Climate change and the WTO: Cap and trade versus carbon tax?

Journal of World Trade

Volumn 45, Issue 4, 2011, Pages 679-726

  Maruyama, Warren H ^a  

^a White House   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

CLIMATE CHANGE; ENVIRONMENTAL TAX; EXPORT; IMPLEMENTATION PROCESS; IMPORT; MULTILATERAL TRADE; WORLD TRADE ORGANIZATION;

CHINA; GERMANY; JAPAN;

EID: 80051564163     PISSN: 10116702     EISSN: None     Source Type: Journal    
DOI: 10.54648/trad2011024     Document Type: Article

References (165)

1. A Parliamentary inquiry concluded that the East Anglia e-mails did not undercut the basic scientific case for climate change. House of Commons Select Committee on Science and Technology, 'The disclosure of climate data from the Climatic Research Unit at the University of East Anglia', HC 387-I, Eighth Report of Session 2009-2010, vol. II (31 Mar. 2010). The errors in the IPCC Fourth Assessment Report apparently involved minor factual details and failures to verify information as opposed to undercutting the report's fundamental conclusions on global warming. Nevertheless, seeking to suppress dissenting scientific opinion or manipulate charts and data to bolster the case for climate change has undercut the credibility of climate science and raised questions as to what a 'scientific consensus' really means and why prominent scientists would engage in such behaviour.
2. Given India's and China's clear-eyed negotiating postures in the Doha Round and other international trade negotiations, this was no surprise. The idea that they would sign on to equivalent greenhouse gas (GHG) reduction commitments after having been exempted from the Kyoto Protocol was probably naive.
3. As the recent November 2010 election showed, these concerns were well-founded. Several Democrats who voted for climate change legislation lost their seats, particularly in Midwestern manufacturing and coal states.
4. Indeed, the Job Protection and Growth provisions of the draft American Power Act, introduced by Senators Kerry and Lieberman on 13 May 2010, are virtually identical to the free emissions rebate allowances and border measures in Waxman-Markey.
5. See, e.g., Prevention of Significant Deterioration and Title v. Greenhouse Gas Tailoring Rule, 75 Federal Register 31,513 (3 Jun. 2010).
6. The draft Kerry-Lieberman bill scales back Kerry-Boxer's ambitious 20% reduction target to 17%, in part by delaying the application of GHG to industrial sources until 2016. Until that date, the GHG limits would apply only to large power plants. Title II of Kerry-Lieberman Draft (13 May 2010).
7. These include ethanol, ferroalloy, food processing, glass, iron and steel, lead, pulp and paper, and zinc production; natural gas distribution companies, and producers of algae based fuels. The Kerry-Lieberman bill defers the application of carbon emissions limits on industrial sources until 2016.
8. A House Energy and Commerce Committee Fact Sheet explains: 'Pursuant to the Inslee-Doyle program, energyintensive, trade-exposed industries that make products like iron, steel, cement, and paper will receive allowances to cover their increased costs.' American Energy and Security Act (H.R. 2454), Committee on Energy and Commerce (2 Jun. 2009).
9. American Clean Energy and Security Act of 2009, H.R. 2454, Title IV, Subtitle A, s. 763(a)(1). A sector would also be deemed presumptively eligible if it has an energy or GHG intensity of at least 20%.
10. Because the draft Kerry-Lieberman bill delays the application of GHG emission reductions to industrial sources until 2016, the date for implementation of free allowances for direct impacts on trade-exposed industries is also pushed back until 2016. Senators Kerry and Lieberman, Summary of American Power Act (13 May 2010), 3. However, industries would remain eligible for free allowances for indirect impacts arising from the higher cost of electricity costs effective in 2013. Sections 774(a)(2)(A) and 774(b)(3). In 2016, this eligibility would be expanded to cover disparities in leakage arising from an industry's direct carbon emissions.
11. H.R. 2454, s. 763(b)(2)(iii).
12. H.R. 2454, s. 763(b)(3)(B).
13. The final border adjustment provisions were drafted by Chairman Sander Levin (D-MI), then Chairman of the House Ways and Means Trade Subcommittee.
14. Sidley Austin LLP, 'WTO Background Analysis of International Provisions of U.S. Climate Change Legislation' (28 Feb. 2008).
15. While Lieberman-Warner (s. 2191) also adopted an International Reserve Allowance Program, it took a somewhat more flexible approach. Under s. 2191, the programme was limited to 'primary products,' unlike Waxman-Markey, which is broader and also covers downstream products. Section 6001(5)(A). Like the House bill, Lieberman-Warner would have excluded least developed countries and those with de minimis emissions. Section 6006 (b)(2) and (c)(4). However, s. 2191 also provided the President with somewhat greater flexibility to exempt countries that took 'comparable action' to reduce emissions. Finally, it permitted the President to adjust the level of international allowances required based on a country's level of economic development and gave the President authority to make additional adjustments to ensure consistency with international agreements. Section 6006(d)(2)(B)(ii) and (g). These flexibilities were stripped from Waxman-Markey to accommodate concerns of import-sensitive US industries and labour unions.
