WTO, UNEP Issue Joint Report on Trade and Climate Change

1 July 2009

As the world's governments work towards a new international treaty on reducing greenhouse gas emissions, the trade implications of countries' climate change policies have emerged as a point of serious contention.

Against this backdrop, the WTO and the United Nations Environment Programme (UNEP) have jointly published a report describing the links between trade and climate change.

The analytical review forthrightly acknowledges that reducing trade barriers could lead to increased greenhouse gas emissions. Liberalizing trade could spur increased economic activity, in turn leading to greater energy use. But it stresses that the relationship is not that straightforward: trade opening could push a country to shift economic activity to less polluting sectors. Lower tariffs on climate-friendly technology could reduce the cost of fighting climate change - a point on which the report lays particular emphasis. And climate change itself could affect trade patterns, for instance, by changing the kinds of crops it is possible to grow in a country.

"Not a prescription, but an explanation," was how UNEP Executive Director Achim Steiner described the report at its launch on 26 June. The largely descriptive book lived up to this billing, notable as much for its content as for the unprecedented cooperation it represented between the global trade body and the UN's environmental office. It faithfully reported the conclusions of a wide range of studies by academics, NGOs, international organisations, and steered carefully clear of drawing controversial conclusions - although some might be unhappy with its refusal to rule out the possibility that curbs on trade for climate policy reasons could be deemed WTO-consistent.

The report opens with a survey of current scientific knowledge about climate change, outlining different projections for atmospheric greenhouse gas levels and estimates for how various parts of world would be affected in terms of food security, water resources, coastal infrastructure, health, and biodiversity. It looks at options for mitigation (reducing the rate and magnitude of climate change) and adaptation (action that aims to soften the blow of climate change, or take advantage of any benefits).

It then proceeds to review the economic literature on how the vast expansion in trade over the past sixty years has affected greenhouse gas emissions. One key insight reported is that greenhouse gas emissions are a global externality - they "are released into the global commons (the atmosphere), and part of their cost is therefore borne by people in other countries." Thus, while growing wealth has driven citizens to push their governments to reduce the effects of locally-concentrated pollutants, incentives to tackle carbon dioxide would be weaker. The relatively few environmental impact assessments of regional trade agreements that examined climate change often found an increase in trade-related emissions, principally due to transport.

In its description of multilateral efforts to tackle global warming, primarily the UN Framework Convention on Climate Change and the Kyoto Protocol, the report looks at the extraordinary success of the Montreal Protocol on reducing the consumption and production of ozone depleting substances. Many of the ozone depleting substances also happened to be significant greenhouse gases, with strong heat-trapping effects. Some experts estimate that the Montreal Protocol, which involved binding, time-targeted commitments for both developed and developing countries - but longer time periods and considerable financial assistance for the latter - has contributed four or gives times more to climate protection than the Kyoto accord would by 2012.

The part of the report most relevant to the raging debate on trade, emissions restrictions, and industrial competitiveness is the section on the trade implications on climate change-related policies.

This section examines a range of policies used by governments to promote energy conservation and the use of renewable energy, from energy efficiency labels to tax incentives and price and investment support for renewable energy. It points to the WTO rules relevant for these policies, mainly those on subsidies, intellectual property, and technical barriers to trade.

The report also examines the carbon taxes and cap-and-trade systems introduced by different countries, and looks at concerns about competitiveness and ‘carbon leakage' arising from climate change policies. Studies have generally found that climate change policies have relatively small effects on competitiveness, except for in a relatively small number of energy-intensive manufacturing industries.

For such cases, a wide range of measures have been proposed by governments and in academic literature to offset any competitive advantages that imports might enjoy. These include the use of free emissions allowances, border tax adjustments (effectively tariffs on imports or rebates for exports), countervailing duties (against ‘de facto' subsidies in the form of absent carbon restrictions), and anti-dumping duties (against ‘environmental dumping').

The report took a cautious approach, describing in detail the way such measures would interact with WTO rules. It stopped short of assessing actual WTO compatibility, although it made clear that much would hinge on the way policies were designed and applied. It also pointed to the practical challenges involved with border tax adjustments: assessing the emissions resulting from a particular product as an inexact science, and carbon prices fluctuate. A country without a carbon tax might still have costly-to-implement technical regulations for energy efficiency, making it hard to evaluate what constitutes "comparable action."

On the subject of extra import charges, mooted by some governments (and most recently the US House climate bill) as a means of shielding domestic industry from unfair competition and encouraging developing countries to accept emissions targets, the report noted that WTO rules already had detailed rules governing border tax adjustments (see related story, this issue). Indeed, such adjustments are already commonly used to compensate for sales and other consumption taxes. The debate, the report says, focuses on whether carbon taxes (or cost increases springing from cap-and-trade requirements) would be eligible for adjustment, and whether a tax on fuel used to power the manufacturing of a particular product could be counted as an indirect tax on that product.

"The general approach under WTO rules has been to acknowledge that some degree of trade restriction may be necessary to achieve certain policy objectives, as long as a number of carefully crafted conditions are respected," the report noted, citing several WTO dispute rulings in which trade restrictions were deemed justifiable for health and environmental reasons.

Even if a "border measure related to climate change" was inconsistent with core GATT obligations, the report suggested that "justification might nonetheless be sought under the general exceptions to the GATT (i.e., Article XX)," such as those allowing trade restrictions to protect human health or the conservation of exhaustible natural resources. To do so, it would have to meet two conditions: "First, the measure must fall under at least one of the GATT exceptions, and a connection must be established between the stated goal of the climate change policy and the border measure at issue," and second, "the measure must not constitute a ‘means of arbitrary or unjustifiable discrimination' or a ‘disguised restriction on international trade'."

The report acknowledged that WTO case law showed that the second requirement "has often been the most challenging aspect of the use of the GATT exceptions."

Most developing countries are strongly opposed to border tax adjustments, not least because they would be the primary targets of such measures. Tariffs on their exports, they feel, would make them foot the bill for mitigating climate change, even though they bear little responsibility for existing levels of greenhouse gas emissions in the atmosphere.

At the report's launch, WTO Director-General Pascal Lamy said that while there was "undoubtedly" scope in WTO disciplines for national policies that pursue environmental goals, another question was worth asking as governments prepare for the Copenhagen climate conference in December: Do border tax adjustments create the right "political, psychological, [and] diplomatic" climate for governments to reach a post-Kyoto agreement?

Lamy reiterated his belief that the issue of competitiveness, like technology transfer, was best dealt with in the UN climate negotiations. If the internationally agreed framework for tackling climate change ultimately included trade measures - as did the Montreal Protocol - the WTO would be able to adapt, he suggested.

Calling the ongoing global talks on climate change and trade liberalisation "an extraordinary moment in terms of multilateralism," UNEP head Steiner said that the processes would determine whether climate change policies and the actions that flow from them are compatible with WTO rules, but also provide an opportunity to assess how compatible WTO rules are to global goals.

Both Lamy and Steiner urged the international community to reach an "equitable and decisive deal" at the UN climate convention meeting in Copenhagen. They also urged nations to conclude the Doha trade round.

The WTO chief plugged the Doha Round negotiations on liberalizing trade in environmental goods and services, saying that a multilateral accord in the long-struggling talks could help efforts to reduce emissions by lowering the cost of photovoltaic cells and windmills for power generation. But the report acknowledged that the price of climate friendly goods was only one of several factors affecting their diffusion.

The report is available online at http://www.wto.org/english/res_e/booksp_e/trade_climate_change_e.pdf.

ICTSD reporting.

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