Legal Options for Adjusting Emissions Costs among Countries Dr. Kateryna Holzer University of Bern, World Trade Institute; NCCR Trade Regulation Presentation at the Research Factory of the Faculty of Business Administration and Economics of the European University Viadrina, Frankfurt (Oder), 30 January 2013 04.02.2013
Outline Introduction: CC, emissions, UNFCCC etc. Climate policy and proposals for border carbon adjustment How does it work in practice? WTO rules Areas of conflict with WTO law Legal approaches to dealing with WTO non-compliance Alternatives to BCAs: e.g. export carbon restrictions Concluding remarks 04.02.2013 1
UNFCCC Article 3.5... 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. 04.02.2013 2
WHY BORDER ADJUSTMENT? Climate change Emissions reductions Price on emissions Market-based tools Emissions trading Carbon taxes Carbon labels & standards Costs : Costs d > Costs f Competitiveness losses Carbon leakage 04.02.2013 3
BCAs in the EU Art. 10(b) of EU ETS Directive foresees BCAs as an option Inclusion of aviation in the EU ETS: the first BCA put in practice? EU and non-eu passenger and cargo airlines landing in or departing from EU airports are obliged to surrender emissions allowances for the flights made in the previous year, with a penalty of Euro 100 for ton of carbon (Art. 3a-3g, Art. 16.3 & Annex I of EU ETS Directive) 04.02.2013 4
BCAs in the USA Legislative proposals of 2007-2010 on cap-and-trade include BCA schemes: e.g. Bingaman-Specter, Lieberman-Warner, Waxman- Markey, Kerry-Boxer, Kerry-Lieberman A BCA scheme is the price of passage of US federal climate legislation 04.02.2013 5
Panoply of possible forms of BCAs Inclusion of imports in an ETS (i.e. a requirement to surrender emissions allowances on importation) Export rebates of allowances and carbon taxes Carbon-intensity standards and carbon labels for imports Import carbon tax Quasi-BCAs: carbon tariffs, countervailing duties, export carbon restrictions etc. 04.02.2013 6
How does BA work in practice? Main purpose of BA: to level taxation and internal regulation systems among countries according to the destination principle: taxes follow goods OECD definition of BTA: any fiscal measures which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products. Can be applied on importation and on exportation, can be fiscal and non-fiscal 04.02.2013 7
Examples From XIX cent. - BTAs for VATs and excise duties on alcohol, cigarettes, gasoline etc. for fiscal reasons and to avoid double taxation. Since 1980 s environmental BTAs to correct a negative market externality of pollutions: - A Superfund tax: an excise tax on certain chemicals used as inputs for producing chemical derivative products (US, 1986); - An excise tax on ozone-depleting chemicals in connection with the obligations under the Montreal Protocol (US, 1989) 04.02.2013 8
Legal Difference of BAMs to Other Border Measures Tariffs (on imports & exports): discriminatory, limited to bound tariff ceilings, MFN; Internal taxes: imposed on imports when the latter are sold on the market of an importing country; NT, MFN; Internal regulations: affect internal sale, offering for sale, purchase, transportation, distribution or use of both domestic and imported products; NT, MFN, some are also subject to the TBT Agreement; Fees: imposed solely in connection with importation and exportation (not for fiscal purposes), limited in amount to the cost of services rendered 04.02.2013 9
Line between Measures is Thin The WTO Agreement (Note to GATT Art. III) and the WTO case law (China-Autos) put BAMs somewhere in between the category of customs duties and the category of internal taxes. They are like customs duties by the moment when the right or obligation to pay them occurs (i.e. at importation) and like internal taxes/charges by the reason behind such a right or an obligation (i.e. to sell the product on the internal market) 04.02.2013 10
Controversies over BCAs Pros: - address carbon leakage and competitiveness concerns - stimulate others to join mitigation efforts and undertake commitments Cons: - open the door to protectionism - political hurdles & risk of retaliation - legal uncertainties and risk of WTO disputes 04.02.2013 11
The PPM Issue Legal uncertainties about BCAs are to a large extent linked to their design of being measures applied to processes and production methods (PPMs), whose legal status in the WTO is not clear. BCAs are applied to the carbon footprint of a product, whereas provisions of the WTO Agreement apply to products as such. 04.02.2013 12