16. H.R. 2454, s. 766(a)(3).
17. H.R. 2454, s. 765(c)
18. This provision would operate as a gatekeeper, i.e., if a multilateral climate change agreement can be reached by 2018, US border measures would not enter into effect.
19. Kerry-Lieberman pushes the date for implementing US border measures under IRAP back to 1 Jan. 2020. See H.R. 2454, ss 776(a) and 776(b), Kerry-Lieberman Draft of 13 May 2010.
20. The Congressional approval requirement and fast-track override procedure were omitted from Kerry-Lieberman.
21. H.R. 2454, s. 767(c)(1).
22. Kerry-Lieberman adopts a somewhat different methodology. Instead of focusing on imports, a sector would be exempted from IRAP if 70% of 'global production' in that sector originates in countries that (1) have adopted enforceable, economy-wide emissions reductions target at least as stringent as the US target, (2) are party to a sectoral emissions reduction agreement, to which the US is also a party, or (3) have an energy or GHG intensity that is equal to or lower than that of the US, § 776(c), Kerry-Lieberman Draft of 13 May 2010. Thus, the bill would focus on climate change actions by the country of origin, as opposed to the competing industry.
23. H.R. 2454, s. 768(a)(1)(D).
24. Sir Nicholas Stern, Stern Review: The Economics of Climate Change (London: HM Treasury, 2006).
25. Paltsev et al., 'Assessment of U.S. Cap-and-Trade Proposals', MIT Joint Program on the Science and Policy of Global Change Report No. 146 (2008), 52.
26. Environmental Protection Agency, Office of Atmospheric Programs, Economic Impacts of S. 1733: The Clean Energy Jobs and American Power Act of 2009 (2009), 18.
27. Response of the Pew Center on Global Climate Change to Committee on Energy and Commerce and its Subcommittee on Energy and Air Quality on Climate Change Legislation Design White Paper (2008), 2.
28. Aldy & Pizer, 'The U.S. Competitiveness Impacts of Domestic Greenhouse Gas Mitigation Policies', Pew Center on Global Climate Change.
29. Matoo et al., 'Reconciling Climate Change and Trade Policy', Working Paper No. 189 (Center for Global Development 2009), 18.
30. Houser et al., 'Leveling the Carbon Playing Field: International Competition and US Climate Policy Design', Peterson Institute for International Economics (Washington, DC: World Bank Publications, 2008): 10.
31. Yudken & Bassi, Climate Policy and Energy Intensive Manufacturing: Impacts and Options (National Commission on Energy Policy, 2009), 21.
32. While the United States signed Kyoto, it was never ratified by the US Senate and thus has never come into force for the US.
33. Efforts by the US, EU, and other advanced economies to close this gap have become one of the most contentious issues in negotiations to draft a multilateral successor to Kyoto, since it has become increasingly clear that any real reductions in global emissions will require participation by the major developing country economies, and failure to close this hole would leave energy-intensive industries in developed countries at a serious competitive disadvantage.
34. US Government Accountability Office, Climate Change Trade Measures: Considerations for U.S. Policy Makers (Washington, DC, 2009)
35. Aldy & Pizer, 'The Competitiveness Aspects of Climate Change Mitigation Policies', Pew Center for Global Environment (Washington, DC, 2009)
36. Houser et al., 'Leveling the Carbon Playing Field', Peterson Institute for International Economics (Washington, DC, 2008): 8.
37. Mattoo et al., 'Reconciling Climate Change and Trade Policy', Working Paper No. 189 (Center for Global Development, November 2009), 1.
38. After the introduction of Kerry-Boxer, e.g., the US steel industry criticized its lack of a border adjustment mechanism and inadequate emissions allowance rebates: 'Unless the Senate makes important modifications in the areas of emissions allowances, energy cost impacts, and border adjustment, US steelmakers and our workers will be at a significant competitive disadvantage in the global marketplace, which will result in extensive job losses and emissions migration to overseas markets.' American Iron and Steel Institute, News Release (27 Oct. 2009).
39. This paper focuses on the trade and competitiveness aspects of climate change legislation and does not purport to address the broader tax policy, macroeconomic, or political dimensions of a carbon or energy tax. Such a 'tax' is generally viewed as a political non-starter, which helps explain the attraction of cap and trade for climate proponents.
40. Report of the Working Party on Border Tax Adjustments, L/3646, BISD 18S/97, para. 9, adopted on 2 Dec. 1970 (emphasis added). While the report uses the word 'argued', there was broad agreement within the Working Party on this point, centering on the concept of 'trade neutrality'. It is possible that 'argued' was a typographical error and the text should have said that this point was 'agreed', which would make more sense in this context.
41. Report of the Working Party on Border Tax Adjustments, L/3646, BISD 18S/97, at para. 14.
42. Report of the Working Party on Border Tax Adjustments, L/3646, BISD 18S/97, at para. 15.
43. Professor Mitsuo Matsushita and Prof. Emeritus, Tokyo University, Consultant to Fair Trade Center, and former Member of WTO Appellate Body, and Prof. Thomas Schoenbaum, Visiting Professor of Law, George Washington University Law School. Comments at George Washington University Law School discussion group (26 Feb. 2010).
