GENERAL WTO ASPECTS OF A CLIMATE BORDER MEASURE
1. National measures to address climate change which have an impact on trade can
be compatible with WTO law.
WTO law must be interpreted ‘
in the light of contemporary concerns of the community
of nations about the protection and conservation of the environment’.
WTO Appellate Body (AB) in
US-Shrimp, October 1998
‘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’.
AB in
Brazil-Retreaded Tyres, December 2007
2. These national measures can include border measures.
A border measure does not have to be identical to the domestic measure.
GATT Article XX
There is a
requirement of even-handedness but without the requirement of
identical
treatment of domestic and imported goods.
AB in U
S-Gasoline, May 1996
If there is ‘
a genuine relationship of ends and means’ and the border measure makes a
‘material contribution’ to the achievement of the environmental objective then a border
measure can be considered ‘
necessary’.
AB in Brazil-Retreaded Tyres
3. The EU can legitimately have higher climate ambitions than other countries.
WTO law recognises the EU’s sovereign right to set as high a level of protection of the
environment as it determines to be appropriate. This right is not unfettered. If the high
ambition includes a border measure then it must not be
a disguised restriction on
international trade or
discriminate between countries where the same conditions prevail or discriminate
between imported and domestic goods.
GATT Articles III and XX
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High EU standards can have the
de facto effect of exporting those standards to
companies wishing to sell into the EU market. This is most clearly seen, for example, in
the health and safety of imported foods or chemicals complying with REACH. This
de
facto effect is not incompatible with trade law.
4. The Climate Border Measure should not be a tariff or import charge
To avoid a GATT II inconsistency, the triggering of the imposition of the charge must not
be
importation itself but an
internal factor such as consumption.
AB
in China-Auto Parts, January 2009
GATT Article II prohibits the imposition of
duties or charges of any kind in excess of the
tariffs set out in a Member’s Country Schedule.
5. ‘As Such’ and ‘As Applied’: the Architecture of the EU’s border measure
WTO Panels and the Appellate Body judge if a measure is compatible with WTO law ‘as
such’ or ‘as applied’. An ‘as such’ review examines whether the national law itself is
compatible with WTO law. An ‘as applied’ review examines whether the WTO member
has acted in breach of WTO law when applying the national law.
The shape or architecture of the EU’s carbon border measure must aim at ‘as such’
compliance.
6. The Architecture of a border measure must address the EU’s climate objective
[W]e consider that a measure’s purposes, objectively manifested in the design,
architecture and structure of the measure, are intensely pertinent to the task of
evaluating whether or not that measure is applied so as to afford protection to domestic
production.
AB
Chile-Taxes on Alcoholic Beverages, December 1999
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The EU has chosen to achieve carbon neutrality by restricting the right to emit carbon.
This policy addresses the carbon footprint of goods manufactured in the EU. This is a
market-based approach (as opposed to a tax or standards approach).
As the EU has an internal a market-based mechanism imposing a market-based
mechanism at the border is not likely to be considered WTO incompatible ‘as such’. A
tax based approach at the border might be.
7. Carbon leakage
Recital 24 of Directive 2009/29 addresses two types of carbon leakage: emissions
imbedded in imported goods, and emissions from industries that could leave the EU.
The substantive provisions of the Directive only address carbon leakage from moving
manufacturing abroad. Rules in relation to the carbon footprint of imported goods have
not been elaborated.
WTO law does not require that the means to avoid carbon leakage in imports are
identical or even exactly mirror the avoidance of carbon leakage through moving
manufacturing abroad. If they are considered different aspects of carbon leakage they
can be addressed differently.
8. Technical or Product Standards
WTO members retain the sovereign right to set whatever standard they consider
appropriate to achieve a legitimate public policy objective. The EU defends this right
even to the point of setting standards for hormones in beef or on genetically modified
organisms (GMOs) which some consider are in breach of WTO law.
The standard would apply equally to domestic and imported goods. Products not
meeting EU standards cannot be present in the European Union (whether produced
domestically or abroad). These standards could be tightened over time.
9. Conclusion
If EU policy is that all goods consumed in the EU must comply with the EU’s carbon
emissions reduction policy then a properly constructed border measure can comply with
WTO law.
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SPECIFIC ELEMENTS OF A CLIMATE BORDER MEASURE
Any cost to be imposed on imports to be consumed in the EU should be at a level
appropriate to the high level of the EU’s climate objective.
The EU’s policy of limiting and reducing emissions over time must also be applied to
goods imported for consumption in the Union.
The EU’s climate objective cannot be achieved if production is shifted to countries with
less ambitious objectives and thus less production cost. Therefore, the risk of carbon
leakage can be addressed by a Climate Border Measure. Carbon leakage will not be
prevented if the overall burden on imports is less than the overall burden on EU
manufacturing. This in turn requires measures to prevent the absorption of any costs
by exporting producers or the sending of low carbon footprint goods to the EU and
diverting high carbon footprint goods to markets with standards lower than the EU.
