Presentation on theme: "Trade and Climate Change"— Presentation transcript:
1 Trade and Climate Change Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)Trade and Environment Division, WTO
2 Part IV: National Mitigation and Adaptation Policies and Trade Implications
3 Climate change mitigation measures Key objectivesKey policy instrumentsInternalize environmental costsCarbon tax, emissions trading schemesEconomic incentivesPromote development & deployment of climate-friendly technologiesFinancial mechanisms: R&D, fiscal, price and investment measuresImprove energy efficiency and reduce GHG emissionsEmissions and energy performance standards and labellingRegulatory instrument
4 Climate change mitigation measures Key objectivesKey policy instrumentsKey WTO AgreementInternalize environmental costsCarbon tax, emissions trading schemesGATTPromote development & deployment of climate-friendly technologiesFinancial Mechanisms: R&D, fiscal, price and investment measuresSCM AgreementImprove energy efficiency and reduce GHG emissionsEmissions standards, labelling on energy performanceTBT Agreement
5 Outline of the presentation Price and market mechanisms to internalize environmental costFinancial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energyTechnical requirements to promote the use of climate-friendly goods and technologies
6 Price and market mechanisms to internalize environmental cost
7 Carbon tax: Key characteristics Tax on the carbon content of fossil fuels, often combined with a tax on energy useEnergy tax on Fossil FuelsCarbon tax“Implicit Carbon Tax”Different tax baseEnergy content (more heavy on oil and gasCarbon content (more heavy on coal)
8 Emissions trading scheme: Definition Fixes a cap on total emissionsTranslates the cap into “allowed emissions” to cover emissions equal or below the size of the capSystem thatCreates a market in which these allowances can be traded at a price set by the market
9 Emissions trading scheme: Important design characteristics Overall emission level (cap-and-trade)Emission targetsEmission standard for each source (rate-base)Number of participants and sectors coveredType of gases coveredFree allocation based on historical emission levels (“Grandfathering”) or on emissions per unit of output (“benchmarking”)Allocation methodAuctioningLinkages with other emission trading schemesFlexibility mechanisms such as banking, borrowing
10 Emissions trading scheme: Where? European Union (the world’s largest GHG ETS), since 2005New Zealand, legislation passed on 25 November 09Australia? (Senate rejected a legislation on ETS)United States: “American Clean Energy and Security Act of 2009” (ACES, Waxman-Markey Bill) approved by the House of Representatives. Senate proposals still under discussion: Kerry-Boxer Bill; Kerry, Cantwell-Collins Bill; Kerry, Graham, Lieberman and their Framework for Climate Action (released 10 Dec 09).
11 Effectiveness: Carbon tax vs. ETS Price is determined directly by the regulators through the tax rate (exogenously)Price is determined by the market (endogenously)Environmental uncertainty?Price uncertainty?Quantity of emissions to be reduced is a result of measures adopted by industry to reduce emissions (endogenously)Quantity of emissions to be reduced is determined by regulators (exogenously)
12 Environmental effectiveness 2 key intended environmental effects of a carbon tax and an ETSDirect effect, i.e. reduction of GHG emissions, by setting a price on emissionsIndirect effect, through “recycling” of fiscal or auctioning revenues to fund e.g. investment in more climate-friendly technologies
14 Climate change border adjustments: Rationale Competitiveness lossEmissions reduction policies are not applied universallyThis may give rise toCarbon leakage
15 Climate change border adjustments: Rationale Concern: enhanced competitiveness (economic) of non carbon constrained producers could lead to ‘carbon leakage’ (environmental)In particular for energy intensive industries However, effects are still uncertain
16 Climate change border adjustments: Rationale CompetitivenessDefinitionAbility of firms and sectors to maintain profits and market sharesEffects of climate change measures on competitiveness of sectors depend on a number of factors:specific characteristics of the sector (e.g. trade exposure, energy-intensity).design of the regulation (e.g. availability of alleviations and exemptions).other policy considerations (e.g. energy and climate policies adopted by other countries).