44. Article II:2(a) GATT (emphasis added).
45. Hufbauer, Charnovitz & Kim, Global Warming and the World Trading System (Washington: Peterson Institute, 2009), 39-46.
46. Hufbauer, Charnovitz & Kim, Global Warming and the World Trading System (Washington: Peterson Institute, 2009), 39-46 (emphasis added).
47. The issues surrounding a border tax adjustment for a carbon or energy tax were discussed in detail in a recent report prepared by the WTO Secretariat. WTO-UNEP, Trade and Climate Change (2009).
48. United States-Taxes on Petroleum and Certain Imported Substances (US-Superfund), BISD 34S/136, L/6175 (Adopted 17 Jun. 1987).
49. United States-Taxes on Petroleum and Certain Imported Substances (US-Superfund), BISD 34S/136, L/6175 (Adopted 17 Jun. 1987), at para. 5.2.4.
50. The Chairman of the Panel, Mr Michael Cartland, also chaired the Uruguay Round negotiations on subsidies and countervailing measures.
51. WTO-UNEP, Trade and Climate Change (2009), 104-105.
52. See, e.g., Bordoff, 'International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns', Draft of forthcoming chapter in Climate Change, Trade, and Competitiveness: Is a Collision Inevitable? (The Brookings Institution, 9 Jun. 2008).
53. Bordoff, 'International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns', Draft of forthcoming chapter in Climate Change, Trade, and Competitiveness: Is a Collision Inevitable? (The Brookings Institution, 9 Jun. 2008), at 4.
54. At the time of the Working Party report, there was an extensive debate about whether the border tax rules put countries that relied primarily on income taxes at a competitive disadvantage, while at the same time 'because of different tax structures and their relation to GATT, one country appears to have a considerable trade protection advantage over another'. John H. Jackson, World Trade and the Law of GATT (Bobbs-Merrill Company, 1969), at 298-99.
55. Report of Working Party on Border Tax Adjustment, John H. Jackson, World Trade and the Law of GATT (Bobbs-Merrill Company, 1969), 21.
56. This discussion is contained in a separate section of the report, which went beyond a description of the GATT rules, and presumably was driven at least in part by US unhappiness with the then existing border tax rules. Such US unhappiness continues to this day and has triggered repeated GATT and WTO disputes over US efforts to reduce the tax disparity, e.g., United States-Tax Treatment of Foreign Sales Corporation, DS108 (20 Mar. 2000) (US-FSC)
57. United States-Tax Legislation (DISC), BISD 23S/98, L/4422 (12 Nov. 1976).
58. Indeed, under Waxman-Markey & Kerry-Boxer, most cap-and-trade allowances initially would be distributed free of charge, and only 15% would be auctioned by EPA for revenue-raising purposes.
59. At the same time, covered entities facing high compliance costs or whose emissions are increasing over historical baseline levels could purchase additional allowances through the trading system.
60. EEC-Measures on Animal Feed Proteins, BISD 25S/49, L/4599 (adopted 14 Mar. 1978).
61. EEC-Measures on Animal Feed Proteins, BISD 25S/49, L/4599 (adopted 14 Mar. 1978), at 64, para. 4.4.
62. See Sidley Austin LLP, WTO Background Analysis of International Provisions of US Climate Change Legislation (28 Feb. 2008), 6 ('[T]he United States could respond that the scope of Article III has been interpreted more flexibly than a hard-and-fast line-drawing exercise would permit. See, e.g., a measure such as [the AEP/IBEW border adjustment proposal], regulating whether and how products, including domestic products, can be sold constitutes an internal regulation for purposes of Article III.').
63. Notes and Supplementary Provisions, Annex I to General Agreement on Tariffs and Trade (1994) (emphasis added). The main purpose of the Note is to clarify that internal regulations can be enforced at the border. It is standard practice in many countries for many internal regulations 'affecting the internal sale, offering for sale, purchase, distribution, transportation, distribution, or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions' to be enforced at the border on imported goods by their customs officials. As the Note makes clear, this practice is to be evaluated under Art. III by examining whether the regulation or standard is discriminatory. Absent the Note, such a practice could fall under Art. XI, which bars quantitative restrictions on imports and thus would be highly vulnerable to WTO challenge.
64. See, e.g., Jackson, World Trade and the Law of GATT (Bobbs-Merrill Company, 1969), 296 ('Where, however, a country's system of taxation includes a tax on a product at an earlier stage of production (e.g., the European turnover tax systems), then governments find it administratively convenient to impose a like tax on imports at the time of importation.').
65. Pauwelyn, 'U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law', Working Paper Prepared for Nicholas Institute for Environmental Policy Solutions (Duke University, April 2007), 24.
