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1 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change.

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Presentation on theme: "1 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change."— Presentation transcript:

1 1 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change

2 2 Part IV: National Mitigation and Adaptation Policies and Trade Implications

3 3 Climate change mitigation measures Key objectives Improve energy efficiency and reduce GHG emissions Key policy instruments Emissions and energy performance standards and labelling Regulatory instrument Promote development & deployment of climate- friendly technologies Financial mechanisms: R&D, fiscal, price and investment measures Economic incentives Internalize environmental costs Carbon tax, emissions trading schemes

4 4 Climate change mitigation measures Key objectives Improve energy efficiency and reduce GHG emissions Key policy instruments Emissions standards, labelling on energy performance Key WTO Agreement TBT Agreement Internalize environmental costs Carbon tax, emissions trading schemes GATT Promote development & deployment of climate- friendly technologies SCM Agreement Financial Mechanisms: R&D, fiscal, price and investment measures

5 5 Outline of the presentation Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy Price and market mechanisms to internalize environmental cost Technical requirements to promote the use of climate-friendly goods and technologies

6 Price and market mechanisms to internalize environmental cost

7 7 Carbon tax: Key characteristics Energy tax on Fossil Fuels Different tax base Carbon tax Energy content (more heavy on oil and gas Carbon content (more heavy on coal) Implicit Carbon Tax Tax on the carbon content of fossil fuels, often combined with a tax on energy use

8 8 Emissions trading scheme: Definition System that Fixes a cap on total emissions Translates the cap into allowed emissions to cover emissions equal or below the size of the cap Creates a market in which these allowances can be traded at a price set by the market

9 9 Emissions trading scheme: Important design characteristics Emission targets Overall emission level (cap-and-trade) Emission standard for each source (rate-base) Number of participants and sectors covered Type of gases covered Allocation method Free allocation based on historical emission levels (Grandfathering) or on emissions per unit of output (benchmarking) Auctioning Linkages with other emission trading schemes Flexibility mechanisms such as banking, borrowing

10 10 Emissions trading scheme: Where? European Union (the worlds largest GHG ETS), since 2005 New Zealand, legislation passed on 25 November 09 Australia? (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 11 Effectiveness: Carbon tax vs. ETS ETS Carbon tax Price is determined directly by the regulators through the tax rate (exogenously) Price is determined by the market (endogenously) 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) Environmental uncertainty? Price uncertainty?

12 12 Environmental effectiveness 2 key intended environmental effects of a carbon tax and an ETS Direct effect, i.e. reduction of GHG emissions, by setting a price on emissions Indirect effect, through recycling of fiscal or auctioning revenues to fund e.g. investment in more climate-friendly technologies

13 13 Climate change border adjustments Relevant WTO rules Rationale

14 14 Climate change border adjustments: Rationale Emissions reduction policies are not applied universally Competitiveness loss Carbon leakage This may give rise to

15 15 Climate change border adjustments: Rationale In particular for energy intensive industries However, effects are still uncertain Concern: enhanced competitiveness (economic) of non carbon constrained producers could lead to carbon leakage (environmental)

16 16 Climate change border adjustments: Rationale Competitiveness Ability of firms and sectors to maintain profits and market shares Definition Effects 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 17 Climate change border adjustments: Rationale Carbon leakage Increase in CO 2 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 another IPCC Definition Risk of energy-intensive industries relocating to countries with weaker environmental policies (carbon havens) linked to differences in carbon price

18 18 Climate change border adjustments: Rationale Border adjustment measures To offset asymmetries in competitiveness To avoid carbon leakage

19 19 Climate change border adjustments: Relevant WTO rules Key legal challenges for a case-by-case analysis Coverage? Consistency? Justifiability? The jury is still out and many questions remain unanswered!

20 20 Climate change border adjustments: Relevant WTO rules Importance to define the instrument at hand to determine relevant WTO/GATT provisions A border adjustment to a tax? A border adjustment to another carbon cost, e.g. an ETS? Coverage?

