Domestic climate policies and the WTO

Zhang, ZhongXiang and Assunção, Lucas (2002): Domestic climate policies and the WTO.

Abstract

Experience with existing multilateral environmental agreements (MEAs) shows that trade measures agreed to within the MEAs themselves may not necessarily lead to a dispute between parties. On the contrary, there is a great chance that disputes may arise from national measures undertaken to fulfil those obligations under the MEAs. This possibility of conflict with their WTO obligations may well arise in implementing the Kyoto Protocol, given that Article 2 of the Protocol gives Annex 1 countries considerable flexibility in the choice of domestic policies to meet their greenhouse gas emissions commitments. It is highly likely that Annex 1 governments with differentiated legal and political systems might pursue their domestic policies in such a way as to unfairly favour domestic producers over foreign ones. Such differential treatments could occur in governing eligibility for, and the amount of, the subsidy, in establishing energy efficiency standards, in the determinations of the category of eco-labelled products and the procedures of establishing eco-labels, in the specifications in tenders, and in specifying condition for participating in government procurement bids. In case where a country unilaterally imposes a carbon tax, it may adjust taxes at the border to mitigate competitiveness effects of cheaper imports not subject to a similar level of the carbon tax in the country of origin. Measure of this sort may well raise complex questions with respect to the WTO consistency and the conditions under which border taxes can be adjusted to accommodate a loss of international competitiveness. All this clearly indicates the necessity of addressing policy coordination between the trade and climate regimes.

Against this background, this paper discusses carbon/energy taxes, subsidies, energy efficiency standards, eco-labels and government procurement policies, and explores the potential interaction between these domestic climate polices and WTO rules. It highlights their potential conflicts, and argues that such conflicts can be avoided or at least minimized if WTO rules are carefully scrutinised at the time Annex 1 governments undertake measures to achieve the required reductions in emissions. The paper suggests an early process of pursuing consultations between WTO members and the Parties to the Climate Change Convention and points to the need of further exploring ways to enhance synergies between the trade and climate regimes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Carbon taxes; energy taxes; subsidies; energy efficiency standards; eco-labels; government procurement; WTO; climate change
• Subjects: K - Law and Economics > K3 - Other Substantive Areas of Law > K32 - Environmental, Health, and Safety Law; F - International Economics > F1 - Trade > F18 - Trade and Environment; K - Law and Economics > K3 - Other Substantive Areas of Law > K33 - International Law; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

References

Assuncao, L. (1998a), The Buenos Aires Tango: What Trade-Related Consequences?, Bridges Between Trade and Sustainable Development, Vol. 2, No. 8, pp. 11, International Centre for Trade and Sustainable Development, Geneva.

Assuncao, L. (1998b), The Climate Change Externality and Competitiveness: Implementing the FCCC Kyoto Protocol at the Firm Level, Presented at the Workshop on Environmental Economics and Policy Analysis, JFK School of Government, Harvard University, Boston, May.

Assuncao, L. (2000), The Climate Change Convention and Trade Regimes, in P. Koenz, C. Bellmann and L. Assuncao (eds.), Trade, Environment and Sustainable Development: A Reader, Institute of Advanced Studies/United Nations University, Tokyo.

Baranzini, A., Goldemberg, J. and S. Speck (2000), A Future for Carbon Taxes, Ecological Economics, Vol. 32, No. 3, pp. 395-412.

Barde, J.P. (1997), Economic Instruments for Environmental Protection: Experience in OECD Countries, in OECD (ed.), Applying Market-Based Instruments to Environmental Policies in China and OECD Countries, Paris, pp. 31-58.

Barker, T., Baylis, S. and P. Madsen (1993), A UK Car¬bon/Energy Tax: The Macroeconomic Effects, Energy Policy, Vol. 21, No. 3, pp. 296-308.

Baron, R. and ECON-Energy (1997), Economic/Fiscal Instruments: Competitiveness Issues Related to Carbon/Energy Taxation, Policies and Measures for Common Action Working Paper 14, Annex 1 Expert Group on the UNFCCC, OECD/IEA, Paris.

Bill, S. (1999), European Commission’s Experience in Designing Environmental Taxation for Energy Products, in J. Hacker and A. Pelchen (eds.), Goals and Economic Instruments for the Achievements of Global Warming Mitigation in Europe, Kluwer, Dordrecht/Boston/London, pp. 231-237.

