalization tax would be levied on imports of like products. The latter scheme requires an upper limitation on GHG emissions and emission allowances are spread amongst industries. Individual emitters are only permitted to emit GHG up to the allowances they possess. Any remaining (i.e. unused) allowances can be sold to buyers in need of additional ones. This scheme creates a trade market for emission allowances. Importers would have to purchase international allowances, paying certain charges.[4] The idea of imposing a price on CO2 emission to help combat climate change has been slowly spreading around the world over the last twenty years. More than 40 governments across the globe have now adopted some kind of price on carbon, either through direct taxes on fossil fuels or through cap-and-trade programs.

GATT/WTO Trade Policy and Climate Measures

What exactly are the possible implications of these taxes and charges under WTO trade policy? In assessing the compatibility of carbon tariffs and like measures with member’s GATT/WTO obligations, several complex issues arise. Hereby, one should, in any case, take into account the fact that the underlying objective of the WTO is and always has been trade liberalisation, not environmental protection. Existing GATT and WTO rules were not drafted to address climate change problems and policies.

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When analysing the interface between trade and climate change rules, certain provisions of the GATT can be considered to have central importance.[5] These relevant GATT/WTO rules in relation to both domestic carbon taxes and BTA as well as cap-and-trade laws and energy taxes and charges will be examined under the following headline. Furthermore, the exceptions under Article XX of GATT particularly relevant in the climate change context will be addressed.

I’d like to emphasise at this point that while WTO rules do not restrict the set of taxes and regulations that a state may impose on products domestically, they do require that the principle of non-discrimination in the application of such policies to domestic versus imported products is upheld. This principle is a central component of the WTO regime and consists of ‘most-favoured nation’ (MFN) principle and the ‘national treatment’ (NT) obligation. The former rules that states cannot discriminate between trading partners. Any advantage granted to goods or services from one country must be extended to ‘like’ goods and services originating from any other WTO member. The latter prohibits protectionist trade measures that favour domestic products by requiring that imported products are ‘accorded to treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.’ In practice, this can be fairly difficult as so-called “likeness” between products and between treatment imposed on domestic and imported products cannot always be easily and clearly identified when it comes to climate change measures including taxes, permits and regulations.

1. Domestic Carbon Taxes and BTA

As indicated earlier, one way a country may try and reduce its CO2 emissions is by putting an energy-product tax on imports collected at the border based upon the principle of BTA which is equivalent in value to a domestic energy tax on like products.

GATT Article III:2 provides that internal taxes may be levied on imported products as long as they are not taxed ‘in excess’ of the taxes levied upon like domestic products. Accordingly, GATT Article II:2(a) allows BTA to collect the taxes on imported products at the border. In order to have a successful BTA climate change tax scheme in place, one has to ensure that the tax is levied on products.[6] This is because of the 1970 report of the GATT Working Party on BTA which clarified that this provision was largely limited to indirect taxes (excise taxes, sales taxes, value-added taxes) and not direct taxes (income taxes, social security taxes, payroll taxes). Generally, Article II:2 has been applied to several kinds of consumption taxes, which are often waived or rebated by exporting countries, and imposed by importing countries, as to avoid double taxation of imports.[7] Whether measures equivalent to carbon tariffs would equally fall under the provision of Article II:2, partly depends on whether the tariff or other charge can be considered as imposed in respect of either the imported product or an article from which the imported product was manufactured, rather than CO2 emissions generated in the process of production. If permitted, Article II:2 then further requires that GATT Article III:2 be satisfied. Article III:2 entails the NT Principle as applied to internal taxes, and prohibits charging taxes on imported products ‘in excess’ of, or dissimilar to, taxes imposed on domestic like products.

In regards to the legality of BTA and remission of domestic taxes on exports, the Agreement on Subsidies and Countervailing Measures (1994) (SCM Agreement) differentiates between countervailable export subsidies and permissible remissions of indirect (product) taxes with the help of an Illustrative List of Export Subsidies. Paragraph (g) of this List provides that there is an export subsidy if there is ‘any exemption or remission, in respect of the production and distribution of exported products, of indirect taxes in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.’ Under the list, ‘indirect taxes’ are defined as ‘sales, excise, turnover, inventory, and equipment taxes, border taxes, and all other taxes other than direct taxes and import charges.’ The underlying objective of paragraph (g) is to make clear that value-added taxes can be remitted on export. Yet, the list, under its paragraph (h) further clarifies that remissions of ‘prior-stage cumulative indirect taxes on goods or services’ used in the production of products are likewise not export subsidies so long as the remissions are not in excess of those levied in the production of like products when sold for domestic consumption. Lastly, paragraph (i) provides that this treatment further applies to inputs to products consumed in the production process of exported products.

