Unresolved Issues in WTO Law

1. Unresolved Issues in WTO Law & climatechangeregulation

2. Issues that may affect WTO-consistency of climate measures • Environmental subsidies • Processing and production methods • Multilateral environmental agreements • Technical barriers to trade • Relationship between different WTO Agreements

3. Emerging climate change policies • Two types of WTO concerns: • Subsidies • Discrimination (MFN, NT) • Four types of measures: • cap-and-trade approach • standards-based policies, which require the adoption of specific measures (eg labels) or set source-specific emissions limits • carbon taxes • border tax adjustments

5. Environmental Subsidies

6. Whatifweapplya taxoncarbonfootprints? As weanalyzethe legal issuesbelow,considerwhetherdifferentialtaxratesbasedondifferentcarbonfootprintswould be consistentwith WTO subsidies law.

7. Applicable WTO Agreements • SCM Agreement applies cumulatively with GATT Articles VI and XVI. • SCM Agreement does not preclude action ‘under other relevant provisions of GATT 1994, where appropriate’ (eg Art I:1 or III). • Agricultural subsidies can raise issues under SCM Agreement or Agreement on Agriculture. • TRIMS Agreement (incorporates some GATT) • Order of analysis: AoA, SCM, then TRIMS/GATT.

8. SCM AgreementActionable & prohibited subsidies • Subsidy • financial contribution by govt or any public body w/in territory of Member • benefit thereby conferred • Prohibited (presumed specific) • contingent on export: 3.1(a) • contingent on use of domestic goods: 3.1(b) • Actionable (if specific) • multilateral action (WTO complaint) • unilateral action (CVDs)

9. Art 1.1(a)(1)(i) financial contribution • A ‘government practice’ (covers all acts of governments or public bodies) involves • a direct transfer of funds (financial resources and other financial claims, not just money) • eg grants, loans, equity infusion • potential direct transfers of funds or liabilities (does not depend upon the probability that a payment will subsequently occur) • eg loan guarantees • Does our carbon footprint tax qualify?

10. Art 1.1(a)(1)(ii) financial contribution • Govtrevenue ‘otherwise due’ • requires comparison of fiscal treatment of comparable income of taxpayers in similar situations • a WTO Member is ‘free not to tax any particular categories of revenues’: US – FSC(AB) • Foregone or not collected • eg fiscal incentives such as tax credits • Different income tax treatment for foreign & domestic sales (US – FSC) • Exemption from duty on auto imports, conditional upon domestic production requirements (Canada – Autos) • Does our carbon footprint tax qualify?

11. Art 1.1(a)(1)(iii) financial contribution • govt provides goods or services other than general infrastructure • Stumpagefees (US – Softwood Lumber IV, AB) • or purchases goods • Notpurchasesof services (US — Large Civil Aircraft (2nd complaint), Panel) • What if the government varies the cost of lumber rights according the carbon footprint of the lumber company?

12. 1.1(a)(1)(iv) financial contribution • a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments •  recognizes that  (i) to (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution: (US – Softwood Lumber IV, AB)

13. 1.1(a)(1)(iv): Privatebody vs. govt • SCM Agreement distinguishes between subsidies made by ‘a government or any public body’ and those made by a ‘private body’. • Financial contributions from private body only subject to SCM Agreement if affirmative demonstration of link between government and specific conduct of private body. • A public body’s conduct can be attributed directly to the State, whereas a private body’s conduct can be attributed to the State only indirectly. • US – Anti-Dumping and CountervailingDuties (China) AB

14. 1.1(a) (2) financial contribution • any form of income or price support in the sense of Article XVI of GATT. • Article XVI: any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory.

15. Article 1.1(b) benefit • ‘[N]ot all government measures capable of conferring benefits would necessarily fall within Article 1.1(a). If that were the case, there would be no need for Article 1.1(a), because all government measures conferring benefits, per se, would be subsidies.’ • US — SoftwoodLumber IV (AB)

16. Article 1.1(b) benefit • ‘a financial contribution will only confer a “benefit”…if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.’ Canada – Aircraft (AB) • Does our carbon footprint tax qualify? • Article 1.1(b) could require an analysis of whether a benefit is obtained from differential carbon tax rates, by whom, whether such a benefit could have been otherwise obtainable in the marketplace, and what the relevant marketplace is.