66. In European Communities-Measures Affecting Asbestos and Asbestos-Containing Products (hereinafter 'EC-Asbestos'), the Appellate Body's analysis focused on whether the domestic and imported goods are 'like products' based on their physical characteristics and qualities, end uses, consumer perceptions and behaviour, and the product's tariffclassification, with an underlying focus on 'the nature and extent of a competitive relationship between and among products'. EC-Asbestos, WT/DS135/AB/R, Report of the Appellate Body, AB-2000-11 (12 Mar. 2001), 34-37, 39-40.
67. The Appellate Body concluded that the difference between asbestos and a related substance, PCG fibres, justified treating them as separate like products. EC-Asbestos, WT/DS135/AB/R, Report of the Appellate Body, AB-2000-11 (12 Mar. 2001), at 44 ('This carcinogenicity, or toxicity, constitutes, as we see it, a defining aspect of the physical properties of chrysotile asbestos fibres. The evidence indicates that PCG fibres, in contrast, do not share these properties, at least to the same extent. We do not see how this highly significant physical difference cannot be a consideration in examining the physical properties of a product as part of a determination of "likeness" under Article III:4 of the GATT 1994.').
68. United States-Restrictions on Imports of Tuna, DS21/R, BISD 39S/155 (3 Sep. 1991).
69. United States-Restrictions on Imports of Tuna, DS21/R, BISD 39S/155 (3 Sep. 1991), at para. 5.15.
70. Appellate Body Report in Brazil-Measures Affecting Imports of Retreaded Tires (hereinafter 'Brazil-Retreaded Tires'), AB-2007-4, WT/DS332/AB/R 3 Dec. 2007)
71. Appellate Body Report in United States-Import Prohibition of Certain Shrimp and Shrimp Products (hereinafter 'US-Shrimp') (Art. 21.5), AB-2001-4, WT/DS58/AB/RW (22 Oct. 2001).
72. This risk has been amply demonstrated in the area of sanitary and phyto-sanitary (SPS) measures, where WTO Members have proven adept at seizing on minor differences in production methods as justification for erecting SPS barriers to imports that compete with domestic farm products. For this reason, the SPS Agreement has generated a host of WTO litigation.
73. Sidley Austin LLP, WTO Background Analysis of International Provisions of US Climate Change Legislation (28 Feb. 2008), at 8.
74. As the Panel noted in Canada-Certain Measures Affecting the Automotive Industry (hereinafter 'Canada-Autos'), WT/DS138/R, para. 10.40 (11 Feb. 2000): 'Article I:1 does not prohibit the imposition of origin-neutral terms and conditions on importation.'
75. See Appellate Body Report in Canada-Autos, WT/DS138/R, para. 81 (adopted 19 Jun. 2000) (striking down special exemption from duties where 'granted only where an exporter of motor vehicles was affiliated with a manufacturer/importer in Canada'.)
76. Panel Report in Indonesia-Certain Measures Affecting the Automobile Industry, WT/DS54R, para. 147 (adopted 23 Jul. 1998) ('For the reasons discussed above, we consider that the June 1996 car programme which introduced discrimination between imports in the allocation of tax and customs duty benefits based on various conditions and other criteria not related to the imports themselves and the February 1996 car programme which also introduced discrimination between imports in the allocation of customs duty benefits based on various conditions and other criteria not related to the imports themselves are inconsistent with the provisions of Article 1 of GATT.').
77. EC-Asbestos, Canada-Autos, WT/DS138/R, para. 81 (adopted 19 Jun. 2000) at para. 67.
78. After indicating that the definition of 'like product' in Art. III:4 is broader than in Art. III:2 (para. 99) and adopting the four general criteria for evaluating 'likeness' from the Report of the Working Party on Border Tax Adjustments (physical characteristics, end use, consumer attitudes, and tariffclassification), the Appellate Body stated: 'we believe that physical properties deserve a separate examination that should not be confused with the examination of end-uses. Although not decisive, the extent to which products share common physical properties may be a useful indicator of "likeness". Furthermore, the physical properties of a product may also influence how the product can be used, consumer attitudes about the product, and tariffclassification'. EC-Asbestos, Canada-Autos, WT/DS138/R, para. 81 (adopted 19 Jun. 2000), at para. 111. Once it was shown that asbestos and PCG fibres were very different, 'a very heavy burden is placed on Canada to show, under the second and third criteria, that chrysotile asbestos and PCG fibres are in such a competitive relationship'. Canada-Autos, WT/DS138/R, para. 81 (adopted 19 Jun. 2000), at para. 118.
79. Appellate Body Report, US-Shrimp, para. 157.
80. See Charnovitz, 'Trade and the Environment in the WTO', Journal of International Economic Law, vol. 10 (September 2007).
81. Report of the Appellate Body in United States-Standards for Reformulated and Conventional Gasoline (hereinafter 'US-Gasoline'), WT/DS2/AB/R (adopted 20 May 1996).
