Traversing WTO Law in a World of Unequal Carbon Prices

July 2015

Trade and the environment have been pitted against each other for far too long. Way back in 1971, in the run-up to the landmark Stockholm Conference on the Human Environment, the then GATT Secretariat prepared a study entitled “Industrial Pollution Control and International Trade”. Even at that early stage when the foundation of the global environmental governance was yet to be laid properly, the trade officials aired their apprehensions that the environmental policies could become obstacles to trade and could emerge as a new avatar of protectionism – “green protectionism”. The Stockholm Conference not only led to the establishment of the UNEP in December 1972, but the outcome of that landmark event also went a long way in sowing the seeds of international environmental law for the coming decades.

Come January 1995, the GATT paved way for a far wider and stronger WTO. Enough care, however, was taken by the trade negotiators at that point to replace the preambular statement in the GATT 1947 on “developing the full use of the resources of the world” with an environmentally friendlier version in the preamble of the WTO Agreement: “allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development”. The aforesaid move could perhaps be considered as an indication of the WTO’s willingness to evolve with the changing world view on the environmental front, particularly in light of the Earth Summit of 1992.

Two decades have passed since then, only to witness heightened concerns over trans-boundary environmental problems like depletion of the ozone layer or climate change. The antagonism between the multilateral trading system and environmental policy measures has only worsened during this period in tandem with the growing share of international trade in global GDP. “Green protectionism” is making headlines even today, with the trade policy makers in developing countries challenging the underlying intent of trade-related climate measures like border carbon adjustment (BCA). Climate policy makers in the developed world on the other hand are increasingly becoming sceptical about trade law that has got teeth that can bite. They are apprehensive that the WTO law is curtailing their freedom to implement domestic climate policies effectively. In a world of unequal carbon prices where international competitiveness and carbon leakage concerns of their domestic industry lobbies are turning out to be too politically sensitive to ignore, they don’t want to see the uncertainty over WTO compliance of BCA as a dampener. Similar concerns are also surfacing more recently in the context of ‘climate clubs’, wherein BCA has widely been contemplated as a ‘stick’ or penalty that could be used to discourage free riding by non-members, alongside exclusive club benefits or ‘carrots’ accruable to members.

Why is this cloud of uncertainty over BCA?  Well, this is due to the ambiguities in the existing WTO jurisprudence on several counts. First, it is not clear whether a domestic tax based on the carbon content of a product could be eligible for adjustment at the border.  Moreover, even if a domestic carbon tax is determined to be adjustable at the border, it has to be ensured in addition that the concomitant border tax adjustment satisfies the National Treatment requirements, which together with the Most Favoured Nation (MFN) requirements constitute the two pillars of the non-discrimination principles on which the multilateral trading system is premised.

A big question that arises in this context pertains to that of “like products”: whether under the WTO jurisprudence products can be regarded as “non-like” only on the basis of their differing carbon content. If they cannot be, then climate regulators may not be able to offer more favourable treatment to the less-emitting variety of say, cement over the more-emitting variety when both varieties arrive at the border. Nor can they discriminate against the more emitting variety if it arrives at the border to compete against domestically-produced less-emitting variety. Unfortunately, there is no definitive answer to date on the aforesaid “like product” question and the existing case law leaves room for arguments to be made either way.

It may be recalled at this juncture that even if a BCA violates any GATT provision, it still stands a chance of being justified under the ‘General Exceptions’ provisions of the GATT Article XX. This provision creates a window for a WTO Member to deviate from its GATT obligations for serving certain legitimate policy objectives, including environmental ones. In my view, a BCA stands a high chance of qualifying as a measure “relating to the conservation of exhaustible natural resources” (under Article XX(g)) or “necessary to protect human, animal or plant life or health” (under Article XX(b)). However, even then a BCA would have to fulfil the requirements included in the ‘chapeau’ or the introductory part of Article XX. In fact, case laws are testimony that it is passing the chapeau tests that has always turned out to be far more difficult. But then we must not forget that the chapeau is aimed at combating abuse of Article XX for protectionist purposes, the importance of which cannot be overemphasized. Moreover, the chapeau is not about the measure as such, but about the nitty-gritty details of how the measure is designed and implemented on the ground.

The existing case law does offer certain indicative guidance as to how to design and implement a BCA in a way that increases its chances of clearing the chapeau tests. For instance, it must follow ‘basic fairness and due process’. The procedures should be ‘transparent’ and ‘predictable’ while creating formal opportunities for the exporting country concerned ‘to be heard, or to respond to any arguments’. The country implementing the BCA must also engage in serious, across-the-board negotiations in good faith to address the climate-related policy goal at hand, before applying the BCA. Care should be taken to see that the exporting country is not compelled to adopt ‘essentially the same’ climate mitigation policies and measures as those in force in the importing country. Instead, there should be ‘sufficient flexibility to take into account the specific conditions prevailing’ in the exporting country. To cut a long story short, if designed and implemented carefully in light of the case law, a BCA may indeed be able to find its requisite defence under Article XX, even if it otherwise fails to satisfy the GATT requirements. That said, the uncertainty over WTO compliance may not be ruled out altogether till the verdict is delivered by the WTO Dispute Settlement System in a particular case.

Several proposals are being considered in the academic and policy discussions including in our E15 Expert Group as to how to deal with such uncertainty on the trade law front. Amend the WTO? Go for a WTO declaration/decision? Exploit the waiver provision of the WTO? So on and so forth. While the attempts to do away with the legal uncertainty have grounds and merits for sure, we must appreciate that whether a potentially WTO-incompatible measure would ultimately end up under the WTO scanner would depend on a host of political, diplomatic and economic factors. As observed by Simon Lester, “(t)he WTO dispute system can never deal with all violations of obligations. Many cases will never be brought; some cases will be settled before there is a ruling; some rulings will be negotiated away; and some rulings will be ignored.”

The Montreal protocol on Substances that Deplete the Ozone Layer, negotiated in 1987, is a case in point. It created room for the Parties to the Protocol to ban trade in ozone-depleting substance (ODS) with non-Parties unless the non-Parties adopted comparable measures. This provision has always been a cause of anxiety as it is likely to violate the GATT rules on the prohibition of quantitative restrictions on trade in products, as well as the non-discrimination requirements discussed above. However, the fact remains that to date no country has brought a WTO dispute against the Montreal Protocol. In fact, of the 250 odd Multilateral Environmental Agreements (MEAs) currently in existence, over 20 include trade measures to achieve their goals. Yet to date there has not been a single WTO dispute pertaining to any of the MEAs. Rather the WTO Members have been discussing ways to maintain a harmonious co-existence between the WTO rules and the specific trade obligations in various MEAs under the Doha Round. The WTO-UNEP brief on trade and the environment released in April this year on the occasion of the twentieth anniversary of the WTO is perhaps symbolic of the WTO’s increasing openness to work in cooperation with the environmental community and also to accommodate the environmental concerns of its Members, to the extent these are genuine and not back-door entries for protectionism!

Kasturi Das is a member of the E15 Expert Group on Climate Change. She is Associate Professor of Economics and International Business at the Institute of Management Technology (IMT) in Ghaziabad.

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