• How a U.S. Climate Change Bill Could Lead to Trouble at the WTO
  • April 6, 2009
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Los Angeles Office
  • As if legal efforts to address climate change weren’t complicated enough, a recently released study by the Peterson Institute for International Economics warns that U.S. Congressional efforts to reduce climate change could run afoul of international trade rules under the General Agreement on Tariffs and Trade (GATT), leading to years of legal disputes in the World Trade Organization.

    Here is the problem: all the major climate change bills introduced in the U.S. Congress include some form of restriction on the emission of greenhouse gases, with the restrictions becoming more stringent over time. Most of the bills rely on a cap-and-trade program, whereby the government would establish maximum carbon (CO2 equivalent) emission levels and allocate and/or auction emission allowances. Holders of allowances could then trade them on the open market. Many have expressed concern that regulating greenhouse gas emissions will increase the cost of production in the United States, putting U.S. producers at a competitive disadvantage. This, as the Peterson Institute report notes, could lead to “leakage” of production and jobs to countries that do not have comparable emissions controls.

    Unless, that is, the new climate law includes “competitiveness provisions” that equalize things at the border. Such provisions, also referred to as border measures, help level the playing field between U.S. enterprises and presumptively less regulated foreign entities. Border measures include import bans, import taxes, export subsidies and comparability measures. Such measures might help with the leakage problem, but they might also violate international trade rules, subjecting the U.S. to costly and time consuming WTO litigation and, depending on the outcome of such litigation, possible trade sanctions, which could impede access by U.S. companies to foreign markets.

    According to the Peterson Institute report, the trade rules implicated by border measures include GATT Article I (most favored nation), which prohibits treating products from some countries different than “like” products from other countries; Article II (tariff schedules), which prohibits charges equivalent to internal taxes applied to imports; Article III (national treatment), which prohibits application of internal taxes and regulations in a way that protects domestic products; and Article XI (quantitative restrictions), which prohibits quotas. In addition, the agreement on Technical Barriers to Trade requires that regulations—including environmental regulations—be based on international standards in most cases. The Agreement on Subsidies and Countervailing Measures (ASCM) prohibits export subsidies, limits the use of subsidies in general, and regulates the application of countervailing measures.

    Border measures would not necessarily violate the GATT, but a foreign government could challenge U.S. measures to the extent they put the foreign government and its commercial actors at a disadvantage. For example, there is room for debate, and for the law to develop, on issues such as whether products with different carbon footprints qualify as “like” products under the GATT, or whether carbon allowances allocated free of charge by the government amount to subsidies.

    Even if a border measure otherwise violates the GATT, however, it might still be permissible under GATT Article XX, which allows measures “necessary to protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption,” and the measures “are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.” U.S. measures to protect sea turtles from harmful shrimping practices, for example, have survived challenges at the WTO based on Article XX. But even if a U.S. climate change law ultimately passes muster with the WTO, that would not avoid disruptive legal challenges, with the attendant uncertainty and potential delays in effective implementation of important (perhaps necessary) climate protection measures.

    The authors of the Peterson Institute report recommend development of a new Code of Good WTO Practice on greenhouse gas emission controls, coupled with a two to four year “peace period” in which WTO member states would delay implementation of border measures. Another possibility, already being incorporated into the legislative process, is the careful drafting of climate laws that factor in GATT/WTO issues. In addition, the WTO members themselves could address climate related border measures directly in any revival of the Doha round of trade negotiations. And finally, participating governments can try to address trade related issues as they negotiate a post Kyoto climate change regime, starting with this year’s meetings, scheduled for December 2009 in Copenhagen. Indeed, Pascal Lamy, the Director General of the WTO, has said that an international accord on climate change should come before national governments try to address the problem individually.