Climate Change and International Trade Law

David Ricardo

Comparative advantage theory

GATT

Global Agreement on Tariffs and Trade

WTO

World Trade Organisation (successor to GATT)

WTO Dispute Settlement Body

Appellate Body (AB)

Could impose countermeasures on states found to have violated rules

Article I GATT

Most favoured nation

Most favoured nation

Imports from all other contracting parties must be treated alike e.g., cannot tariff solar panels at 10% from UK but 5% from India

China-Raw Materials

Article I covers those measures which have a limiting effect on imports/exports quantity (focused on increasing)

Canada-Autos

Article I covers de facto discrimination as well as de jure

Article XI GATT

General prohibition on quantitative restrictions on imports and exports

General prohibition on quantitative restrictions on imports and exports implication

Tariffs (customs duties) as main protection at border

Tariffs to be reduced by periodic 'rounds of negotiations'

Why does the GATT prefer tariffs?

Lang: understood as more transparent and more flexible

Article III GATT

National treatment obligation

National treatment obligation

Imported products must be accorded 'treatment no less favourable' than domestic 'like' products - applies to any domestic laws, regulations and requirements affecting internal sale e.g., regulation of quality and safety, tax measures, consumer protection

Article III elements

Like products

Treatment no less favourable

Meaning of like products Article III

Japan-Alcoholic Beverages: accordion metaphor, 'likeness' stretches and squeezes as different provisions are applied

EC-Asbestos: 'like' is related to 'the nature and extent of a competitive relationship between and among products.' Market-based test, 4 criteria:

i) properties, nature and quality

ii) end-use

iii) consumer tastes and habits

iv) internal tariff classification

Concluded speculatively that consumers don't think asbestos and non-asbestos products are the same

Meaning of Article III treatment no less favourable

Korea Beef - whether the measure 'modifies the conditions of competition'

Article XX GATT

General exceptions

General exceptions GATT

Necessary - protection of public morals (initially porn, now applied to HR); protection of human, animal, or plant life or health

Relating to [lower bar] - conservation of exhaustible natural resources f such measures made effective in conjunction with restrictions on domestic production or consumption

Article XX Chapeau

Even if measure justified, must not be applied in a way that constitute i) arbitrary or unjustifiable discrimination between countries where same conditions prevail or ii) disguised restriction on international trade

Necessity Article XX

(Art XX(a) and (b)) - whether the alternative is a reasonable one, and domestic rule would be ineffectual without the measure

Necessity Article XX case law

Thailand-Cigarettes (1990) - trade-restrictiveness: 'least trade restrictive means reasonably available'

Korea-Beef (2000) - weighing and balancing

i) contribution made by compliance measure to end pursued

ii) importance of common interests or values protected by that law

iii) accompanying impact of law/regulation on imports or exports

Brazil-Retreated Tyres (2007): outright bans likely to fall foul of 'necessity' criterion

'Relating to' Article XX

US-Shrimp: close and genuine relationship of means and ends (but not 'indispensable')

Requirement of 'even handedness'

Arbitrary or unjustifiable Article XX

Brazil-Retreaded Tyres, can still be A or U because explained by rationale that bears no relationship to objective of a measure provisionally justified under one of the paragraphs of Article XX

TBT

Technical Barriers to Trade agreement

TBT scope

Applies to technical regulations and standards e.g., product quality and safety, labelling

Article 2 TBT

Treatment no less favourable, like products

US-Tuna II (Article 2 TBT)

US-Tuna II: the fact complainant could have complied does not mean consistent if it goes beyond 'what is required to achieve the legitimate objective' that the measure pursues

Meaning of regulations for TBT

Product characteristics

EC-Abestos: any features, qualities, attributes or other distinguishing mark

Processes and production methods (PPM)

With which compliance is mandatory

Also packaging, labelling etc.

TBT Article 2.2

TBT Exceptions

TBT exceptions

Tech regs must not be adopted or applied with view or effect of 'creating unnecessary obstacles to international trade'

'Shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of risks' of non-fulfilment'

Legitimate objectives:

Protection of human health or safety

Animal or plant life or health

Or environment

Risks: relevant elements of consideration include scientific and tech info

WTO AB on climate

US- Gasoline: Members are free to adopt their own policies aimed at protecting the environment as long as, in so doing, they fulfil their obligations and respect the rights of other members under the WTO Agreement'

US-Shrimp: 'have not decided sovereign states should not act together...to otherwise protect the environment. Clearly, they should and do'

WTO on the Marrakesh Agreement and climate

WTO says that members 'established a clear link between sustainable development and disciplined trade liberalisation' - to ensure market opening 'goes hand in hand with environmental and social objectives'

EU CBAM - acronym

EU Carbon Border Adjustment Mechanism

EU CBAM explained

Functions like a tariff

Firms that import into the EU have to buy carbon certs = the carbon price that would have been paid under EU pricing (EU ETS)