GATT Article III
In relation to the cost burden, GATT Article III provides that there should be no
discrimination between imported and domestically produced goods. In other words, the
carbon cost burden on imported goods should not be
in excess of the carbon cost burden
on
like or
substitutable/competitive EU products.
The exact carbon cost burden on an EU manufacturer for a particular good at any one
time will always be a matter of fact. This implies that some sort of mechanism will be
required to set the exact cost burden on the imported good. The import cost burden
mechanism cannot operate so as to allow carbon leakage and therefore must also
address the wider carbon reduction objectives.
GATT Article XX
If a border measure which reflects a high level of climate ambition is in breach of GATT
Article III, recourse to the exceptions in GATT Article XX will be required.
The key to a successful recourse to GATT Article XX is that any discrimination or trade
restriction is done for authentic environment/health related considerations.
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To come within GATT XX, the border measure must be shown:
• to be
necessary to protect human, animal, plant health (GATT XX(b))
• to
relate to the conservation of exhaustible natural resources (GATT XX(g))
And, if it passes either one of these first two tests, the chapeau of GATT XX provides:
• It must not be a disguised restriction on international trade, or
• Constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prevail.
An import cost burden mechanism is in line with the general legal requirement
(reflected in the EU
Outokumpu Oy case from April 1998 – Case C-213/96) that there
must always be a mechanism that allows importers to show the actual conditions of the
imported good.
A mechanism of this nature would have to allow, for example, adjustments for countries
participating in the EU’s ETS or its equivalent or for products that have already incurred
specific costs.
Burden of Proof
It need not be problematic from a WTO law perspective if the burden of proof both in
relation to actual emissions and actual costs already incurred is on the importer.
Flexibility for EU importers at company and/or country level
GATT Article I prohibits discrimination between imports based on origin. Thus
exempting,
per se, imports from certain origins on the basis of carbon policies could
breach this provision. However,
Canada-Autos (February 2000) indicates that origin
neutral measures which evaluate production processes in particular countries could be
WTO compatible. This reasoning might well apply to a country that participated in the
EU’s ETS or had an equivalent ETS system in place.
EU policy seeks to reduce emissions by placing limitations and costs on emissions. This
results in a cost burden per tonne of steel. The border measure must materially
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contribute to this objective of limiting and costing emissions while seeking, as far as
possible, not discriminating between imported and domestically produced goods.
If, in the production of the imported good, emission limitations or costs have already
been incurred, whether those limitations or costs are due to third country public policy
or individual company policy, then those limitations and costs must be taken into
consideration in ensuring no discrimination on the goods themselves within GATT Article
III and on the origin within GATT Article I, so long as to do so would not undermine the
EU’s overall climate policy.
It is reasonable to think of border cost burden mechanism that, when evaluating the
emissions of a particular good, would provide that if the good came from a particular
origin (whether country or company) a pre-evaluated amount of emissions (or cost)
might be provisionally recognised (so as to facilitate trade and ease of border
evaluation). This evaluation would have to be based on verified evidence rather than
political assumptions and a mechanism to contest the provisional evaluation should be
available to importers.
Risk of Absorption and Source Shifting
A third country producer could export its low carbon footprint steel to the EU and sell
its high carbon footprint steel on the domestic market or in markets with lower climate
ambitions than the EU (source shifting).
Or a third country producer could absorb the EU carbon costs imposed at the border if
the percentage of exports to the EU as against its total sales was low and there were no
carbon emission costs on the other volumes not exported to the EU (absorption).
A border measure that addresses absorption and source shifting need not,
per se, be
incompatible with WTO rules. At the same time, it can be complex. GATT Article III
applies to the good traded rather than total production of all the goods from the country
of origin or the manufacturer. This indicates that a provision in the border measure
addressing total company or country emissions so as to avoid source shifting and
absorption would have to be designed to come within GATT XX.
It can be expected that addressing absorption and source shifting will require the
development of a sophisticated monitoring and enforcement mechanisms. These types
of mechanisms are common in trade and can be seen in trade defence instruments or
in ensuring the health and safety of foods and agricultural products.
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Abatement costs
Abatement investment costs are incurred today with the object of a future benefit.
Given the view of the WTO Appellate Body in
Brazil-Retreaded Tyres (cited above) the
legality of one part of a border measure addressing the issue of abatement and which
made a material contribution to the EU’s carbon reduction policy does not appear to be
per se incompatible with WTO law. Compatibility will depend on the issues of
material
contribution and
necessity.
To the extent that EU law requires abatement or sets specific carbon reduction targets
for specific products these policies could be reflected in the border measure.
Transition and complexity
There is nothing inherently incompatible with WTO law if the EU’s carbon border
measure is phased-in over time and is made up of a variety of elements.
The transition to carbon neutrality can also be complex and the fact of complexity does
not make it WTO incompatible. This could see the possibility of evolution of the two
types of carbon leakage policies (addressing emissions in imports and avoiding the flight
of manufacturing) independently of each other if there is an environmental justification
for such difference within the EU’s high level of ambition.
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