The OECD guiding principles revisited.

• Author: Stevens, Candice
• Position: Organization for Economic Co-operation and Development - Trade and the Environment

1. Introduction

   Trade and environment issues are not new and were discussed and debated in the Organization for Economic Co-operation and Development (OECD) more than twenty years ago. At that time, the issues were framed more narrowly and the debate focused on the effects of environmental policies on trade competitiveness, particularly those policies which relate to pollution abatement. The discussions led to what remains the only international arrangement that addresses the general trade aspects of environmental policies - the OECD Council Recommendation on "Guiding Principles Concerning the International Economic Aspects of Environmental Policies"' adopted May 26,1972.(1)

   The most famous of the OECD Guiding Principles is the "Polluter-Pays Principle." The other principles pertain to harmonization, national treatment and nondiscrimination, and compensating import levies and export rebates.(2) While these issues remain part of today's debate on trade and environment, the OECD Guiding Principles are somewhat antiquated and require reexamination. At the time they were formulated, global environmental problems were not recognized widely. Trade measures were not put to direct use in achieving environmental goals at the national and international levels. There was little concern about the effects of trade policies in the environment. Further, the non-OECD countries were not, included within the scope of the Guiding Principles. This Essay will review the status of the four OECD Guiding Principles and discuss areas where modifications or new principles may be warranted.

2. The Polluter-Pays Principle

   The principle to be used for allocating costs of pollution prevention and control measures to encourage rational use of scarce environmental resources and to avoid distortions in international trade and investment is the so-called "Polluter-Pays Principle." This principle means that the polluter should bear the expenses of carrying out the above mentioned measures decided by public authorities to ensure that the environment is in an acceptable state. In other words the cost of these measures should be reflected in the cost of goods and services which cause pollution in production and/ or consumption. Such measures should not be accompanied by subsidies that would create significant distortions in international trade and investment.(3)

   The Polluter-Pays Principle is the fundamental principle for the nonsubsidization of polluters. It is intended both to encourage internalization of environmental costs in prices and markets and to prevent the problem of trade distortions which might result from different pollution abatement financing methods. Under this principle, polluting firms should bear the costs of pollution control and should not benefit from environmental subsidies which might distort trade.

   The OECD provides exceptions to the Polluter-Pays Principle by allowing governments to grant environmental subsidies in certain cases. These exceptions are specified in a follow-up recommendation adopted by the OECD Council on November 14, 1974, regarding the implementation of the Polluter-Pays Principle.(4) Governmental assistance for pollution control might be given: 1) to ease transition periods when especially stringent pollution control regimens are being implemented; 2) to stimulate the development of new pollution control technologies; and 3) in the context of measures to achieve specific socio-economic objectives, such as the reduction of serious interregional imbalances.(6) Any assistance granted under the OECD exceptions should be given for a fixed amount of time in a clearly defined program and should not create significant distortions in international trade and investment.

   These issues have been revisited in the General Agreement on Tariffs and Trade (GATT)(6) where, in the context of the Uruguay Round, the negotiating group on subsidies and countervailing measures has discussed means of imposing greater discipline on the the use of government subsidies. Originally, it was proposed that environmental subsidies be included in that category of government in trade supports which are generally acceptable (or nonactionable in trade terms) under certain conditions. These conditions were similar to the OECD exceptions to the Polluter-Pays Principle: environmental subsidies would be used only for the adaptation of existing facilities to new environmental regulations or for the development and adoption of new environmental technologies and equipment. Any environmental support would be one-time only, limited to a certain percentage of overall costs and strictly for pollution control. However, the most recent draft of the Uruguay Round text has removed environmental subsidies from the nonactionable category, putting the GATT a odds with the OECD Guiding Principles.(7) There was concern among some countries that acceptance of environmental aids under the GATT Subsidies Code might cause environmental supports to be used as disguised aids to industry. Current studies, however, show that direct pollution prevention assistance is minor, with only a negligible impact on production costs, compared to other types of government aids to industry.(8)

   As a means of monitoring environmental aids to industry, the OECD Council Recommendation in 1974 provided a notification and consultation system regarding financial assistance for pollution prevention and control.(9) Four surveys have...