Border tax adjustments: climate change, the WTO, and new tools for international environmental law-making.

Author:Nielsen, Laura
Position:Proceedings of the One Hundred Third Annual Meeting of the American Society of International Law: International Law as Law

This panel was convened at 2:45 p.m. on Friday, March 27, by its moderator, Steve Charnovitz of George Washington University Law School, who introduced the panelists: Rachel Brewster of Harvard Law School; Ellen Hey of Erasmus University School of Law; Laura Nielsen of the University of Copenhagen; and Jonathon Zasloff of UCLA School of Law. *

INTRODUCTORY REMARKS BY STEVE CHARNOVITZ ([dagger])

Welcome to our panel on climate border adjustments and world trade law. This panel has two segments. First, we have two trade law experts discussing whether such measures are consistent with trade law. The speakers are Laura Nielsen from the University of Copenhagen Law School and Rachel Brewster from Harvard Law School. The second segment features two prominent scholars from other fields of international law. They are Ellen Hay from Erasmus School of Law in Rotterdam and Jonanthan Zasloff from UCLA Law School. We have tasked these two panelists to reflect on the implications of the debate on trade and climate.

* Jonathon Zasloff did not submit remarks for the Proceedings.

([dagger]) Associate Professor of Law, George Washington University Law School.

BORDER CARBON ADJUSTMENTS, THE UNFCCC, AND WTO RULES

My presentation on Trade and Climate Change concludes that border carbon adjustments can be consistent with both the climate change and WTO rules--depending, of course, on their design--but that they are not necessarily attractive.

I define border carbon adjustments (or border tax adjustments, carbon taxes, etc.) as border taxes levied on especially carbon intensive products such as steel, aluminum, paper, chemicals, and cement, originating from countries that have not committed themselves to strict climate change laws to lower their green house gas (GHG) emissions. These countries are most often understood as those that have not committed themselves under a cap in the Kyoto Protocol or those that will not commit themselves under a cap in a Post-Kyoto Agreement. Border carbon adjustments can, of course, be aimed at all countries and a broader range of products, or potentially all products, based on their carbon footprint stemming from their production and perhaps even their transportation. However, for purposes of this presentation, I will limit myself to talking about those measures, which are aimed at countries that are not committed under a cap.

The economic rationale behind border carbon adjustment measures is to counter the competitive advantage a foreign product may have because it benefits from coming from a country that is not committed under a cap and thus does not have strict rules for GHG emissions. The environmental rationale is to avoid carbon leakage. Carbon leakage is the term used for the phenomenon that companies or industries may relocate to another country where rules for GHG emissions are not so strict, which results in a potential rise in total global GHG emissions, or at best that GHG emissions are not curbed. Border carbon adjustments are also viewed as a type of "negative" negotiation strategy in the run-up to the "COP15" in Copenhagen in December 2009. The mere threat of being met by such a measure, should a country fail to commit itself under a cap in Copenhagen, is thought to pressure more countries into a commitment. Others view this argument as encouraging countries to negotiate in bad faith because its goal is to counteract the effects of a "failed" agreement on climate change. And, finally, domestic reasons behind enacting border carbon adjustments should not be underestimated, particularly in the United States.

Without a specific measure to examine, the legal analysis of border carbon adjustment measures amount to some general observations. My first point is to underline that border carbon adjustments need not "just" be WTO-consistent but those measures must also be consistent with the climate change rules (i.e., the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and a Post-Kyoto Agreement) assuming, of course, that the country enacting the border carbon adjustment is a party to those Agreements and Protocols. It can generally be said that the UNFCCC itself does not prohibit unilateral climate change trade measures, and the legality of such measures in relation to the climate change rules will therefore depend on the analysis of the Kyoto Protocol and a Post-Kyoto Agreement.

The analysis of a border carbon adjustment measure in relation to the Kyoto Protocol or a Post-Kyoto Agreement depends on whether the measure is aimed at parties or non-parties. If, for example, an "early mover" took measures against the United States before 2012, that measure would be against a non-party to the Kyoto Protocol and therefore not cause any problems vis-a-vis this instrument. The issue is, however, very different if the action is taken against parties--for example, non-Annex 1 parties such as China, India, and Brazil, which are currently not under a cap.

The legality of measures aimed at parties to the Kyoto Protocol and a Post-Kyoto Agreement will depend on whether unilateral trade measures against parties are even allowed under these instruments. The Kyoto Protocol does not prohibit such measures, and it remains to be seen whether the Post-Kyoto Agreement will do so. Under the Kyoto Protocol, action towards parties is generally limited by the language of Article 2.3, which encourages parties to strive to implement their Kyoto obligations in such a way as to minimize adverse effects on trade. This limitation is, however, unlikely to render a border carbon adjustment measure inconsistent with the Kyoto Protocol rules.

When unilateral trade measures are not explicitly prohibited, the issue becomes whether "extra" climate change measures are allowed when the issue is already dealt with in those agreements. In other words: if it can be said that those agreements are the full and exhaustive solution on climate change issues, this would make extra unilateral climate change measures illegal. The Kyoto Protocol hardly constitutes the full and exhaustive solution, and it does not currently look like COP15 will be the meeting to solve all issues, so a Post-Kyoto Agreement will most likely not constitute a full and exhaustive solution either. But even if they did, it could nevertheless be argued that border carbon adjustment measures are not climate change measures--that, instead, they are competition issues concerning the adjustment for the price on carbon. And, in that situation, border carbon adjustment measures should not even be evaluated under the climate change rules, unless those rules specifically said they also governed price and competition issues concerning carbon-pricing.

It can also be argued that the obligation of non-Annex 1 countries is decided in the Kyoto Protocol as being not under a cap--and should it then be allowed to subject non-Annex 1 countries to additional unilateral measures anyway? To this, it can, as in the previous example, be argued that a border carbon adjustment measure is solely related to competition issues, and is therefore not a climate change measure to be evaluated under the Kyoto Protocol or a post-Kyoto Agreement. It can, furthermore, be argued that such a measure does not impose any obligations on non-Annex 1 parties because, as with all trade measures, the exporting country is free to export to other countries without a border carbon adjustment measure in place.

Thus, if the international community...

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