New Zealand Journal of Environmental Law
Last Updated: 30 January 2023
Kyoto v WTO: Carbon Tariffs — Addressing Conflicts Between the Kyoto Protocol and International Trade Rules
G R Milner-White*
This article explores conflicts that can arise between domestic measures to implement climate change obligations and international trade rules. It uses as an example recent legislation introduced in the US House of Representatives, the Clean Energy and Security Bill of 2009 (the Waxman-Markey Bill), which establishes a carbon “cap and trade” system. After overviewing the international legal framework, the article analyses the trade-related provisions of the Bill against WTO obligations. It is concludes that these provisions are likely to violate the non-discrimination provisions under the General Agreement on Tariffs and Trade (“GATT”) and possibly also the national treatment obligations, but are nevertheless likely to be able to be justified under the environmental exemptions in Article XX of GATT. The analysis demonstrates the significant complexity in designing a system to protect domestic “trade exposed” industry from the costs of climate change mitigation, that is both workable and complies with WTO obligations. The article concludes by examining some possible solutions to existing tensions between trade and environmental objectives in this area. It suggests that the WTO should work towards establishing a comprehensive framework for dealing with WTO–Kyoto conflicts with an effective dispute resolution mechanism. A possible solution may be to seek to amend Article XX of GATT to clarify the status of climate change mitigation measures in relation to GATT’s substantive obligations, or
*Greg Milner-White is a senior associate with Kensington Swan solicitors in Auckland. He specialises in acting for local authorities and commercial clients on resource management issues. He appears before the Environment Court and High Court on consent appeals, plan changes, and enforcement matters. This article was submitted as part of his LLM course at the University of Auckland in 2009.
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the promulgation of a new interpretative decision by the contracting parties to clarify uncertainty about existing environmental exceptions. Without an adequate global consensus on the conflicting goals, there is the likelihood of continued unilateral and uncoordinated domestic action.
The eyes of the international community have recently been on Copenhagen for the 15th Conference of the Parties (“COP15”) as the developed and developing countries negotiate a new framework to address climate change issues beyond 2012. At the Meeting of Parties1 in April 2009 in Germany, the issue again arose as to whether Trade Related Environmental Measures (“TREMs”) should be used by Annex I (developed) parties in their efforts to mitigate climate change and comply with their Kyoto obligations. Among the various TREMs discussed was the use of Border Tax Adjustments (“BTAs”) which are being used by countries in conjunction with their climate change policies to address international competitiveness issues.2
The United States Energy Secretary Steven Chu has recently endorsed the idea of “carbon tariffs” as a means of defending the competitiveness of domestic industry. He said that establishing a carbon tariff would help “level the playing field” if other countries have not imposed greenhouse gas (“GHG”) reduction measures similar to those which have been proposed in the United States.3
Commentators have identified carbon taxes and associated BTAs as likely sources of WTO–Kyoto conflict.4 In particular, an exporting country may claim that such measures conflict with the obligations of WTO members to maintain
pdf > (accessed 1 June 2009).
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free and non-discriminatory international trade. A Chinese negotiator, Li Gao, has said of the proposed US carbon tariff that this would be a “disaster”, would prompt a trade war, and does not abide by the rules of the WTO.5 There are a number of European countries which already utilise energy taxes and associated BTAs, and there is a prospect that other countries which do not currently have equivalent domestic carbon taxes may seek to challenge the imposition of such measures on imported goods.6 It is likely therefore that these issues will be placed before the WTO’s Dispute Settlement Body at some future point.
The issue of carbon tax and BTAs is one of many possible conflicts that may arise as a result of the implementation of the Kyoto Protocol by member states and international trade obligations. This article seeks to outline some of the key areas of conflict between the international trade regime and the efforts being made to address the problems of climate change under the Kyoto Protocol. Part 2 provides an explanation of the institutional structures of the WTO and key trade obligations which are likely to interact with international environmental obligations, particularly under the General Agreement on Tariffs and Trade (“GATT”)7 and other WTO agreements. Part 3 outlines the key institutions of the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Kyoto Protocol, and existing dispute resolution mechanisms. Part 4 overviews potential conflicts between international climate change mitigation measures and focuses on the legality of BTAs between countries under relevant GATT provisions. Part 5 uses the recent American Clean Energy and Security Bill of 2009 as a case study and assesses its compliance with international trade obligations.
Finally, Part 6 considers possible solutions or clarifications to the existing tensions. The article concludes that in addition to the attempts to address the place of TREMs within the round of current climate change negotiations, the WTO should work towards establishing a comprehensive framework for dealing with WTO–Kyoto conflicts with an effective dispute resolution mechanism. A possible solution may be to seek to amend Article XX of GATT to clarify the status of climate change mitigation measures in relation to the GATT’s substantive obligation, or the promulgation of a new interpretative decision by the contracting parties to clarify uncertainty about existing environmental exceptions.
7 General Agreement on Tariffs and Trade (“GATT”), opened for signature 13 October 1947 (entered into force 1 January 1947), at <http://www.wto.org/english/docs_e/legal_e/
gatt47_01_e.htm> (accessed 25 May 2009).
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2. INTERNATIONAL LEGAL FRAMEWORK
2.1 GATT and World Trade Organization
The current global trade regime was initially conceived toward the end of World War II. One of its aims was to prevent another world war as it was considered that protectionism had been an element of the conflict and that ensuring trade restrictions were removed might avoid similar conflicts.8 The GATT was negotiated by the Conference of Parties in 1947. It was originally intended that an International Trade Organization (“ITO”) was to be formed to provide institutional support, but when the US Congress failed to ratify the ITO’s establishment, the GATT became the de facto international institution with responsibility for the international trade regime for the next 50 years.9
The World Trade Organization (“WTO”) emerged from the Uruguay round of trade negotiations which culminated in the Marrakesh Agreements in 1994. It was designed to provide a formal international organisation to handle trade- related matters and also a two-tier Dispute Resolution Understanding to handle all trade disputes. The Marrakesh Agreements were the most comprehensive set of multilateral agreements since the 1947 GATT and covered the majority of the world’s trade and business services.10 A key goal of the GATT is to encourage economic development by liberalising trade among member nations and reducing tariff levels.11
The primary obligations of member states include:
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2.2 WTO and Environmental Issues
The preamble to the GATT sets out the various objectives of the agreement including “developing the full use of the resources of the world”. The preamble to the Marrakesh Agreement establishing the WTO expressly also refers to the overlap between environmental and trade issues and recognises among the listed objectives, “allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with [member states’] respective needs and concerns at different levels of development”.16
When this preambular language was inserted, few considered it would have particular significance. However, the Appellate Body in United States
— Import Prohibition of Certain Shrimp and Shrimp Products (“United States — Shrimp ”)17 demonstrated a desire to take an even-handed approach between trade and environmental issues, and consider principles of international environmental law.18 The Appellate Body in that case stated that the preamble shows that WTO negotiators determined to “qualify the original objectives of the GATT 1947” and “demonstrates a recognition by WTO negotiators that
min01_e/mindecl_e.htm#tradeenvironment> (accessed 9 May 2009).
