Trade and Climate Change Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO

Part IV: National Mitigation and Adaptation Policies and Trade Implications

Climate change mitigation measures Key objectives Key policy instruments Internalize environmental costs Carbon tax, emissions trading schemes Economic incentives Promote development & deployment of climate-friendly technologies Financial mechanisms: R&D, fiscal, price and investment measures Improve energy efficiency and reduce GHG emissions Emissions and energy performance standards and labelling Regulatory instrument

Climate change mitigation measures Key objectives Key policy instruments Key WTO Agreement Internalize environmental costs Carbon tax, emissions trading schemes GATT Promote development & deployment of climate-friendly technologies Financial Mechanisms: R&D, fiscal, price and investment measures SCM Agreement Improve energy efficiency and reduce GHG emissions Emissions standards, labelling on energy performance TBT Agreement

Outline of the presentation Price and market mechanisms to internalize environmental cost Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy Technical requirements to promote the use of climate-friendly goods and technologies

Price and market mechanisms to internalize environmental cost

Carbon tax: Key characteristics Tax on the carbon content of fossil fuels, often combined with a tax on energy use Energy tax on Fossil Fuels Carbon tax “Implicit Carbon Tax” Different tax base Energy content (more heavy on oil and gas Carbon content (more heavy on coal)

Emissions trading scheme: Definition Fixes a cap on total emissions Translates the cap into “allowed emissions” to cover emissions equal or below the size of the cap System that Creates a market in which these allowances can be traded at a price set by the market

Emissions trading scheme: Important design characteristics Overall emission level (cap-and-trade) Emission targets Emission standard for each source (rate-base) Number of participants and sectors covered Type of gases covered Free allocation based on historical emission levels (“Grandfathering”) or on emissions per unit of output (“benchmarking”) Allocation method Auctioning Linkages with other emission trading schemes Flexibility mechanisms such as banking, borrowing

Emissions trading scheme: Where? European Union (the world’s largest GHG ETS), since 2005 New Zealand, legislation passed on 25 November 09 Australia? (Senate rejected a legislation on ETS) United States: “American Clean Energy and Security Act of 2009” (ACES, Waxman-Markey Bill) approved by the House of Representatives. Senate proposals still under discussion: Kerry-Boxer Bill; Kerry, Cantwell-Collins Bill; Kerry, Graham, Lieberman and their Framework for Climate Action (released 10 Dec 09).

Effectiveness: Carbon tax vs. ETS Price is determined directly by the regulators through the tax rate (exogenously) Price is determined by the market (endogenously) Environmental uncertainty? Price uncertainty? Quantity of emissions to be reduced is a result of measures adopted by industry to reduce emissions (endogenously) Quantity of emissions to be reduced is determined by regulators (exogenously)

Environmental effectiveness 2 key intended environmental effects of a carbon tax and an ETS Direct effect, i.e. reduction of GHG emissions, by setting a price on emissions Indirect effect, through “recycling” of fiscal or auctioning revenues to fund e.g. investment in more climate-friendly technologies

Climate change border adjustments Rationale Relevant WTO rules

Climate change border adjustments: Rationale Competitiveness loss Emissions reduction policies are not applied universally This may give rise to Carbon leakage

Climate change border adjustments: Rationale Concern: enhanced competitiveness (economic) of non carbon constrained producers could lead to ‘carbon leakage’ (environmental) In particular for energy intensive industries  However, effects are still uncertain

Climate change border adjustments: Rationale Competitiveness Definition Ability of firms and sectors to maintain profits and market shares Effects of climate change measures on competitiveness of sectors depend on a number of factors: specific characteristics of the sector (e.g. trade exposure, energy-intensity). design of the regulation (e.g. availability of alleviations and exemptions). other policy considerations (e.g. energy and climate policies adopted by other countries).

Climate change border adjustments: Rationale Carbon leakage Increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries, i.e. the ratio of increased emissions in one region as the result of an emissions constraint introduced in another IPCC Definition Risk of energy-intensive industries relocating to countries with weaker environmental policies (“carbon havens”)  linked to differences in carbon price

Climate change border adjustments: Rationale To offset asymmetries in competitiveness Border adjustment measures To avoid carbon leakage

Climate change border adjustments: Relevant WTO rules Coverage? Key legal challenges for a case-by-case analysis Consistency? Justifiability? The jury is still out and many questions remain unanswered!

Climate change border adjustments: Relevant WTO rules Coverage? Importance to define the instrument at hand to determine relevant WTO/GATT provisions A border adjustment to a tax? A border adjustment to another carbon cost, e.g. an ETS?

