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Draft Discussion Paper; please do not cite without permission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 SchoolApril 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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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).


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 Tuna-

Dolphin 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 Sources1. 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.org4. 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.org7. 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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http://www.wto.org/english/tratop_e/dispu_e/58abr.pdf

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Trade and Climate Change: Is there a Path to Sustainable ... · Web viewSimilarly, investors within NAFTA can, and have, successfully challenged unilateral environmental measures according