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optimal use of the world’s resources should be made in accordance with the objective of sustainable development”. The Appellate Body also declared that states should seek to protect the environment either “within the WTO or in some other international forum”.19 This case is discussed further below.
Article XX(b) and (g) of GATT provide a specified set of exceptions to the general obligations outlined above. Trade restrictions are permitted if they are:
Trade measures meeting these criteria may be exempt if they are not applied in a manner which would constitute a means of “arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”.22 Relevant case law relating to these provisions is dealt with further below.
There are a number of other provisions within WTO texts which specifically relate to the environment. These include:
19 US — Shrimp, supra note 17, at para 185. 20 GATT Art XX(b).
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2.3 Committee on Trade and Environment
Since the entry into force of the WTO in 1995, the Committee on Trade and Environment (“CTE”) has been established. This arose from the Uruguay round of negotiations culminating in the Ministerial Decision on Trade and Environment of April 1994 which stated:
There should not be, nor need be, any policy contradiction between upholding and safeguarding an open, non-discriminatory and equitable multilateral trading system on the one hand, and acting for the protection of the environment, and the promotion of sustainable development on the other.
The declaration went on to establish the CTE and mandate the Committee to:27
In particular, the Committee is charged with examining the relationship between the provisions of the multilateral trading system and charges and taxes for environmental purposes.
by the SCM Agreement including those which may be provided for under other WTO Agreements.
docs_e/legal_e/15-sps.doc> (accessed 31 May 2009).
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The CTE currently has a ten-point work programme.28 The Committee is focused on some of these, whilst other points are now formally part of the Doha negotiations.29 Its work is guided by various parameters. The first is that the WTO’s competency for coordinating policy is limited to trade and those aspects of the environmental policies that are related to trade and have significant effects on WTO trade. It specifically emphasises that the WTO is not an environmental protection agency,30 and also should not become involved in setting or reviewing environmental standards or developing global policies on the environment.
Commentators have noted that the CTE’s achievements have been modest, and it is constrained by the fact that it is an advisory body and has no real decision-making ability.31 The CTE has provided a forum for officials to meet to discuss trade and environment issues, and representatives from some international organisations such as the United Nations Environment Programme (“UNEP”) have been granted observer status.
With regard to the CTE’s work relating to taxes for environmental purposes and Border Tax Adjustments, progress has been particularly limited. There is only one document which has been published by the Secretariat from May 1997 which relates to this CTE item of work. It appears that there are no active negotiations within the CTE currently in relation to compatibility of environmental taxes with WTO rules. Recent annual reports of the CTE indicate that it has focused instead on market access issues, particularly in relation to labelling and packaging requirements for environmental purposes.32
2.4 WTO Case Law
The scope of environmental exceptions under Article XX of GATT has been considered by the WTO Appellant Body on a number of occasions. As noted, if a trade restriction is found to fall within one of the two key exceptions (under Article XX(b) or (g)) and is applied according to Article XX’s Chapeau (i.e. introductory paragraph), it is exempted from GATT’s non-discrimination requirements.
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In relation to Article XX(b), the member state must show that the trade restriction is “necessary to protect human, plant or animal life or health”. In Korea — Measures Affecting Imports of Fresh, Chilled and Frozen Beef (“Korea
— Beef ”)33 the Appellate Body determined that although “necessary” did not mean “indispensable”, it involved in every case a process of weighing and balancing factors including the contribution made by the compliance measure to furthering a legitimate objective, the importance of common interests or values protected, and the accompanying impact on trade.34
In addition to these requirements, the measure must be the least restrictive trade alternative reasonably available to satisfy the requirements of Article XX(b). As the Appellate Body said in United States — Section 337 of the Tariff Act of 1930 (“US — Section 337”):35
It was clear to the Panel that a contracting party cannot justify a measure inconsistent with another GATT provision as ‘necessary’ in terms of Article XX(d), if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions.
Whether an alternative measure is reasonably available depends on a variety of factors including the domestic costs of such an alternative measure, and other factors such as financial and technical difficulties of implementation.36
The importance of the interests at stake will be a driving consideration. In European Communities — Measures Affecting Asbestos and Products Containing Asbestos (“EC — Asbestos”)37 the Appellate Body considered a complaint by Canada relating to a prohibition of asbestos and products containing asbestos (including an import ban) by France. The Appellate Body upheld the finding of the Dispute Panel that the French decree was justified under Article XX(b) of GATT 1994 as “necessary to protect human ... life
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or health”. With regard to the “necessity” requirement, the Appellate Body reinforced the point that the more vital or important the value at stake, the easier it would be to accept the necessity of measures designed to achieve those ends. It found that a measure proposed by France to eliminate health risks associated with asbestos fibres was a measure designed to achieve the objective of preservation of human life and health. It described the value pursued as both “vital and important in the highest degree”.
It appears therefore that measures which come within the scope of the human life and health exception are more likely to satisfy the Article XX(b) necessity requirement on the basis of the importance of the values engaged.38
A trade-restrictive measure, such as a BTA, may also be justifiable under Article XX(g) which exempts measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”.
This Article has not yet been considered by the Appellate Body in the climate change context and there is an issue as to whether or not “exhaustible natural resources” could be read so as to include the atmosphere or climate.39 However, in United States — Shrimp the Appellate Body held that Article XX(g) is not limited to conservation of mineral or “non living” natural resources. The phrase “exhaustible natural resources” includes living, renewable and non- renewable resources. The complainant’s principal argument that because living natural resources (in that case, various species of sea turtle) are renewable they are also not exhaustible, was rejected.40
At para 129, the Appellate Body held that “exhaustible natural resources” must be “read by a treaty interpreter in light of the contemporary concerns of the community of nations about the protection and conservation of the environment”.41 Applying this line of reasoning to the climate change context, it could be argued that in light of the widespread concern around the world about climate change issues and the existing agreements restricting carbon emissions,
v WTO: Carbon Tariffs — Addressing Conflicts 47
it is likely that the term “exhaustible natural resources” will be read to include the climate.42
This also appears to be consistent with the finding of the Dispute Panel in United States — Standards for Reformulated and Convention Gasoline,43 which considered the scope of the Article XX(g) exception in the context of a complaint made by Venezuela that the United States was applying rules that discriminated against its gasoline imports. The dispute originated from the US applying stricter requirements in relation to chemical characteristics of import- ed gasoline than to domestic refiners. The US claimed that the measure was designed to control air pollution under domestic legislation and was justifiable under Article XX. One of the issues between the parties was whether “clean air” qualifies as an “exhaustible natural resource”.44 The Dispute Panel found that clean air was a natural resource that could be depleted, and that a policy to reduce the depletion of clean air was a policy to conserve an exhaustible natural resource within the meaning of Article XX(g). This aspect of the Panel’s findings was not disturbed on appeal.45 This appears to support the conclusion that a measure relating to conservation of the climate or atmosphere would, subject to complying with the Chapeau, come within the terms of Article XX(g). Another requirement is that a measure under Article XX(g) must “relate to”
the conservation of exhaustible natural resources. This has been interpreted to require a causal or “means and ends” relationship between the measure at issue and a legitimate policy of conserving an exhaustible natural resource.46 In the context of climate change-related measures, it is likely that arguments could arise as a result of scientific uncertainties over the causes and effects of climate change.47
The introductory paragraph, or the “Chapeau”, prohibits measures that are applied so as to impose “a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”.
