Climate and trade law: normative links
Climate policies can have numerous and significant trade implications. The implementation of subsidy schemes to support the deployment of renewable energy, the imposition of taxes and levies based on the carbon content of products or the adoption of sustainability standards are but some of the many issues giving rise to interactions between international climate and trade law.
From the perspective of international climate change law, the interaction with trade is informed by a general principle of openness. The United Nations Framework Convention on Climate Change (UNFCCC) provides under Article 3(5) that ‘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’. This entails that the need to tackle climate change cannot be invoked as a justification for measures that are unnecessarily trade-restrictive, requiring that potential restrictions on international trade be objectively justified by their substantial benefits from a climate perspective.
The international trade regime, on the other hand, does not specifically regulate the interaction with international climate change law, merely disciplining the broader interaction between trade and environment. In this sense, the Preamble to the Agreement Establishing the World Trade Organization (WTO) includes the protection and preservation of the environment among the core objectives of the WTO. Moreover, environmental measures can benefit from the flexibilities provided under Article XX(b) and Article XX(g) of the General Agreement on Tariffs and Trade (GATT), respectively concerning the protection of ‘human, animal or plant life or health’ and the ‘conservation of exhaustible natural resources’. While such provisions are yet to be applied in a legal dispute to justify climate measures, their theoretical applicability is widely agreed upon by legal scholars, and, with specific regard to Article XX(b) GATT, has been further affirmed by the WTO Appellate Body in Brazil – Retreaded Tyres.
[photo credit: Ian Taylor on unsplash]
Selected areas of interaction
Interactions between climate and trade law are broadly related to the implementation, in numerous industrial sectors, of green industrial policies, i.e. domestic policies aimed at supporting the growth of green industries. In this regard, legal challenges under international trade law may arise when such policies are designed in such a way that is inconsistent with international trade obligations. Relevant issue areas include the following:
- Subsidies for green industries. The deployment of subsidies to support the growth of climate-friendly industries, such as the production of electricity from renewable sources or the manufacturing of renewable energy technologies, can give rise to legal issues under several international trade agreements which are part of the WTO legal framework. Legal disputes adjudicated before the WTO Panel and Appellate Body have concerned, in particular, the compatibility of renewable energy subsidies with the Agreement on Subsidy and Countervailing Measures (SCM Agreement), as well as the inclusion of local content requirements in renewable energy subsidy schemes, which has been successfully challenged in the disputes Canada – Renewable Energy and India – Solar Cells as incompatible with the National Treatment obligation under Article III:4 GATT and Article 2.1 of the Agreement on Trade-Related Investment Measures (TRIMs Agreement).
- Unilateral trade remedies. The imposition of unilateral trade remedies, i.e. anti-dumping duties, countervailing duties and safeguard measures on green technologies, such as renewable energy manufacturing equipment, has similarly been challenged for inconsistencies with the procedural and substantial requirements under the SCM Agreement, the Anti-Dumping Agreement (ADA) and the Agreement on Safeguards (SG Agreement).
- Border measures. The implementation of carbon pricing, through carbon taxes or market-based emission trading systems (ETS), can be accompanied by the introduction of border adjustment measures. These would serve to prevent carbon leakage, i.e. the shift of emissions from one country to another due to climate policy measures, and ensure that carbon pricing also applies to products manufactured in third countries. In order to be compliant with international trade rules, and particularly with Article II:2(a) and Article III:2 of the GATT, such measures need to be closely linked to the carbon content of a product and not pursue discriminatory objectives. Border carbon adjustment measures are currently being developed, among others, by the European Union as part of the European Green Deal, although they also face objections by several trade partners, including the United States.
- The adoption of regulatory standards related to the climate performance of a product can similarly serve to support greenhouse gas emissions reductions, for instance by setting emissions thresholds for the commercialization of a product. However, in order to be WTO-compliant such technical regulations must not exceed what is necessary to fulfil a legitimate objective, such as complying with climate commitments, as provided under Article 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement).
Current challenges and way forward
Global trade relationships are currently hitting an historical low, which also affects progress on climate measures within the WTO framework. For instance, negotiations conducted under the aegis of the WTO to bridge the gap between climate and trade, such as the adoption of a sectoral Environmental Goods Agreement (EGA) aimed at reducing tariffs on selected climate-friendly goods, have thus far proven largely unsuccessful. Conversely, bilateral and regional free trade agreements (FTAs) are currently on the rise and in several cases, such as the Comprehensive and Progressive Agreement for Trans-Pacific Cooperation (CPTPP) or the EU-Vietnam FTA, specific provisions are included to support climate action.
Potential developments in the upcoming years may include an increase of plurilateral trade agreements among smaller groups of countries, specifically aimed at realigning trade and climate policies. An example in this sense is given by the Agreement on Climate Change, Trade and Sustainability (ACCTS), currently under negotiation between Switzerland and other five countries.