82. Report of the Appellate Body in US-Shrimp, para. 120.
83. US-Shrimp, para. 153.
84. While climate change measures might also qualify as measures 'necessary to protect human, animal or plant life or health', the standard for this exception is harder to meet, because it requires a WTO Member to show that the measure is 'necessary', i.e., there is no reasonable WTO-consistent alternative available to it. GATT Panel report in United States-Section 337 of the TariffAct of 1930, BISD 36S/345, L/6439, para. 5.26 (adopted November 1989). The Appellate Body appears to have taken a much more lenient approach to environmental trade restrictions under para. (b) in Brazil-Retreaded Tires, so it is very likely that border carbon measures could qualify under Art. XX(b) as well. However, since para. (b) normally represents a harder test, this paper will focus on whether climate border measures qualify under para. (g).
85. In evaluating whether a measure qualifies under para. (g), the Appellate Body has looked broadly at the measure itself, as opposed to specific, objectionable elements. In US-Gasoline, the Panel struck down a US clean air regulation after finding that the discriminatory element of the regulation (lack of individual baselines for foreign refiners) did not relate to the environment. The Appellate Body reversed, '[The] problem with the reasoning in that paragraph is that the Panel asked itself whether the 'less favourable treatment' of imported gasoline was 'primarily aimed at' the conservation of natural resources, rather than whether the 'measure', i.e., the baseline establishment rules, was primarily aimed at conservation of clean air. The chapeau of Art. XX makes it clear that it is the 'measures' that are to be examined under Art. XX(g) and not the legal finding of 'less favourable treatment'.' United States-Section 337 of the TariffAct of 1930, BISD 36S/345, L/6439, at 16. Thereafter, while finding that the US measure 'related to' natural resource conservation under para. (g), the Appellate Body struck down the discriminatory component of the overall regulation under the Chapeau. Thus, here, the WTO's evaluation of 'relating to' for para. (g) purposes would focus on the overall International Reserve Allowance Program, as opposed to its specific components. Similarly, in Brazil-Retreaded Tires, the Appellate Body first examined the Brazilian tire programme and found that it complied with para. (b), before evaluating whether the Mercosur exception complied with the Chapeau.
86. US-Gasoline, 19.
87. US-Shrimp, paras 141-142.
88. US-Shrimp, paras 141-142.
89. US-Gasoline, 21.
90. Canada-Measures Affecting Exports of Unprocessed Herring and Salmon, Report of Panel adopted on 22 Mar. 1988 (L/6268), BISD 35S/98 (hereinafter 'Herring and Salmon'). While the Appellate Body noted that the 'primarily aimed at' test from the GATT Panel decision in Herring and Salmon was not actual treaty language (p. 18), it went on to find that if a measure did not have a 'positive effect on conservation goals, it would very probably be because that measure was not designed as a conservation regulation to begin with' and thus 'would not have been 'primarily aimed at' conservation of natural resources at all'.
91. US-Gasoline, at 21.
92. US-Shrimp, para. 133. Tuna-Dolphin also involved a migratory species that was not confined to a single WTO Member's territory.
93. See, e.g., Brazil-Retreaded Tires, where the Appellate Body upheld a Brazilian ban on imports of retreaded tires. The Panel found that the import ban led to imported retreaded tires being replaced by retreaded tires made from local casing or new tires that are retreadable, thus reducing the dumping of used tires, which posed a health hazard. US-Shrimp, at paras 153-154. The Appellate Body found that the measure was 'necessary' under para. (b), which has an even higher threshold than para. (g).
94. US-Shrimp, at para. 159.
95. Appellate Body Report, Brazil-Tires, para. 182.
96. Appellate Body Report, US-Shrimp, at para. 160.
97. Appellate Body Report in US-Shrimp, para. 120.
98. Appellate Body Report, US-Gasoline, 21.
99. Appellate Body report in US-Shirts and Blouses [add cite].
100. Appellate Body Report, US-Shrimp, para. 158.
101. Appellate Body Report, US-Gasoline, 20.
102. US-Shrimp, para. 157.
103. US-Shrimp, at para. 150. As the Appellate Body noted in US-Gasoline, the standard for discrimination in Art. XX of necessity goes beyond the level of discrimination required in Arts I, III, and XIII, since Art. XX presupposes that a measure has already been found to violate a GATT article. US-Gasoline, 23.
104. While the WTO has found several measures to represent 'arbitrary discrimination', e.g., Appellate Body Reports in US-Shrimp and US-Gasoline, it has been much more reluctant to label a WTO Member's actions as 'disguised protectionism'-probably because of the pejorative implications of bad faith. As a result, 'arbitrary discrimination' offers a useful catch-all label for practices that do not pass muster under the Chapeau.
105. US-Shrimp, at 29.
106. Appellate Body Report, US-Shrimp, para. 177.
107. Appellate Body Report, US-Shrimp, at para. 162.
108. Appellate Body Report, US-Shrimp, at para. 164.
109. Appellate Body Report, US-Shrimp (Art. 21.5), para. 144.
110. Appellate Body Report, US-Shrimp, para. 166.
111. Both Waxman-Markey and its predecessor, the Lieberman Warner Climate Security Act of 2008, were heavily influenced by a WTO analysis prepared by Sidley Austin for American Electric Power and the International Brotherhood of Electrical Workers (IBEW). See, e.g., Andrew W. Shoyer, Esq., Summary of WTO Consistency of International Allowance Program, Sidley Austin (17 Jun. 2008).