17 Climate change border adjustments: Rationale Carbon leakageIncrease in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries, i.e. the ratio of increased emissions in one region as the result of an emissions constraint introduced in anotherIPCC DefinitionRisk of energy-intensive industries relocating to countries with weaker environmental policies (“carbon havens”) linked to differences in carbon price
18 Climate change border adjustments: Rationale To offset asymmetries in competitivenessBorder adjustment measuresTo avoid carbon leakage
19 Climate change border adjustments: Relevant WTO rules Coverage?Key legal challenges for a case-by-case analysisConsistency?Justifiability?The jury is still out and many questions remain unanswered!
20 Climate change border adjustments: Relevant WTO rules Coverage?Importance to define the instrument at hand to determine relevant WTO/GATT provisionsA border adjustment to a tax?A border adjustment to another carbon cost, e.g. an ETS?
21 Climate change border adjustments: Relevant WTO rules Coverage?BTA on imports (equivalent to a domestic tax)Two Situations The GATT Working Group on Border Tax Adjustments (1970)BTA on exports (i.e. a refund of domestic tax before exportation)Implementation of the destination principle to ensure trade neutrality
22 Climate change border adjustments: Relevant WTO rules GATT Article II.2(a) provides for the possibility of imposing at any time on the importation of any product:A charge equivalent to an internal tax in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part.GATT Article III.2 covers “internal taxes or other internal charges of any kind”
23 Climate change border adjustments: Relevant WTO rules Coverage?A border adjustment to a regulation, e.g. an ETS?Submit emissions credits acquired abroad to cover the emissions during the production process of the imported goodPotential requirements on importersHold emission allowances, up to the amount of CO2 emitted during the production of imported products and applied on a per unit basis to each good
24 Climate change border adjustments: Relevant WTO rules Can the price paid by an industry to participate in an ETS be qualified as an “internal tax or other internal charge of any kind”, covered under Article III.2?GATT Article III.2Can an ETS be seen as a measure covered by Article III:4, i.e. as a law, regulation and requirement affecting the internal sale, offering for sale, purchase, transportation, distribution or use?GATT Article III.4
25 Climate change border adjustments: Relevant WTO rules Consistency?National treatmentWith basic principles, e.g. non discriminationMost Favoured ClauseProhibition to discriminate between “like” products
26 Climate change border adjustments: Relevant WTO rules Non discrimination principle (GATT Article III):Imported products shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.
27 Climate change border adjustments: Relevant WTO rules Consistency?Prohibition to discriminate between “like” productsExcept if...
28 Climate change border adjustments: Relevant WTO rules Justifiability?WTO rules, as confirmed by jurisprudenceUnder certain conditions, Members can adopt trade-related measures aimed at protecting the environmentthe right of Members to take regulatory measures to achieve legitimate policy objectivesEssential to maintain a balance betweenthe rights of other WTO Members under basic trade rules
29 Climate change border adjustments and WTO rules Justifiability?Conservation of clean air from air pollutionConservation of sea turtles from incidental capture in commercial fishingSeveral disputes on measures that sought to achieve a variety of policy objectivesProtection of human health from risks posed by asbestosProtection of human health from risks posed by the accumulation of waste tyresWTO jurisprudence has confirmed that WTO rules do not trump environment, as long as…
30 Climate change border adjustments and WTO rules Justifiability?…as long as several carefully crafted conditions are respected…Environmental measures must not be applied in a manner which constitutesa means of arbitrary/unjustifiable discrimination or a disguised restriction on international trade
31 Climate change border adjustments: Relevant WTO rules Justifiability?Major practical challenges in implementation in assessing product-specific emissions fluctuations of the carbon priceexistence of carbon leakage…Implementation is key!First best option is a successful multilateral agreement!