The first limb is whether the application of the measure amounts to discrimination that is arbitrary or unjustifiable in character between countries where the same conditions prevail. It has been held that such discrimination
46 United States — Shrimp, supra note 17, at para 141. 47 Green & Epps, supra note 39, at 15.
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can occur not only between different exporting countries, but also the exporting member and the importing member concerned.48 Arbitrary and unjustifiable discrimination occurs where exporting countries are treated differently and the same conditions apply, or conversely where countries are treated the same and different conditions apply in those states.49
Factors which the Appellate Body has assessed in considering whether discrimination is arbitrary or unjustifiable include whether there has been good- faith negotiations with all exporting countries prior to imposing a restriction on trade and/or whether measures have been designed in such a way as to ensure that there is sufficient flexibility to take account of different conditions that apply in different exporting states.50
The second limb concerns whether a measure is a disguised restriction on trade. This concerns both process requirements, i.e. that the application of the measure is transparent and open (including appropriate public notification procedures) and substantive requirements, i.e. that the objective or the measure is linked closely to a legitimate goal.51 An adjudicating body will be concerned to ensure the Article XX exceptions are not used to conceal trade-restrictive measures for protectionist reasons.
The application of the Article XX Chapeau has been considered in a number of cases. A leading decision remains US — Shrimp. That case concerned a challenge brought by India, Malaysia, Pakistan and Thailand against a United States ban on importation of certain shrimp and shrimp products. The US Endangered Species Act 1973 required US shrimp trawlers to use “Turtle Excluder Devices” in areas where they were likely to come into contact with sea turtles. Importers of shrimp products were also required to comply with specified requirements to protect turtles. The effect was that countries wishing to import harvested shrimp into the US had to impose on their fishermen requirements similar to those carried out by the US shrimping industry if they wanted to be certified to bring shrimp into the US.
The Appellate Body found that although turtles were an “exhaustible natural resource” within the meaning of Article XX(g), the US measure did not comply with the Article XX Chapeau, primarily because it constituted a unilateral attempt to impose US domestic rules on the foreign importers and because it discriminated between WTO members.
The Appellate Body described the task of interpreting the Chapeau as a “delicate one of locating and marking out a line of equilibrium between the right of a Member to invoke an exception under Article XX and the rights of other Members under varying substantive provisions ... so that neither of the
48 United States — Shrimp, supra note 17, at para 150. 49 Hawkins, supra note 9, at 438.
50 United States — Shrimp, supra note 17, at paras 163–164. 51 Ibid.
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competing rights would cancel out the other and thereby distort and nullify or impair the balance of rights and obligations constructed by the Members themselves in that Agreement”.52 It considered that the United States had crossed the line as the challenged measure had the effect of requiring other WTO members to adopt a regulatory programme “essentially the same” as that applied to the US shrimp trawl vessels.53
The US was also criticised for failing to engage the complainant countries as well as other member states exporting shrimp to the United States in “serious, across the board, negotiations with the objective of concluding bilateral or multilateral agreements for the protection and conservation of sea turtles, before enforcing the import prohibition against shrimp imports of those other countries”.54 This was particularly the case as the US was a signatory to the Inter-American Convention for the Protection and Conservation of Sea Turtles, which the Appellate Body considered provided a convincing demonstration that an alternative course of action was reasonably open to the United States for securing the legitimate policy goal of the measure at issue — i.e. other than a unilateral and non-consensual import prohibition under domestic legislation. This also showed that the US had negotiated seriously with some but not with other states (including the complainant countries) that export shrimp to the United States.55 The Appellate Body found that the import ban imposed a “rigid and unbending” requirement on countries applying for certification and neither was the certification process sufficiently transparent or predictable. For these reasons, it concluded that the United States’ measure was applied in a manner which amounted to arbitrary and unjustifiable discrimination.
The Appellate Body also emphasised that it had not decided that the protection and preservation of the environment was of no significance to members of the WTO. It stated: “[W]e have not decided that sovereign states should not act together bilaterally, plurilaterally or multilaterally, either within the WTO or in some other international fora, to protect endangered species or to otherwise protect the environment. Clearly they should and do.”56
A postscript to this case is that the United States subsequently modified the application of its import ban, and also engaged in negotiations with the complainant countries about revised guidelines relating to criteria for certification of shrimp exporters. Malaysia challenged the revised guidelines, and the case reached the Appellate Body in United States — Import Prohibition of Certain Shrimp and Shrimp Products — Recourse to Article 21.5 of the DSU
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by Malaysia (“United States — Shrimp/ Turtle (Article 21.5)”).57 The Appellate Body found that the United States had made serious “good faith” efforts to negotiate an international agreement relating to conservation of sea turtles, and rejected Malaysia’s argument that the United States was required to conclude an international agreement, which would in effect give any country a veto over US attempts to comply with WTO obligations.
