Trade and Climate Change: Is there a Path to Sustainable Development under Law?

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1 Trade and Climate Change: Is there a Path to Sustainable Development under Law? Deepa Badrinarayana Chapman Law School April 11, 2008 Please note that this work is based on my SJD thesis on global environmental governance, and therefore, I have not provided detailed citations yet. But a list of major sources relied on are provided at the end, with links to additional reading. Introduction In 1997, Business Roundtable (BR), an organization of CEOs from about 200 top U.S. companies wrote to the U.S. Senate and to President Clinton, urging them not to ratify Kyoto Protocol. BR pointed out that ratification of the Kyoto Protocol would put U.S. businesses at a competitive disadvantage, especially because developing countries such as China and India that were rapidly industrializing and trading were not legally bound to reduce greenhouse gas (GHG) emissions under the Protocol. The free trade implications of reducing greenhouse gas emissions, and consequently mitigating climate change, remains a major impediment in establishing a comprehensive legal regime to address one of humanity s most critical challenge. This paper sets out the connection between trade and climate change and the complex legal issues involved in regulating greenhouse gas emissions. The paper also provides a brief background about climate change and free trade arrangements as a starting point for the paper. Climate Change Climate change is a phenomenon that is predicted to occur when the average global 1

2 temperature rises beyond a particular level. According to scientists, the nature and impact of changes in climatic conditions will depend on the degree of temperature increases within specific time periods. Thus, according to a majority of scientists within the international expert body Intergovernmental Panel on Climate Change (IPCC) and the U.S. National Aeronautics and Space Administration (NASA) an increase of over 2 degrees Celsius by 2025 would lead us to a tipping point, or a point at which climate changes will become irreversible and could lead to catastrophic events. At this point, climate change can still be mitigated because temperature increases are not only caused by natural occurrences, but also by anthropogenic GHG emissions, particularly carbon dioxide (CO2). In fact, the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol were aimed at reducing greenhouse gas emissions, by articulating the need for action and by setting out specific deadlines for reducing emissions to pre-1990 levels. However, the effectiveness of the international agreements is undermined because of three major emitters--the United States has refused to ratify the Protocol, and China and India are not obligated to reduce emissions because of their historically low per capita carbon consumption. Although, significant progress was made at a recent meeting of the Conference of Parties to UNFCCC held in Bali, with all three nations agreeing to engage, the future form of the Kyoto Protocol, which will expire in 2012, is not yet clear. (See Figure 1 for an overview of the complex interaction between climate and other processes and systems). 2

3 Figure 1, source IPCC, Trade Trade is essentially a flow of goods/commodities and services and can take place from the individual to the institutional levels, including companies and States. Free trade arrangements among nations was initially propounded by Ricardo who argued that certain goods could be produced more efficiently than by others because of certain competitive advantages such as, say, abundance of labor, and could thereby lead to better pricing. Since the 1990s nations have actively entered into free trade arrangements, which provide legal and other institutional tools through which tariffs and other barriers to trade have been reduced. To date nations have entered into hundreds of bilateral and multilateral 3

4 free trade agreements (FTAs), which not only facilitate trade, but also foreign direct investments. (See Figure 2, showing the pattern of bilateral investment arrangements). Figure 2, source UNCTAD, Free trade arrangements, especially multilateral trade agreements such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT), have increasingly led countries to enact laws that liberalize trade and reduce restrictions. (See, Figure 3). Moreover, NAFTA and GATT provide institutional mechanisms to settle disputes and enforce the provisions. Restrictions on trade for reasons of environmental protection are controlled by trade agreements, leaving little room for 4

5 signatories to impose unilateral restrictions based on national regulation. Figure 3, source UNCTAD, For example, Article XX of GATT sets out limited exceptions, including environmental protection, when Parties can impose non-tariff barriers to imports. However, disputes regarding the imposition of such barriers are, and have been, subject to the scrutiny within a dispute settlement mechanism under GATT, which is administered by the World Trade Organization (WTO). Similarly, investors within NAFTA can, and have, successfully challenged unilateral environmental measures according to an arbitration procedure provided under the treaty. Additionally, the environmental exceptions must comply with some of the basic tenets of the trade treaties, such as non-discrimination, which means that like products from 5