Böhringer, C. and T.F. Rutherford (1997), Carbon Taxes with Exemptions in an Open Economy: A General Equilibrium Analysis of the German Tax Initiative, Journal of Environmental Economics and Management, Vol. 32, pp. 189-203.

Brack, D., Grubb, M. and C. Windram (1999), International Trade and Climate Change Policies, The Royal Institute of International Affairs and Earthscan, London.

Cameron, J. and M. Buck (1998), International Trade Law and Green Procurement Initiatives, Prepared for International Institute for Sustainable Development, Winnipeg, Manitoba, Canada.

CEC (1992), Proposal for a Council Directive Introducing a Tax on Carbon Dioxide Emissions and Energy, Commission of the European Communities (CEC), COM(92)226Final, Brussels, 30 June.

Charnovitz, S. (1991), Exploring the Environmental Exceptions in GATT Article XX, Journal of World Trade, Vol. 25, No. 5, pp. 37-55.

Cogen Europe (2001), Commission Proposal on State Aid Guidelines for Environmental Protection, Newsletter, No. 19, p. 10.

Cosbey, A. and J. Cameron (1999), Trade Implications of the Kyoto Protocol, International Institute for Sustainable Development, Winnipeg, Manitoba, Canada.

CTI (1998), Enhancing Markets for Climate Friendly Technologies: Leadership through Government Purchasing Strategies, Vol. 1, Climate Technology Initiative (CTI), International Energy Agency, Paris, Available at http://www.climatetech.net/pdf/procure.pdf.

Delbeke, J. (1997), Environmental Taxes and Charges in the European Union, in OECD (ed.), Applying Market-Based Instruments to Environmental Policies in China and OECD Countries, Paris, pp. 59-64.

Eizenstat, S. (1998), Stick with Kyoto: A Sound Start on Global Warming, Foreign Affairs, Vol. 77, No. 3, pp. 119-121.

Esty, D. (1994), Greening the GATT: Trade, Environment and the Future, Institute of International Economics, Washington, DC.

Ewing, K.P. and R.G. Tarasofsky (1997), The “Trade and Environment” Agenda: Survey of Major Issues and Proposals – From Marrakech to Singapore, IUCN Environmental Policy and Law Paper No. 33, IUCN Environmental Law Centre, Bonn.

Goldberg, D. (1995), The Framework Convention on Climate Change, in UNEP (editor), The Use of Trade Measures in Select Multilateral Environmental Agreements, UNEP Trade and Environment Series No.10, Geneva.

Grossman, G.M. and A.B. Krueger (1993), Environmental Impacts of a North American Free Trade Agreement, in P.M. Garber (ed.), The Mexico-U.S. Free Trade Agreement, MIT Press, Cambridge and London, pp. 13-56.

Hoel, M. (1991), Efficient International Agreements for Reducing Emissions of CO2, The Energy Journal, Vol. 12, No. 2, pp. 93-108.

Hoel, M. (1992), International Environment Conventions: The Case of Uniform Reductions of Emissions, Environmental and Resource Econ¬omics, Vol. 2, pp. 141-59.

Hoeller, P. and J. Coppel (1992), Energy Taxation and Price Distortions in Fossil-fuel Markets: Some Implications for Climate Change Policy, in OECD (ed.), Climate Change – Designing a Practical Tax System, Paris.

Hoerner, J.A. (1998), The Role of Border Tax Adjustments in Environmental Taxation: Theory and U.S. Experience, Presented at the International Workshop on Market-based Instruments and Interna¬tional Trade, Amsterdam, 19-20 March.

IPCC (1996), Chapter 4 Industrial Sector, in R.T. Watson, M.C. Zinyowera and R.H. Moss (eds.), Technologies, Policies and Measures for Mitigating Climate Change IPCC Technical Paper No. 1, Geneva, pp. 31-36.

Jackson, J.H (1992), World Trade Rules and Environmental Policies: Congruence or Conflict?, Washington and Lee Law Review, Vol. 49, No. 4, pp. 1227-1275.

