Draft Discussion Paper; please do not cite without permission
Trade and Climate Change: Is there a Path to Sustainable Development under Law?
Deepa Badrinarayana
Chapman Law School
April 11, 2008
Please note that this work is based on my SJD thesis on global environmental
governance, and therefore, I have not provided detailed citations yet. But a list of
major sources relied on are provided at the end, with links to additional reading.
Introduction
In 1997, Business Roundtable (BR), an organization of CEOs from about 200 top
U.S. companies wrote to the U.S. Senate and to President Clinton, urging them not to
ratify Kyoto Protocol. BR pointed out that ratification of the Kyoto Protocol would put
U.S. businesses at a competitive disadvantage, especially because developing countries
such as China and India that were rapidly industrializing and trading were not legally
bound to reduce greenhouse gas (GHG) emissions under the Protocol. The free trade
implications of reducing greenhouse gas emissions, and consequently mitigating climate
change, remains a major impediment in establishing a comprehensive legal regime to
address one of humanity’s most critical challenge.
This paper sets out the connection between trade and climate change and the
complex legal issues involved in regulating greenhouse gas emissions. The paper also
provides a brief background about climate change and free trade arrangements as a
starting point for the paper.
Climate Change
Climate change is a phenomenon that is predicted to occur when the average
global temperature rises beyond a particular level. According to scientists, the nature and
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impact of changes in climatic conditions will depend on the degree of temperature
increases within specific time periods. Thus, according to a majority of scientists within
the international expert body Intergovernmental Panel on Climate Change (IPCC) and the
U.S. National Aeronautics and Space Administration (NASA) an increase of over 2
degrees Celsius by 2025 would lead us to a “tipping point,” or a point at which climate
changes will become irreversible and could lead to catastrophic events. At this point,
climate change can still be mitigated because temperature increases are not only caused
by natural occurrences, but also by anthropogenic GHG emissions, particularly carbon
dioxide (CO2).
In fact, the United Nations Framework Convention on Climate Change
(UNFCCC) and the Kyoto Protocol were aimed at reducing greenhouse gas emissions, by
articulating the need for action and by setting out specific deadlines for reducing
emissions to pre-1990 levels. However, the effectiveness of the international agreements
is undermined because of three major emitters--the United States has refused to ratify the
Protocol, and China and India are not obligated to reduce emissions because of their
historically low per capita carbon consumption. Although, significant progress was made
at a recent meeting of the Conference of Parties to UNFCCC held in Bali, with all three
nations agreeing to engage, the future form of the Kyoto Protocol, which will expire in
2012, is not yet clear. (See Figure 1 for an overview of the complex interaction between
climate and other processes and systems).
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Figure 1, source IPCC, http://www.ipcc.ch/graphics/graphics/syr/figi-1.jpg
Trade
Trade is essentially a flow of goods/commodities and services and can take place
from the individual to the institutional levels, including companies and States. Free trade
arrangements among nations was initially propounded by Ricardo who argued that
certain goods could be produced more efficiently than by others because of certain
competitive advantages such as, say, abundance of labor, and could thereby lead to better
pricing.
Since the 1990s nations have actively entered into free trade arrangements, which
provide legal and other institutional tools through which tariffs and other barriers to trade
have been reduced. To date nations have entered into hundreds of bilateral and
multilateral free trade agreements (FTAs), which not only facilitate trade, but also foreign
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direct investments. (See Figure 2, showing the pattern of bilateral investment
arrangements).
Figure 2, source UNCTAD, http://globstat.unctad.org/html/index.html
Free trade arrangements, especially multilateral trade agreements such as the
North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs
and Trade (GATT), have increasingly led countries to enact laws that liberalize trade and
reduce restrictions. (See, Figure 3). Moreover, NAFTA and GATT provide institutional
mechanisms to settle disputes and enforce the provisions. Restrictions on trade for
reasons of environmental protection are controlled by trade agreements, leaving little
room for signatories to impose unilateral restrictions based on national regulation.
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Figure 3, source UNCTAD, http://globstat.unctad.org/html/index.html
For example, Article XX of GATT sets out limited exceptions, including
environmental protection, when Parties can impose non-tariff barriers to imports.
However, disputes regarding the imposition of such barriers are, and have been, subject
to the scrutiny within a dispute settlement mechanism under GATT, which is
administered by the World Trade Organization (WTO). Similarly, investors within
NAFTA can, and have, successfully challenged unilateral environmental measures
according to an arbitration procedure provided under the treaty.
