Unresolved Issues in WTO Law

& climate change regulation

Issues that may affect WTO-consistency of climate measures

• Environmental subsidies • Processing and production methods • Multilateral environmental agreements• Technical barriers to trade• Relationship between different WTO

Agreements

Emerging climate change policies

• Two types of WTO concerns:– Subsidies – Discrimination (MFN, NT)

• Four types of measures:– cap-and-trade approach – standards-based policies, which require the adoption of

specific measures (eg labels) or set source-specific emissions limits

– carbon taxes– border tax adjustments

Environmental Subsidies

What if we apply a tax on carbon footprints?

As we analyze the legal issues below, consider whether differential tax rates based on different carbon footprints would be consistent with WTO subsidies law.

Applicable WTO Agreements

• SCM Agreement applies cumulatively with GATT Articles VI and XVI.

• SCM Agreement does not preclude action ‘under other relevant provisions of GATT 1994, where appropriate’ (eg Art I:1 or III).

• Agricultural subsidies can raise issues under SCM Agreement or Agreement on Agriculture.

• TRIMS Agreement (incorporates some GATT)• Order of analysis: AoA, SCM, then TRIMS/GATT.

SCM AgreementActionable & prohibited subsidies

• Subsidy– financial contribution by govt or any public body w/in

territory of Member– benefit thereby conferred

• Prohibited (presumed specific)– contingent on export: 3.1(a) – contingent on use of domestic goods: 3.1(b)

• Actionable (if specific)– multilateral action (WTO complaint)– unilateral action (CVDs)

Art 1.1(a)(1)(i) financial contribution

• A ‘government practice’ (covers all acts of governments or public bodies) involves

• a direct transfer of funds (financial resources and other financial claims, not just money)• eg grants, loans, equity infusion

• potential direct transfers of funds or liabilities (does not depend upon the probability that a payment will subsequently occur)• eg loan guarantees

• Does our carbon footprint tax qualify?

Art 1.1(a)(1)(ii) financial contribution

• Govt revenue ‘otherwise due’ • requires comparison of fiscal treatment of comparable income of

taxpayers in similar situations• a WTO Member is ‘free not to tax any particular categories of

revenues’: US – FSC (AB)• Foregone or not collected

• eg fiscal incentives such as tax credits• Different income tax treatment for foreign & domestic sales

(US – FSC) • Exemption from duty on auto imports, conditional upon

domestic production requirements (Canada – Autos)• Does our carbon footprint tax qualify?

Art 1.1(a)(1)(iii) financial contribution

• govt provides goods or services other than general infrastructure• Stumpage fees (US – Softwood Lumber IV, AB)

• or purchases goods• Not purchases of services (US — Large Civil Aircraft

(2nd complaint), Panel)• What if the government varies the cost of lumber

rights according the carbon footprint of the lumber company?

1.1(a)(1)(iv) financial contribution• a government makes payments to a funding mechanism, or

entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments

• recognizes that (i) to (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution: (US – Softwood Lumber IV, AB)

1.1(a)(1)(iv): Private body vs. govt• SCM Agreement distinguishes between subsidies made by ‘a

government or any public body’ and those made by a ‘private body’.

• Financial contributions from private body only subject to SCM Agreement if affirmative demonstration of link between government and specific conduct of private body.

• A public body’s conduct can be attributed directly to the State, whereas a private body’s conduct can be attributed to the State only indirectly.

• US – Anti-Dumping and Countervailing Duties (China) AB

1.1(a) (2) financial contribution

• any form of income or price support in the sense of Article XVI of GATT.

• Article XVI: any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory.

Article 1.1(b) benefit

• ‘[N]ot all government measures capable of conferring benefits would necessarily fall within Article 1.1(a). If that were the case, there would be no need for Article 1.1(a), because all government measures conferring benefits, per se, would be subsidies.’

• US — Softwood Lumber IV (AB)

Article 1.1(b) benefit

• ‘a financial contribution will only confer a “benefit”…if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.’ Canada – Aircraft (AB)

• Does our carbon footprint tax qualify?– Article 1.1(b) could require an analysis of whether a benefit is

obtained from differential carbon tax rates, by whom, whether such a benefit could have been otherwise obtainable in the marketplace, and what the relevant marketplace is.

Article 1.1(b) benefit

• Competitive wholesale electricity markets will rarely operate to remunerate adequately the mix of generators needed to secure a reliable electricity system that pursues human health and environmental objectives through the inclusion of facilities using solar photovoltaic and wind technologies into the supply-mix.