The US — Shrimp case is instructive in relation to how the Article XX exception is applied in practice, and also provides guidance as to how climate change-related measures, such as carbon taxes and associated BTAs, may be designed to achieve compliance with Article XX. It signals strongly the Appellate Body’s desire to discourage seemingly well-intentioned environmental measures being imposed on a unilateral basis, without fully engaging in negotiations with other affected countries.58
3. UNFCCC AND THE KYOTO PROTOCOL
3.1 Climate Change and Outline of Treaty Provisions
The WTO describes climate change as the biggest sustainable development challenge the international community has had to tackle to date.59 The fourth assessment report of the Inter-Governmental Panel on Climate Change (“IPCC”) is the most authoritative statement to date about the direct effects of climate change. It concludes that warming of the climate system is unequivocal as is evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level.60 The IPCC also concludes that most of the observed increase in global average temperatures since the mid 20th century is “very likely” due to observed increase in human-induced (anthropogenic) GHG concentrations.61
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In May 1992, the United Nations Framework Convention on Climate Change (“UNFCCC”)62 was signed, and entered into force on 21 March 1994. It commits member states to the objective of stabilising atmospheric concentrations of GHGs, and requires developed countries to implement policies to reduce emission of GHGs to 1990 levels. The UNFCCC, however, sets no mandatory targets and contains no enforcement provisions. The Convention has instruments of ratification from 192 states.63
Article 3.5 of the UNFCCC provides: “Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.” 64 It appears therefore that the framers of the UNFCCC did not intend that this should operate in isolation from the WTO rules.65
At the first conference of the parties (“COP1”) in 1995, it was acknowledged that the UNFCCC was insufficient to stabilise GHGs on its own, and negotiations began to decide on more detailed and binding commitments for industrialised and developed countries.66 In 1997 the Kyoto Protocol to the UNFCCC, which sets mandatory reductions for GHGs, was adopted by COP3.67 Countries that are party to the Protocol are divided into Annex B and non- Annex B countries.68 There are currently 37 Annex B countries, which includes those parties that were members of the Organisation for Economic Co-operation
conveng.pdf > (accessed 25 May 2009).
essential_background/kyoto_protocol/items/1678.php> (accessed 9 May 2009).
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and Development (“OECD”) as well as countries in Eastern Europe whose economies were in transition to a market economy at that time. These countries are subject to binding targets for reducing overall GHG emissions by at least 5% below 1990 levels in the first commitment period (“CP1”) between 2008 and 2012.69
The Protocol was required to be ratified by 55 countries (including those responsible for at least 55% of the world’s 1990 GHG emissions) before it could enter into force.70 This was achieved when Russia ratified the Protocol in late 2004 and it came into force on 16 February 2005. To date 184 parties to the UNFCCC have ratified the Protocol. Detailed rules for the implementation of the Protocol and compliance mechanisms were adopted at COP7 in Marrakesh in 2001.
Under the Kyoto Protocol, Annex B countries must meet their targets either through national or, where appropriate, regional programmes to mitigate climate change.71 In addition, in order to enable Annex B countries to meet their commitments there are three “flexibility mechanisms”:
The Marrakesh Accords75 also contain provisions relating to monitoring enforcement of Kyoto obligations. The key enforcement mechanism is known as the 1.3 Penalty Rule. If it is determined that a country has not complied with
72 Kyoto Protocol, Arts IV & VI. 73 Kyoto Protocol, Art XII.
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its emissions target, it has deducted from its assigned amount for the second commitment period a number of tonnes equal to 1.3 times the amount of tonnes of excess emissions. In addition, a non-complying party’s ability to transfer or acquire units is suspended until it meets its targets.
Although these penalties seem significant, one problem with the 1.3 Penalty Rule is that it will only be relevant if the Annex B state adopts an emission reduction target for the second commitment period (i.e. after 2012). A non- complying country may choose not to enter into renegotiations, or even if it does so, may be unwilling to accept large reductions in its cap.76
The other key issue relating to the efficacy of the current Kyoto Protocol is that it only contains commitments relating to specified developed countries (i.e. Annex B countries), and other major emitting states, such as the United States, have not ratified the Protocol. There are also issues with commitments relating to developing countries (such as China) and the fact that many countries have been unable to meet their targets.77 The existing targets (even if met) are unlikely to have significant environmental benefit. The IPCC recognises that the impact of the first commitment period relative to global emissions is projected to be limited and future mitigation efforts will need to achieve deeper reductions of emissions.78
In the context of the relatively weak commitments under the current Kyoto Protocol, environmental policy-makers have increasingly recognised the potential for trade measures to assist in addressing climate change objectives and complying with any future climate change agreement.79 Although the Kyoto Protocol does not contain specific provisions relating to TREMs, or authorise members to restrict trade for environmental or climate change reasons, Kyoto does create a framework for emissions trading and requires countries to develop national measures in order to meet their Kyoto commitments. The next part of this article explains in general terms the types of trade-restrictive measures that countries may take to comply with their Kyoto obligations and, in particular, assesses the legality of one type of TREM, carbon taxes and associated BTAs.
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4. INTERACTION BETWEEN WTO AND THE KYOTO PROTOCOL — BORDER TAX ADJUSTMENTS
Green and Epps note that there are at least three ways in which trade measures may interact with an international climate change agreement (i.e. either the Kyoto Protocol or any successor agreement).80 Firstly, preferential trade concessions may be offered to foster participation and/or compliance with a climate change agreement. The most common example of such a “carrot” would be the grant of preferential market access. This may include, for example, a free trade agreement or other preferential concessions to particular developing countries. Such preferences are envisaged under the GATT’s “Enabling Clause”, which allows a system of generalised and non-discriminatory trade preferences for developing countries. This provides a limited exception to GATT Article I, the most favoured nation obligation, which generally prohibits preferential tariff treatment.81
Secondly, trade measures could be used as “sticks” to impose either import bans, restrictive quotas, or punitive tariffs on certain products. Such measures, particularly if taken unilaterally, would likely face significant difficulty under the WTO rules. They would constitute a breach of Article XI (General Elimination of Quantitative Restrictions) and would need therefore to be justified in terms of the Article XX exceptions.
Thirdly, an intermediate measure between these two extremes could be trade measures designed to eliminate competitive advantage that may be acting as a disincentive to the participation and/or compliance of the importing country. An example of such a measure would be carbon taxes and associated BTAs.
In addition to these possible interactions, there has been significant commentary on whether the global emissions trading system itself could give rise to conflict with WTO rules, in particular if a trade in emissions allowances constitutes a trade in a GATT “Good” or “Product”, or can be considered to be a “subsidy” under the SCM Agreement.82 An area of concern is that emission
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allocation systems might be viewed by the WTO Dispute Settlement Body as creating subsidies to specific sectors which may in turn be viewed as prohibited under the SCM Agreement.
There are a number of other examples of domestic measures implemented to encourage “climate friendly” behaviours in the domestic market, including technical regulations relating to packaging standards (e.g., eco labelling or labels relating to energy efficiency ratings), domestic subsidies (e.g. for renewable energy generation or public transportation), or government procurement policies which favour “green” products or services. These measures all engage the WTO rules in various ways and run the compliance risks, particularly if the measure at issue favours domestic suppliers/manufacturers over foreign competitors. The extent of this risk will depend largely on how the standard or measure is designed and implemented.83 It is beyond the scope of this article to examine these issues in detail.
