Climate Change and International Trade Regulation: State of Play and Challenges Ahead

1. Climate Change and International Trade Regulation: State of Play and Challenges Ahead Thomas Cottier EAERE2016 in Zurich, June 24, 2016 NCCR – Trade Regulation WP 5 World Trade Institute, Berne

2. Trade and Climate Change • Close interaction: • Trade induced growth and CO2 emissions • Impact of trade flows on defining shared but differentiated responsibility: • Trade adjustment • Taking into account consumption of imported products • Lack of disciplines in UNFCCC and 2015 Accord shifts emphasis to trade, finance and investment • Need to identify and develop trade-related disciplines fostering decarbonisation of the economy

3. 2015 Paris Accord: What Does it Mean for Trade Regulation? • Lack of binding legal commitments • Opens the doors for unilateral measures in national systems • to achieve a level playing field for domestic producers • to avoid carbon leakage • to push the adoption of the climate legislation abroad • WTO will have to deal with such measures in Dispute Settlement and retaliation • Recourse to unilateral measures as an incentive to help new post Kyoto Protocol multilateral disciplines avoiding trade wars, protectionism and economic down turn.

4. Principle of Common Concern of Humankind • Climate Change recognised as a common concern of humankind • Arguably entails: • Obligations to do homework • International cooperation • Taking unilateral action of need be in relation to non-cooperative partners under UNFCC and Paris Accord • Foundation for future legal commitments

5. Agenda • Achievements of the Trading System • The Role of Trade Regulation in Climate Change • Carbon Tariffs, BTA, Subsidies, Technology Transfer, Government Procurement, Environmental Goods and Services • Towards a climate-related Post Doha sectorial Agenda in WTO • Issues of Climate Change adaptation not included (agriculture)

6. Achievements of the Multilateral Trading System (WTO) • Multilateralization of Tariff and non-tariff Policies and Law • Progressive Liberalisation (goods and services), protection of IPRs • Principles of Non-discrimination based upon equal treatment of like and competitive products irrespective of geographical origin • Most favoured Nation Treatment • National Treatment • Equal Conditions of Competition • Transparency • The Rule of Law (DSU)

8. The Common Law of International Trade • RTAs all structured on the basis of WTO law disciplines: TTP, TTIP, CETA and many others • Shared values and principles • Core legal concepts of tariffs, QRs, non-discrimination (national treatment) and exceptions • Structure of agreements follow WTO law • WTO-plus and sometimes WTO-minus • Introduction of new areas (e.g. labour, environment, competition, investment, TK protection) • Potential to develop climate related disciplines in PTAs largely untapped so far (e.g. mutual recognition of technical standards, equivalence, MRAs)

9. State of Play • General rules of WTO law and RTAs define scope for domestic action • Green procurement under revised GPA • Reducing tariffs and NTBs on Environmental Goods and Services (EGS) • Negotiations on Services (TISA) relating to energy related activities • Yet, so far lack of climate specific negotiation, in particular in energy and electricity in WTO, and PTAs alike

10. Impact of Non-Discrimination • Most Favoured Nation Treatment (Art. I GATT) • Alike Treatment of All 153 Members of the WTO; exemption of comprehensive preferential trade agreements • National Treatment (Art. III GATT) • Treatment no less favourable of imported like and substituting products, e.g. in taxation • Subject to exemptions in particular for the protection of non-renewable resources, including air and climate (US - Gasoline) • Non discrimination based upon equal treatment of physical like and competitive products (Border Tax adjustment criteria)

11. Product and Process Methods (PPMs) • Increasing focus away from physical properties to production methods and processes (PPMs) • Potential to differentiate on the basis of greenhouse gas emissions, and to shape trade instruments accordingly • EC – Seals Products (2014) • De facto extraterritorial effects of PPMs

12. Border Tax Adjustment • Adressing Carbon-leakage • GATT II:2 (a) allows for BTA not in excess of an internal tax on a product or a tax on input articles • GATT in principleallows for an adjustment for a tax on ‘certain chemicals’ used in the process of producing products the polluting effect of which happened abroad (US – Superfund) • Differential Treatment on the basis of PPM can be justified for the protection of global commons (Art. XX(g) GATT, subject to conditions) • BTA however limited to levels of domestic carbon taxes imposed. • Reduced impact of BTA in clean economies

13. Carbon Tariffs • Tariffs in WTO main lawful instrument of protection • Tariff reduction in industrial goods reduced on average from 40% to 4 %; agriculture: >20%) • Consolidation and Bound Tariffs • Unilateral Deconsolidation and Compensation • Issues: • Should we use tariffs to achieve a level playing in climate mitigation? • Should tariffs be deconsolidated and imposed on the basis of CO2 emission standards of products, and PPMs? • Multilateral negotiations, unilateral or bilateral approach? • How to compensate sectoral increases?

14. 1. Statistical Analysis Weexplore the possibility of a unilateral tariff increase on the imports of the most carbon-intensive products (as identified in this literature) from countries non-committed to climate-mitigation polices under Annex II, Kyoto Protocol Preliminary statistical analysis reveals the importance of these products in the trade flows of both importing and exporting countries Results from partial equilibrium simulations suggest that the committed importing countries would have to raise their tariffs only slightly to effect a significant decline in the imports of these products from non-committed countries.