Climate change border adjustments: Relevant WTO rules Coverage? BTA on imports (equivalent to a domestic tax) Two Situations  The GATT Working Group on Border Tax Adjustments (1970) BTA on exports (i.e. a refund of domestic tax before exportation) Implementation of the destination principle to ensure trade neutrality

Climate change border adjustments: Relevant WTO rules GATT Article II.2(a) provides for the possibility of imposing at any time on the importation of any product: A charge equivalent to an internal tax 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. GATT Article III.2 covers “internal taxes or other internal charges of any kind”

Climate change border adjustments: Relevant WTO rules Coverage? A border adjustment to a regulation, e.g. an ETS? Submit emissions credits acquired abroad to cover the emissions during the production process of the imported good Potential requirements on importers Hold emission allowances, up to the amount of CO2 emitted during the production of imported products and applied on a per unit basis to each good

Climate change border adjustments: Relevant WTO rules Can the price paid by an industry to participate in an ETS be qualified as an “internal tax or other internal charge of any kind”, covered under Article III.2? GATT Article III.2 Can an ETS be seen as a measure covered by Article III:4, i.e. as a law, regulation and requirement affecting the internal sale, offering for sale, purchase, transportation, distribution or use? GATT Article III.4

Climate change border adjustments: Relevant WTO rules Consistency? National treatment With basic principles, e.g. non discrimination Most Favoured Clause Prohibition to discriminate between “like” products

Climate change border adjustments: Relevant WTO rules Non discrimination principle (GATT Article III): Imported products shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.

Climate change border adjustments: Relevant WTO rules Consistency? Prohibition to discriminate between “like” products Except if...

Climate change border adjustments: Relevant WTO rules Justifiability? WTO rules, as confirmed by jurisprudence Under certain conditions, Members can adopt trade-related measures aimed at protecting the environment the right of Members to take regulatory measures to achieve legitimate policy objectives Essential to maintain a balance between the rights of other WTO Members under basic trade rules

Climate change border adjustments and WTO rules Justifiability? Conservation of clean air from air pollution Conservation of sea turtles from incidental capture in commercial fishing Several disputes on measures that sought to achieve a variety of policy objectives Protection of human health from risks posed by asbestos Protection of human health from risks posed by the accumulation of waste tyres WTO jurisprudence has confirmed that WTO rules do not trump environment, as long as…

Climate change border adjustments and WTO rules Justifiability? …as long as several carefully crafted conditions are respected… Environmental measures must not be applied in a manner which constitutes a means of arbitrary/unjustifiable discrimination or  a disguised restriction on international trade

Climate change border adjustments: Relevant WTO rules Justifiability? Major practical challenges in implementation  in assessing product-specific emissions  fluctuations of the carbon price existence of carbon leakage … Implementation is key! First best option is a successful multilateral agreement!

Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy

Rationale Development & deployment of new CC friendly technologies May be occurring at a slower pace than desirable from an environmental point of view Development & deployment of new CC friendly technologies May therefore need to be reinforced by national policies Environmental externality: without cost, no direct incentive to find ways to reduce emissions Cost of renewable energy is generally not competitive with wholesale electricity and fossil fuel prices Negative factors Learning cost

Type of support 2 main types of support Incentives to promote invention of new climate-friendly technologies and goods 2 main types of support Incentives to encourage the deployment of climate-friendly goods and technologies and the increased use of renewable sources of energy

Incentives to promote inventions of new cc technologies Support development of new technologies, e.g. to finance research on renewable energy technologies Grants  Example: In Korea, the Automobile Low Emission Technology Development Support funded research institutions developing, inter alia, hybrid vehicles for use as public shuttle buses Awards (ex post or ex ante) e.g. in the context of a competition to recompense for an innovation  Example: Bright Tomorrow Lighting Prizes (US) to develop technologies for a new “21st Century Lamp” to replace 60 watt incandescent light bulbs and PAR 38 halogen lamps

Incentives to promote deployment of CC technologies & renewable energy Fiscal measures 3 main types of financial support Price support Investment support

Incentives to promote deployment of CC technologies & renewable energy Fiscal measures (e.g. tax reductions, tax credits) To increase consumption of certain technologies To facilitate investment in production of CC goods & renewable technology  Example: reduction in value-added tax (VAT) for small hydroelectric, wind and biogas power generation plants in China  Example: Chinese government’s reduction of income taxes for producers of wind and biogas power projects

Incentives to promote deployment of CC technologies & renewable energy Price support Feed-in tariffs (regulated min. guaranteed price per Kwatt-hour paid by electricity company for renewable energy fed into the national electricity grid by a private independent producer) Net metering (If power a consumer’s renewable energy equipment supplies to the national electricity grid > what it takes from the grid  the consumer receives a credit for that amount on future energy bills)  Examples: United States, Germany, Spain, Italy, France, Thailand and China  Examples: United States, certain provinces in Canada, Thailand and Mexico

Incentives to promote deployment of CC technologies & renewable energy Investment support (to reduce the capital cost of installing and deploying renewable energy technologies) Capital Grants Percentage of costs of installing climate-friendly technologies is returned to the investor as a capital grant, resulting in significant reductions in overall cost of such technologies Favourable lending conditions Or low-cost financing with subsidized interest rates for investors in climate-friendly technologies  Examples: Indian Solar Loan Programme; In Bangladesh, micro-financing institutions Proshika and Grameen offer assistance to increase adaptability and reducing vulnerability to the effects of climate change  Examples: In Canada, EcoENERGY Retrofit grants for improving the energy efficiency of buildings

