Index

Expert Opinion: Doing Trade and Climate Policy Together

By ZhongXiang Zhang

Climate and trade policies both affect the use of natural resources. Their linkages are recognized in the objectives of the corresponding agreements to safeguard the two regimes. The ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC) is to stabilize greenhouse gas concentrations in the atmosphere. An underlying principle to guide this effort is that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.” At the same time, the World Trade Organization (WTO) Agreement recognizes that trade should be conducted “while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to provide and preserve the environment and to enhance the means for doing so.”

Clearly, the main aim of both the UNFCCC and the WTO is to ensure efficiency in the use of resources, either from the perspective of maximizing the gains from the comparative advantage of nations or of ensuring that economic development is environmentally sustainable. Therefore, the objectives of the UNFCCC (and its Kyoto Protocol) and the WTO do not explicitly conflict with each other.

However, the possibility of conflicts may arise in implementing the Kyoto Protocol. With the Kyoto Protocol having entered into force, Annex 1 countries are preparing, adopting and implementing comprehensive measures to meet their emissions targets set under the Protocol. The Kyoto Protocol gives these countries considerable flexibility in the choice of domestic policies to meet their emissions commitments. Possible climate measures include carbon/energy taxes, subsidies, energy efficiency standards, eco-labels, government procurement policies, and flexibility mechanisms build into the Kyoto Protocol. The implementation of these measures has the potential to affect trade and thus raises concerns about compatibility with WTO rules. In order to meet their Kyoto emissions targets with minimum adverse effects on their economies, it is very likely that Annex 1 governments with differentiated legal and political systems might pursue emission reduction policies in such a way as to favour domestic producers over foreign ones. Such differential treatment could occur in governing eligibility for, and the amount of, a subsidy, in establishing energy efficiency standards, in determining qualification as eco-labeled products and the procedures for establishing eco-labels, and in specifying criteria for tenders and conditions for participating in government procurement bids. In the case where a country unilaterally imposes a carbon tax, it may adjust taxes at the border to mitigate competitiveness effects of cheaper imports not subject to a similar level of the carbon tax in the country of origin. Measures of this sort raise complex questions with respect to their WTO consistency and the conditions under which border taxes can be adjusted to accommodate a loss of international competitiveness.

It should be emphasized that some of these potential trade practices may be particularly worrisome and detrimental to developing countries because they often do not have the technical and financial capacity to adapt their process and production methods (PPMs) to those required in the importing developed countries. Developing countries have not committed themselves to legally binding greenhouse gas emissions targets as have their developed counterparts. Hence, importing developed countries could claim that the absence of emissions commitments in these trading partners would be equivalent to giving an implicit export subsidy, which favours their energy-intensive sectors as the costs of environmental degradation are not reflected in the prices of those exported products.

On this ground, importing countries may impose countervailing duties, although doing so poses a “slippery slope” problem of where to draw an appropriate line in distinguishing desirable “like” products from unacceptable non-product related PPMs without opening the door to abuse. Also, eco-labels are increasingly based on a lifecycle analysis of the environmental effects of products, which may contain product and nonproduct related PPMs criteria. Where developed countries use an eco-label as the criterion to purchase products from developing countries, this may constitute a de facto market access barrier and adversely affect developing countries’ ability to export to developed countries.

Clearly, these domestic climate policies have the potential to bring countries into conflict with their WTO obligations. In many cases, however, such conflicts are not so intractable as to threaten the integrity of either the Kyoto Protocol or the WTO agreements. Provided that WTO rules are carefully scrutinized at the time when Annex 1 governments design and implement measures to achieve the required reductions in greenhouse gas emissions, these conflicts can be avoided or at least minimized.

Another issue of particular interest to developing countries, which has garnered attention, concerns embodied carbon dioxide (CO2) emissions in international trade. Emissions from production in developing countries are higher than from consumption. The developing countries are in effect emitting CO2 to meet the consumption needs of rich developed countries. Clearly, under the Kyoto accounting framework of in-country production emissions, a country’s measured emissions levels may be misleadingly low if it produces very few emissions but imports large quantities of goods whose production gives rise to significant emissions, indicating that a production-based indicator which does not take into account trade flows can give a misleading underestimation of the emissions caused by a country’s consumption patterns. This issue remains central to any discussion on establishing an equitable distribution of future mitigation efforts by industrialized and developing countries.

ZhongXiang Zhang, from The Netherlands, is a Senior Fellow at the East-West Center, Honolulu, Hawaii, and a visiting professor at the Chinese Academy of Social Sciences, Peking University and Chinese Academy of Sciences, Beijing.