• Panel Reports in Canada – Renewable Energy and Canada – Feed-In Tariff Program

Article 1.1(b) benefit

• The absence of a general environmental exception in the SCM Agreement makes the role of the benefit analysis important in saving clean energy subsidies from violating the SCM Agreement.

• Can this analysis take into account that the higher cost of clean energy incorporates the externality of environmental harm, whereas the lower cost of fossil fuel energy does not?

Does our carbon footprint tax qualify as a prohibited subsidy?

• If both the domestic and imported products are substitutable inputs for domestic production and the foregone revenue confers a benefit, there could be a violation of SCM Agreement Article 3.1(b).

• This could be the case if countries diverge in their regulation and reduction of carbon emissions, so that some countries engage in less carbon-intensive production than others. Divergences in the carbon intensity of production would probably lead to differential treatment of imports, thereby raising issues regarding MFN treatment.

• The reference in footnote 1 to ‘the exemption of an exported product from duties or taxes borne by the like product’ could indicate that Article 1.1(a)(1)(ii) is intended to apply to other cases where like products receive different consumption tax treatment.

AoA, SCM & prohibited subsidies

• Export subsidy that violates AoA 3.3 & 8 (bc not within limits in Member’s Schedule) also violates SCM 3.1(a): US – Upland Cotton. – Unlikely that export subsidy consistent with the AoA could

be impugned under SCM 3.1(a).– AoA prevails where conflict: AoA permits certain export

subsidies, SCM prohibits all.• BUT compliance with AoA domestic support

commitments violates SCM 3.1(b) if contingent on use of domestic goods: US – Upland Cotton.

Multilateral &unilateral action

• Multilateral SCM Part III (actionable subsidies)– Subsidy causes adverse effects in third country

markets (eg lost sales, price suppression)– Need not quantify precise amount of subsidy

• Unilateral SCM Part V (countervailing measures)– Subsidy causes injury to the domestic producers of

like products– Need to quantify precise amount of subsidy

Multilateral &unilateral action on carbon footprints?

• Is failure to tax carbon a subsidy?• Can we apply CVDs against products based on

their carbon footprint?• Would the lack of a carbon tax be subject to

SCM Part III?

GATT Article III:4, TRIMS Article 2.1 • Canada – Renewable Energy and Canada – Feed-In Tariff

Program: FIT Program domestic input requirements.• GATT Article III:8(a) did not exclude FIT Program from Art III:4;

procurement undertaken with a view to commercial resale. • Benefit analysis saved the FIT Program from SCM 3.1(b) • Inconsistency with GATT Art III:4 leaves open possibility of

justification under GATT Art XX, unlike SCM Agreement. • Unlikely Art XX could be invoked as SCM defense.• Benefit approach creates possibility that non-discriminatory

clean energy subsidies could survive a WTO challenge.

‘Like Products’ and Processing and Production Methods

The PPM Debate

‘like products’ is a key concept

• Which environmental concerns can be taken into consideration to determine likeness?

• Non-discrimination obligations in:– GATT Articles I:1, III:2 and III:4 – TBT Agreement– term is not defined in these treaty texts

• SCM Agreement & Antidumping Agreement – term is defined in these treaty texts

criteria to determine likeness(not a closed list)

(1) The physical properties, nature and quality of the products;

(2) The extent to which the products may serve the same or similar end uses in a given market;

(3) The extent to which consumers perceive and treat the products as alternative means of satisfying a want or demand; and

(4) Tariff classification (not determinative)

like products analysis

• Purpose: ‘to take account of evidence which indicates whether, and to what extent, the products involved are – or could be – in a competitive relationship in the marketplace’.

• Relevant market: where the products compete. • Competitive relationship between same products

may differ in different markets and market segments. • Competitive relationship between products is the

central issue.

Can PPMs determine likeness?(eg related to carbon footprint)

• Only characteristics of the product as such are relevant: US – Tuna I (Mexico) (not adopted)

• If they compete in one segment of the market, that is sufficient: Philippines – Distilled Spirits

• Access to dolphin-safe label required to compete in US market: US – Tuna II (Mexico)

• Does this mean that carbon footprint PPMs relevant if they determine competitive relationship in all segments of the market?

Another possible route:less favourable treatment

• Legitimate regulatory distinctions ‘based exclusively on … particular product characteristics or on particular processes and production methods’ would not per se constitute less favourable treatment within the meaning of TBT Art 2.1.

• US – Clove Cigarettes (AB)

Other hurdles to overcome with respect to carbon labels

• Accuracy of measurement of GHGs produced in the life cycle of a particular product

• Extent to which the carbon label discriminates between products from different countries based on factors other than emissions or minimal differences

• Extent to which consumers consider carbon footprints determining factor in a given marketplace

• In TBT context, whether the issuer of the carbon label qualifies as international standardizing body.