Additionally, the environmental exceptions must comply with some of the basic
tenets of the trade treaties, such as non-discrimination, which means that like products
from one member country cannot be treated differently from another; national treatment,
which means that imported goods must be treated like domestic goods; and most favored
nation treatment, which means that any special treatment accorded to one Party should be
given to all trading Parties. If these basic principles are not complied with trade barriers
that meet the environmental exceptions will, and have been, held to be contrary to GATT.
Under the WTO arrangement, however, the Appellate Body, which is part of the
Dispute Settlement Mechanism, has held that the objective of sustainable development
mentioned in the Chapeau to GATT could justify imposition of trade restrictions to
protect the environment. However, in the same case, the Shrimp-Turtle case, the
Appellate Body also held that such an interpretation would apply only if the other basic
tenets—non-discrimination, national treatment, most-favored nation treatment—have
been observed.
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Trade and Climate Change Linkage
Trade and climate change are inextricable linked in this era of globalization. As
mentioned earlier, trade arrangements catalyze production of commodities, transport of
manufactured goods, and transfer of services on different geographic scales—domestic,
regional, and international (See, Figure 4).
Figure 4, source UNCTAD, http://globstat.unctad.org/html/index.html
These activities—production, transport, and trade are also highly carbon intensive
and are major sources of greenhouse gases. (See, Figure 5). Further, trade also catalyzes
these carbon intensive activities in developing countries, whose carbon footprint has been
historically low. Thus, trade not only catalyzes growth, but also increased emissions of
greenhouse gases. However, since trade could potentially lead to increases in the gross
domestic product (GDP) and, if properly distributed, alleviate poverty the challenge lies
in mitigating climate change without limiting trade, what one may frame as the objective
of achieving sustainable development.
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Figure 5, source IPCC, http://www.ipcc.ch/graphics/graphics/syr/fig2-1.jpg
However, the present climate regime does not address the issue of trade. In fact,
as mentioned in the introduction, one of the reasons for the U.S. opposing Kyoto Protocol
is that excluding China and India would give these economies a comparative advantage,
because they would have no additional technological cost and other legal burdens to
reduce emissions. Consequently, these countries would be able to sell goods and services
at a cheaper rate than U.S. companies.
Nevertheless, the legal issues regarding climate change may occur outside the
treaty regime if signatories to the Kyoto Protocol such as the European Union and
Canada introduce restrictive measures based on GHG emissions reduction laws. Some
such possibilities and their legal implications are discussed below.
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Trade and Climate Change—Legal Implications from Certain Potential Measures
Trade restrictions can generally be imposed either on the products or process, so
also in the case of climate change. Barrier on products can be imposed by imposing local
energy efficiency standards. For example, cars could be required to meet certain
minimum mileage requirements or use a particular percentage of biofuels, as proposed by
the European Union. Products that do not meet the standard would be excluded from a
particular market through such a non-tariff barrier.
Process restrictions could be imposed by levying extra carbon tax on goods that
have been produced in a manner that is not carbon efficient. For instance, France has
proposed that a carbon tax should be levied on all imports from countries that are not
signatories to the Kyoto Protocol.
Both types of trade restrictions will invoke responses under trade agreements such
as NAFTA and WTO. This discussion, however, focuses on implications under the WTO
regime. As mentioned earlier, trade restrictions can be imposed under Article XX of
GATT, which provides,
“[s]ubject to the requirement that such 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, nothing in this Agreement shall be construed to prevent the adoption or
enforcement by any contracting party of measures:…
(b) necessary to protect human, animal or plant life or health....
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(g) relating to the conservation of exhaustible natural resources if such measures are
made effective in conjunction with restrictions on domestic production or
consumption;…”
If the test set out in Article XX, read with interpretations of the Appellate Body of
WTO, is satisfied one can conclude that there is room for imposing trade restrictions on
goods that affect climate, because of their greenhouse gas emissions.
1. Barrier on Product
Under a plain reading of Article XX, one could argue that a signatory
could impose trade restrictions on products such as cars that do not meet, say,
certain fuel efficiency requirements, so long as similar restrictions are imposed on
all other countries, and the measures are genuine ones and not intended as a guise
for limiting trade. However, earlier cases show that application of such exceptions
may not be easy.
For instance, under the earlier version of GATT, the United States
imposed fuel efficiency standards (corporate average fuel economy or CAFE) on
all vehicles sold in the U.S., in response to the oil crisis. The standard required
U.S. manufacturers and sellers of both domestic and imported cars to meet the
standard, which they did. Consequently, some European manufacturers that sold
less fuel-efficient luxury cars were excluded from the U.S. market.