21 21 Climate change border adjustments: Relevant WTO rules Two Situations BTA on imports (equivalent to a domestic tax) BTA on exports (i.e. a refund of domestic tax before exportation) Implementation of the destination principle to ensure trade neutrality The GATT Working Group on Border Tax Adjustments (1970) Coverage?

22 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 23 Submit emissions credits acquired abroad to cover the emissions during the production process of the imported good Climate change border adjustments: Relevant WTO rules Hold emission allowances, up to the amount of CO 2 emitted during the production of imported products and applied on a per unit basis to each good Potential requirements on importers A border adjustment to a regulation, e.g. an ETS? Coverage?

24 24 Climate change border adjustments: Relevant WTO rules GATT Article III.2 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.4 Can 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?

25 25 Climate change border adjustments: Relevant WTO rules With basic principles, e.g. non discrimination Most Favoured Clause National treatment Prohibition to discriminate between like products Consistency?

26 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 27 Climate change border adjustments: Relevant WTO rules Prohibition to discriminate between like products Except if... Consistency?

28 28 Climate change border adjustments: Relevant WTO rules Under certain conditions, Members can adopt trade-related measures aimed at protecting the environment WTO rules, as confirmed by jurisprudence the right of Members to take regulatory measures to achieve legitimate policy objectives Essential to maintain a balance between the rights of other WTO Members under basic trade rules Justifiability?

29 29 Climate change border adjustments and WTO rules Justifiability? Several disputes on measures that sought to achieve a variety of policy objectives Conservation of clean air from air pollution Protection of human health from risks posed by asbestos Conservation of sea turtles from incidental capture in commercial fishing Protection of human health from risks posed by the accumulation of waste tyres WTO jurisprudence has confirmed that WTO rules do not trump environment, as long as…

30 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 constitutes a means of arbitrary/unjustifiable discrimination or a disguised restriction on international trade Environmental measures must not be applied in a manner which constitutes a means of arbitrary/unjustifiable discrimination or a disguised restriction on international trade

31 31 Climate change border adjustments: Relevant WTO rules Implementation is key! Justifiability? Major practical challenges in implementation in assessing product-specific emissions fluctuations of the carbon price First best option is a successful multilateral agreement! existence of carbon leakage …

32 Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy

33 33 Rationale May therefore need to be reinforced by national policies Development & deployment of new CC friendly technologies May be occurring at a slower pace than desirable from an environmental point of view Cost of renewable energy is generally not competitive with wholesale electricity and fossil fuel prices Negative factors Environmental externality: without cost, no direct incentive to find ways to reduce emissions Learning cost

34 34 Type of support 2 main types of support Incentives to promote invention of new climate- friendly technologies and goods Incentives to encourage the deployment of climate-friendly goods and technologies and the increased use of renewable sources of energy

35 35 Incentives to promote inventions of new cc technologies Grants Support development of new technologies, e.g. to finance research on renewable energy technologies Awards (ex post or ex ante) e.g. in the context of a competition to recompense for an innovation Example: In Korea, the Automobile Low Emission Technology Development Support funded research institutions developing, inter alia, hybrid vehicles for use as public shuttle buses Example: Bright Tomorrow Lighting Prizes (US) to develop technologies for a new 21 st Century Lamp to replace 60 watt incandescent light bulbs and PAR 38 halogen lamps

36 36 Incentives to promote deployment of CC technologies & renewable energy 3 main types of financial support Fiscal measures Price support Investment support

37 37 Incentives to promote deployment of CC technologies & renewable energy Fiscal measures (e.g. tax reductions, tax credits) To increase consumption of certain technologies To facilitate investment in production of CC goods & renewable technology Example: Chinese governments reduction of income taxes for producers of wind and biogas power projects Example: reduction in value- added tax (VAT) for small hydroelectric, wind and biogas power generation plants in China

38 38 Incentives to promote deployment of CC technologies & renewable energy Price support Feed-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 consumers 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, certain provinces in Canada, Thailand and Mexico Examples: United States, Germany, Spain, Italy, France, Thailand and China