Summing up, on the export side remissions of all kinds of energy taxes on products are clearly permitted as long as they are not in excess of the similar taxes levied, and the remissions may include prior-stage taxes and taxes on inputs consumed in the process of production of the corresponding product. Given the unclarity on the import side, it would be best for the WTO to read GATT Article II:2(a) so as to permit symmetry in BTA regarding both imports and exports. Any other interpretation would be unreasonable. This argument can be supported by Vienna Convention on the Law of Treaties (VCLT) Article 31 which states that a treaty be interpreted in good faith in accordance with its terms in their context and in the light of the treaty’s object and purpose. As those provisions of the SCM Agreement explicitly permitting remission of energy input taxes and BTA on the export side can be considered essential parts of the context of GATT Article II:2(a), interpretation of the article in its context means that border collection of energy input charges on imported products that otherwise comply with GATT Article III:2, are allowed using BTA.

2. Cap-and-trade Laws and Energy Taxes and Charges

A different kind of border measure that may be levied on imports in order to supplement national climate change legislation is the requirement that importers pay a charge or purchase emission allowances so to mitigate the GHG emissions created during production of the imported product. The amount of such charge or the quantity of allowances required for every product imported can be determined by using a certain formula or criteria.

The U.S., under its proposed cap-and-trade regime, put forward border adjustment measures taking the form of emission allowance requirements (EAR), known to be the most concrete unilateral trade measures to control carbon emissions.[8] The U.S. EAR target major emerging economies including China and India in order for them to take climate actions similar to those of the U.S. EAR come with the risk that, if implemented improperly, they could disrupt the world trade order and trigger a trade war.[9] This system of climate change border charges would potentially violate several WTO rules.

On the one hand, imports from some WTO members would enjoy exemptions on the basis that their domestic climate change laws were similar or comparable or would sufficiently minimize GHG emissions already.[10] On the other hand, these exemptions would constitute violations of GATT Article I, the MFN principle. Furthermore, such system would violate GATT Article II:1(b), prohibiting ‘duties and charges’ other than those contained in the member’s GATT schedule. Other violations may include GATT Article III:2 in case the charge is found to constitute a tax and cannot be considered equivalent to the corresponding taxes levied on domestic like products; and GATT Article III:4 if the system is considered to be a regulatory system on imported products. Accordingly, the only provisions that could possibly justify such regime would be either GATT Article XX(b) or (g), namely the general exception for human, animal, and plant life and health, and to conserve exhaustible natural resources.

A consistent interpretation of Article XX was given by the Appellate Body in the Shrimp-Turtle (WTO 1998) case. The Shrimp-Turtle decision is considered the leading WTO Appellate Body decision on the relationship between trade and the environment. It is highly relevant as it involves a involved a trade measure comparable to those employed in the famous Tuna Dolphin cases. In this case, a number of Asian countries complained against a U.S. ban on imports of shrimp from countries that do not have a regulatory scheme comparable to the one in place in the U.S. that requires fishermen to fish for shrimp using techniques that do not pose a threat to sea turtles. Albeit admitting the ban constituted a violation of Article XI, the U.S. sought to justify it under Article XX(g). Firstly, it needs to be clarified under Article XX(g) whether the trade measure in question concerns the conservation of exhaustible resources. In this respect, the Appellate Body has taken a generous view, meaning a ‘resource’ can be either living or non-living, and does not need to be rare or endangered in order to be considered potentially ‘exhaustible’. Secondly, the trade measure has to be ‘related to’ natural resource conservation which has been interpreted as having to be ‘primarily aimed at’ conservation. Differences of opinions arise as to whether the ‘primarily aimed at’ meaning of ‘relating to’ is correct. The Appellate Body has interpreted the phrase ‘relating to’ the meaning of a ‘close and genuine relationship of ends and means.’ ‘Conservation’ is given the meaning of ‘the preservation of the environment, especially of natural resources.’ The third and last requirement of Article XX(g) is that the measure taken must be ‘made effective in conjunction with restrictions on domestic production or consumption’, which in the Shrimp-Turtle case was a requirement that the U.S. certainly had satisfied by imposing similar measures on its own fishing fleet. The Appellate Body then went on to the chapeau conditions, under which measures provisionally justified under one of the Article XX exceptions must not be applied in such way that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade.[11] In the given case, the Appellate Body held that the U.S. were being applied in such manner that was unjustifiably discriminatory as all exporting countries had to adopt essentially the same policy as the U.S. taking no account of the circumstances of members who might be differently situated and able to achieve similar levels of effectiveness to the U.S. requirements through different policies.