Jaffe, A., Peterson, P., Portney, P. and R. Stavins (1995), Environmental Regulation and the Competitiveness of US Manufacturing: What Does the Evidence Tell Us?, Journal of Economic Literature, Vol. 33, No. 1, pp. 132-163.

Manne, A.S. and R.G. Richels (1993), The EC Proposal for Combining Carbon and Energy Taxes: The Implications for Future CO2 Emissions, Energy Policy, Vol. 21, No. 1, pp. 5-12.

Mullins, F. (1996), Demand Side Efficiency: Energy Efficiency Standards for Traded Products, Policies and Measures for Common Action Working Paper No. 5, Annex 1 Expert Group on the UNFCCC, OECD/IEA, Paris.

OECD (1995), Report on Trade and Environment to the OECD Council at Ministerial Level, OECD/GD(95)63, Paris.

OECD (1996), Reconciling Trade, Environment and Development Policies: The Role of Development Co-operation, Paris.

OECD (1997a), Eco-labelling: Actual Effects of Selected Programmes, OECD/GD(97)105, Paris.

OECD (1997b), Process and Production Methods (PPMs): Conceptual Framework and Considerations on Use of PPMs-based Trade Measures, OECD/GD(97)137, Paris.

OECD (1997c), Reforming Energy and Transport Subsidies: Energy and Environmental Implications, Paris.

OECD (1999), Trade Issues in the Greening of Public Purchasing, OECD/TD/ENV(97)111/FINAL, Paris.

OECD (2000), Greener Public Purchasing: Issues and Practical Solutions, Paris.

Parker, R.W. (1998), Design for Domestic Carbon Emissions Trading: Comments on WTO Aspects, Discussion Draft, The H. John Heinz III Center for Science, Economics and the Environment, Washington, DC.

Petsonk, A., (1999), The Kyoto Protocol and the WTO: Integrating Greenhouse Gas Emissions Allowance Trading into the Global Marketplace, Duke Environmental Law and Policy Forum, Vol. 10, pp. 185-220.

Poterba, J.M. and J.J. Rotemberg (1995), Environmental Taxes on Intermediate and Final Goods When Both Can Be Imported, International Tax and Public Finance, Vol. 2, pp. 221-228.

Schwartz, R. (2000), Trade Measures Pursuant to Multilateral Environmental Agreements – Developments from Singapore to Seattle, Review of European Community and International Environmental Law (RECIEL), Vol. 9, No. 1, pp. 63-70.

Stewardson, R. (1994), The Case of Carbon Taxes, in OECD (ed.), Trade and Environment: Process and Production Methods, Paris, pp. 93-108.

Tietje, C. (1995), Voluntary Eco-labelling Programmes and Questions of State Responsibility in the WTO/GATT Legal System, Journal of World Trade, Vol. 29, No. 5, pp. 123-158.

UNCTAD (1997), Environmental Management Standards, Particularly the ISO 14000 Series: Trade and Investment Impacts on Developing Countries, TD/B/COM.1/EM.4.2, Geneva.

UNFCCC (1996), Report on the in-depth Review of the National Communication of United States of America, FCCC/IDR.1/USA, Bonn.

Werksman, J. (1999), Greenhouse Gas Emissions Trading and the WTO, Review of European Community and International Environmental Law (RECIEL), Vol. 8, No. 3, pp. 251-264.

WTO (1995), The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts, World Trade Organization (WTO), Geneva.

WTO (1996), The Report of the Committee on Trade and Environment, WT/CTE/1, World Trade Organization (WTO), Geneva.

Zhang, Z.X. (1997), The Economics of Energy Policy in China: Implications for Global Climate Change, New Horizons in Environmental Economics Series, Edward Elgar, Cheltenham, England and Northampton, USA.

Zhang, Z.X. (1998), Greenhouse Gas Emissions Trading and the World Trading System, Journal of World Trade, Vol. 32, No. 5, pp. 219-239.

Zhang, Z.X. (2000), Estimating the Size of the Potential Market for the Kyoto Flexibility Mechanisms, Weltwirtschaftliches Archiv - Review of World Economics, Vol. 136, No. 3, pp. 491-521.

Zhang, Z.X. (2001), An Assessment of the EU Proposal for Ceilings on the Use of Kyoto Flexibility Mechanisms, Ecological Economics, Vol. 37, No. 1, pp. 53-69.