4.2 Border Tax Adjustments
One of the most likely sources of WTO–Kyoto conflicts is BTAs.84 As noted, the primary purpose of BTAs is to eliminate any competitive advantage to exporters from countries which have determined not to participate in and/or comply with climate change obligations. BTAs seek to impose costs on imported goods similar to those faced by domestic products, and thereby remedy the competitive position of the domestic products. If a domestic industry is left to bear this cost, it could result in a shift of that industry to other countries which do not impose such taxes. This is sometimes referred to as “carbon leakage”. The result could be not only loss of employment and revenue for the country in question, but also that the environmental goal of the carbon tax or mitigation measure will be undermined (as the product will be produced in another state which does not require manufacturers to pay the true cost of production via carbon taxes or charges).85
Carbon taxes and associated BTAs can be imposed both on energy products,
i.e. oil, coal, gas, or electricity, and also final products resulting from energy inputs. This is discussed further in relation to the significance of process and production methods (“PPMs”).
BTAs can be used both in relation to imports and exports. In relation to imports, they may be used to impose a tax that matches any carbon tax which is levied on a domestic product. Conversely, in relation to exports, BTAs may either exempt or refund carbon taxes incurred by exporters during production.
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The imposition of charges or taxes on imports is addressed in Article III of GATT 1994. Article III:1 and 2 provides:
In addition, Article II:2(a) provides that notwithstanding the provisions of Article II (which provides for schedules of concessions), a member state may impose at the time of importation of any product “a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part”.
A key issue under both provisions is whether the imported and domestic products are “like” products.86
The concept of a “like” product was considered by the 1970 Working Party on Border Tax Adjustments.87 This was established by the GATT contracting parties to examine practices in relation to BTAs and their possible effects on international trade. With regard to the interpretation of the term “like or similar products” which occurs throughout the GATT, the Working Party considered that problems arising from the interpretation of the term should be examined on a case-by-case basis. It noted criteria for determining whether a product is similar which included:88
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The report noted that the phrase caused uncertainty and it would be desirable to improve upon it; however, no improved term was able to be arrived at.
The approach of the Working Party was endorsed by the Appellate Body in the 1996 case Japan — Taxes on Alcoholic Beverages.89 In that case the European communities, Canada and the United States lodged complaints against Japan relating to its liquor tax laws and distinctions it made between tax treatment on a Japanese beverage called “Shochu” and other Western-style undistilled liquors (i.e. it taxed Shochu less).
The Dispute Panel determined that the appropriate test to define whether two products are “like” is the marketplace. At para 6.22 the Panel commented:
The decisive criterion in order to determine whether two products are directly competitive or substitutable is whether they have common end-uses, inter alia, as shown by elasticity of substitution. The wording of the term ‘like products’ however, suggests that commonality of end-uses is a necessary, but not a sufficient, criterion to define likeness ... The term ‘like products’ suggests that for two products to fall under this category, they must share, apart from commonality in their uses, essentially the same physical characteristics.
This decision was confirmed by the Appellate Body which also endorsed the approach referred to above set out in the Working Party report.
The “likeness” determination could be particularly difficult in the context of BTAs imposed for climate change reasons where products are “like” in terms of the criteria specified in the WTO case law, but differ in terms of their production and process methods. In particular, an issue can arise as to whether it is legitimate to distinguish between two products on the basis that one has consumed a greater amount of energy during the course of its production than another.90
An argument could be made that products should not be considered to be “like” where consumers differentiate between them based on different perceptions about the environmental benefits or green properties.91 An example may be automobiles or household appliances (such as fridges or washing machines) which some consumers may distinguish between on the basis of energy efficiency ratings. Such an interpretation would promote the overall
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environmental objective of reducing GHG emissions, and would mean an imported product that had been manufactured in an environmentally unfriendly manner (e.g. using greater energy inputs) could be taxed at a different level than the domestic product, which may have been produced through the use of cleaner and less energy-intensive technologies. In this way, the foreign producer would pay the real cost of production in terms of all environmental externalities and not “piggyback” on the efficiency of domestic producers.92
On the other hand, however, there would be significant practical difficulties if PPMs were considered relevant to the issue of likeness. This would have the effect of creating as many different “products” as there were substitutable product processes.93 The administration of a BTA based on embodied emissions of final products would be particularly difficult where there were significant numbers of process or production methods available.
It has been suggested that it is probable that goods that are “like” in terms of their physical characteristics and their end uses will not be considered to contravene the “likeness” requirement on the basis of energy consumed during the production.94
Another issue that arises in the Article III:2 jurisprudence is what type of domestic taxes can form the basis of a BTA measure.
The Working Party concluded that taxes levied directly on products were eligible for BTAs (including specific excise duties, sales taxes and cascade taxes and tax on value added). However, taxes not directly levied on products, but levied on producers, were not eligible for tax adjustment. Examples of the latter category include payroll or income taxes or social security charges.95 This distinction has been confirmed by the WTO Dispute Panel in United States — Income Tax Legislation (DISC).96
The original policy rationale for the distinction between taxes on products and taxes on producers was based on the assumption that taxes on products are shifted “forward” by the taxpayer. In other words, manufacturers attempt to pass the cost of these taxes on to final consumers. Such taxes are eventually therefore reflected in the price of the product and should be considered adjustable at the
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border.97 On the other hand, it is assumed that producer taxes (direct taxes) are costs largely borne by the manufacturer and they are shifted “backward” and are generally not reflected in the final price of the product. As such, so the rationale goes, it is not appropriate that these should be adjustable at the border (because they are not reflected in final product prices).
Even at the time of the report of the Working Party (December 1970), it was noted that the assumption of full shifting of producer taxes is not a reflection of economic reality.98 It certainly seems likely that manufacturers or producers will, where possible, pass on costs incurred as a result of producer taxes (e.g. income tax) to final consumers of their products. The current GATT regime also creates an artificial situation where countries which use a tax regime focused on product taxes are favoured over those who predominantly use producer taxes.99 Although carbon taxes will usually be product taxes (and therefore eligible
for adjustments at the border), difficult issues can arise where a state wishes to impose a tax on energy used during the production of the product or pollution created from the production method. Article III:2 allows taxes to be imposed on imported products to adjust for taxes imposed “directly or indirectly” on like domestic products. The word “indirectly” could be interpreted as referring to indirect taxes on energy inputs including production processes.100
The Working Party did consider the issue of whether taxes on energy inputs and other process taxes could be adjusted at the border, but left the question open.101 Their report commented that they felt that this area of taxation was unclear, but its importance was not such as to justify further examination particularly in light of the scarcity of complaints reported.