GATT Article XXGeneral exceptions

• XX(g): measures ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’

• XX(b): measures ‘necessary to protect human, animal or plant life or health’

Article XX(g): conservation of exhaustible natural resources

(1) Is the climate an ‘exhaustible natural resource’? (2) Does a sufficient jurisdictional nexus exist between

all WTO Members and the global climate? (3) How should a panel determine whether a specific

measure relates to climate change? (4) Are the measures ‘made effective in conjunction

with restrictions on domestic production or consumption’?

‘exhaustible natural resources’

• Subject to evolutionary interpretation• Include living and non-living natural resources • AB and GATT panels have found following to

be exhaustible natural resources: clean air; sea turtles; salmon; herring; tuna; dolphins

• Climate change measures could qualify as:– Clean air (control of emissions; US Clean Air Act)– Indirect conservation of living resources– Stable climate as the resource

jurisdictional nexus

• US – Shrimp: AB found sufficient jurisdictional nexus between migratory sea turtles and US

• Turtles spent part of migratory life cycle in US waters

• No ruling on whether there is a jurisdictional limit implied in the language of Article XX(g)

• If there is, global effects of climate change should be a sufficient jurisdictional nexus

‘relating to’

• Means ‘primarily aimed at’ • Examine ‘relationship between the measure… and

the legitimate policy of conserving exhaustible natural resources’.

• Requires ‘a close and genuine relationship of ends and means’

• Examine ‘relationship between the general structure and design of the measure…and the policy goal it purports to serve’

• Measure based on MEA obligations likely to qualify

‘made effective in conjunction with restrictions on domestic production or consumption’

• ‘made effective’ means a governmental measure being ‘operative’, ‘in force’

• No empirical ‘effects test’• Requirement of even-handedness in the

imposition of restrictions• Equivalent terms in Spanish and French of

‘made effective’: ‘se apliquen’ and ‘sont appliqués’

XX(b): ‘necessary to protect human, animal or plant life or health’

• Issue 1: Does the policy goal fall within the range of policies designed to protect human, animal or plant life or health?

• Brazil – Retreaded Tyres: environmental measures covered by Article XX(b).

XX(b): ‘necessary to protect human, animal or plant life or health’

• Issue 2: Is the measure ‘necessary’ to achieve the policy goal?

• Analyze in light of level of risk Member sets for itself. • Involves weighing and balancing factors:– importance of the interests or values – contribution to the end pursued– trade impact – whether a WTO-consistent alternative measure which the

Member concerned could reasonably be expected to employ is available, or whether a less WTO-inconsistent measure is reasonably available

importance of interests or values

• Human life and health are ‘both vital and important in the highest degree’: AB, EC – Asbestos

• Environment is ‘important’: AB, Brazil – Retreaded Tyres

• Climate change impacts on human life and health, environment

contribution to the end pursued

• Measure must be ‘apt to produce a material contribution to the achievement of its objective’

• ‘Marginal or insignificant contribution’ is not enough• Indirect contribution via long-term economic

development does not qualify (Kuznet’s curve)• Need to view the measure against the broader

context of a comprehensive strategy• Can be quantitative or qualitative measurement• But difficult to measure contribution of climate

change measures

AB, Brazil – Retreaded Tyres

‘the results obtained from certain actions—for instance, measures adopted in order to attenuate global warming and climate change...—can only be evaluated with the benefit of time’

trade impact

• Prohibitions have passed the test: – EC – Asbestos– Brazil – Retreaded Tyres

• But cumulative impact of a series of climate change measures could together have much more significant restrictive effects than a measure considered in isolation.

alternative measures

• Must achieve same objectives as challenged measure– difficult to argue if effect of measure might not be revealed

in the near future • Must be WTO-consistent or less inconsistent– Jurisprudence makes this moving target (subsidies instead

of trade restrictions after Canada—Renewable Energy?)• Must be ‘reasonably available’ in light of interests or

values being pursued and desired level of protection– Level of economic and technological development?– Consultations or negotiations with other countries?– What scientific evidence will be required?

Article XX chapeau

• Purpose is to prevent abuse of exceptions• Do not apply measure in a manner that

constitutes: • arbitrary discrimination between countries

where the same conditions prevail; • unjustifiable discrimination between countries

where the same conditions prevail; or • a disguised restriction on international trade

‘arbitrary or unjustifiable discrimination between countries where the same conditions prevail’

(1) application results in discrimination (2) discrimination is arbitrary or unjustifiable – effort to negotiate (transboundary only?)– flexibility of the measure (prevailing

conditions)– rational connection between objective and

reasons given for discrimination(3) discrimination between countries where same conditions prevail

Do paragraphs b and g apply to different matters?