39 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 Grants Percentage 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 technologies Favourable lending conditions Or 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 40 Relevance to Trade Governmental funding policies may have an impact on the price and production of low-carbon goods and technologies Such policies lower the costs for producers, leading to lower product prices Lower prices may reduce exporting countries access to the market of the subsidizing country or may increase the exports of the subsidizing country Lower costs of installing emission- reducing technologies enable industries to maintain international competitiveness

41 41 Agreement on Subsidies and Countervailing Measures Key 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 ) Relevant WTO rules

42 Technical requirements to promote the use of climate- friendly goods and technologies

43 43 Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on designBased on performance Best used when few options for controlling emissions Prevalent to improve energy efficiency in appliances and buildings more flexibility Japans 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 44 Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on designBased on performance Defining productsDefining processes Mainly address energy efficiency & emissions related to the use of the product May result in direct environmental outcomes, as they improve energy efficiency or limit emissions to a certain level during production

45 45 Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on designBased on performance Defining productsDefining processes Mandatory Voluntary Minimum Energy Performance Standards (MEPS) for appliances (Australia) ENERGY STAR (United States)

46 46 Key Characteristics Emissions/ energy efficiency standards and regulations can be… Based on designBased on performance Defining productsDefining processes Mandatory Voluntary PublicPrivate Minimum energy-efficiency performance standards for major domestic appliances (Canada) Leadership in Energy and Environmental Design (LEED) in the building sector (United States)

47 47 Key compliance tools: Labelling Most OECD countries (energy-efficiency labelling) Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia Also examples of voluntary energy labelling programmes for household appliances (E.g. Thailand, Hong Kong, China, India, Brazil) Scope

48 48 Key compliance tools: Labelling Scope Most OECD countries (energy-efficiency labelling) Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia Information covered Products energy performance/emissions levels while in operation Products entire life-cycle, including its energy efficiency e.g. EU, Australia, Canada and US require energy- efficiency labels for several household appliances e.g. Nordic Swan, German Blue Angel and the EUs eco-label Flower The issue of food miles

49 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 food The real carbon footprint of a product would need to look at its entire life- cycle

50 50 Key compliance tools: Labelling Comparative labels compare performance among similar models Endorsement labels Seals of approval assuring consumers that a product meets certain criteria Type of instrument e.g. for household appliances in Australia, EU, Canada, US, Brazil, Tunisia, China, Thailand and Korea e.g. Energy Star label (US), Brazil, Thailand and China (Certificate for Energy Conservation Product)

51 51 Key compliance tools: Conformity assessment to determine whether the requirements in standards & regulations are fulfilled Objectives give consumers confidence in the integrity of products add value to manufacturers marketing claims

52 52 Key compliance tools: Conformity assessment Testing Inspection Type of instrument Certification Accreditation Metrology Ex post efficiency testing on labelled appliances (Electricity Generating Authority of Thailand) In the building sector, the Leadership in Energy and Environmental Design (LEED) (US) Mark that energy performance of regulated energy- using products has been verified (Canada)

53 53 Key compliance tools: Restrictions and prohibitions Bans & regulatory measures to prevent the use of fluorinated GHGs (HFCs, PFCs, SF6) (e.g. Austria, Denmark, Switzerland & EU) Ban of certain less energy-efficient products, e.g. incandescent light bulbs in Australia, EU, Canada, Chinese Taipei & Argentina Examples to restrict the sale or prohibit the import of certain energy-inefficient products Objectives to ban the use of certain greenhouse gases in the composition of products

54 54 Environmental effectiveness Increase in energy efficiency of products, e.g. electrical equipment Measurement tools Behavioural changes of consumers and manufacturers In California, the energy use of refrigerators in 2000 was more than two-thirds lower than in 1974 (energy-efficiency standards are in place and regularly updated since the late 1970s) In 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 55 Relevant WTO rules? Agreement on Technical Barriers to Trade / GATT Key principles include Harmonization Non discrimination Avoidance of unnecessary trade barrier

56 56 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change


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