The Interface Between the Trade Rules and Climate Change Actions

Note that subsidies can be demanded and have been demanded independently of the situation of the industry in other countries. Industries affected by carbon-related regulation have requested subsidies and other benefits to assist them cope with the financial burden imposed by all new carbon regulation.

The trade and WTO implications of other approaches to managing climate change policy internationally, such as an agreement on carbon taxes, are not addressed in this paper.

GATT Article II:2 also includes two other types of border (price) adjustment measures: (i) anti-dumping and countervailing duties (Article VI); and (ii) charges for services rendered (Article VIII). The provision on countervailing duties could become relevant in the context of climate change if collected against allegedly subsidized exports that result in injury to domestic industry. We discuss this situation in Section III of this paper.

According to WTO (2008), the Panel and the Appellate Body determined criteria to distinguish a border measure, in the form of a tariff governed by GATT Article II, and an internal tax enforced upon imports at the border governed by Article III on national treatment. The Panel emphasized that if the obligation to pay a charge accrues due to an internal event, such as the distribution, sale, use or transportation of the imported product then it is an internal charge governed by Article III. If the charge is imposed “on importation” and independently of its distribution in the domestic market, then it is a border measure subject to the requirements of Article II. This was reinforced by the AB in Appellate Body Report (WTO 2009, para. 163).

The ‘likeness’ of Article III: 4 and Article I GATT is considered to be broader than Article III: 2, since the latter also refers to directly competitive or substitutable products (DCS). Likeness in Article III: 2 refers to perfectly substitutable products, while DCS products are imperfectly substitutable, but they are in a competitive relationship. In the analysis of DCS, emphasis is placed on the market place, or in other words, the consumer preferences characteristic. However, DCS and the competitive relationship between products are not to be analysed exclusively by reference to current consumer preferences. According to the AB in Japan-Alcoholic Beverages, the word substitutable indicates that the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes, but which are, nonetheless, capable of being substituted for one another. Likeness in Article I and III: 4 is broader than likeness under Article III: 2, but not broader than DCS.

Note that the GATT US-Superfund case seems to provide support for treating a tax on energy as eligible for border adjustment. The Panel in that case allowed the United States to impose a tax, domestically applied to certain chemicals, on imports that had used the same chemicals in the production of the imported goods. However, the panel did not specify whether these chemicals had to be physically present in the imported product (GATT 1987). A tax on energy, however, is not necessarily the same as a tax on GHGs. Even if a precedent may exist for taxing inputs that are not physically incorporated, GHG emissions are not an input but an output. Moreover, an interpretation of the Superfund panel report that would allow a tax on GHGs to be adjusted at the border would seem to clash with the conclusions of the 1970 Working Party on Border Tax Adjustments. It is noteworthy, however, that the report of the Working Party on Border Tax Adjustments did not specify whether taxes based on non-product-related PPMs can be adjusted at the border. The pre-WTO case US Tuna-Dolphin II shared this view. It was mentioned in paragraph 5.8 that the Ad Note of Article III “could not apply to the enforcement, at the time or point of importation, of laws, regulations or requirements that related to policies or practices that could not affect the product as such, and that accorded less favorable treatment to like products not produced in conformity with the domestic policies of the importing country.” (GATT 1994, para. 5.8)

“…in endeavouring to ensure ‘equality of competitive conditions’, the ‘general principle’ in Article III seeks to prevent Members from applying internal taxes and regulations in a manner which affects the competitive relationship, in the marketplace, between the domestic and imported products involved, ‘so as to afford protection to domestic production.’” (WTO 2001, paras. 96, 98)

See Sect. 2.3 below.

Prescriptive policies are regulations, mandates and agreements that directly compel specific actions by, or communicate expectations to, industry companies and/or associations. They can be: technology-prescriptive as in the case of equipment standards; management-prescriptive as is in the cases of auditing, conservation planning and energy management standards; or performance oriented as in the cases of plant, firm or sector regulation and agreements concerning benchmark targets and absolute energy savings goals.

An extensive literature—not reviewed here—has developed on the relative merits of alternative carbon constraint policies. Taxes, for example, provide cost certainty for businesses because the tax rate is known in advance. Emissions trading potentially offers lowest-cost solutions for the economy, but the price of allowances (or permits) is not known in advance and will be determined by trading in the market.

Comparability of costs of different climate change mitigation policies can be analysed either from a top-down level, through general equilibrium models, or using bottom-up cost analyses. In theory, it is possible to render different policy-imposed costs comparable by attaching values to all relevant elements in production and output pricing that are attributable to the policy intervention in question (Baron et al. 2007). But economic tools that “convert” non-price-based policies to price-based equivalents raise both analytical and practical challenges. We know from trade theory on the non-equivalence of tariffs and quotas, for example, that even if price equivalents are calculated, different kinds of intervention carry different resource allocation consequences which can affect the conditions of competition in the market.