6 one member country cannot be treated differently from another; national treatment, which means that imported goods must be treated like domestic goods; and most favored nation treatment, which means that any special treatment accorded to one Party should be given to all trading Parties. If these basic principles are not complied with trade barriers that meet the environmental exceptions will, and have been, held to be contrary to GATT. Under the WTO arrangement, however, the Appellate Body, which is part of the Dispute Settlement Mechanism, has held that the objective of sustainable development mentioned in the Chapeau to GATT could justify imposition of trade restrictions to protect the environment. However, in the same case, the Shrimp-Turtle case, the Appellate Body also held that such an interpretation would apply only if the other basic tenets nondiscrimination, national treatment, most-favored nation treatment have been observed. Trade and Climate Change Linkage Trade and climate change are inextricable linked in this era of globalization. As mentioned earlier, trade arrangements catalyze production of commodities, transport of manufactured goods, and transfer of services on different geographic scales domestic, regional, and international (See, Figure 4). 6

7 Figure 4, source UNCTAD, These activities production, transport, and trade are also highly carbon intensive and are major sources of greenhouse gases. (See, Figure 5). Further, trade also catalyzes these carbon intensive activities in developing countries, whose carbon footprint has been historically low. Thus, trade not only catalyzes growth, but also increased emissions of greenhouse gases. However, since trade could potentially lead to increases in the gross domestic product (GDP) and, if properly distributed, alleviate poverty the challenge lies in mitigating climate change without limiting trade, what one may frame as the objective of achieving sustainable development. 7

8 Figure 5, source IPCC, However, the present climate regime does not address the issue of trade. In fact, as mentioned in the introduction, one of the reasons for the U.S. opposing Kyoto Protocol is that excluding China and India would give these economies a comparative advantage, because they would have no additional technological cost and other legal burdens to reduce emissions. Consequently, these countries would be able to sell goods and services at a cheaper rate than U.S. companies. Nevertheless, the legal issues regarding climate change may occur outside the treaty regime if signatories to the Kyoto Protocol such as the European Union and Canada introduce restrictive measures based on GHG emissions reduction laws. Some such possibilities and their legal implications are discussed below. 8

9 Trade and Climate Change Legal Implications from Certain Potential Measures Trade restrictions can generally be imposed either on the products or process, so also in the case of climate change. Barrier on products can be imposed by imposing local energy efficiency standards. For example, cars could be required to meet certain minimum mileage requirements or use a particular percentage of biofuels, as proposed by the European Union. Products that do not meet the standard would be excluded from a particular market through such a non-tariff barrier. Process restrictions could be imposed by levying extra carbon tax on goods that have been produced in a manner that is not carbon efficient. For instance, France has proposed that a carbon tax should be levied on all imports from countries that are not signatories to the Kyoto Protocol. Both types of trade restrictions will invoke responses under trade agreements such as NAFTA and WTO. This discussion, however, focuses on implications under the WTO regime. As mentioned earlier, trade restrictions can be imposed under Article XX of GATT, which provides, [s]ubject to the requirement that such 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, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (b) necessary to protect human, animal or plant life or health... 9

10 (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; If the test set out in Article XX, read with interpretations of the Appellate Body of WTO, is satisfied one can conclude that there is room for imposing trade restrictions on goods that affect climate, because of their greenhouse gas emissions. 1. Barrier on Product Under a plain reading of Article XX, one could argue that a signatory could impose trade restrictions on products such as cars that do not meet, say, certain fuel efficiency requirements, so long as similar restrictions are imposed on all other countries, and the measures are genuine ones and not intended as a guise for limiting trade. However, earlier cases show that application of such exceptions may not be easy. For instance, under the earlier version of GATT, the United States imposed fuel efficiency standards (corporate average fuel economy or CAFE) on all vehicles sold in the U.S., in response to the oil crisis. The standard required U.S. manufacturers and sellers of both domestic and imported cars to meet the standard, which they did. Consequently, some European manufacturers that sold less fuel-efficient luxury cars were excluded from the U.S. market. 10