Relevance to Trade Governmental funding policies may have an impact on the price and production of low-carbon goods and technologies Such policies lower the costs for producers, leading to lower product prices Lower prices may reduce exporting countries’ access to the market of the subsidizing country or may increase the exports of the subsidizing country Lower costs of installing emission-reducing technologies enable industries to maintain international competitiveness

Agreement on Subsidies and Countervailing Measures Relevant WTO rules Agreement on Subsidies and Countervailing Measures Key concepts include: Definition of a subsidy (whether a financial contribution confers a benefit, whether the subsidy is specific to a certain industry) Definition of an actionable subsidy (whether the subsidy causes adverse effects to the interests of other WTO Members)

Technical requirements to promote the use of climate-friendly goods and technologies

Emissions/ energy efficiency standards and regulations can be… Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on design Based on performance Prevalent to improve energy efficiency in appliances and buildings  more flexibility Best used when few options for controlling emissions Japan’s Top Runner Program (the energy performance of the most efficient model (e.g. household appliances) on the market is used to set a target for all manufacturers.

Emissions/ energy efficiency standards and regulations can be… Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on design Based on performance Defining products Defining processes May result in direct environmental outcomes, as they improve energy efficiency or limit emissions to a certain level during production Mainly address energy efficiency & emissions related to the use of the product

Emissions/ energy efficiency standards and regulations can be… Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on design Based on performance Defining products Defining processes Mandatory Voluntary Minimum Energy Performance Standards (MEPS) for appliances (Australia) ENERGY STAR (United States)

Emissions/ energy efficiency standards and regulations can be… Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on design Based on performance Defining products Defining processes Mandatory Voluntary Public Private Minimum energy-efficiency performance standards for major domestic appliances (Canada) Leadership in Energy and Environmental Design (LEED) in the building sector (United States)

Key compliance tools: Labelling Most OECD countries (energy-efficiency labelling) Scope Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia Also examples of voluntary energy labelling programmes for household appliances (E.g. Thailand, Hong Kong, China, India, Brazil)

Key compliance tools: Labelling Most OECD countries (energy-efficiency labelling) Scope Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia Product’s energy performance/emissions levels while in operation Information covered e.g. EU, Australia, Canada and US require energy-efficiency labels for several household appliances Product’s entire life-cycle, including its energy efficiency e.g. Nordic Swan, German Blue Angel and the EU’s eco-label Flower  The issue of food miles

How does trade affect GHG emissions? Trade and transport? “Food miles” may be a counter intuitive issue! (i.e. the distance food is transported from the time of its production until it reaches the consumer) It is only one dimension used in assessing the environmental impact of food The real carbon footprint of a product would need to look at its entire life-cycle

Key compliance tools: Labelling Comparative labels  compare performance among similar models Type of instrument e.g. for household appliances in Australia, EU, Canada, US, Brazil, Tunisia, China, Thailand and Korea Endorsement labels  Seals of approval assuring consumers that a product meets certain criteria e.g. Energy Star label (US), Brazil, Thailand and China (Certificate for Energy Conservation Product)

Key compliance tools: Conformity assessment to determine whether the requirements in standards & regulations are fulfilled give consumers confidence in the integrity of products Objectives add value to manufacturers’ marketing claims

Key compliance tools: Conformity assessment Testing Ex post efficiency testing on labelled appliances (Electricity Generating Authority of Thailand) Inspection In the building sector, the Leadership in Energy and Environmental Design (LEED) (US) Type of instrument Certification Mark that energy performance of regulated energy-using products has been verified (Canada) Accreditation Metrology

Key compliance tools: Restrictions and prohibitions to restrict the sale or prohibit the import of certain energy-inefficient products Objectives to ban the use of certain greenhouse gases in the composition of products Bans & regulatory measures to prevent the use of fluorinated GHGs (HFCs, PFCs, SF6) (e.g. Austria, Denmark, Switzerland & EU) Examples Ban of certain less energy-efficient products, e.g. incandescent light bulbs in Australia, EU, Canada, Chinese Taipei & Argentina

Environmental effectiveness Increase in energy efficiency of products, e.g. electrical equipment In California, the energy use of refrigerators in 2000 was more than two-thirds lower than in 1974 (energy-efficiency standards are in place and regularly updated since the late 1970s) Measurement tools Behavioural changes of consumers and manufacturers In the United States, recognition of the Energy Guide label was found to be quite good; however understanding was limited, with respondents unable to determine which appliance was more energy-efficient, based on the labels

Relevant WTO rules? Agreement on Technical Barriers to Trade / GATT Non discrimination Key principles include Avoidance of unnecessary trade barrier Harmonization

Trade and Climate Change Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO