Current Developments in Domestic Climate Mitigation Measures

1. Current Developments in Domestic Climate Mitigation Measures Price-based Instruments and relevant WTO rules Ludivine Tamiotti, Counsellor Trade and Environment Division, WTO ludivine.tamiotti@wto.org

2. Outline of presentation Price and market mechanisms to internalize environmental cost Border carbon adjustments Relevant WTO rules

3. Price & market mechanisms to internalize environmental cost

4. Two Key Instruments Tax on the carbon content of fossil fuels, often combined with a tax on energy use Emissions Trading Scheme

5. Effectiveness: Carbon tax vs. ETS Carbon tax ETS Price is determined directly by the regulators through the tax rate(exogenously) Price is determined by the market (endogenously) Environmental uncertainty? Price uncertainty? Quantity of emissions to be reduced is a result of measures adopted by industry to reduce emissions (endogenously) Quantity of emissions to be reduced is determined by regulators(exogenously)

6. Environmental effectiveness 2 key intended environmental effects of a carbon tax and an ETS Indirect effect, through “recycling” of fiscal or auctioning revenues to fund e.g. investment in more climate-friendly technologies Direct effect, i.e. reduction of GHG emissions, by setting a price on emissions

7. Border carbon adjustments

8. Rationale Competitiveness loss Emissions reduction policies are not applied universally This may give rise to Carbon leakage

9. 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

10. Rationale To offset asymmetries in competitiveness Border adjustment measures To avoid carbon leakage

11. Relevant WTO Rules

12. Relevant WTO rules Coverage? Key legal challenges for a case-by-case analysis Consistency? Justifiability?

13. 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?

14. Coverage? BTA on imports (equivalent to a domestic tax) Two Situations  The GATT Working Group on Border Tax Adjustments (1970) BTA on exports (i.e. a refund of domestic tax before exportation) Implementation of the destination principleto ensure trade neutrality

15. Coverage? 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 whichthe 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”

16. 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

17. Coverage? 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.2 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? GATT Article III.4

18. Consistency? National treatment With basic principles, e.g. non discrimination Most Favoured Clause Prohibition to discriminate between “like” products

19. Consistency? Prohibition to discriminate between “like” products Except if...

20. Justifiability? WTO rules, as confirmed by jurisprudence 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 Essential to maintain a balance between the rights of other WTO Members under basic trade rules

21. Justifiability? Conservation of clean air from air pollution Conservation of sea turtles from incidental capture in commercial fishing Several disputes on measures that sought to achieve a variety of policy objectives 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 not trump environment, as long as…

22. 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

23. Justifiability? Major practical challenges in implementation • in assessing product-specific emissions • fluctuations of the carbon price • existence of carbon leakage • … Implementation is key!

24. Current Developments in Domestic Climate Mitigation Measures Price-based Instruments and relevant WTO rules Ludivine Tamiotti, Counsellor Trade and Environment Division, WTO ludivine.tamiotti@wto.org