• Rule of effective treaty interpretation: avoid redundancy, harmonious interpretation

• Term ‘necessary’ sets higher threshold than term ‘relating to’

• Difference between ‘animals’ and ‘exhaustible natural resources’?

• Difference between domestic and transnational issues?

Technical Barriers to Trade

TBT Agreement

definition of ‘technical regulation’

• Must be met to apply Article 2• Document must meet 3 criteria: – (1) Applies to an identifiable product or group of

products. – (2) Lays down one or more characteristics of the

product. – (3) Compliance with product characteristics must

be mandatory.

‘technical regulation’ or ‘standard’?

• TBT Agreement applies to PPM labels.• Whether measure is ‘technical regulation’ or

‘standard’ not determined by whether legally permissible to sell product without a particular label.

• Factors to determine whether ‘technical regulation’:– law or regulation enacted by a WTO Member – prescribes or prohibits particular conduct – specific requirements that constitute the sole means of

addressing a particular matter – nature of matter addressed by measure

TBT Agreement Article 2.1

• Combines national treatment & MFN• Treatment no less favourable– modifies conditions of competition to the detriment of

imported products?– legitimate regulatory distinction or discrimination?– emissions from different fuels could be subject to different

taxes where different emissions pose different risks– different treatment of products, based on PPMs such as

differences in carbon footprint• Like products (unless based on origin of products)

TBT Agreement Article 2.2

• Does regulation pursue a legitimate objective?– Includes national security requirements; the

prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment

• Does regulation fulfil the legitimate objective?– level at which Member seeks to pursue particular

objective– degree of contribution regulation makes to

achieve legitimate objective

TBT Agreement Article 2.2

• Does regulation create unnecessary obstacles to international trade?– (1) trade-restrictiveness of technical regulation; – (2) degree of contribution to achieve objective;

and – (3) risks non-fulfilment would create in light of • available scientific and technical information (does not

require conclusive scientific evidence) • related processing technology or • intended end-uses of products

TBT Agreement Article 2.2alternative measures

• Comparison of measure with possible alternative– in light of nature of risks & gravity of consequences that

would arise from non-fulfilment of legitimate objective • Application to climate change, key issues– availability of scientific information, scientific uncertainty– capacity of country to reduce GHG emissions depends on

PPM technology it has available– gravity of consequences should provide greater leeway to

reject proposed alternatives– standard of proof re proximate cause difficult issue

TBT Agreement Article 2.2alternative measures

• Should be measures respondent can take, not measures beyond its control that would require consultations or negotiations.

• Alternatives should be: – less trade restrictive – make equivalent contribution – reasonably available to the relevant country given

economic and technological capacity

TBT Agreement Article 2.4, 2.5 International standards

• Article 2.4: use ‘relevant international standard’ as basis for technical regulations, except when such standard would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued by the Member.

• Article 2.5: rebuttable presumption of compliance with Article 2.2 where technical regulation for explicitly mentioned legitimate objective in accordance with relevant international standards

Relevant international standard

• Standard in climate change MEA might qualify if membership is open to all WTO Members.

• Can be ineffective or inappropriate for the fulfillment of the specific objective as defined by Member: US – COOL

• A standard is used as a basis for a technical regulation when it is used as the principal constituent or fundamental principle for the purpose of enacting the technical regulation: EC – Sardines

Relevant international standardArticle 12.4

• ‘Developing country Members should not be expected to use international standards as a basis for their technical regulations...which are not appropriate to their development, financial and trade needs’.

• Might entitle them to more leeway, but provision is not mandatory.

Conclusion

MEAs and Article XX

• MEAs on climate change probably relevant to determine consistency of climate change measures with GATT Article XX and TBT Agreement.

• Unlikely GATT Article XX will be applied to SCM Agreement, Agreement on Agriculture or TBT Agreement.

• Article XX application to provisions in other agreements in Annex 1A case-by-case.

PPMs, subsidies

• PPMs may be relevant re ‘like products’ in GATT Articles I and III, SCM Agreement, Antidumping Agreement and TBT Agreement

• Environmental subsidies OK if: – Actionable: not specific = no unilateral or multilateral

action– Export subsidies: comply with Agreement on Agriculture – Import substitution subsidies:

• comply with SCM Agreement (benefit issue) and • Agreement on Agriculture• BUT can still violate TRIMS and GATT (Article XX defense?)