32 Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy
33 Rationale Development & deployment of new CC friendly technologies May be occurring at a slower pace than desirable from an environmental point of viewDevelopment & deployment of new CC friendly technologiesMay therefore need to be reinforced by national policiesEnvironmental externality: without cost, no direct incentive to find ways to reduce emissionsCost of renewable energy is generally not competitive with wholesale electricity and fossil fuel pricesNegative factorsLearning cost
34 Type of support 2 main types of support Incentives to promote invention of new climate-friendly technologies and goods2 main types of supportIncentives to encourage the deployment of climate-friendly goods and technologies and the increased use of renewable sources of energy
35 Incentives to promote inventions of new cc technologies Support development of new technologies, e.g. to finance research on renewable energy technologiesGrants Example: In Korea, the Automobile Low Emission Technology Development Support funded research institutions developing, inter alia, hybrid vehicles for use as public shuttle busesAwards (ex post or ex ante)e.g. in the context of a competition to recompense for an innovation Example: Bright Tomorrow Lighting Prizes (US) to develop technologies for a new “21st Century Lamp” to replace 60 watt incandescent light bulbs and PAR 38 halogen lamps
36 Incentives to promote deployment of CC technologies & renewable energy Fiscal measures3 main types of financial supportPrice supportInvestment support
37 Incentives to promote deployment of CC technologies & renewable energy Fiscal measures(e.g. tax reductions, tax credits)To increase consumption of certain technologiesTo facilitate investment in production of CC goods & renewable technology Example: reduction in value-added tax (VAT) for small hydroelectric, wind and biogas power generation plants in China Example: Chinese government’s reduction of income taxes for producers of wind and biogas power projects
38 Incentives to promote deployment of CC technologies & renewable energy Price supportFeed-in tariffs(regulated min. guaranteed price per Kwatt-hour paid by electricity company for renewable energy fed into the national electricity grid by a private independent producer)Net metering(If power a consumer’s renewable energy equipment supplies to the national electricity grid > what it takes from the grid the consumer receives a credit for that amount on future energy bills) Examples: United States, Germany, Spain, Italy, France, Thailand and China Examples: United States, certain provinces in Canada, Thailand and Mexico
39 Incentives to promote deployment of CC technologies & renewable energy Investment support(to reduce the capital cost of installing and deploying renewable energy technologies)Capital GrantsPercentage of costs of installing climate-friendly technologies is returned to the investor as a capital grant, resulting in significant reductions in overall cost of such technologiesFavourable lending conditionsOr low-cost financing with subsidized interest rates for investors in climate-friendly technologies Examples: Indian Solar Loan Programme; In Bangladesh, micro-financing institutions Proshika and Grameen offer assistance to increase adaptability and reducing vulnerability to the effects of climate change Examples: In Canada, EcoENERGY Retrofit grants for improving the energy efficiency of buildings
40 Relevance to TradeGovernmental funding policies may have an impact on the price and production of low-carbon goods and technologiesSuch policies lower the costs for producers, leading to lower product pricesLower prices may reduce exporting countries’ access to the market of the subsidizing country or may increase the exports of the subsidizing countryLower costs of installing emission-reducing technologies enable industries to maintain international competitiveness
41 Agreement on Subsidies and Countervailing Measures Relevant WTO rulesAgreement on Subsidies and Countervailing MeasuresKey concepts include:Definition of a subsidy (whether a financial contribution confers a benefit, whether the subsidy is specific to a certain industry)Definition of an actionable subsidy (whether the subsidy causes adverse effects to the interests of other WTO Members)
42 Technical requirements to promote the use of climate-friendly goods and technologies
43 Emissions/ energy efficiency standards and regulations can be… Key CharacteristicsEmissions/ energy efficiency standards and regulations can be…Based on designBased on performancePrevalent to improve energy efficiency in appliances and buildings more flexibilityBest used when few options for controlling emissionsJapan’s Top Runner Program (the energy performance of the most efficient model (e.g. household appliances) on the market is used to set a target for all manufacturers.