Areas of Potential Legal Conflict Holzer, 2010: Proposals on carbon-related border adjustments: Prospects for WTO Compliance, Carbon and Climate Law Review, vol. 1. Rule no.1: Adjustment is made only for indirect taxes. Question: Can taxes levied not on products but on production methods qualify as indirect and thus be adjusted? Rule no. 2: National treatment and MFN: Traditional like product test excludes non-physical characteristics from consideration of likeness. Question: Is it possible to treat products differently depending on the amount of emissions occurred during their production abroad? 04.02.2013 13
Areas of Potential Legal Conflict (II) Rule no. 3: Export rebates must not be in excess of the amount of taxes borne by the like product when destined for domestic consumption. Question: Is it possible to accurately calculate the adjustment level for allowances rebates so that it does not constitute a subsidy? 04.02.2013 14
Implementation Hurdles How to determine the level of adjustment? Available design options: - PPM-based (actual emissions level) - Based on the best available technology - Based on the predominent method of production - Based on the average level of emissions (in the importing or exporting country) 04.02.2013 15
Implementation Hurdles (II) The price of an allowance for importers under the free allocation of allowances and fluctuating market prices The issue of recycling of fiscal revenues from BCAs Where to purchase allowances? - international reserve of importing country s ETS - on the world carbon market - use of the Kyoto Protocol units 04.02.2013 16
Likely Verdict An importer emission allowance requirement, if found to be a fiscal measure, risks qualifying as a prohibited charge in excess of a bound tariff under GATT Article II:1(b) or, if found to be a non-fiscal measure, a prohibited quantitative restriction under GATT Article XI. 04.02.2013 17
Possibility of Justification under GATT A TWO-TIER TEST: Article XX XX (b): a measure is necessary to protect human, animal or plant life or health OR XX (g): a measure relating to the conservation of exhaustible natural resources if made effective in conjunction with restrictions on domestic production or consumption AND Chapeau: a measure does not constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade. 04.02.2013 18
Possibility of Justification under GATT Article XX (II) Should take account of different situations in different countries The reasons for discrimination between countries should have connection to the objective of the relevant paragraph of Art. XX E.g. Waxman-Markey excludes sectors having more than 85% of imports from countries a) parties to international agreements with economywide binding national commitments at least as stringent as those of the US, b) have annual energy or GHG intensities for the sector comparable or better than the equivalent US sector Little chances to withstand a legal challenge: the adoption of essentially the same program vs. the adoption of a program comparable in effectiveness (Shrimp/Turtle) 04.02.2013 19
Possibility of Justification under GATT Article XX (III) Does a border adjustment measure fit the scope of Art. XX? - Intrinsic competition-related motives - What about the parallel use of BA on exportation? Better chances for a measure if designed as a tariff? 04.02.2013 20
Legal Approaches to WTO Incompatibility of BCAs Adjudication: case by case, unpredictable no disputes so far Negotiations: - In a multilateral forum (e.g. UNFCCC, WTO) - Bilaterally or plurilaterally (e.g. PTAs) 04.02.2013 21
Why in Preferential Trade Agreements? Makes PTAs more sustainable - contributes to climate change mitigation May involve top GHG emitters bilateral FTAs/economic partnership agreements between e.g. EU/US/Australia/Japan and China/India/Russia/South Korea/South Africa Would stimulate non-annex I countries to reduce emissions Reduces the risk of trade retaliation and WTO challenge RTAs under GATT Art. XXIV benefit from a substantial regulatory leeway Could facilitate the formation of global climate regime clusters of bottom-up arrangements with gradual regulatory approximation 04.02.2013 22
