Challenges at the Intersection of WTO Law and Climate Change Regulation
Unresolved issues in WTO law regarding climate change regulation include concerns about the consistency of climate measures, environmental subsidies, processing methods, and technical barriers to trade. Emerging climate change policies raise two main WTO concerns: subsidies discrimination and different types of measures like cap-and-trade and carbon taxes. Considerations on applying differential tax rates based on carbon footprints and the applicability of WTO agreements such as the SCM Agreement and TRIMS Agreement are also discussed in relation to environmental subsidies.
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Unresolved Issues in WTO Law & climate change regulation
Issues that may affect WTO- consistency of climate measures Environmental subsidies Processing and production methods Multilateral environmental agreements Technical barriers to trade Relationship between different WTO Agreements
Emerging climate change policies Two types of WTO concerns: Subsidies Discrimination (MFN, NT) Four types of measures: cap-and-trade approach standards-based policies, which require the adoption of specific measures (eg labels) or set source-specific emissions limits carbon taxes border tax adjustments
What if we apply a tax on carbon footprints? As we analyze the legal issues below, consider whether differential tax rates based on different carbon footprints would be consistent with WTO subsidies law.
Applicable WTO Agreements SCM Agreement applies cumulatively with GATT Articles VI and XVI. SCM Agreement does not preclude action under other relevant provisions of GATT 1994, where appropriate (eg Art I:1 or III). Agricultural subsidies can raise issues under SCM Agreement or Agreement on Agriculture. TRIMS Agreement (incorporates some GATT) Order of analysis: AoA, SCM, then TRIMS/GATT.
SCM Agreement Actionable & prohibited subsidies Subsidy financial contribution by govt or any public body w/in territory of Member benefit thereby conferred Prohibited (presumed specific) contingent on export: 3.1(a) contingent on use of domestic goods: 3.1(b) Actionable (if specific) multilateral action (WTO complaint) unilateral action (CVDs)
Art 1.1(a)(1)(i) financial contribution A government practice (covers all acts of governments or public bodies) involves a direct transfer of funds (financial resources and other financial claims, not just money) eg grants, loans, equity infusion potential direct transfers of funds or liabilities (does not depend upon the probability that a payment will subsequently occur) eg loan guarantees Does our carbon footprint tax qualify?
Art 1.1(a)(1)(ii) financial contribution Govt revenue otherwise due requires comparison of fiscal treatment of comparable income of taxpayers in similar situations a WTO Member is free not to tax any particular categories of revenues : US FSC (AB) Foregone or not collected eg fiscal incentives such as tax credits Different income tax treatment for foreign & domestic sales (US FSC) Exemption from duty on auto imports, conditional upon domestic production requirements (Canada Autos) Does our carbon footprint tax qualify?
Art 1.1(a)(1)(iii) financial contribution govt provides goods or services other than general infrastructure Stumpage fees (US Softwood Lumber IV, AB) or purchases goods Not purchases of services (US Large Civil Aircraft (2ndcomplaint), Panel) What if the government varies the cost of lumber rights according the carbon footprint of the lumber company?
1.1(a)(1)(iv) financial contribution a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments recognizes that (i) to (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution: (US Softwood Lumber IV, AB)
1.1(a)(1)(iv): Private body vs. govt SCM Agreement distinguishes between subsidies made by a government or any public body and those made by a private body . Financial contributions from private body only subject to SCM Agreement if affirmative demonstration of link between government and specific conduct of private body. A public body s conduct can be attributed directly to the State, whereas a private body s conduct can be attributed to the State only indirectly. US Anti-Dumping and Countervailing Duties (China) AB
1.1(a) (2) financial contribution any form of income or price support in the sense of Article XVI of GATT. Article XVI: any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory.
Article 1.1(b) benefit [N]ot all government measures capable of conferring benefits would necessarily fall within Article 1.1(a). If that were the case, there would be no need for Article 1.1(a), because all government measures conferring benefits, per se, would be subsidies. US Softwood Lumber IV (AB)
Article 1.1(b) benefit a financial contribution will only confer a benefit if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market. Canada Aircraft (AB) Does our carbon footprint tax qualify? Article 1.1(b) could require an analysis of whether a benefit is obtained from differential carbon tax rates, by whom, whether such a benefit could have been otherwise obtainable in the marketplace, and what the relevant marketplace is.
Article 1.1(b) benefit Competitive wholesale electricity markets will rarely operate to remunerate adequately the mix of generators needed to secure a reliable electricity system that pursues human health and environmental objectives through the inclusion of facilities using solar photovoltaic and wind technologies into the supply-mix. Panel Reports in Canada Renewable Energy and Canada Feed-In Tariff Program
Article 1.1(b) benefit The absence of a general environmental exception in the SCM Agreement makes the role of the benefit analysis important in saving clean energy subsidies from violating the SCM Agreement. Can this analysis take into account that the higher cost of clean energy incorporates the externality of environmental harm, whereas the lower cost of fossil fuel energy does not?
Does our carbon footprint tax qualify as a prohibited subsidy? If both the domestic and imported products are substitutable inputs for domestic production and the foregone revenue confers a benefit, there could be a violation of SCM Agreement Article 3.1(b). This could be the case if countries diverge in their regulation and reduction of carbon emissions, so that some countries engage in less carbon-intensive production than others. Divergences in the carbon intensity of production would probably lead to differential treatment of imports, thereby raising issues regarding MFN treatment. The reference in footnote 1 to the exemption of an exported product from duties or taxes borne by the like product could indicate that Article 1.1(a)(1)(ii) is intended to apply to other cases where like products receive different consumption tax treatment.
AoA, SCM & prohibited subsidies Export subsidy that violates AoA 3.3 & 8 (bc not within limits in Member s Schedule) also violates SCM 3.1(a): US Upland Cotton. Unlikely that export subsidy consistent with the AoA could be impugned under SCM 3.1(a). AoA prevails where conflict: AoA permits certain export subsidies, SCM prohibits all. BUT compliance with AoA domestic support commitments violates SCM 3.1(b) if contingent on use of domestic goods: US Upland Cotton.
Multilateral &unilateral action Multilateral SCM Part III (actionable subsidies) Subsidy causes adverse effects in third country markets (eg lost sales, price suppression) Need not quantify precise amount of subsidy Unilateral SCM Part V (countervailing measures) Subsidy causes injury to the domestic producers of like products Need to quantify precise amount of subsidy
Multilateral &unilateral action on carbon footprints? Is failure to tax carbon a subsidy? Can we apply CVDs against products based on their carbon footprint? Would the lack of a carbon tax be subject to SCM Part III?
GATT Article III:4, TRIMS Article 2.1 Canada Renewable Energy and Canada Feed-In Tariff Program: FIT Program domestic input requirements. GATT Article III:8(a) did not exclude FIT Program from Art III:4; procurement undertaken with a view to commercial resale. Benefit analysis saved the FIT Program from SCM 3.1(b) Inconsistency with GATT Art III:4 leaves open possibility of justification under GATT Art XX, unlike SCM Agreement. Unlikely Art XX could be invoked as SCM defense. Benefit approach creates possibility that non-discriminatory clean energy subsidies could survive a WTO challenge.
Like Products and Processing and Production Methods The PPM Debate
like products is a key concept Which environmental concerns can be taken into consideration to determine likeness? Non-discrimination obligations in: GATT Articles I:1, III:2 and III:4 TBT Agreement term is not defined in these treaty texts SCM Agreement & Antidumping Agreement term is defined in these treaty texts
criteria to determine likeness (not a closed list) (1) The physical properties, nature and quality of the products; (2) The extent to which the products may serve the same or similar end uses in a given market; (3) The extent to which consumers perceive and treat the products as alternative means of satisfying a want or demand; and (4) Tariff classification (not determinative)
like products analysis Purpose: to take account of evidence which indicates whether, and to what extent, the products involved are or could be in a competitive relationship in the marketplace . Relevant market: where the products compete. Competitive relationship between same products may differ in different markets and market segments. Competitive relationship between products is the central issue.
Can PPMs determine likeness? (eg related to carbon footprint) Only characteristics of the product as such are relevant: US Tuna I (Mexico) (not adopted) If they compete in one segment of the market, that is sufficient: Philippines Distilled Spirits Access to dolphin-safe label required to compete in US market: US Tuna II (Mexico) Does this mean that carbon footprint PPMs relevant if they determine competitive relationship in all segments of the market?
Another possible route: less favourable treatment Legitimate regulatory distinctions based exclusively on particular product characteristics or on particular processes and production methods would not per se constitute less favourable treatment within the meaning of TBT Art 2.1. US Clove Cigarettes (AB)
Other hurdles to overcome with respect to carbon labels Accuracy of measurement of GHGs produced in the life cycle of a particular product Extent to which the carbon label discriminates between products from different countries based on factors other than emissions or minimal differences Extent to which consumers consider carbon footprints determining factor in a given marketplace In TBT context, whether the issuer of the carbon label qualifies as international standardizing body.
GATT Article XX General exceptions XX(g): measures relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption XX(b): measures necessary to protect human, animal or plant life or health
Article XX(g): conservation of exhaustible natural resources (1) Is the climate an exhaustible natural resource ? (2) Does a sufficient jurisdictional nexus exist between all WTO Members and the global climate? (3) How should a panel determine whether a specific measure relates to climate change? (4) Are the measures made effective in conjunction with restrictions on domestic production or consumption ?
exhaustible natural resources Subject to evolutionary interpretation Include living and non-living natural resources AB and GATT panels have found following to be exhaustible natural resources: clean air; sea turtles; salmon; herring; tuna; dolphins Climate change measures could qualify as: Clean air (control of emissions; US Clean Air Act) Indirect conservation of living resources Stable climate as the resource
jurisdictional nexus US Shrimp: AB found sufficient jurisdictional nexus between migratory sea turtles and US Turtles spent part of migratory life cycle in US waters No ruling on whether there is a jurisdictional limit implied in the language of Article XX(g) If there is, global effects of climate change should be a sufficient jurisdictional nexus
relating to Means primarily aimed at Examine relationship between the measure and the legitimate policy of conserving exhaustible natural resources . Requires a close and genuine relationship of ends and means Examine relationship between the general structure and design of the measure and the policy goal it purports to serve Measure based on MEA obligations likely to qualify
made effective in conjunction with restrictions on domestic production or consumption made effective means a governmental measure being operative , in force No empirical effects test Requirement of even-handedness in the imposition of restrictions Equivalent terms in Spanish and French of made effective : se apliquen and sont appliqu s
XX(b): necessary to protect human, animal or plant life or health Issue 1: Does the policy goal fall within the range of policies designed to protect human, animal or plant life or health? Brazil Retreaded Tyres: environmental measures covered by Article XX(b).
XX(b): necessary to protect human, animal or plant life or health Issue 2: Is the measure necessary to achieve the policy goal? Analyze in light of level of risk Member sets for itself. Involves weighing and balancing factors: importance of the interests or values contribution to the end pursued trade impact whether a WTO-consistent alternative measure which the Member concerned could reasonably be expected to employ is available, or whether a less WTO-inconsistent measure is reasonably available
importance of interests or values Human life and health are both vital and important in the highest degree : AB, EC Asbestos Environment is important : AB, Brazil Retreaded Tyres Climate change impacts on human life and health, environment
contribution to the end pursued Measure must be apt to produce a material contribution to the achievement of its objective Marginal or insignificant contribution is not enough Indirect contribution via long-term economic development does not qualify (Kuznet s curve) Need to view the measure against the broader context of a comprehensive strategy Can be quantitative or qualitative measurement But difficult to measure contribution of climate change measures
AB, Brazil Retreaded Tyres the results obtained from certain actions for instance, measures adopted in order to attenuate global warming and climate change... can only be evaluated with the benefit of time
trade impact Prohibitions have passed the test: EC Asbestos Brazil Retreaded Tyres But cumulative impact of a series of climate change measures could together have much more significant restrictive effects than a measure considered in isolation.
alternative measures Must achieve same objectives as challenged measure difficult to argue if effect of measure might not be revealed in the near future Must be WTO-consistent or less inconsistent Jurisprudence makes this moving target (subsidies instead of trade restrictions after Canada Renewable Energy?) Must be reasonably available in light of interests or values being pursued and desired level of protection Level of economic and technological development? Consultations or negotiations with other countries? What scientific evidence will be required?