15. 2. List of countries and products • Importers: Australia, Canada, the EC, Iceland, Japan, New Zealand, Norway, Switzerland and USA • Exporters: Argentina, Brazil, Chile, China, India, Indonesia, Israel, Mexico, the Philippines, Russia, South Africa, South Korea, Thailand & Turkey • [NB: These countries account for 70-80% of global CO2 emissions over 1996-2008] Products: Paper, rubber, plastics, iron & steel, basic chemicals, glass

16. 3. Potential Impact of Carbon Tariffs • Deconsolidation and compensation to the benefit of clean like products on the basis of PPMs • Potential recourse to carbon tariffs by major importers is a major incentive to join a future multilateral system under the UNFCC by developing countries, in particular Brazil, China and India in avoiding the loss of export markets in carbon based products

17. Use of Subsidies • Do the WTO Agreement on Subsidies and Countervailing Duties and the Agreement on Agriculture allow for climate-friendly Subsidies? – type Kyoto 2.1.a (iv): • Subsidies for energy conservation • Subsidies for RE production or consumption • Subsidies for R&D grants for climate technologies • Subsidies for carbon capture & storage • Kyoto 2.1 Subsidies are not excluded by WTO (actionable subsidies – yellow light) • Canada – Feed in tariffs

18. Towards an Agreement reducing Fossil Fuel Subsidies • Negotiations on subsidies will be core of WTO law work • Reduction of massive fossil fuel subsidies • Development of sectoral agreement on fossil fuels

19. Electricity • Besides de-carbonization, deployment of renewable energy is is needed for • Diversification of power supplies • Social and economic cohesion • Securing basic supply to all: right to access to electricity • Need for long distant trade to stabilise supply and baseload with REs

20. The Idea of a Global Grid and Building-Blocks ‘The Global High VoltageDirectCurrentGrid (ETHZ 2013)’

21. Wind farming in Greenland • Greenland – North UK: 2066 km (81% cable) • Greenland – Quebec: 3269 km (32% cable) ‘The Global High VoltageDirectCurrentGrid (ETHZ 2013)’ World Trade Institute Berne

22. Towards a Framework Agreement on Trade in Electricity • Integrated approach (goods, services, IPRs, investment) • Security of stable electric supplies (Right to electricity) • Access and interconnection, transit rules • TBTs • Ownership and competition (Reference Paper) • Classification of services (vertical integration) • Investment protection World Trade Institute Berne

23. Technology Development and Transfer • Art 66.2 Agreement on Intellectual Property (TRIPs) – LDC’s technology transfer obligation to LLCDs • Multilateral Environmental Agreements have weak technology transfer obligations • Clean Development Mechanism (CDM): incentive for technology transfer insufficient • Lack of Incentives Schemes for Knowledge Transfer (Tax Reductions v. Export Subsidy); Need to link to PPM disciplines

24. Government Procurement • Revised Agreement on Government Procurement (GPA) allows to condition Purchases on Ecology and arguably PPMs (Product Specification) • National Treatment and Equal Opportunity • Transparency Requirements

25. Towards a Post-Doha Agenda on Climate Change in WTO • Recourse to carbon tariffs where appropriate • Agreement on fossil fuels • Reducing export and internal subsidies • Access to technology and services • Agreement on Trade in Electricity • Interconnection • Smart Grids • Services • Transfer of Technology and Tax Breaks for Renewable Energies in return to enhanced recourse to PPMs • Focusing EGS on Green House Gases (sectorial initiative)

26. Conclusions • Foundations of Coherence in Principle of Common Concern (homework, cooperation and unilateral action) • WTO law allows principle for unilateral PM based BTA, Carbon taxes, Carbon tariffs and differential taxation of energy and subsidies for Res • Green Government Procurement • Specific negotiating agenda WTO not developed (EGS) • Future Agreement on Fossil Fuels (Subsidies) • Future Agreement on Electricity • Additional disciplines Transfer of Technology • Disciplines on Climate Change Adaptation (Agriculture)

27. Short Bibliography • Conrad, Christiane R, . Processes and Production Methods (PPMs) in WTO Law: Interfacing Trade and Social Goods 2011. • Cottier, Thomas et al; The Principle of Common Concern and Climate Change, 52 Archiv des Völkerrechts 293—324 (2014) • Cottier, Thomas, Renewable Energy and WTO Law: More Policy Space or Enhanced Disciplines?, 5 Renewable Energy Law and Policy Review 40-51 (2014). • Cottier Thomas, Nartova Olga, Shingal Anirudh, The Potential of Tariff Policy for Climate Change Mitigation: Legal and Economic Analysis, 48 Journal of World Trade 1007-1037 (2014) • Cottier, Thomas / Nartova, Olga / Bigdeli, Sadeq Z. (eds.). International Trade Regulation and the Mitigation of Climate Change. Cambridge 2009 • Espa, Ilaria, Rolland Sonia E., Subsidies, Clean Energy and Climate Change, E15, ICTDS (2014) • Holzer, Kateryna, Carbon-Related Border Adjustment in WTO Law, (Edward Elgar 2014) • Holzer Kateryna, Cottier, Thomas, Addressing climate change under preferential trade agreements: Towards alignment of carbon standards under the Transatlantic Trade and Investment Partnership, in: 35 Global Environmental Change 514-522 (2015).