The issue was considered by the WTO Dispute Panel in United States — Taxes on Petroleum in Certain Imported Substances (“the Superfund case”),102 which related to US legislation concerning clean-up of hazardous waste sites. In that case, the challenged legislation imposed both a domestic tax on certain chemicals and import tax on products produced or manufactured using the same chemicals.103 The amount of tax payable by the importer was calculated on the basis of how much tax would have been paid had the chemical been produced within the United States.
The WTO Panel held that the US was permitted to impose an import tax on chemicals as materials in manufacture and production, and which were
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subject to the domestic tax. It did not go on, however, to make clear whether the substance (i.e. the chemicals) had to be physically present in the imported product.104
There is a precedent for an adjustment of tax on imports of either substances themselves or products containing or produced with them. An example quoted is a US excise tax on certain ozone-depleting chemicals in order to comply with the US obligations imposed under the Montreal Protocol on Substances that Deplete the Ozone Layer.105 A domestic tax was imposed for such chemicals and imports were also charged with an equivalent amount. The imposition of the import tax (i.e. on the ozone-depleting chemicals, rather than the final products in which they were contained) was never challenged, so the legality under WTO rules remains uncertain.
It remains to be seen whether energy products in particular will be considered to be “materials” in a similar vein to the taxed chemicals in the Superfund case. Even if energy inputs were not considered to be a “material” in terms of Superfund there is no reason, in principle, that the wide wording of Article III which refers to taxes imposed “directly or indirectly” on products would not be wide enough to cover this situation.106
Where other requirements are met, the tax applied to the imported products must not be “in excess of ” the tax on like domestic products. This is the case even if any trade effects of the tax, for example on trading volumes, are non-existent.107 It has been noted that this limits the ability for BTAs to be a “stick” as they are unlikely to be sufficient of themselves to force compliance or participation by a foreign importing company.108 Such adjustments at the border may, however, have the ability to “level the playing field” and address competitiveness concerns, particularly for trade-exposed industries. The next section considers a recent case example designed to respond to such concerns.
5. CASE EXAMPLE: AMERICAN CLEAN ENERGY AND SECURITY ACT OF 2009 (“WAXMAN-MARKEY BILL”)
Arguments about the legality of carbon tariffs in the form of BTAs are far from academic. Although some countries have take the position that carbon tariffs in
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any form are not desirable,109 others including the United States have specifically sought to deal with competitiveness concerns in domestic legislation relating to climate change.
One of the most high-profile and recent examples of such a measure is the American Clean Energy and Security Act of 2009 (“ACES” or “the Bill”). A discussion draft of the Bill was introduced into the United States House of Representatives by Democrats Henry Waxman and Edward Markey on 31 March 2009.110 A key aim of ACES is to address the problem of “carbon leakage”111 — i.e. where carbon-intensive industries move to countries with more lenient environmental standards thereby affecting domestic industry and employment.
ACES is designed to establish a US domestic cap-and-trade programme along with various initiatives including:112
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The key feature of ACES is the establishment of a market-based programme for reducing emissions from electric utilities, oil companies, large industrial sources, and other entities. Covered entities are required to hold or submit emission allowances, which are tradable permits, equal to the amount of GHG emissions which they are responsible for emitting into the atmosphere.113 In lieu of holding necessary emission allowances, covered entities may satisfy their compliance obligations by purchasing allowances114 or obtaining offset reductions which have been approved by the Environmental Protection Agency (“EPA”).115 The overall aim is to reduce economy-wide global warming pollution to 97% of 2005 levels by 2012, 80% by 2020, 58% by 2030, and 17%
“Title IV” of ACES inserts new provisions into the existing US Clean Air Act.117 It is concerned to ensure that US manufacturers are not disadvantaged relative to foreign industry, and addresses issues of domestic competitiveness. It establishes two mechanisms to safeguard the competitiveness of certain sectors. Firstly, the Bill authorises certain sectors to receive “rebates” intended to compensate those sectors for the costs they incur as a result of complying with the cap-and-trade programme. Sectors that use a large amount of energy will be eligible for such rebates.118 The net effect will be that emissions allowances will be allocated at no cost to energy-intensive and potentially trade-exposed industry. In this way qualifying US manufacturers should in theory be able to maintain their competitiveness with foreign manufacturers.
Title IV also provides for a potential fall-back mechanism. In the event that the President does not consider that the rebate provisions adequately address competitive imbalances, there is provision for the establishment of
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an International Reserve Allowance Program (“IRAP”) relating to “covered goods”. These provisions require the President to submit a report to Congress no later than June 2017 regarding the extent to which compliance costs under ACES have resulted, or are likely to result, in negative impacts to domestic producers. If the President considers that adverse impacts have occurred, there is power to promulgate regulations establishing the IRAP within 24 months.
The IRAP (if established) relates to “Covered Goods”, which are defined as primary products119 that generate a “substantial quantity of direct greenhouse gas emissions or indirect greenhouse gas emissions” and are “closely related to a good of the United States”. “Indirect Greenhouse Gas Emissions” means “Greenhouse gas emissions resulting from the generation of electricity con- sumed in manufacturing a covered good”.120
Under the IRAP foreign manufacturers are required to submit and surrender on importation “International Reserve Allowances” of appropriate amounts required under regulations (yet to be promulgated). Section 416(2) provides that the purpose of the IRAP is to establish a programme in a manner that addresses, “consistent with international agreements to which the United States is a party, the competitive imbalance in the costs of producing and manufacturing covered goods in affected sectors or subsectors resulting from the difference in direct and indirect cost of complying with [domestic requirements under the Clean Air Act] and costs of complying in other countries with greenhouse gas regulatory programs, requirements, export tariffs, or other measures adopted or imposed to reduce greenhouse gas emissions”. The importance of this section is discussed further below.
Imports originating from countries accounting for less than 0.5% of total GHG emissions or other countries which the United Nations has identified as among the least developed would be exempted from International Reserve Allowance requirements.121
5.2 United States Policy Position
The current indications from the Obama administration are that it wishes to distance itself from the idea of border taxes on imports, despite comments of Energy Secretary Stephen Chu at the hearing of the House of Representatives
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in March 2009.122 Secretary Chu suggested that in order to address problems created by carbon leakage, the US would not rule out using tariffs and other trade barriers to pressure countries like India and China to cut back on emissions.123
However, later statements by US trade representative Ron Kirk to members of the House Committee on Energy and Commerce (which is currently considering the ACES Bill) are that the Obama administration does not support “specific measures, including border measures, at this time”.124 Mr Kirk stated in an open letter to the House Committee that “[t]he Administration believes that the best approach to address concerns with carbon leakage is to negotiate a new international climate change agreement in the United Nations that ensures that all major emitters take long term significant action to reduce their greenhouse gas emissions”.125 The letter also stressed that the administration is seeking to ensure the design and implementation of a domestic energy and climate change policy which is compatible with international trade obligations, and minimise incentives for trading partners to pursue “countermeasures” that could impact negatively on US exports.
5.3 Compatibility with International Trade Rules
Despite these current indications, there is a possibility that a future administration may seek to establish the IRAP or a variation of the currently proposed scheme. If implemented, foreign countries whose exporters are faced with BTAs or other differential treatment may claim the US is in breach of GATT rules.
It is likely that a trade restriction requiring purchase of International Reserve Allowances based on compliance costs in different importing countries would breach Article I of GATT. As noted, this article provides that member states may not treat imports from particular states less favourably than “like” products from other states. ACES would potentially discriminate between like products from importing countries based on “direct and indirect” costs
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incurred in those countries complying with local regulatory requirements.126 If one importing country had no such relevant regulatory programme, then it appears that under Article I it would not be lawful to require importers from that country to purchase allowances under the IRAP. The most favoured nation requirement under GATT would prohibit discrimination between GHG and non- GHG restricted states.127
This outcome, however, would be subject to the issue of whether the imported and domestic products in question were sufficiently “like” to be caught under Article I. As noted, there is some uncertainty in the jurisprudence about whether differing PPMs (for example, relating to energy intensity or the relative amount of electricity consumed during production) could form the basis for distinguishing between final products. If the court was to say differences in PPMs could create a valid distinction, it could be legitimate for the US to require one country to purchase allowances on import of a product (if created using less-efficient PPMs than a nominated baseline), on the basis that the products are not sufficiently “like”. It is noted, however, that the conventional wisdom appears to be that differing PPMs do not make two products “unlike” one another.128
The IRAP could also face difficulties under Article III (the national treatment obligation). Relevantly, this article provides that laws, regulations and requirements affecting “internal sale” and “offering for sale” shall not be applied to imported products in a manner that favours domestic production. Title IV of the Bill effectively requires all importers of “covered goods”129 to participate in a parallel cap-and-trade system under the IRAP. The requirement
— i.e. to purchase required amounts of International Reserve Allowances on import of covered goods — could be considered to affect the “internal sale” of those goods or a requirement relating to their offering for sale.130 This is
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particularly as these regulations will have effects on a good’s price, and possibly, availability. If the result is to afford protection to domestic industry, this may breach Article III. The answer to the question will be reliant on the detail of the regulations relating to the IRAP to be promulgated.
In summary, it appears that the IRAP (if implemented) would be likely to violate Article I and may also breach Article III depending on regulatory requirements relating to the parallel cap-and-trade scheme for imports. It is possible, however, that the exceptions under Article XX(b) and (g) may be able to justify these contraventions.
With regard to Article XX(b), the purpose of Title IV of ACES is to “pro- mote a strong global effort to significantly reduce greenhouse gas emissions, and, through this global effort, stabilise greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous anthropogenic interference with the climate system”. As such, it seems arguable that trade restrictions in ACES fits within Article XX(b)’s exception for measures “necessary to protect human, plant, or animal life or health”.
As noted, the question of whether or not the IRAP is “necessary” requires the measure to be the least trade-restrictive alternative reasonably available.131 The cases have emphasised the need for the country seeking to impose the trade restriction to undertake “serious, across the board negotiations with the objective of concluding bilateral or multilateral agreements” before seeking to implement import prohibitions or restrictions.132
The ACES specifically identifies that its purposes can be most effectively addressed and achieved through cooperative international negotiations and provides a period of time to allow such negotiations to occur.133 The most recent draft of the Bill provides that the IRAP should not be established before 2025 and there are notification obligations from 2020 in relation to foreign countries affected by any future IRAP programme.
There is room for argument in relation to whether or not a statement of policy in the Bill in favour of international negotiations would be sufficient to show that the US has employed the least trade-restrictive measures available.134 To the extent that ACES is seen as an attempt by the US to change the domestic climate policies of countries which seek to import into the US, it cannot be considered “necessary” in terms of Article XX(b).135
As discussed, the nature of the interests at stake is also an important consideration. It could be argued that the need to halt global climate change
131 Hawkins, supra note 9, at 444. 132 US — Shrimp, supra note 17. 133 ACES, ss 413 & 414.
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is “vital and important in the highest degree” in terms of the EC — Asbestos case,136 and as such, it is more likely that the necessity requirement will be met. The analogy with EC — Asbestos needs to be made with care, however, as the connection in that case between asbestos fibres and cancer was more tangible and firmly established than the connection between proposed trade-restrictive measures and effects on human, animal or plant life or health caused by climate change.137
On balance, the necessity requirement appears to be a significant hurdle and it seems to be a difficult argument to make that the implementation of the IRAP is “necessary” to protect human, animal or plant life or health. This is reinforced by the issue identified about whether it can be said the Title IV provisions are the least trade-restrictive in the circumstances.
With regard to Article XX(g), this appears to be a more likely ground for justification of IRAP. This provides a general exception to GATT’s substantive obligations for those measures that are primarily aimed at the conservation of “exhaustible natural resources”. The term “exhaustible natural resources” has been discussed and it is suggested that it is likely this phrase will be read to include the climate. This is reinforced by the WTO Panel decision in United States — Reformulated Gasoline, where the Panel took the view that clean air was a “natural resource” that could be depleted.138
The second requirement under Article XX(g) is that the member state adopts domestic measures concurrently aimed at the same conservation objectives. It is suggested that this is likely to be met under ACES, as a key feature of the Bill is the establishment of a domestic US cap-and-trade system which covered entities (including utility companies, oil companies, and large industrial emitters) are required to comply with. As noted, the overall purpose of the domestic scheme is to ensure reduction and aggregate emissions in a staged fashion to 2050. Assuming that future regulations relating to the IRAP do not disadvantage foreign importers vis-à-vis the domestic cap-and-trade system, it appears therefore that the requirement for even-handedness under Article XX(g) is able to be met.
The final issue is whether the IRAP may be caught under the provisions of the Article XX Chapeau as being either arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.
The provisions within the Bill to accommodate international negotiations and its stated preference to conclude bilateral or multilateral agreements to address climate change issues is again highly relevant in this respect. If ACES
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is implemented in accordance with these stated preferences, it is likely to avoid some of the pitfalls of previous US measures such as in US — Shrimp.
The second issue is that there is a reasonable argument that the Bill is structured so as to take into consideration different conditions that may exist in affected exporting countries. The Chapeau requires that a measure be designed in such a manner that there is sufficient flexibility to take into account the specific conditions prevailing in any export member.139 An important feature of ACES in this regard is that the IRAP does not come into existence unless there is an adverse finding by the President in relation to a particular sector or subsector (that is required to comply with the Clean Air Act). One of the adverse effects that the President can take into account is whether an increase in GHG emissions has been caused by “foreign manufacturing facilities that manufacture or produce covered goods and that do not have greenhouse gas compliance obligations commensurate with those that would apply in the United States”. The report to Congress is also required to identify the level of GHG regulation of particular sectors or subsectors in other developed or developing countries, and the cost of compliance with those regulations.140 In summary, it appears the Bill has been drafted to ensure that there can be no criticism that the IRAP has been implemented prior to careful consideration of the specific conditions prevailing in affected importing countries.
A related point is that the Bill has notification requirements in relation to foreign countries in the event that it is proposed to implement the IRAP. Affected countries must be notified no later than 1 January 2020 in relation to all primary products produced by that country which are affected.141 The Bill itself also provides for specific emission caps, providing some predictability to affected counties, in advance of when a decision will need to be made about the implementation or otherwise of the IRAP. Indeed, the scheme of ACES is such that primary mitigation measures with respect to domestic industry are intended to be rebates for trade-exposed sectors in specified circumstances — i.e. the intent is that the proposed measures affecting imports under the IRAP will not need to take effect.
It is concluded that the trade restrictions in ACES, although likely to violate the non-discrimination provisions of GATT (Article I) and possibly also the national treatment obligation (Article III), are likely nevertheless to be able to be justified under Article XX(b) and/or Article XX(g). If the IRAP, in particular, is implemented in accordance with the objectives in the Bill, it is unlikely to be successfully challenged.
139 US — Shrimp, supra note 17, at para 165. 140 ACES, s 414.
141 ACES, s 762 (see marked-up draft version of Bill dated 15 May 2009).
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This article has discussed the conflicts that can arise between domestic measures to implement climate change obligations and international trade rules. It has focused on the recent Bill introduced in the US House of Representatives to establish a US cap-and-trade system and also address concerns about domestic competitiveness of trade-exposed sectors of the US economy. The analysis undertaken demonstrates that there is significant complexity in designing a system that is both workable and also complies with WTO obligations. The ACES Bill appears to have learnt from some of the mistakes made by previous US administrations with regard to imposing TREMs, but much will depend on the way in which the Bill is finally passed and then implemented.
The world is watching with significant interest the developments in the US. China, in particular, has been a vocal opponent of any attempt to introduce a US carbon tariff and has stated that it considers that the onus of emissions charges on goods produced in China should be placed on countries that purchase or consume the goods, rather than China itself. They have expressed concern that the US Bill will amount to a form of protectionism which is not compliant with GATT.142
In a broader sense, the relationship between trade and the environment and, in particular, the use of TREMs to achieve climate change objectives, is yet to be fully debated or resolved. In May 2008, Pascal Lamy, the Director-General of the WTO, suggested in a speech to the European Parliament that the relationship between international trade, the WTO, and climate change needs to be defined by an international accord on climate change. He said that until a truly global consensus emerges on how best to tackle the problem of climate change, WTO members will continue to hold different views on what a multilateral trading system must and can do.143 Mr Lamy’s predecessor, Dr Supachai Panitchpakdi, also considered that the WTO did not have the capacity and expertise to align agreements on environmental protection and trade. He considered it was necessary to have another organisation — a “World Environment Organiza- tion” — that had responsibility for policing and coordinating policy action to tackle global environmental problems.144 The views of both Mr Lamy and Dr Panitchpakdi represent the consensus held by a considerable number of WTO
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members that whilst it is appropriate for the WTO to accommodate Multilateral Environmental Agreements (“MEAs”) such as the Kyoto Protocol, it should not bear primary responsibility for reconciling trade–environment issues.145
The US has stated that the best approach to address concerns of climate change and in particular “carbon leakage” is to negotiate a new international climate change agreement that ensures that all major emitters take long-term, significant action to reduce their emissions. This certainly seems a preferable course to the case-by-case approach to environment–trade conflicts that have occurred to date.146
In addition to a new climate change agreement dealing with potential conflicts, another alternative (particularly if a comprehensive agreement is not politically achievable) could be to deal with the conflict under existing WTO mechanisms. A method which could be used would be to amend Article XX to specifically provide for trade measures taken to implement climate change obligations imposed in specified MEAs (including Kyoto) or to broaden the existing exceptions to allow more room for allowing environmental measures.147 The European Community has in fact previously suggested that MEA trade provisions should come within the specific Article XX exceptions and/or there be a new clause to protect “measures necessary to protect the environment”.148 Although such an amendment is likely to be controversial and could face significant opposition, particularly from developing country members of the WTO (who could be concerned about increased costs for their exports into developed countries), it would be a method to satisfy the desire of many member states for a multilateral solution to this vital environmental issue. It would also have the effect of restricting any dispute between parties to an examination of whether the measure at issue conformed with the requirements of the Article XX Chapeau (i.e. would not require the party promulgating the measure to show
that it was necessary).149
Another possibility, which has been suggested by China and Switzerland, is that the WTO promulgate an Interpretative Decision setting out the condi-
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tions and principles for “WTO consistency of certain obligations provided by MEAs”.150 Interpretative Decisions relating to particular provisions can be adopted by the Ministerial Conference and the General Council at any time and do not require complete consensus, but can be taken by a three-fourths majority of the members.151 It has been suggested that an Interpretative Decision could be used in future to examine the legitimacy of TREMs instituted to implement MEA requirements, and also would be able to provide meaningful guidance for WTO members negotiating new MEAs.152
This would have the advantage of resolving the relationship between obligations clearly in advance, rather than requiring the Dispute Settlement Body to do so on a case-by-case basis. In a practical sense, an Interpretative Decision or understanding is also likely to be significantly easier to negotiate and pass than a fully fledged amendment to Article XX or other substantive treaty provisions. Although an Interpretative Decision would not have the same status as a formal amendment to the GATT, it would provide a strong policy signal about future direction which would be of assistance to domestic policy- makers.153
It remains to be seen how this debate will be furthered at the COP15 meeting in Copenhagen later this year and in future WTO discussions. The above analysis has demonstrated the need for greater clarity and discussion about the intersection between trade and environment issues and how the pressing problem of climate change should be addressed within existing frameworks. It is suggested that without adequate harmonisation in this area, there is the likelihood of continued examples of unilateral and uncoordinated domestic action, which will not only undermine global efforts to address climate change, but could also serve to destabilise the aims of the international trade regime. The risks of a “go it alone approach” to tackling climate change cannot be underestimated, and could result in ad hoc and potentially conflicting requirements for exporters to fulfil and, more importantly, also not succeed in addressing the overall challenge of global warming.154