Incentives for PTA partners to agree Start with an alternative: ETSs in all partner-countries and mutual acceptance of emissions allowances and climate laws and standards Trade-offs with trade concessions and concessions in other policy areas (investment, migration, political issues ) Link to national development priorities Clean-technology transfers and technological aid Negotiations will depend on the objectives, nature and scope of a PTA, and on the negotiating power of a party which is interested in emissions-related provisions. 04.02.2013 23
Design Issues of BCAs in PTAs Holzer & Shariff, 2012: Inclusion of BCAs in PTAs, CCLR, vol. 3. Most effective options for implementing BCAs in PTAs: 1. BCA rates below MFN rates 2. BCA rates above MFN rates - rules of origin 3. Negotiating with largest trading partner 04.02.2013 24
BCA Rates in PTAs Dong & Whaley 0.35% to 2.9% (carbon price from $25 to $200, using emissions intensity of importing country) Center for Global Development 7% (importing country intensity) to 40% (exporting country intensity) high carbon price ~ $300/tonne IISD 8% for steel sector @ $20 per tonne 04.02.2013 25
Example of BCAs Rates Applied to Steel and Aluminum Imports to the EU from China Aluminum Steel Existing MFN Tariffs 6.5% 1.7% BCA using Chinese emissions intensity @ $20/tonne 6.8% 12.7% BCA using EU emissions intensity @ $20/tonne 0.4% 1.1% 04.02.2013 26
BCA Rates Above MFN Rates - Rules of Origin Ordinary part of PTAs set amount of value added (VA) needed to receive preferential rates BCAs are analogous could set an amount of VA that requires BCA rate to be imposed rather than the MFN rate 04.02.2013 27
Negotiations with Largest Trading Partner Many of key products imported from just a few nations for example, in 2010: Five countries made up almost 50% of EU imports of raw iron and steel Three countries made up 50% of EU imports of products of iron and steel Benefits of PTAs likely outweigh the carbon costs 04.02.2013 28
Legal Issues of BCAs in PTAs Except for MFN, WTO rules on BCAs must be followed. Turkey-Textiles: The violation of WTO rules applicable to BCAs may only be allowed if the PTA could not have been concluded, had the provisions on BCAs not been included. Subject to the internal requirement for regional liberalization: substantially all the trade. Recourse to Article XX inevitable? But likelihood of WTO challenge is low! 04.02.2013 29
Design-specific Legal Issues 1. BCAs rates above MFN rates Rules of origin: WTO members are free to design RoOs in their PTAs as they want. Prohibited tariff rates in excess of bound tariffs: Violation of GATT Art. II 2. BCA rates less than MFN rates but above zero: Provided the inclusion of BCAs in a PTA is found to satisfy the essentially all the trade rule, such a BCAs design would not face legal hurdles. 04.02.2013 30
Export Carbon Restrictions, or Exporting Countries BCAs Karapinar & Holzer, 2012: Legal Implications of the Use of Export Taxes in Addressing Carbon Leakage. New Zealand J of Public & Int. Law, vol. 10. Could be used to pre-empt or counteract on importing countries BCAs Could contribute to CC mitigation and carbon leakage and competitiveness solutions Tax revenues go to exporting countries 04.02.2013 31
Implications of Export Carbon Legal: Restrictions - Observance of MFN & the rule on quantitative restrictions. Questions to the availability of Art. XX defense - The policy scope is limited for WTO newly acceded members: China-Raw Materials Welfare: losses for some groups of economic players Environmental integrity is questionable 04.02.2013 32
Practical Issues of Export Carbon Restrictions Problems of interaction with BCA policies of importing countries - Limits posed by the MFN obligation - Who will decide on criteria for comparability? - Need for mutual recognition agreements 04.02.2013 33
Conclusions A multilateral approach to existing disparities in CC mitigation costs is preferable to unilateral solutions. WTO law offers some policy space for the unilateral use of BCAs. Legality of BCAs under WTO law will depend on the particular design of measures. Justification of WTO-inconsistent BCAs will depend on their potential to contribution to CC mitigation. 04.02.2013 34
Conclusions (II) Legal uncertainties about the unilateral use of BCAs call for alternative approaches: RTAs can play a useful role. Export carbon restrictions can potentially be used to counteract or preempt BCAs. Their role in addressing competitiveness and carbon leakage concerns of climate policies needs to be explored. 04.02.2013 35