Trade Measures and Climate Change: Searching for Common Ground on an Uneven Playing Field

As the United States and other developed countries have enacted or are in the process of developing legislation to cap greenhouse gas emissions post-2012, their policymakers are under increasing pressure from domestic constituencies to include trade measures as part of climate policy. This Working Paper analyzes relevant measures in emerging U.S. domestic climate policies, describes the objectives of these measures, assesses how they might be imposed, and discusses their implications for both a future climate agreement and the international trading system. It also touches on proposals to use trade measures in the European Union and other developed countries.

We find that:

• Proposed trade measures are driven by multiple objectives. Trade measures have been included in draft climate legislation in the U.S. and have been considered by the EU in an effort to achieve several policy objectives: to protect domestic industry from potential competitive disadvantages that might arise from unequal carbon prices (“competitiveness”); to provide temporary assistance to energy intensive, trade exposed industries in transition towards a low-carbon economy (“transition assistance”); to prevent greenhouse gas intensive production from moving to countries with less stringent limits on carbon emissions, undermining the environmental effectiveness of domestic climate policy (“leakage”); and to create incentives for other countries to adopt climate policies and join a future climate agreement (“free-riding”).
• Protecting domestic industry is not a legitimate use of a trade measure. The United Nations Framework Convention on Climate Change (UNFCCC) and World Trade Organization (WTO) agreements share a set of common principles that discourage the use of unilateral trade measures that are arbitrary, unjustifiable, or disguised restrictions on trade. Neither the UNFCCC nor the WTO authorizes the use of trade measures for the specific purpose of protecting domestic industry from competition.
• Properly designed trade measures are not prohibited under the WTO or the UNFCCC. It may be possible to design trade measures that are sufficiently targeted and equitably applied to prevent emissions leakage to contribute to the UNFCCC’s objective without violating WTO rules. While the UNFCCC Conference of the Parties (COP) has not formally considered whether using trade measures to prevent emissions leakage or to penalize non-Parties would be consistent with the UNFCCC, some developing country Parties are calling on the COP to prohibit the use of unilateral trade measures (by developed country parties) to promote climate change objectives.
• Draft U.S. climate policy includes the use of trade measures. The most procedurally advanced proposal for U.S. climate change legislation, the American Clean Energy and Security Act (ACESA), was passed by the U.S. House of Representatives in June 2009. ACESA is intended, in part, to help “reach an internationally binding agreement in which all major greenhouse gas-emitting countries contribute equitably to the reduction of global greenhouse gas emissions.”3 Yet, ACESA would, in certain circumstances, authorize the U.S. government to use trade measures against products from another Party to a post-2012 international climate agreement, even if that Party was in full compliance with its commitments under that agreement, if the U.S. determines that the Party’s commitment in that agreement was not “at least as stringent as” that of the U.S.4 In other words, ACESA would permit the U.S. to make its own determination of whether another country’s efforts to reduce its emissions were “equitable” as compared to U.S. efforts. This determination could override burden sharing as agreed internationally and principles key to UNFCCC, including the principle of common but differentiated responsibilities and respective capabilities of developed and developing countries.
• A number of developing countries have come forward with significant actions that may entail costs for their domestic industries. In recent months, a number of developing countries have announced significant new climate policies that would contribute to a global deal and a global response to climate change. As indicated, they have also proposed that the UNFCCC parties agree to prohibit developed country parties from using unilateral trade measures to advance climate policy. It is not clear whether these developing countries contemplate the use of such trade measures themselves.
• The risk of a WTO dispute arising over climate related trade measures is high, but could be lowered or guided by UNFCCC decisions or processes. If climate-related trade measures were implemented, by either a developed or a developing country, a trade dispute could arise and a WTO dispute settlement panel could be asked to choose between a result that required a country to dismantle a central part of its climate legislation, and a result that allowed the trade measure to stand but that redefined UNFCCC standards for fair and effective climate policy.

Since it is unlikely that the U.S. or the EU would agree to an outright prohibition on the use of trade measures, or that China or India would agree to rules that explicitly authorized such measures, the UNFCCC COP should articulate a set of principles and procedures to limit the use of any trade measures to avoid, or help resolve, any disputes that might arise under the WTO or elsewhere.