Dealing with WTO Law Inconsistencies of Carbon-related Border Adjustment Measures Kateryna Holzer World Trade Institute, University of Bern NCCR Climate WP4 PhD Workshop Bern, 11 November 2010 1

Outline 1. Trade measures in trade and climate interface 2. The use of border adjustment measures (BAMs) in climate policy: current proposals 3. Legality issues of carbon-related BAMs in WTO law 4. Possibility of justification under GATT exceptions 5. Institutional solutions to the WTO inconsistency 6. Conclusions 2

Trade Measures in Trade and Climate Interface Potential of conflict Relationship between WTO provisions and specific trade obligations (STOs) under multilateral environmental agreements (MEAs) A tool to achieve objectives of climate policy Experience under the Montreal Protocol on the ozone layer protection (threat of imposition of export and import bans) 3

The Use of Trade Measures in Climate Policy On the road to unilateralism: influenced by the modest outcome of Copenhagen and slowing down of the UNFCCC process BAMs are a price of passage of US climate legislation Possible BAMs: emissions allowance requirement for an importer (e.g. US Waxman-Markey bill, EU proposals) import emissions tax emission-intensity standard applied to imports export emissions allowance rebates etc. 4

Inclusion of Imports: Test on WTO Compliance BA is an acceptable practice under WTO law BUT PPM nature Can otherwise like products be treated differently depending on the amount of GHGs emitted during their production? Can taxes/charges levied not on products but on production methods qualify as indirect taxes and thus be adjusted? Extraterritoriality Can one country impose on another country its environmental norms and specific technologies on foreign producers? Implementation issues: tracing emissions in products, fixing BA level, place of buying allowances, recycling of BA revenues etc. 5

Legal Constraints of Tracing Carbon and Determining Adjustment Level How to trace emissions in final products? 1. Using actual info? (Not always available) 2. Imputing the carbon content based on the predominant method of production (best available technology)? 3. Using as a bemchmark the average level of emissions in a sector? How to determine the adjustment level 1. Under free allocation of allowances 2. Under fluctuating market prices Available methodology is vulnerable to WTO challenge as inconsistent with the National Treatment principle

Defense under GATT Article XX A two-tier test: XX (b): a measure is “necessary to protect human, animal or plant life or health” or XX (g): a measure “relating to the conservation of exhaustible natural resources if … made effective in conjunction with restrictions on domestic production or consumption” and the Chapeau: a measure does not constitute “a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”. 7

Defense under GATT Article XX (cont.) a) Flexibility to take into account different situations in countries “the adoption of essentially the same program” vs. “the adoption of a program comparable in effectiveness” and b) Rationale for discrimination and its connection to the objective criteria chosen for import coverage E.g. Waxman-Markey bill (ACES, 2009): excluded are sectors having more than 85% of imports from countries a) parties to international agreements requiring economy-wide binding national commitments at least as stringent as those of the US, b) have annual energy or GHG intensities for the sector comparable or better than the equivalent US sector... Little chances to withstand a WTO challenge: coersive 8

Defense under GATT Article XX (cont.) Does a border adjustment measure fit the scope of Article XX? Intrinsic competition-related motives The idea behind BA is to level taxation and internal regulation systems among countries according to the destination principle: “taxes follow goods” Parallel use of BA on exportation “any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products” (OECD definition of BTA used in the 1970 GATT Working Party Report on BTA) 9

Institutional Solutions to the WTO Inconsistency Problem Harmonisation of emissions taxes and regulations and applying the origin principle in taxation: ideal but more a dream than reality Solutions negotiated between UNFCCC parties as a separate agreement on BAMs or as provisions in a post- Kyoto agreement Solutions negotiated between WTO members amendments to WTO provisions waiver plurilateral agreement on BAMs provisions in PTAs 10

Conclusions Carbon-related trade measures are possible, but can be challenged in the WTO The best solution is to avoid the application of BAMs in climate policy The Article XX defense is not excluded but for a carbon- related BAM is problematic. How to meet the requirements of the Chapeau of Art. XX, how to avoid protectionist motives of BA and parallel use of adjustment on exportation are crucial questions. Potential of bilateral approach (in RTAs) to the use of BAMs needs to be further explored. 11

Thank you for your attention! 12