112. Hufbauer, Charnovitz & Kim, Global Warming and the World Trading System (Peterson Institute, 2009), 96.
113. See, e.g., for purposes of determining whether a measure is 'necessary' under Art. XX(b), the Appellate Body has made it clear that the negative trade effects from a WTO-inconsistent measure must be balanced against its public policy justification. The more important the policy objective, the greater the degree of negative trade effects allowed. Thus, as the Appellate Body explained in China-Audiovisuals: '[D]etermining whether a measure is "necessary" involves a process of weighing and balancing a series of factors that prominently include the contribution made by the measure to secure compliance with the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports. The greater the contribution a measure makes to the objective pursued, the more likely it is to be characterized as "necessary"' (emphasis added).
114. As Chairman Waxman's Opening Statement on H.R. 2454 explains: '[W]e worked hard to assist industry in making the transition to a clean energy economy. We cannot afford to add significant uncompensated costs that would disadvantage manufacturing and production here compared to other countries that do not have emissions limitations, like China and India'. Opening Statement of Rep. Henry Waxman, Hearing on Allowance Allocation Policies in Climate Legislation: Assisting Consumers, Investing in a Clean Energy Future, and Adapting to Climate Change (9 Jun. 2009).
115. This provision would operate as an up-or-down decision-a US sector would be subject to the full panoply of international allowance requirements, or it would be completely exempt. In contrast, the Appellate Body in US-Shrimp required broad flexibility to adjust for conditions in specific countries, so that different countries could be treated differently.
116. Appellate Body Report in United States-Import Prohibition of Certain Shrimp and Shrimp Products: Recourse to Article 21.5 of the DSU by Malaysia (hereinafter 'US-Shrimp (Article 21.5)'), WT/DS58/AB/RW, paras 122-124 (22 Oct. 2001). Malaysia argued that the US was required to conclude an agreement with all WTO Members. As the Appellate Body noted: 'Requiring that a multilateral agreement be concluded by the United States in order to avoid "arbitrary or unjustifiable discrimination" in applying its measure would mean that any country party to the negotiations with the United States, whether a WTO Member or not, would have, in effect, a veto over whether the United States could fulfil its WTO obligations. Such a requirement would not be reasonable', US-Shrimp (Article 21.5), para. 123.
117. United Nations Framework Convention on Climate Change, Art. 3.3 (1992).
118. United Nations Framework Convention on Climate Change, at Art. 3.2.
119. United Nations Framework Convention on Climate Change, at Art. 3.2., at Preamble.
120. Article 3.5 of the UNFCCC states: 'The Parties should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties, thus enabling them to better address the problem of climate change. Measures to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.'
121. Articles 3.1 and 3.2 UNFCCC.
122. There were proposals to allow border measures to be imposed before 2020 if an eligible US industry experienced a sharp increase in its production costs under cap and trade that was not adequately addressed by emissions rebate allowances, but these were no adopted in the final bill. See Ways and Means Committee Discussion Draft, s. 905(c) (June 2009).
123. Indeed, several provisions of IRAP presuppose the existence of an international climate change agreement when decisions as to the application of US border measures to covered imports from particular countries are being made, e.g., ss 767 and 768 of Waxman-Markey.
124. Such conflicts would be mitigated if the treaty clarifies the scope for border measures and is approved by the US Senate, so that it takes precedence over prior US laws, or if such conflicts are directly addressed in any US implementing legislation.
125. Appellate Body Report, US-Gasoline, 23-24.
126. H.R. 2454, s. 768(a)(1)(c) (emphasis added).
127. Testimony of Michael G. Morris, Chairman, President, and Chief Executive Office, American Electric Power Before the House Energy and Commerce Subcommittee on Energy and Air Quality (5 Mar. 2008), 9 ('effectiveness of the IBEW/AEP "stick"'); Testimony of Annie Petsonk, International Counsel, Environmental Defence, House Energy and Commerce Committee, US House of Representatives (27 Mar. 2007), 18 ('carrots and sticks').
128. Appellate Body Report in US-Shrimp, at para. 164.
129. US-Shrimp, at para. 215.
130. The import ban forced Brazilian retreaders to consume domestic used tires, thereby reducing existing stockpiles. The used tires posed a public health threat because they accumulated water and attracted insects, which served as carriers of tropical diseases.
131. The bill originally stated that the purpose of border measures was to address 'the competitive imbalances in the costs of producing or manufacturing primary products in industrial sectors resulting from the difference between' US and foreign GHG emissions reduction costs. s. 766(a)(2) of H.R. 2454 (as introduced on 9 May 2009)(emphasis added). See also Offices of Speaker Pelosi, Leader Hoyer, the Committee on Energy and Commerce, the Select Committee on Energy Independence and Global Warming, Building the Clean Energy Economy (30 Jul. 2009), 12 ('This legislation will strengthen US global competitiveness, helping America become a world leader in new technologies, while preventing American job losses to other countries. The clean energy jobs plan includes critical protection measures for American workers and businesses to prevent the shifting of jobs and pollution to other countries. Under the American Clean Energy and Security Act, energy-intensive, trade-exposed industries like steel will receive allowances to cover transition costs as America moves toward a clean energy future. In addition, the bill establishes critical goals for international climate negotiations, and takes steps to level the playing field to ensure that the United States is not placed at a competitive disadvantage if it addresses global climate change and other nations do not. The bill includes tariffbackstops beginning in 2020 on goods imported from countries that do not incorporate the cost of carbon emissions in their production processes.').
132. Section 766(a)(2), H.R. 2454 (15 May 2009).
133. Similarly, a paper issued by the Senate Committee on the Environment regarding an early draft of Kerry-Boxer explains: 'The Clean Energy Jobs and American Power Act doesn't just create the jobs of the future-it also protects existing jobs in the manufacturing sector as our economy transforms. This bill has strong measures to ensure that jobs don't "leak" to other countries, who think they can pollute their way to economic success.' The paper cites 'Support for energy-intensive, trade exposed industries like chemicals' and 'Robust border measures'. Clean Energy Jobs and American Power Act: Summary of Provisions.
134. H.R. 2454, §767(c).
135. In a similar situation in US-Gasoline, the Appellate Body struck down as arbitrary and unjustifiable discrimination a US clean air regulation that allowed US refiners to seek individual emissions baselines but applied a single, across-theboard standard to foreign refiners with no exceptions for individual foreign plants with lower emissions. Appellate Body Report, US-Gasoline, 22.
136. This situation would not arise if a UNFCCC climate change agreement can be completed, since then such imports would be exempted under §§ 767(c)(1) and 768(a)(1)(E)(i), H.R. 2454.
137. This difficulty would arise because none of the exemptions would apply (except possibly the sectoral exception if such an agreement were to be negotiated in the future). These firms would not qualify under s. 767(c)(1) in the absence of a multilateral agreement and would not qualify under s. 767(c)(3) because their emissions levels would be higher than those of their US competitors. The EU has adopted a weaker baseline of 1990, so its cuts would not be as stringent as those of the US under Waxman-Markey or Kerry-Boxer.
138. Kerry-Lieberman adopts a different methodology that is more likely to survive a WTO challenge. Instead of focusing on imports, Kerry-Lieberman would exclude an industrial sector from IRAP if 70% of 'global production' in that sector originates in countries that (1) have adopted enforceable, economy-wide emissions reductions target at least as stringent as the US target; (2) are parties to a sectoral emissions reduction agreement to which the US is also a party; or (3) have an energy or GHG intensity that is equal to or lower than that of the US, 776(c), Kerry-Lieberman Draft of 13 May 2010. Thus, the bill would focus on overall climate change policies by countries competing in a particular sector, as opposed to levels of emissions by a competing industry. This is more consistent with using Art. XX(g) as a tool to address environmental GHG leakage. On the other hand, it does not guarantee a level playing field for competing US industries and thus would not fully address competitiveness and employment concerns.
139. The rebate provisions of Kerry-Boxer are virtually identical to those in Waxman-Markey.
140. H.R. 2454, §763.
141. H.R. 2454, §764.
142. The distribution of free emissions allowances by EPA under the rebate programme would represent a government 'financial contribution' since this term covers revenue foregone. SCM Art. 1.1(a)(1)(ii). The emissions allowances have value and could otherwise be auctioned in order to raise revenues. See, e.g., United States-Foreign Sales Corporation (Article 21.5), paras 89-90 and 98 (29 Jan. 2002).
143. See, e.g., Panel report in US-Softwood Lumber III, para. 7.22 ('The ordinary meaning of the word 'goods' is. very broad and in and of itself does not seem to place any limits on the kinds of "tangible or movable personal property, other than money", that could be considered a good.').
144. Canada-Autos, para. 100.
145. Canada-Autos, para. 100.
146. See, e.g., Appellate Body Reports in US-FSC, Canada-Autos, DS139, para. 107 (19 Jun. 2000)
147. Australia-Subsidies Provided to Producers and Exporters of Automotive Leather II, DS126, para. 9.55 (16 Jun. 1999)
148. Canada-Measures Affecting the Export of Civilian Aircraft, DS70, para. 171 (20 Aug. 1999).
149. There are comparatively few WTO cases involving de jure export subsidies, since defending an explicit export contingency in a law or regulation is widely viewed as a sure loser by most lawyers, so most of the disputes result in a speedy settlement, e.g., China-Certain Measures Granting Refunds, Reductions or Exemptions from Taxes and Other Payments, DS358 (June 2007).
