WTO Compatibility of «Green Border Taxes» Dr. Joëlle de Sépibus World Trade Institute, Bern

« Green Border Taxes » Green Border Taxes: –The obligation to pay border taxes or to surrender emission allowances imposed on importers of goods produced under less stringent climate constraints

Reasons for the adoption of « Green Border Taxes » Stern Report 2006: –« Climate change… greatest and widest-ranging market failure » Loss of jobs in the EU and increase of overall carbon emissions (« carbon leakage ») Reduction of internal opposition to impose ambitious carbon cuts Incentive for uncapped countries to agree to carbon cuts

United States American Clean Energy and Security Act 2009 (Waxman-Markey bill): –Obligation to surrender allowances imposed on importers of goods produced in countries which have no comparable carbon constraints Kerry-Boxer bill proposal 2009: –Enabling clause for Green Border Taxes

European Union EU Emission Trading Scheme (Directive 2009/29/EC): –Carbon Equalisation System –June 2010, Commission Report Conclusions of the European Council of 30th October 2009: –Best solution to address carbon leakage is an ambitious climate deal –Appropriate measures may be taken to address the risk of carbon leakage

Main WTO principles National Treatment (Art. III GATT) –A Member shall not discriminate between its own and like foreign products Most favoured nation principle (Art. I GATT): –A Member shall not discriminate between like products from different trading partners Exceptions (Art. XX GATT)

Questions of legal classification Can the financial burden imposed by a cap-and-trade system be qualified as an internal tax on a product in the sense of Article III: 2 GATT? Cap-and-trade is a novelty: –imposed on installations during production but aimed at price effects on products

Border Tax Adjustment Art. III: 2 GATT –Taxes or charges on imports should not be applied in excess to taxes levied on like domestic products or on input articles

«Like» product Key question: –Can a product be distinguished on the basis of Production and Process Methods (PPMs)? –Is, for example, steel with a different carbon footprint a like product? Answer: –In generally denied, but see exemptions below

Calculation of a «green border tax» Art. III: 2 GATT : –Not in excess to taxes levied on like domestic products… Calculation of the green border tax –based on average financial burden of the sector? –based on best-available technology ? How to account for free allocation of allowances ?

Most favoured nation principle American Clean Energy and Security Act: –No green border tax for post-Kyoto parties with comparable emission cuts GHG intensity equal or below US Least-developed countries –Fewer allowances based on climate efforts in country of origin EU ETS: –Enabling clause: Green border tax calculated according to the principle of common but differentiated responsibilities and respective capabilities Special treatment of least developed countries

Environmental exemptions Art. XX (b): –related to the conservation of exhaustible natural resources Art. XX (g): – necessary to protect … life or health Application : –« Chapeau » of Art. XX No arbitrary or unjustifiable discrimination No disguised restriction of international trade

Environmental exemptions Case law of the Appellate body regarding the chapeau: –Measures taken in good faith in order to protect legitimate interests Negotiations at international level Flexibility of the measure to take into account different situations in different countries. –A country may not require another member to adopt essentially the same regulations

Conclusions Compatibility of Green Border Taxes with WTO Law : –Core questions of legal classification remain unanswered –In case of a violation of Article III and I GATT, possibility of an exemption under Article XX GATT: Efforts to reach an agreement at the international level « Comparable » regulations in the exporting country must be taken into account