Note that one WTO Member could arguably invoke the paragraph (a) measures necessary to protect public morals, as the survival of humans via GHG actions might be argued to be an action of public morals.

The AB reaffirmed in this case (contrary to the conclusions reached in the two US-Tuna reports decided by GATT panels) the right of Members to take even unilateral trade-restrictive environmental measures so long as a balance of rights and obligations is maintained “between the right of a Member to invoke one or more of the exceptions of Article XX…, on the one hand, and the substantive rights of other Members under the GATT 1994, on the other hand”—as provided by the chapeau of Article XX.

The AB held in EC-Asbestos that whether there are reasonably available alternative measures is part of the “weighing and balancing process” to determine whether a trade restrictive measure is necessary, as referred to in (WTO 2000b). This is an area where the jurisprudence has taken a 180° turn. In the GATT days, it was understood that the country invoking the exception would have to prove the absence of alternatives. Under the WTO, the Appellate Body changed this and concluded that “while the responding Member must show that a measure is necessary, it does not have to show, in the first instance, that there are no reasonably available alternatives to achieve its objectives” (WTO 2005a, b, para. 309), see also (GATT 1991, 1994).

However, in setting out this test it also insisted on the distinct wording of the paragraph XX(b) and paragraph XX(g) exceptions, saying that their coverage and scope of application were very different. Paragraph XX(g)—measures relating to the conservation of natural resources—was considered broader in reach, while the XX(b) exception—measures necessary for the protection of health—required a more stringent “necessity” test. However, the Brazil-Retreaded Tyres jurisprudence, further discussed below, seems to have brought these two tests closer so that, to a large extent, the relationship required by the two paragraphs is similar, bringing closer the operation of the environment and health policy exceptions.

It may be argued that this is the case for developing versus developed countries. It may oblige a country to consider whether developing countries should carry the same burden. More flexibility might be needed by developing countries, which would be in line with the ‘common but differentiated responsibilities and respective capabilities’ principle under UNFCCC. Thus, any measure must not be rigid or inflexible and should involve a comparison with other countries (WTO 1998, para. 177).

It may oblige a country to impose lower or no requirements on countries that have their own (comparable in effectiveness) climate legislation. In the first US-Shrimp case (WTO 1998), the Appellate Body found that the United States required other WTO Members to “adopt a regulatory program (with respect to shrimp harvesting) that [was] not merely comparable, but rather essentially the same, as that applied to the United States shrimp trawl vessels.” This was considered to be too “rigid and unbending”; because it did not take into account whether exporting countries might be using other measures to protect sea turtles. In the second US-Shrimp dispute, the US measure was considered to be consistent with Article XX because the US introduced flexibilities in its import regulation that allowed imports from countries that demonstrated policies of comparable effectiveness in dealing with the protection of turtles.

See also Appellate Body Reports including United States—Gasoline (WTO 1996b, p. 23), Japan—Alcoholic Beverages II (WTO 1996a, p. 12) and India—Patents (WTO 1997, para. 45).

See the example: Appellate Body Report (WTO 2012b, para. 373).

A central element in the PPM debate is the product-process distinction or ‘product-process doctrine’ as coined by Hudec in 1998, who observed that “under this so-called ‘product-process doctrine’, product distinctions based on characteristics of the production process, or of the producer, that are not determinants of product characteristics are simply viewed as a priori illegitimate” (Hudec 2003, pp. 619–649; Conrad 2011, pp. 25–31). The product-process distinction has been severely criticized (Howse and Regan 2000), and Hudec (2000) noted that the distinction posed a potentially lethal threat to process based regulation.

The distinction between product related and non-product related PPMs emerged through the debate surrounding the product-process doctrine, referred to in Appellate Body Report (WTO 1999), and has since become a widely accepted analytical tool (Conrad 2011).

The AB did not rule on the applicability of the GATT to that measure, however, since it found it to be in violation of the TBT Agreement, and Mexico did not request it to complete the legal analysis in the event it overturned the Panel’s findings in relation to the GATT (which it did, finding that the Panel exercised a “false judicial economy” in according the same reasoning to Article 2.1 of the TBT Agreement and Article I and III of the GATT); see Appellate Body Report (WTO 2012d).

The AB noted that ‘[t]he definition of a technical regulation further provides that such a regulation may prescribe “product characteristics or their related [PPMs]”. The use here of the disjunctive “or” indicates that “related [PPMs]” may play an additional or alternative role vis-à-vis ‘product characteristics’ under Annex 1.1’. It observed in this regard that ‘[a] plain reading of Annex 1.1 thus suggests that a “related” PPM is one that is “connected” or “has a relation” to the characteristics of a product. The word “their”, which immediately precedes the words “related processes and production methods”, refers back to “product characteristics”. Thus, in the context of the first sentence of Annex 1.1, we understand the reference to “or their related processes and production methods” to indicate that the subject matter of a technical regulation may consist of a process or production method that is related to product characteristics. In order to determine whether a measure lays down related PPMs, a panel thus will have to examine whether the processes and production method prescribed by the measure has a sufficient nexus to the characteristics of a product in order to be considered related to those characteristics.’ See Marceau (2014) and WTO (2014, para. 5.12).

See Marceau and Wyatt (2013, p. 291) and Marceau (2013, p. 36) for an in depth discussion of these cases.

Paragraph 317 in US-Tuna II (Mexico) report refers to paragraph 252 of Appellate Body Report, China – Publications and Audiovisual Products (2009). Recall also that in its US-Tuna report, the Appellate Body made it clear that “fulfil” does not necessarily mean “fully meet” in US-Tuna II (Mexico) report (WTO 2012d, para. 2012d).

The AB nonetheless noted the difference in the legal tests under the GATT and TBT, and expressly rejected the importation of the “legitimate regulatory distinction” test to GATT Article I and III, see paragraphs from 5.310 to 5.312 of the AB Report in EC-Seal Products (WTO 2014), and paragraphs from 5.108 to 5.130 for its full reasoning in that regard.

Assume for example, that Member A imposes certain climate-change related regulations on its domestic steel industry. The steel industry in Member A may demand that imported steel from Member B be subject to a border tax adjustment, since Member B does not impose similar regulatory measures on its steel industry and accordingly the steel industry in Member B produces cheaper steel. Member B, however, could respond that although it does not have climate change related restrictions on its steel industry, it has a number of climate change related policies in the forestry sector. It could even argue that it has undertaken more climate change mitigation responsibilities than it is required to under the UNFCCC, and therefore should not be punished simply because it has not taken the particular climate change related policy prescribed by Member A in relation to its (Member A’s) steel industry. Member A, on the other hand, could respond that it is entitled to protect what it considers vital for the protection of health and the environment, including measures addressing climate change applicable to the steel sector—as the US claimed it was entitled to protect sea turtles (more than other species) in US-Shrimp. Such a situation raises fundamental questions about whether the legitimacy of Member’s A border tax adjustment, and whether the central or primary concern of such GHG-related regulations as are imposed by Member A is the protection of the climate generally (and thus Member B’s forestry policies may be considered “equivalent” to Member A’s steel policies), or is rather concerned more narrowly with the climate effect of the steel industry (in which case the fact that Member B has a forestry program may be of little or no relevance to the question whether Member A’s border tax adjustment is legitimate).

Labels can be voluntary or mandatory, along the same lines as the distinction maintained in the TBT Agreement between mandatory and voluntary measures, but PPM-related labels are explicitly covered by the TBT Agreement. Traditionally, voluntary labels were not considered to be governed by the GATT/WTO, which focuses on mandatory governmental actions. But the TBT Agreement contains a Code of Good Practices on voluntary standards to be (voluntarily) accepted by standardizing bodies. The Code contains comparable provisions to those applicable to technical regulations on trade. If the use of voluntary labels provides preferential market access to domestic like products, they could be considered more restrictive than necessary contrary to Article 2.2 of the TBT Agreement or as providing less favourable treatment contrary to article III.

The international regime for emission trading certificates was created initially under the Kyoto Protocol, which outlined the general principles upon which the regime should function, and the 2001 Marrakesh Accords which include more detailed rules specific to the system. The rules contained in the Marrakesh Accords were later adopted by the parties to the UNFCCC in the COP 7 meeting in 2001.

Kyoto Protocol: ‘the Parties included in Annex I shall strive to implement policies and measures under this article in such a way as to minimize adverse effects, including the adverse effects of climate change, effects on international trade…’ and the UNFCC: ‘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’, at Art 3, para 5.

Primarily, under GATS, the EU members have used the Understanding on Commitments in Financial Services to schedule their obligations. Under the ‘market access restrictions’ heading, Members (those who accepted the Understanding without reservations) are obliged to allow their residents to purchase, in the territory of another Member, financial services as outlined in the Annex. Further, by virtue of the national treatment obligation, members must allow non-residents also to provide these financial services within their territory. They must also remove effects of non-discriminatory measures that limit financial service suppliers from providing financial services in their territory. The EU Member States have also made market access commitments with regard to financial services under Mode 1 (cross border supply) and Mode 2 (consumption abroad).

A prohibited subsidy may be challenged in dispute settlement or it may be countervailed.

UNFCCC Article 3(1) states: “The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof.”

See the Appellate Body Report (WTO 2012a), for a discussion of what products constitute “essential products” within the meaning of that provision. China argued in that case that certain raw materials were “essential products”; the AB ruled however that raw materials are not essential products, whereas food items are.