In the case of U.S.’s EAR, the U.S. would have to show that the measures taken are both ‘necessary’ under Article XX(b), and ‘related to’ the conservation of natural resources under Article XX(g). Even if the U.S. EAR system passes either or both Articles XX(b) and (g), it may founder on Article XXX chapeau prohibiting arbitrary or unjustified discrimination and disguised obstacles to international trade.

Concluding from both measures, a tax system appears to be the better solution and it would also be more easy to fold into the rules of the multilateral trading system than any cap-and-trade regime.

3. The TBT Agreement

The TBT Agreement may prove itself significant in the adjustment of international trade in goods to protect the earth’s climate from anthropomorphic changes. It distinguishes between technical regulations, which are mandatory, and product standards, which are voluntary, as well as labelling schemes attached to products. The definition of technical regulations and standards makes clear that both can determine conditions of methods for process and production as well as product characteristics. Accordingly, energy-related standards can be adopted for products in international trade that would be enforced by national authorities at the border. However, national standards would have to comply with provisions of the TBT Agreement, most notably meet the requirements of TBT Article 2. Mandatory or voluntary climate change regulations or standards must not be discriminatory and must not be prepared, adopted or applied with the view to or effect of creating unnecessary obstacles to international trade.[12] Furthermore, national standards must not be ‘more trade-restrictive than necessary to fulfil a legitimate objective. However, harmonisation of international technical regulations and standards and particularly the adoption of international standards is being preferred so to circumvent violations. Under the provisions of the TBT Agreement, protecting climate and international trade can be best achieved by assigning appropriate international standard-setting organisations with developing international technical requirements and standards for the most commonly traded products on the international market. This way, energy efficiency standards can be adopted and enforced by WTO members in compliance with existing WTO provisions.

In contrast to the GATT which would plainly emphasise the significance of complying with the principle of non-discrimination, the TBT Agreement promotes a rather broad ranging concept of regulatory efficiency domestically in different areas (e.g. technical and food safety regulations). Thus, the TBT Agreement can be considered to complement GATT objectives.

4. WTO Reforms as a Possible Solution

As identified earlier, the underlying objective of the WTO is trade liberalisation rather than environmental protection. Yet, the WTO as an organisation with a broad membership and effective dispute resolution system has the potential to evolve to accommodate countries’ ‘pro-climate’ policies within the WTO system and, beyond that, to actively promote climate change objectives. As suggested by the WTO-UNEP Report on Trade and Climate Change, ‘mitigation measures should be designed and implemented in a manner that ensures that trade and climate policies are “mutually supportive”’. Measures to actively promote climate change objectives within the WTO regime include reconciling existing WTO law with domestic and international climate change provisions and, over long term, proposing amendments to the WTO agreements. For instance, a first and fairly simple yet effective reform would be an extension of the exceptions list in GATT Article XX so as to explicitly include climate change measures. Furthermore, one could consider establishing an independent environmental or climate change agreement within the framework of the WTO. This would address the great variety of issues all at once.[13] Whatever WTO reforms may be proposed or put in motion in the future, further clarification of the relationship between WTO law and other areas of international law (international environmental law in particular) will be necessary.

The Role of Free Trade Agreements and the Future of the WTO

Why utilise FTAs in combating climate change? Outside the WTO negotiating rounds, states may use bilateral and regional FTAs (e.g. the current TPP or TTIP negotiations) to negotiate trade advantages and secure investor protection. More and more states are using these smaller negotiations to include a variety of pro-environmental measures in trade as well as investment agreements. 

As existing trade agreements, both within and outside the WTO system, do not sufficiently incorporate climate protection measures and concerns about climate change continuously grow, attention is now given to FTAs as a possible solution. This is particularly true for so-called ‘new-generation’ multilateral FTAs including the Comprehensive and Progressive Agreement for the Transpacific Partnership (CPTTP) due to the size of their membership and their potential to have an influence on future trade deals.