Europe challenged the CAFE standards on the ground that it had a
discriminatory effect, which the then GATT Panel upheld. While the Panel
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decision is not binding on WTO Appellate Body, there is a possibility that trade
limits on products may not succeed.
Also, in 1999 Japan passed a legislation requiring all cars in the middle
weight section sold in the country to meet higher GHG efficiency standards.
However, both the United States and Europe challenged the law as having a
discriminatory effect. Even though the dispute was not brought before WTO, U.S.
and Europe essentially blocked an energy efficient standard.
Thus, restrictions on trade in products may be subject to limitations.
2. Barriers on Process
Trade restrictions on goods manufactured in a manner that affect the
environment have also been interpreted narrowly. For instance, in the TunaDolphin case, United States banned import of tuna caught in a method that killed
dolphins under the U.S. Marine Mammal Protection Act, an action which was
challenged before the GATT Panel. The Panel essentially held that the restriction
was not permitted under Article XX, because the exception applied only to
products and not to processes.
On the other hand, the decision may be mitigated to some extent in light of
the Appellate Body decision in the Shrimp-Turtle dispute, in which U.S. imposed
embargoes on shrimp caught in a manner that killed turtles. Here, the Appellate
Body held that since the broader objective of GATT was the promotion of
sustainable development, the restriction was justified. Two important aspects need
to be noted.
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One, the decision was supported by an international legal regime—the
Convention on International Trade in Endangered Species (CITES), under which
the turtles were listed. Two, despite the broad readings of the term “sustainable
development,” the Appellate Body found the measure illegal under GATT,
because of its discriminatory treatment of excluding some Parties that also
imported shrimp caught in a way that killed sea turtles.
Thus, while the broader goal of sustainable development based on the
Kyoto Protocol could justify the imposition of higher taxes, say, on goods
produced in countries with lower carbon efficiency standards, it would depend on
uniform application among all Parties that import “like” products.
Limits of an Alternative Plan
In light of the narrow interpretation of the environmental exceptions within WTO,
nations are currently focusing of using trade as leverage for addressing climate change,
rather than forcing action. For instance, the United States Trade Representative is focused
on removing tariff and non-tariff barriers to technology to promote trade in energy
efficient goods and services. These include, consultancy services in the use of, say, solar
energy.
However, technological transfer is subject to another agreement within the WTO
regime, Trade Related Intellectual Property Rights (TRIPs). TRIPs requires all Member
countries to provide intellectual property rights protection. Since such rights would
increase the price of technology, it is unclear whether developing countries such as China
and India would want to engage in technology transfer arrangements within the WTO
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framework. Rather, propositions may have to be made within the framework of the Kyoto
Protocol.
Conclusion
Climate change clearly poses a threat to free trade, because at the heart of the
problem are the carbon-intensive based development and the increase in movement of
goods and services, and the resulting rise in production and energy consumption. New
technologies could promote efficiency, but are also constrained by the trade regime.
Unless, international environmental regulations are developed to match up with trade
regulations, trade laws may impede protection of environment.
The argument that free trade promotes sustainable development cannot be applied
to the case of climate change, because free trade has become a catalyst for climate
change. At the same time, the legal regime underlying free trade does not appear to
recognize the limits of increased production, transportation, and consumption of goods
and services.
I leave you with these questions…can we have free trade and protect the climate
at the same time? If so, what changes should we seek within the current legal regime.
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Key Sources
1. Joost Pauwelyn, U.S. Federal Climate Policy and Competitive Concerns: The
Limits and Options of International Trade Law, Working Paper, Nicholas Institute
for Environmental Policy Solutions, Duke University (on file with author).
2. Office of the United States Representative of Trade ,
http://www.ustr.gov/index.html
3. World Trade Organization, www.wto.org
4. United States-Import Prohibition of Certain Shrimp and Shrimp Products, Report
of the Appellate Body, WT/DS58/AB/R, 12 October 1998,
http://www.wto.org/english/tratop_e/dispu_e/58abr.pdf.
5. Judith Hippler Bello, Book Review, 95 AJIL 984, 986-87 (2001) (reviewing John
H. Jackson, The Jurisprudence of GATT & the WTO)
6. Intergovernmental Panel on Climate Change, www.ipcc.org
7. National Aeronautics and Space Agency, NASA, www.nasa.gov
Additional Reading
http://www.wto.org/english/tratop_e/envir_e/climate_change_e.pdf
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