44 Emissions/ energy efficiency standards and regulations can be… Key CharacteristicsEmissions/ energy efficiency standards and regulations can be…Based on designBased on performanceDefining productsDefining processesMay result in direct environmental outcomes, as they improve energy efficiency or limit emissions to a certain level during productionMainly address energy efficiency & emissions related to the use of the product
45 Emissions/ energy efficiency standards and regulations can be… Key CharacteristicsEmissions/ energy efficiency standards and regulations can be…Based on designBased on performanceDefining productsDefining processesMandatoryVoluntaryMinimum Energy Performance Standards (MEPS) for appliances (Australia)ENERGY STAR (United States)
46 Emissions/ energy efficiency standards and regulations can be… Key CharacteristicsEmissions/ energy efficiency standards and regulations can be…Based on designBased on performanceDefining productsDefining processesMandatoryVoluntaryPublicPrivateMinimum energy-efficiency performance standards for major domestic appliances (Canada)Leadership in Energy and Environmental Design (LEED) in the building sector (United States)
47 Key compliance tools: Labelling Most OECD countries (energy-efficiency labelling)ScopeMany non OECD countries, e.g. South Africa, Argentina, Sri Lanka and TunisiaAlso examples of voluntary energy labelling programmes for household appliances (E.g. Thailand, Hong Kong, China, India, Brazil)
48 Key compliance tools: Labelling Most OECD countries (energy-efficiency labelling)ScopeMany non OECD countries, e.g. South Africa, Argentina, Sri Lanka and TunisiaProduct’s energy performance/emissions levels while in operationInformation coverede.g. EU, Australia, Canada and US require energy-efficiency labels for several household appliancesProduct’s entire life-cycle, including its energy efficiencye.g. Nordic Swan, German Blue Angel and the EU’s eco-label Flower The issue of food miles
49 How does trade affect GHG emissions? Trade and transport?“Food miles” may be a counter intuitive issue! (i.e. the distance food is transported from the time of its production until it reaches the consumer)It is only one dimension used in assessing the environmental impact of foodThe real carbon footprint of a product would need to look at its entire life-cycle
50 Key compliance tools: Labelling Comparative labels compare performance among similar modelsType of instrumente.g. for household appliances in Australia, EU, Canada, US, Brazil, Tunisia, China, Thailand and KoreaEndorsement labels Seals of approval assuring consumers that a product meets certain criteriae.g. Energy Star label (US), Brazil, Thailand and China (Certificate for Energy Conservation Product)
51 Key compliance tools: Conformity assessment to determine whether the requirements in standards & regulations are fulfilledgive consumers confidence in the integrity of productsObjectivesadd value to manufacturers’ marketing claims
52 Key compliance tools: Conformity assessment TestingEx post efficiency testing on labelled appliances (Electricity Generating Authority of Thailand)InspectionIn the building sector, the Leadership in Energy and Environmental Design (LEED) (US)Type of instrumentCertificationMark that energy performance of regulated energy-using products has been verified (Canada)AccreditationMetrology
53 Key compliance tools: Restrictions and prohibitions to restrict the sale or prohibit the import of certain energy-inefficient productsObjectivesto ban the use of certain greenhouse gases in the composition of productsBans & regulatory measures to prevent the use of fluorinated GHGs (HFCs, PFCs, SF6) (e.g. Austria, Denmark, Switzerland & EU)ExamplesBan of certain less energy-efficient products, e.g. incandescent light bulbs in Australia, EU, Canada, Chinese Taipei & Argentina
54 Environmental effectiveness Increase in energy efficiency of products, e.g. electrical equipmentIn California, the energy use of refrigerators in 2000 was more than two-thirds lower than in (energy-efficiency standards are in place and regularly updated since the late 1970s)Measurement toolsBehavioural changes of consumers and manufacturersIn the United States, recognition of the Energy Guide label was found to be quite good; however understanding was limited, with respondents unable to determine which appliance was more energy-efficient, based on the labels
55 Relevant WTO rules? Agreement on Technical Barriers to Trade / GATT Non discriminationKey principles includeAvoidance of unnecessary trade barrierHarmonization
56 Trade and Climate Change Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)Trade and Environment Division, WTO