17. Article 1.1(b) benefit • Competitive wholesale electricity markets will rarely operate to remunerate adequately the mix of generators needed to secure a reliable electricity system that pursues human health and environmental objectives through the inclusion of facilities using solar photovoltaic and wind technologies into the supply-mix. • Panel Reports in Canada – Renewable Energy and Canada – Feed-In Tariff Program

18. Article 1.1(b) benefit • The absence of a general environmental exception in the SCM Agreement makes the role of the benefit analysis important in saving clean energy subsidies from violating the SCM Agreement. • Can this analysis take into account that the higher cost of clean energy incorporates the externality of environmental harm, whereas the lower cost of fossil fuel energy does not?

19. Does our carbon footprint tax qualify as a prohibited subsidy? • If both the domestic and imported products are substitutable inputs for domestic production and the foregone revenue confers a benefit, there could be a violation of SCM Agreement Article 3.1(b). • This could be the case if countries diverge in their regulation and reduction of carbon emissions, so that some countries engage in less carbon-intensive production than others. Divergences in the carbon intensity of production would probably lead to differential treatment of imports, thereby raising issues regarding MFN treatment. • The reference in footnote 1 to ‘the exemption of an exported product from duties or taxes borne by the like product’ could indicate that Article 1.1(a)(1)(ii) is intended to apply to other cases where like products receive different consumption tax treatment.

20. AoA, SCM & prohibited subsidies • Export subsidy that violates AoA3.3 & 8 (bc not within limits in Member’s Schedule) also violates SCM 3.1(a): US – UplandCotton. • Unlikely that export subsidy consistentwith the AoA could be impugned under SCM 3.1(a). • AoA prevails where conflict: AoA permits certain export subsidies, SCM prohibits all. • BUT compliance with AoA domestic support commitments violates SCM 3.1(b) if contingent on use of domestic goods: US – Upland Cotton.

21. Multilateral &unilateral action • Multilateral SCM Part III (actionable subsidies) • Subsidy causes adverse effects in third country markets (eglost sales, price suppression) • Need not quantify precise amount of subsidy • Unilateral SCM Part V (countervailing measures) • Subsidy causes injury to the domestic producers of like products • Need to quantify precise amount of subsidy

22. Multilateral &unilateral action on carbon footprints? • Isfailuretotaxcarbon a subsidy? • Can weapplyCVDsagainstproductsbasedontheircarbonfootprint? • Wouldthelack of a carbontax be subjecttoSCM Part III?

23. GATT Article III:4, TRIMS Article 2.1 • Canada – Renewable Energy and Canada – Feed-In Tariff Program:FIT Program domestic input requirements. • GATT Article III:8(a) did not exclude FIT Program from Art III:4; procurement undertaken with a view to commercial resale. • Benefit analysis saved the FIT Program from SCM 3.1(b) • Inconsistency with GATT Art III:4 leaves open possibility of justification under GATT Art XX, unlike SCM Agreement. • Unlikely Art XX could be invoked as SCM defense. • Benefit approach creates possibility that non-discriminatory clean energy subsidies could survive a WTO challenge.

25. ‘LikeProducts’ and Processing and ProductionMethods The PPM Debate

26. ‘like products’ is a key concept • Which environmental concerns can be taken into consideration to determine likeness? • Non-discrimination obligations in: • GATT Articles I:1, III:2 and III:4 • TBT Agreement • term is not defined in these treaty texts • SCM Agreement & Antidumping Agreement • term is definedin these treaty texts

27. criteriato determine likeness(not a closed list) • The physical properties, nature and quality of the products; • The extent to which the products may serve the same or similar end uses in a given market; • The extent to which consumers perceive and treat the products as alternative means of satisfying a want or demand; and • Tariff classification (not determinative)

29. like products analysis • Purpose: ‘to take account of evidence which indicates whether, and to what extent, the products involved are – or could be – in a competitive relationship in the marketplace’. • Relevant market: where the products compete. • Competitive relationship between same products may differ in different markets and market segments. • Competitive relationship between products is the central issue.

30. Can PPMs determine likeness?(eg related to carbon footprint) • Only characteristics of the product as such are relevant: US – Tuna I (Mexico) (notadopted) • Ifthey compete in onesegment of themarket, thatissufficient: Philippines – DistilledSpirits • Access todolphin-safelabelrequiredto compete in US market: US – Tuna II (Mexico) • Doesthis mean thatcarbonfootprintPPMsrelevantifthey determine competitiverelationship in allsegments of themarket?