If they have paid the equivalent carbon price, they can fully deduct the cost

Scope 1 sectors first (cement, iron and steel, and 3 others)

EU CBAM rationale

European Commission: Carbon leakage - cheaper products from abroad without same regulations, EU products sell less (more expensive), foreign carbon-intensive products sell better

Loss of competitiveness on global markets with no environmental gain

Carbon leakage previously managed through free allocation of emissions allowances to EU industries but weakens price signal

Pushes for more ambitious climate action in EU's trading partners

Article II GATT

Charge equivalent to an internal tax is allowed as long as it is consistent with Article III (National treatment)

BASIC on EU CBAM

Goes against WTO law and CBDRRC

Article III Like test and climate

Consumers habits

EC-Abestos: Canada had not proved consumers treated products the same (asbestos and non-asbestos)

If consumers shown not to differentiate, products are 'like', stronger likelihood that discrimination will be found and regulation prohibited

Implication for products produced using renewable energy product and processing methods (PPM) where carbon-based fuel use in PPMs is prohibited?

Article III treatment no less favourable and climate

EC-Asbestos: Members can draw distinctions between 'like' products without necessarily giving less favourable treatment to imported products

Implication - regulatory differentiation may be possible if doesn't result in de facto discrimination e.g., requirements on kinds of material, quotas on carbon-intense goods, ecolabelling

Duran on WTO law and EU CBAM

Should be permissible

Article XX(B)

To protect human...life or health

US-Tuna I on Article XX(B)

US banned domestic and imported tuna not fished in 'dolphin safe' manner

'If broad interpretation...suggested by the US were accepted, each contracting party could unilaterally determine the life or health protection policies from which other contracting parties could not deviate without jeopardising their rights under the General Agreement' - would then 'no longer constitute a multilateral framework for trade'

Art XX(a)

Public morals

Art XX(a) case law and test

EC-Seals: violated chapeau because discriminated against seals from indigenous EU vs indigenous Canadian/US, but test:

i) whether concern exists

ii) falls within scope of 'public morals' as 'defined and applied' by Membe

'Relating to' for Art XX and climate

US-Gasoline: clean air = 'exhaustible natural resource'

China-Rare Earths: not 'disproportionately wide in reach and scope' in relation to climate conservation objective and means-to-end relationship 'close and real'

UNFCCC Article 3.5

'Measures taken to combat CC, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade'

Interpreting UNFCCC Article 3.5

Terms not defined, unclear whether they should be interpreted in line with WTO jurisprudence concerning Article XX GATT - note that the GATT only prohibits 'between countries where the same conditions prevail'

Bodansky on UNFCCC Article 3.5

Effect of this provision is neutral, neither allowing nor forbidding the adoption of trade measures (including unilateral measures) to tackle climate change

Hertel on UNFCCC Article 3.5

can be argued that by setting out explicit conditions on the use of trade-related climate measures, the UNFCCC implicitly recognises (or takes for granted) that Parties may resort to such measures, even unilaterally

TBT Committee

Looks at CC measures to ensure they do not pose unnecessary obstacles to international trade

UNFCCC Article 3.1

'In accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof'

Paris Agreement Article 4

Developed country Parties should continue taking the lead by undertaking economy wide absolute emission reduction targets

Paris Agreement Article 4.6

The least developed countries and small island developing States may prepare and communicate strategies, plans and actions for low greenhouse gas emissions development reflecting their special circumstances.

EU CBAM para 73

desirable that the Union continue to provide financial support towards mit and adapt in LDCs, and contribute to facilitate adaptation of industries concerned to new regulatory requirements from the CBAM

EU CBAM para 74

repeats the desire to support low and middle income third countries towards decarbonisation, and working towards new resource based on revenues generated by sale of CBAM certificates

Duran on EU CBAM and CBDRRC (and what needs to change)

CBAM does not respect CBDRRC and needs to be adjusted through differential treatment

Full exemption for LDCs and SIDS

EP called for special treatment but no signs this will be implemented

LDCs and SIDS account for small share of EU imports of targeted products but considerable impact on their economies

Use of CBAM generated revenue to support decarbonisation in other dev.

Duran interpretation of CBDRRC

'Common responsibility' - generally understood as recognition of 'common concern'

'Differentiated' - basis is ambiguous, but responsibility and capability

Expectation that 'developed countries should take the lead' may be read as implying resp. was conceived of in relation to varying historical contributions which in turn gave greater capacity

European Commission on CBDR (and Duran's response)

Commission: CBAM designed so does not directly depend on overall level of ambition of a country

Duran: But does seek to incentivise

Duran: KP binary Annex I and non-Annex I, difficult to see how Paris legal framework with expectations to ratchet up could justify exempting all non-Annex I

Duran: pressuring LDCs and SIDS not in line with Art 4.6 PA