Transcript Climate change border adjustments: Relevant WTO rules

Trade and
Climate Change
Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)
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Trade and Environment Division, WTO
Part IV:
National Mitigation
and Adaptation
Policies and Trade
Implications
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Climate change mitigation measures
Economic
incentives
Regulatory
instrument
Key objectives
Key policy instruments
Internalize
environmental costs
Carbon tax, emissions
trading schemes
Promote development &
deployment of climatefriendly technologies
Financial mechanisms:
R&D, fiscal, price and
investment measures
Improve energy
efficiency and reduce
GHG emissions
Emissions and energy
performance standards
and labelling 3
Climate change mitigation measures
Key objectives
Key policy instruments
Key WTO Agreement
Internalize
environmental costs
Carbon tax, emissions
trading schemes
GATT
Promote development &
deployment of climatefriendly technologies
Financial Mechanisms:
R&D, fiscal, price and
investment measures
SCM Agreement
Improve energy
efficiency and reduce
GHG emissions
Emissions standards,
labelling on energy
performance
TBT Agreement
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Outline of the presentation
Price and market mechanisms to internalize
environmental cost
Financial mechanisms for development and
deployment of climate goods and technologies
and increased used of renewable energy
Technical requirements to promote the use of
climate-friendly goods and technologies
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Price and market mechanisms to
internalize environmental cost
Carbon tax: Key characteristics
Tax on the carbon content of fossil fuels, often
combined with a tax on energy use
Energy tax on
Fossil Fuels
“Implicit
Carbon Tax”
Carbon tax
Different tax base
Energy content (more
heavy on oil and gas
Carbon content (more
heavy on coal)
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Emissions trading scheme:
Definition
Fixes a cap on total emissions
System that
Translates the cap into “allowed
emissions” to cover emissions equal or
below the size of the cap
Creates a market in which these
allowances can be traded at a price set
by the market
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Emissions trading scheme:
Important design characteristics
Overall emission level (cap-and-trade)
Emission targets
Emission standard for each source (rate-base)
Number of participants and sectors covered
Type of gases covered
Allocation
method
Free allocation based on historical emission
levels (“Grandfathering”) or on emissions
per unit of output (“benchmarking”)
Auctioning
Linkages with other emission trading schemes
Flexibility mechanisms such as banking, borrowing
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Emissions trading scheme: Where?
European Union (the world’s largest GHG ETS), since 2005
New Zealand, legislation passed on 25 November 09
Australia? (Senate rejected a legislation on ETS)
United States: “American Clean Energy and Security Act of
2009” (ACES, Waxman-Markey Bill) approved by the
House of Representatives. Senate proposals still under
discussion: Kerry-Boxer Bill; Kerry, Cantwell-Collins Bill;
Kerry, Graham, Lieberman and their Framework for
Climate Action (released 10 Dec 09).
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Effectiveness: Carbon tax vs. ETS
Carbon tax
Price is determined directly by the
regulators through the tax rate
(exogenously)
Environmental
uncertainty?
Quantity of emissions to be reduced
is a result of measures adopted by
industry to reduce emissions
(endogenously)
ETS
Price is determined by the market
(endogenously)
Price uncertainty?
Quantity of emissions to be reduced
is determined by regulators
(exogenously)
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Environmental effectiveness
2 key intended environmental effects of a
carbon tax and an ETS
Direct effect, i.e.
reduction of GHG
emissions, by setting
a price on emissions
Indirect effect, through “recycling”
of fiscal or auctioning revenues to
fund e.g. investment in more
climate-friendly technologies
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Climate change border adjustments
Rationale
Relevant WTO rules
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Climate change border adjustments:
Rationale
Competitiveness loss
Emissions
reduction policies
This may give rise to
are not applied
universally
Carbon leakage
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Climate change border adjustments:
Rationale
Concern: enhanced competitiveness (economic) of non
carbon constrained producers could lead to ‘carbon
leakage’ (environmental)
In particular for energy intensive
industries
 However, effects are still uncertain
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Climate change border adjustments:
Rationale
Competitiveness
Definition Ability of firms and sectors to
maintain profits and market shares
Effects of climate change measures on competitiveness of sectors
depend on a number of factors:
specific characteristics of the sector (e.g. trade exposure, energyintensity).
design of the regulation (e.g. availability of alleviations and
exemptions).
other policy considerations (e.g. energy and climate policies adopted by
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other countries).
Climate change border adjustments:
Rationale
Carbon leakage
IPCC
Definition
Increase in CO2 emissions outside the
countries taking domestic mitigation
action divided by the reduction in the
emissions of these countries,
i.e. the ratio of increased emissions in
one region as the result of an emissions
constraint introduced in another
Risk of energy-intensive industries relocating to countries with
weaker environmental policies (“carbon havens”)
 linked to differences in carbon price
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Climate change border adjustments:
Rationale
To offset
asymmetries in
competitiveness
To avoid carbon
leakage
Border
adjustment
measures
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Climate change border adjustments:
Relevant WTO rules
Coverage?
Key legal challenges for
a case-by-case analysis
Consistency?
Justifiability?
The jury is still out and many questions
remain unanswered!
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Climate change border adjustments:
Relevant WTO rules
Coverage?
Importance to define the instrument at hand to determine
relevant WTO/GATT provisions
A border adjustment to a tax?
A border adjustment to another
carbon cost, e.g. an ETS?
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Climate change border adjustments:
Relevant WTO rules
Coverage?
BTA on imports (equivalent to a
domestic tax)
 The GATT Working Group on
Two
Situations
Border Tax Adjustments (1970)
BTA on exports (i.e. a refund of
domestic tax before exportation)
Implementation of the destination principle
to ensure trade neutrality
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Climate change border adjustments:
Relevant WTO rules
GATT Article II.2(a) provides for the possibility of imposing
at any time on the importation of any product:
A charge equivalent to an internal tax in respect of the like
domestic product or in respect of an article from which the
imported product has been manufactured or produced in
whole or in part.
GATT Article III.2 covers “internal taxes or other internal
charges of any kind”
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Climate change border adjustments:
Relevant WTO rules
Coverage?
A border adjustment to a regulation, e.g. an ETS?
Submit emissions credits acquired abroad to
cover the emissions during the production
process of the imported good
Potential
requirements
on importers
Hold emission allowances, up to the amount
of CO2 emitted during the production of
imported products and applied on a per unit
basis to each good
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Climate change border adjustments:
Relevant WTO rules
GATT
Article III.2
Can the price paid by an industry to
participate in an ETS be qualified as an
“internal tax or other internal charge of
any kind”, covered under Article III.2?
GATT
Article III.4
Can an ETS be seen as a measure covered
by Article III:4, i.e. as a law, regulation
and requirement affecting the internal
sale, offering for sale, purchase,
transportation, distribution or use?
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Climate change border adjustments:
Relevant WTO rules
Consistency?
With basic
principles, e.g. non
discrimination
National treatment
Most Favoured Clause
Prohibition to discriminate between “like” products
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Climate change border adjustments:
Relevant WTO rules
Non discrimination principle (GATT Article III):
Imported products shall not be subject, directly or indirectly,
to internal taxes or other internal charges of any kind in
excess of those applied, directly or indirectly, to like domestic
products.
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Climate change border adjustments:
Relevant WTO rules
Consistency?
Prohibition to discriminate between “like” products
Except if...
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Climate change border adjustments:
Relevant WTO rules
Justifiability?
WTO rules, as
confirmed by
jurisprudence
Essential to maintain
a balance between
Under certain conditions, Members can
adopt trade-related measures aimed at
protecting the environment
the right of Members to take
regulatory measures to achieve
legitimate policy objectives
the rights of other WTO Members
under basic trade rules
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Climate change border adjustments
and WTO rules
Justifiability?
Conservation of clean air from air
pollution
Several disputes on
measures that sought
to achieve a variety of
policy objectives
Conservation of sea turtles from
incidental capture in commercial fishing
Protection of human health from risks
posed by asbestos
Protection of human health from risks
posed by the accumulation of waste tyres
WTO jurisprudence has confirmed that WTO rules do
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not trump environment, as long as…
Climate change border adjustments
and WTO rules
Justifiability?
…as long as several carefully crafted conditions are
respected…
Environmental measures must not be applied in a
manner which constitutes
a means of arbitrary/unjustifiable
discrimination or
 a disguised restriction on international trade
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Climate change border adjustments:
Relevant WTO rules
Justifiability?
Major practical challenges in implementation
 in assessing product-specific emissions
 fluctuations of the carbon price
existence of carbon leakage
…
Implementation is key!
First best option is a successful
multilateral agreement!
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Financial mechanisms for
development and deployment of
climate goods and technologies and
increased used of renewable energy
Rationale
Development &
deployment of new CC
friendly technologies
May be occurring at a slower pace
than desirable from an
environmental point of view
May therefore need to be reinforced
by national policies
Environmental externality: without
cost, no direct incentive to find ways
to reduce emissions
Negative factors
Cost of renewable energy is generally
not competitive with wholesale
electricity and fossil fuel prices
Learning cost
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Type of support
Incentives to promote invention of new climatefriendly technologies and goods
2 main types
of support
Incentives to encourage the deployment of
climate-friendly goods and technologies and the
increased use of renewable sources of energy
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Incentives to promote inventions of
new cc technologies
Support development of new technologies,
e.g. to finance research on renewable energy
technologies
Grants
 Example: In Korea, the Automobile Low Emission Technology
Development Support funded research institutions developing, inter
alia, hybrid vehicles for use as public shuttle buses
Awards (ex post
or ex ante)
e.g. in the context of a competition to
recompense for an innovation
 Example: Bright Tomorrow Lighting Prizes (US) to develop
technologies for a new “21st Century Lamp” to replace 60 watt
incandescent light bulbs and PAR 38 halogen lamps
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Incentives to promote deployment of
CC technologies & renewable energy
Fiscal measures
3 main types
of financial
support
Price support
Investment support
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Incentives to promote deployment of
CC technologies & renewable energy
Fiscal measures
(e.g. tax reductions, tax credits)
To increase
consumption of
certain technologies
To facilitate investment in
production of CC goods &
renewable technology
 Example: reduction in value-
 Example: Chinese government’s
added tax (VAT) for small
hydroelectric, wind and biogas
power generation plants in China
reduction of income taxes for
producers of wind and biogas
power projects
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Incentives to promote deployment of
CC technologies & renewable energy
Price support
Feed-in tariffs
Net metering
(regulated min. guaranteed price per
Kwatt-hour paid by electricity company
for renewable energy fed into the national
electricity grid by a private independent
producer)
(If power a consumer’s renewable energy
equipment supplies to the national
electricity grid > what it takes from the
grid  the consumer receives a credit for
that amount on future energy bills)
 Examples: United States,
 Examples: United States,
Germany, Spain, Italy, France,
Thailand and China
certain provinces in Canada,
Thailand and Mexico
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Incentives to promote deployment of
CC technologies & renewable energy
Investment support
(to reduce the capital cost of installing and deploying
renewable energy technologies)
Capital Grants
Percentage of costs of installing climatefriendly technologies is returned to the
investor as a capital grant, resulting in
significant reductions in overall cost of
such technologies
 Examples: In Canada,
EcoENERGY Retrofit grants for
improving the energy efficiency of
buildings
Favourable lending
conditions
Or low-cost financing with subsidized
interest rates for investors in climatefriendly technologies
 Examples: Indian Solar Loan
Programme; In Bangladesh, microfinancing institutions Proshika and
Grameen offer assistance to increase
adaptability and reducing vulnerability to
the effects of climate change 39
Relevance to Trade
Governmental funding policies may have an impact on the
price and production of low-carbon goods and technologies
Such policies lower the costs for producers, leading to lower
product prices
Lower prices may reduce exporting
countries’ access to the market of the
subsidizing country or may increase
the exports of the subsidizing country
Lower costs of installing emissionreducing technologies enable
industries to maintain international
competitiveness
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Relevant WTO rules
Agreement on Subsidies and
Countervailing Measures
Key concepts include:
•Definition of a subsidy (whether a financial contribution
confers a benefit, whether the subsidy is specific to a certain
industry)
•Definition of an actionable subsidy (whether the subsidy
causes adverse effects to the interests of other WTO Members)
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Technical requirements to
promote the use of climatefriendly goods and technologies
Key Characteristics
Emissions/ energy efficiency
standards and regulations can be…
Based on design
Based on performance
Best used when few options
for controlling emissions
Prevalent to improve energy
efficiency in appliances and
buildings  more flexibility
Japan’s Top Runner Program (the energy
performance of the most efficient model (e.g.
household appliances) on the market is used
to set a target for all manufacturers. 43
Key Characteristics
Emissions/ energy efficiency
standards and regulations can be…
Based on design
Based on performance
Defining products
Defining processes
Mainly address energy efficiency
& emissions related to the use of
the product
May result in direct environmental
outcomes, as they improve energy
efficiency or limit emissions to a
certain level during production
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Key Characteristics
Emissions/ energy efficiency
standards and regulations can be…
Based on design
Based on performance
Defining products
Defining processes
Mandatory
Voluntary
Minimum Energy Performance
Standards (MEPS) for
appliances (Australia)
ENERGY STAR
(United States)
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Key Characteristics
Emissions/ energy efficiency
standards and regulations can be…
Based on design
Based on performance
Defining products
Defining processes
Mandatory
Voluntary
Public
Private
Minimum energy-efficiency
performance standards for major
domestic appliances (Canada)
Leadership in Energy and
Environmental Design (LEED) in
the building sector (United States)
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Key compliance tools: Labelling
Most OECD countries (energy-efficiency
labelling)
Scope
Many non OECD countries, e.g. South
Africa, Argentina, Sri Lanka and Tunisia
Also examples of voluntary energy labelling programmes for household
appliances (E.g. Thailand, Hong Kong, China, India, Brazil)
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Key compliance tools: Labelling
Most OECD countries (energy-efficiency
labelling)
Scope
Many non OECD countries, e.g. South
Africa, Argentina, Sri Lanka and Tunisia
Product’s energy performance/emissions
levels while in operation
Information
covered
e.g. EU, Australia, Canada and US require energyefficiency labels for several household appliances
Product’s entire life-cycle, including its
energy efficiency
e.g. Nordic Swan, German Blue Angel and the EU’s
eco-label Flower
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 The issue of food miles
How does trade affect GHG
emissions?
Trade and transport?
“Food miles” may be a counter intuitive issue! (i.e.
the distance food is transported from the time of its
production until it reaches the consumer)
It is only one dimension
used in assessing the
environmental impact of
food
The real carbon footprint
of a product would need
to look at its entire lifecycle
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Key compliance tools: Labelling
Comparative labels
 compare performance among similar
models
Type of
instrument
e.g. for household appliances in
Australia, EU, Canada, US, Brazil,
Tunisia, China, Thailand and Korea
Endorsement labels
 Seals of approval assuring consumers
that a product meets certain criteria
e.g. Energy Star label (US), Brazil,
Thailand and China (Certificate for
Energy Conservation Product)
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Key compliance tools:
Conformity assessment
to determine whether the requirements
in standards & regulations are fulfilled
Objectives
give consumers confidence in the
integrity of products
add value to manufacturers’
marketing claims
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Key compliance tools:
Conformity assessment
Testing
Ex post efficiency testing on labelled appliances
(Electricity Generating Authority of Thailand)
Inspection
Type of
instrument
In the building sector, the Leadership in Energy and
Environmental Design (LEED) (US)
Certification
Mark that energy performance of regulated energyusing products has been verified (Canada)
Accreditation
Metrology
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Key compliance tools: Restrictions
and prohibitions
to restrict the sale or prohibit the import of
certain energy-inefficient products
Objectives
to ban the use of certain greenhouse gases in
the composition of products
Bans & regulatory measures to prevent the
use of fluorinated GHGs (HFCs, PFCs, SF6)
(e.g. Austria, Denmark, Switzerland & EU)
Examples
Ban of certain less energy-efficient products,
e.g. incandescent light bulbs in Australia,
EU, Canada, Chinese Taipei & Argentina
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Environmental effectiveness
Increase in energy efficiency of
products, e.g. electrical equipment
Measurement
tools
In California, the energy use of refrigerators in 2000
was more than two-thirds lower than in 1974
(energy-efficiency standards are in place and
regularly updated since the late 1970s)
Behavioural changes of consumers
and manufacturers
In the United States, recognition of the Energy Guide
label was found to be quite good; however
understanding was limited, with respondents unable
to determine which appliance was more energyefficient, based on the labels
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Relevant WTO rules?
Agreement on Technical Barriers
to Trade / GATT
Non discrimination
Key principles
include
Avoidance of unnecessary
trade barrier
Harmonization
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Trade and
Climate Change
Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)
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Trade and Environment Division, WTO