31. Anotherpossibleroute:less favourable treatment • Legitimate regulatory distinctions ‘based exclusively on … particular product characteristics or on particular processes and production methods’ would not per se constitute less favourable treatment within the meaning of TBT Art 2.1. • US – Clove Cigarettes (AB)

37. Other hurdles to overcome with respect to carbon labels • Accuracy of measurement of GHGs produced in the life cycle of a particular product • Extent to which the carbon label discriminates between products from different countries based on factors other than emissions or minimal differences • Extent to which consumers consider carbon footprints determining factor in a given marketplace • In TBT context, whether the issuer of the carbon label qualifies as international standardizing body.

38. GATT ArticleXXGeneral exceptions • XX(g): measures ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’ • XX(b): measures ‘necessary to protect human, animal or plant life or health’

39. Article XX(g): conservation of exhaustible natural resources • Is the climate an ‘exhaustible natural resource’? • Does a sufficient jurisdictional nexus exist between all WTO Members and the global climate? • How should a panel determine whether a specific measure relates to climate change? • Are the measures ‘made effective in conjunction with restrictions on domestic production or consumption’?

40. ‘exhaustible natural resources’ • Subject to evolutionary interpretation • Include living and non-living natural resources • AB and GATT panels have found following to be exhaustible natural resources: clean air; sea turtles; salmon; herring; tuna; dolphins • Climatechangemeasurescouldqualify as: • Clean air (control of emissions; US Clean Air Act) • Indirectconservation of living resources • Stableclimate as theresource

41. jurisdictional nexus • US – Shrimp: AB found sufficient jurisdictional nexus between migratory sea turtles and US • Turtles spent part of migratory life cycle in US waters • No ruling on whether there is a jurisdictional limit implied in the language of Article XX(g) • If there is, global effects of climate change should be a sufficient jurisdictional nexus

42. ‘relating to’ • Means ‘primarily aimed at’ • Examine ‘relationship between the measure… and the legitimate policy of conserving exhaustible natural resources’. • Requires ‘a close and genuine relationship of ends and means’ • Examine ‘relationship between the general structure and design of the measure…and the policy goal it purports to serve’ • Measure based on MEA obligations likely to qualify

43. ‘made effective in conjunction with restrictions on domestic production or consumption’ • ‘made effective’ means a governmental measure being ‘operative’, ‘in force’ • No empirical ‘effects test’ • Requirement of even-handedness in the imposition of restrictions • Equivalent terms in Spanish and French of ‘made effective’: ‘se apliquen’ and ‘sont appliqués’

44. XX(b): ‘necessary to protect human, animal or plant life or health’ • Issue 1: Does the policy goal fall within the range of policies designed to protect human, animal or plant life or health? • Brazil – Retreaded Tyres: environmental measures covered by Article XX(b).

45. XX(b): ‘necessary to protect human, animal or plant life or health’ • Issue 2: Is the measure ‘necessary’ to achieve the policy goal? • Analyze in light of level of risk Member sets for itself. • Involves weighing and balancing factors: • importance of the interests or values • contribution to the end pursued • trade impact • whether a WTO-consistent alternative measure which the Member concerned could reasonably be expected to employ is available, or whether a less WTO-inconsistent measure is reasonably available

46. importance of interestsorvalues • Human life and healthare ‘both vital and important in the highest degree’: AB, EC – Asbestos • Environmentis‘important’: AB, Brazil – Retreaded Tyres • Climatechangeimpactson human life and health, environment

47. contribution to the end pursued • Measure must be ‘apt to produce a material contribution to the achievement of its objective’ • ‘Marginal or insignificant contribution’ is not enough • Indirect contribution via long-term economic development does not qualify (Kuznet’s curve) • Need to view the measure against the broader context of a comprehensive strategy • Can be quantitative or qualitative measurement • But difficult to measure contribution of climate change measures

48. AB, Brazil – Retreaded Tyres ‘the results obtained from certain actions—for instance, measures adopted in order to attenuate global warming and climate change...—can only be evaluated with the benefit of time’

49. trade impact • Prohibitions have passed the test: • EC – Asbestos • Brazil – Retreaded Tyres • But cumulative impact of a series of climate change measures could together have much more significant restrictive effects than a measure considered in isolation.

50. alternative measures • Must achieve same objectives as challenged measure • difficult to argue if effect of measure might not be revealed in the near future • Must be WTO-consistent or less inconsistent • Jurisprudence makes this moving target (subsidies instead of trade restrictions after Canada—Renewable Energy?) • Must be ‘reasonably available’ in light of interests or values being pursued and desired level of protection • Level of economic and technological development? • Consultations or negotiations with other countries? • What scientific evidence will be required?