Aside from the problem of insufficient climate protection measures, it is worth mentioning that the economic policy under Trump’s administration is breaking down the whole WTO system at high speed and demolishing the laws-based international order.[14] Besides imposing tariffs, the U.S. is also blocking the appointment of new judges to the body interpreting and enforcing WTO rules, decisions and agreements. If this proceeds, experts estimate that the WTO will cease to exist by the end of this year. In light of these facts, reflecting the present crisis within the WTO, the world in general and developing countries in particular have to start preparing for this inconvenient new reality, namely a new world trade order. Consequently, states increasingly rely on FTAs and harmonisation of existing FTAs with current and future trade issues related to climate change is becoming more and more important. This is particularly true in regards to requirements under the Paris Agreement, in accordance with which States will have to actively invest in and support industries such as the renewable energy industry so to achieve set targets.

Under the Paris Agreement regional economic integration, organisations (e.g. an FTA) may, with consensus of its member states, become a party to the UNFCCC and act jointly to implement its objectives. Such bilateral and regional FTAs could be a powerful tool in the fight against climate change by enhancing commitments made under environmental chapters and ensuring their effectiveness through legally binding commitments to uphold and improve climate change measures. Generally speaking, these agreements would present an opportunity to develop synergies between trade and climate change as they would implement climate change measures into a trade agreement. However, up to today no trade agreement has done so. As a matter of fact, no existing FTA has explicitly made reference to the UNFCCC.

Nevertheless, FTAs could still facilitate the Paris Agreement’s goals by supporting several opportunities such as the removal of tariff barriers on environmental goods and services, the removal of non-tariff barriers on environmental goods and services and border adjustment carbon taxes.[15]

Contemporary FTAs include the CPTPP (2018), The EU – Singapore Economic Partnership Agreement (2018), The EU – Canada Comprehensive Economic Trade Agreement (CETA, 2016) and The Korea – Australia Free Trade Agreement (KAFTA, 2014).

All these agreements contain a chapter regarding environment or sustainable development. However, the legal status of environment-related provisions remains weak. Language continues to be aspirational, while provisions have a focus on national protection and enforcement of laws. Any further objectives are usually broad and non-binding “vigorous efforts”. The KAFTA explicitly excludes environment related disputes from the main dispute settlement mechanism, instead emphasising consultation as well as dialogue. In comparison, the CPTPP contains a stronger dispute-resolution mechanism which applies to environmental provisions. If a member nation fails to resolve any environment-related trade dispute within 60 days, the aggrieved party can either request consultation under the dispute-settlement chapter, or alternatively the establishment of a panel to seek technical advice. In case the panel decides that the measure taken is not consistent with a party’s obligations, the party has to take steps in resolving the problem.

For the main part, these four FTAs fail to support opportunities to promote climate change goals.

While contemporary trade agreements (in contrast to traditional trade agreements) differentiate between environmental and non-environmental goods and services when addressing tariffs, they do so in “vigorous efforts” obligations, thus emphasising cooperation in the promotion of green trade. For example, The EU – Singapore agreement, advocates facilitating the removal of obstacles to trade in climate-friendly goods and services, however fails to include binding commitments to reduce or remove tariffs.[16] Therefore, despite acknowledging the importance of reducing tariffs on environmental goods and services, contemporary FTAs miss out on obliging member countries to pursue more than plain cooperation and discussion in this respect.[17]

Furthermore, while some contemporary FTAs do focus on removing NTBs to environmental goods and services, as with tariffs, the problem of vague and aspirational terminology as well as lack of binding commitments to remove NTBs remains.[18] A whole chapter of The EU – Singapore agreement is dedicated to the issue but only calls for nations to cooperate on removing or reducing NTBs (e.g. through dialogue on the use of eco-labelling and fair trade schemes).[19] CETA contains one provision on the removal of environmental NTBs, according to which the parties must only resolve to make efforts to facilitate and promote trade and investment in such goods, including by reducing NTBs.[20] Likewise, CPTPP and KAFTA each have a provision that determines that the committee shall consider NTBs in environmental goods and services and endeavour to address any potential barriers to trade.[21] All in all, while unprecedented in addressing environmental NTBs, the provisions contemporary FTAs contain are mainly based on “vigorous efforts”, cooperation and consultation. Besides, language is vague as well as open to interpretation whilst also dependent on good faith of the parties. None of the agreements entails specific or immediate actions.

