Trade law no block to carbon tariffs: John Kemp

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LONDON, June 26 (Reuters) - Nothing in international trade law would prevent countries that introduce carbon taxes or cap-and-trade programmes from supplementing them with excise duties, tariffs or other measures on imports from countries that don’t.

The absence of a single international carbon price risks causing significant trade distortions as well as undermining the effectiveness of emissions reduction programmes if business migrates from countries with a high carbon price to ones with a low or zero one.

So the question of whether control programmes can be buttressed with measures such as tariffs and other restrictions to “level the playing field” and prevent “carbon leakage” is crucial to the success of the system as well as its political acceptability.

While the issue of “greenhouse tariffs” has aroused bitter opposition from developing countries such as India and China, the rules are fairly clear, and the World Trade Organisation (WTO) has helpfully set them out in a joint report on “Trade And Climate Change” [ID:nLQ110798] published in conjunction with the United Nations Environment Programme (http://www.wto.org/english/res_e/booksp_e/trade_climate_change_e.pdf).

TARIFFS AND TAX ADJUSTMENTS

Market-based programmes can be based on either a tax or a cap-and-trade system. In theory, a tax would be the most efficient solution, because it would create a simple, transparent and predictable price. In practice, every country that has implemented or is considering a programme has chosen cap-and-trade to reduce political opposition [ID:nLR468410]. The choice has important implications for trade measures. Governments wanting to level the playing field and prevent carbon leakage have four basic alternatives:

* Give domestic manufacturers of energy-intensive goods a free allocation of permits to reduce the competitive disadvantage imposed by the scheme.

* Require importers of energy-intensive goods to purchase carbon allowances in the same cap-and-trade market as domestic manufacturers as a condition of entry.

* Subject imports to a special “border tax adjustment” offsetting any advantage they gain over domestic firms that have to buy costly cap-and-trade permits. Many countries already use border tax adjustments to ensure importers do not gain an unfair advantage over domestic manufacturers paying special excise duties on items such as cigarettes and alcohol.

* Levy a “carbon tariff” on imports over and above normal customs tariffs.
The first two approaches are straightforward. The problem with the second two (tax adjustments and carbon tariffs) is how to quantify the increased cost of energy/emissions for domestic producers and therefore how large the additional tax adjustment or tariff should be.

In a carbon tax system, this would be easy, since there would be a predictable price. But in a cap-and-trade system, the price, and therefore the offsetting tax adjustment or tariff, would be uncertain and change continuously.

LEGAL FRAMEWORK CLEAR

Whatever approach governments eventually decide to use, the legal framework for applying tax adjustments, tariffs, or requiring importers to buy emissions allowances is clear.

Supporters and critics alike portray the WTO as a simple “free trade” agreement. Critics complain it prioritises trade liberalisation over other social objectives (such as labour standards, environmental protection and product safety) and prevents governments and elected parliaments responding to popular demands by taking action in these areas. But this is an unfair caricature.

Article XX (General Exceptions) of the General Agreement on Tariffs and Trade (GATT) 1947 (re-enacted as part of the WTO Agreement in 1994) gives governments wide-ranging powers to deviate from the trade-liberalising aspects of the agreement in order to promote other social objectives.

Among other things, governments can take action to protect public morals; protect human, animal or plant life or health; conserve exhaustible natural resources; or further an international commodity agreement (http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf).
Article XX therefore provides several “routes” by which WTO members could claim an exemption from normal trade rules to introduce tax adjustments, permit schemes or carbon tariffs:
* Governments could claim an exemption on the basis that climate change endangers human life and health. In the United States, the Environmental Protection Agency (EPA) has already made a similar “endangerment” finding under the Clean Air Act, enabling it to regulate greenhouse gas emissions from motor vehicles [ID:nLK20098].
* Governments could claim that either hydrocarbons or clean air is an exhaustible natural resource.
* Governments could brand an international accord on emissions control or cap-and-trade systems an exempt “commodity agreement”.

For Article XX exemptions, the only requirement is that “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”.

There is no reason governments could not introduce tax adjustments, tariffs or permit requirements — provided they were carefully tailored and imposed in a manner that was linked to the danger, consistent and proportionate.

FORESTALLING A BACKLASH

Politically, carbon tariffs or tax adjustments would represent a radical shift for the WTO and its members. For more than 60 years, the GATT/WTO process has been animated by the goal of reducing barriers to trade. While the tax adjustments and carbon tariffs would not violate the letter of the agreements, they would certainly mark a revolutionary shift in the spirit.

But the real aim of the report, and those who have pushed for it, is twofold:

* It seems designed to pre-empt hostility from environmental groups and other activists who are suspicious that WTO rules will prevent effective action on climate issues, and prevent them from mobilising an all-out campaign to dismantle the GATT/WTO framework.

* It provides developed countries (such as the United States and the European Union) with a source of leverage to secure agreement from emerging markets to adopt their own emissions control and trading framework. If developing countries do not adopt their own carbon taxes or cap-and-trade systems, they risk finding that border tax adjustments or tariffs are used against them. (Editing by David Evans)

By John Kemp

– John Kemp is a Reuters columnist. The views expressed are his own –