11 Europe challenged the CAFE standards on the ground that it had a discriminatory effect, which the then GATT Panel upheld. While the Panel decision is not binding on WTO Appellate Body, there is a possibility that trade limits on products may not succeed. Also, in 1999 Japan passed a legislation requiring all cars in the middle weight section sold in the country to meet higher GHG efficiency standards. However, both the United States and Europe challenged the law as having a discriminatory effect. Even though the dispute was not brought before WTO, U.S. and Europe essentially blocked an energy efficient standard. Thus, restrictions on trade in products may be subject to limitations. 2. Barriers on Process Trade restrictions on goods manufactured in a manner that affect the environment have also been interpreted narrowly. For instance, in the Tuna- Dolphin case, United States banned import of tuna caught in a method that killed dolphins under the U.S. Marine Mammal Protection Act, an action which was challenged before the GATT Panel. The Panel essentially held that the restriction was not permitted under Article XX, because the exception applied only to products and not to processes. 11

12 On the other hand, the decision may be mitigated to some extent in light of the Appellate Body decision in the Shrimp-Turtle dispute, in which U.S. imposed embargoes on shrimp caught in a manner that killed turtles. Here, the Appellate Body held that since the broader objective of GATT was the promotion of sustainable development, the restriction was justified. Two important aspects need to be noted. One, the decision was supported by an international legal regime the Convention on International Trade in Endangered Species (CITES), under which the turtles were listed. Two, despite the broad readings of the term sustainable development, the Appellate Body found the measure illegal under GATT, because of its discriminatory treatment of excluding some Parties that also imported shrimp caught in a way that killed sea turtles. Thus, while the broader goal of sustainable development based on the Kyoto Protocol could justify the imposition of higher taxes, say, on goods produced in countries with lower carbon efficiency standards, it would depend on uniform application among all Parties that import like products. Limits of an Alternative Plan In light of the narrow interpretation of the environmental exceptions within WTO, nations are currently focusing of using trade as leverage for addressing climate change, rather than forcing action. For instance, the United States Trade Representative is focused 12

13 on removing tariff and non-tariff barriers to technology to promote trade in energy efficient goods and services. These include, consultancy services in the use of, say, solar energy. However, technological transfer is subject to another agreement within the WTO regime, Trade Related Intellectual Property Rights (TRIPs). TRIPs requires all Member countries to provide intellectual property rights protection. Since such rights would increase the price of technology, it is unclear whether developing countries such as China and India would want to engage in technology transfer arrangements within the WTO framework. Rather, propositions may have to be made within the framework of the Kyoto Protocol. Conclusion Climate change clearly poses a threat to free trade, because at the heart of the problem are the carbon-intensive based development and the increase in movement of goods and services, and the resulting rise in production and energy consumption. New technologies could promote efficiency, but are also constrained by the trade regime. Unless, international environmental regulations are developed to match up with trade regulations, trade laws may impede protection of environment. The argument that free trade promotes sustainable development cannot be applied to the case of climate change, because free trade has become a catalyst for climate change. At the same time, the legal regime underlying free trade does not appear to recognize the limits of increased production, transportation, and consumption of goods and services. 13

14 I leave you with these questions can we have free trade and protect the climate at the same time? If so, what changes should we seek within the current legal regime. 14

15 Key Sources 1. Joost Pauwelyn, U.S. Federal Climate Policy and Competitive Concerns: The Limits and Options of International Trade Law, Working Paper, Nicholas Institute for Environmental Policy Solutions, Duke University (on file with author). 2. Office of the United States Representative of Trade, 3. World Trade Organization, 4. United States-Import Prohibition of Certain Shrimp and Shrimp Products, Report of the Appellate Body, WT/DS58/AB/R, 12 October 1998, 5. Judith Hippler Bello, Book Review, 95 AJIL 984, (2001) (reviewing John H. Jackson, The Jurisprudence of GATT & the WTO) 6. Intergovernmental Panel on Climate Change, 7. National Aeronautics and Space Agency, NASA, Additional Reading 15