150. That the statutory formula makes import-intensive industries presumptively eligible as well is not a defence, since as the Appellate Body noted in US-FSC: 'Our conclusion that the ETI measures grants subsidies that are export contingent in the first set of circumstances is not affected by the fact that the subsidy can also be obtained in the second set of circumstances.' US-FSC, para. 8.72.
151. These issues were some of the biggest obstacles to a multilateral accord in Copenhagen and led to major North-South divisions between the developed and developing countries.
152. The only WTO-legal way to channel subsidies to export-oriented industries would be to convert the free allowance rebates into a domestic subsidy by making all US industries eligible, instead of targeting them to 'trade-intensive' sectors. In this situation, however, free allowances would be subject to the looser domestic subsidy rules in Art. 5 of the SCM Agreement and thus have a better chance of surviving a WTO challenge, absent a finding of 'serious prejudice'. However, this approach would drive up the cost and significantly undermine the environmental benefits of cap and trade.
153. The GATT Panel in US-Superfund indicated, however, that if such information is not available, a party can use an alternative calculation methodology based on the 'predominant method of production. US-Superfund, paras 2.6 and 5.2.9-5.2.10. A nationwide system of emissions rebate allowances and border carbon adjustments would be even more complicated to administer, since it would require a large bureaucracy to make specific emissions calculations for every industrial sector and tens of thousands of individual producers, operate a system of border carbon measures, and monitor and enforce compliance.
154. While the US Environmental Protection Agency is drafting GHG emissions regulations under the Clean Air Act based on the Supreme Court's decision in Massachusetts v. EPA, 549 US 497 [2007], this would be the worst approach from a trade and competitiveness perspective. EPA does not have any independent authority to restrict imports under the Clean Air Act. Because Congress has carefully guarded its Constitutional authority to regulate international trade, it has delegated authority to the Executive Branch to limit imports or impose tariffs only in limited and very narrowly defined circumstances. Thus, any effort by the President to address the ensuing trade damage to US industry from broad-based EPA regulations would likely require declaring an international emergency under the International Emergency Economic Powers Act (IEEPA). 50 USC 1701.
155. Testimony of Annie Petsonk, International Counsel, Environmental Defence, House Energy and Commerce Committee, US House of Representatives (27 Mar. 2007), 18 ('carrots and sticks'); testimony of Michael G. Morris, Chairman, President, and Chief Executive Office, American Electric Power Before the House Energy and Commerce Subcommittee on Energy and Air Quality (5 Mar. 2008), 9 ('As global political pressure for action on climate change intensifies, the effectiveness of the IBEW-AEP "stick" is becoming apparent.').
156. Copenhagen Accord, United Nations Framework Convention on Climate Change, Decision-/CP.15 (18 Dec. 2009). Under the Copenhagen Accord, the participants reiterated their political commitment to enhance long-term cooperative action to address climate change and agreed that industrialized countries and certain non-Annex I developing countries would submit specific economy-wide emissions targets by 31 Jan. 2010.
157. Response of the Pew Center on Global Climate Change to Committee on Energy and Commerce and its Subcommittee on Energy and Air Quality, US House of Representatives, on Climate Change Design White Paper: Competitiveness Concerns/Engaging Developing Countries (2008).
158. US Trade Representative Susan C. Schwab, Letter to Ranking Member Rep. Joe Barton, House Energy and Commerce Committee, US House of Representatives (4 Mar. 2008).
159. In his 2010 State of the Union Address, President Obama announced a goal of doubling US exports over the next five years.
160. In his 2010 State of the Union Address, President Obama announced a goal of doubling US exports over the next five years.; see, e.g., US Chamber of Commerce and National Foreign Trade Council comments.
161. Gary Hufbauer estimates that US exports account for only 0.5% of Chinese iron and steel production, 0.3% of its primary aluminum; 0.9% of cement.
162. 0.1% of pulp and paper, and 0.5% of nitrogenous fertilizers. These figures are not enough to warrant China turning its economy upside down to accommodate US environmental demands. Hufbauer, 'Competitiveness Concerns and the Latest Data', The GMF/Nicholas Institute on Cap-and-Trade, Competitiveness and International Trade (17 Jul. 2009), 5. China and India also account for a relatively small share of US imports of many key carbon-intensive products. See Hufbauer, Charnovitz & Kim, Global Warming and the Global Trading System (Peterson Institute, 2009), 13. The impact of US sanctions could be further reduced if Chinese and Indian productions are diverted to other global markets to replace goods that are being shipped to the US in their place. On the other hand, the Center for Global Development estimates that the most extreme forms of border measures would reduce Chinese and Indian exports by between 16% and 21%, but this would require across-the-board measures by all industrial countries acting in unison.
163. Matoo et al., 'Reconciling Climate Change and Trade Policy', Working Paper No. 189 (Center for Global Development, 2009), 18.
164. Given their exclusion from Kyoto Protocol, China and India have little incentive to agree to equivalent cuts.
165. Hufbauer, 'Climate Change: Competitiveness Concerns and Prospects', Testimony Before Subcommittee on Energy and Air Quality, House Energy and Commerce Committee, US House of Representatives (8 Mar. 2008).