Lastly, none of the traditional FTAs focused on border adjustment carbon taxes. Amongst the contemporary FTAs, CETA acknowledges carbon markets as a possible “cooperation activity” in trade-related aspects of parties’ current as well as future climate change regimes and policies, albeit not specifically mentioning border adjustment carbon taxes.[22] Other than that, border adjustment carbon taxes are almost completely absent from FTAs.[23] This again indicates the controversy surrounding such taxes. One constraint is missing clear and rigorous methodology for the calculation of embedded carbon, because this would potentially allow countries to use embedded carbon as an excuse for other forms of trade protection.[24] 

Summing up, bilateral and regional FTAs currently being negotiated would have to be made more “climate friendly”. This is to be done by building upon the best practices shown in recent agreements. First and foremost, this means that countries generally have to be committed to removing NTBs on environmental goods and services and supporting broad ranging climate policy cooperation. Besides, language must become clearer and obligations binding on the parties. Countries must further take into account how to seize more challenging opportunities (both technically and politically) including border adjustment carbon taxes.[25] Climate-friendly FTAs should then receive international support as they are important measures in the fight against climate change and would position trade as an attempt to solving the problem, rather than causing it.

Conclusion

International trade law has yet to make a substantial positive contribution to the global issue of climate change. Climate change policies continue to raise a variety of unresolved questions of WTO law and some uncertainty remains about the compatibility of WTO-rules with climate change policies. Under the Kyoto Protocol, many countries have committed themselves (through unilateral declarations) to reducing CO2 emissions in the future. As a matter of fact, these commitments would actually promote green growth, were they not linked to changes in trade regimes.

The broad membership of the WTO presents true opportunities for the WTO to take a leading role in tackling climate change. Furthermore, a good aspect of trade policy is that it rewards nations as well as firms taking measures to greening their energy, transport and industrial systems, while punishing those that are not.[26] Efforts currently under consideration to reform WTO provisions so to accommodate climate change measures within the existing framework (e.g. to explicitly include climate change in the exception list of GATT Article XX) as well as to create an Environmental Goods Agreement under the WTO should gain more support. WTO-compatibility of measures taken will depend on how they are designed and implemented.

Successive FTAs, such as CPTPP and TTIP, appear to have the underlying objective of promoting business, and restricting the scope for countries to enact effective policies and programs to green their industries. The ‘environment’ chapters contained in these FTAs show little tendency to impose more stringent standards. Taken together, FTAs present a great opportunity to develop synergies between trade and climate change as they integrate climate change measures into trade regimes, which are known to have better enforcement mechanisms. This opportunity should not be missed. As bilateral, regional and multilateral trade agreements are becoming more and more important given the current WTO crisis, further steps have to be taken to include pro-environment provisions (preferably making explicit reference to UNFCCC) in FTAs that are legally binding and thus enforceable. Only this way, FTAs can be successful in preventing or at least minimising the causes of climate change making trade ‘a driver of climate action.

References

[1] International Bar Association, ‘Achieving Justice and Human Right in an Era of Climate Disruption’, Climate Change Justice and Human Rights Task Force Report (2014), 44.

[2] Matsushita, Mitsuo, ‘The World Trade Organisation: Law, Practice, and Policy’, Oxford University Press, 2015, 764.

[3] Ibid.

[4] Ibid.

[5] Trebilcock, M. J., ‘Understanding Trade Law’, Edward Elgar Publishing, 2011, 168.

[6] Matsushita, Mitsuo, ‘The World Trade Organisation: Law, Practice, and Policy’, Oxford University Press, 2015, 765.

[7] Trebilcock, M. J., ‘Understanding Trade Law’, Edward Elgar Publishing, 2011, 168.

[8] ZhongXiang Zhang, ‘The U.S. Proposed Carbon Tariffs, WTO Scrutiny and China’s Response’, in: Deok-Young Park, ‘Legal Issues on Climate Change and International Trade Law’, Springer (2016), 67.

[9] Ibid.

[10] Ibid, 70.

[11] Ibid, 730.

[12] Article 2 TBT.

[13] Ibid.

[14] Anil Padmanabhan, ‘Countries should brace for post-WTO world order’, LiveMint (online), 15 October 2018, ; Giovanni de Lieto, ‘Australia has to prepare for life after the World Trade Organisation’, The Conversation (online), 6 August 2018, .

Climate Strategies, ‘Making the International Trade System Work for Climate Change: Assessing the Options’, CS Report 2018 – Assessing the Options (2018), 32.

[16] Ibid.

[17] Ibid.

[18] Ibid, 22.

[19] Ibid.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Ibid.

[24] Ibid, 25.

[25] Ibid.

[26] Ibid.