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

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

5. Outline of the presentation
Price and market mechanisms to internalize environmental cost
Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy
Technical 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 use
Energy tax on Fossil Fuels
Carbon tax
“Implicit Carbon Tax”
Different tax base
Energy content (more heavy on oil and gas
Carbon content (more heavy on coal)

8. Emissions trading scheme: Definition
Fixes a cap on total emissions
Translates the cap into “allowed emissions” to cover emissions equal or below the size of the cap
System that
Creates 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 targets
Emission standard for each source (rate-base)
Number of participants and sectors covered
Type of gases covered
Free allocation based on historical emission levels (“Grandfathering”) or on emissions per unit of output (“benchmarking”)
Allocation method
Auctioning
Linkages with other emission trading schemes
Flexibility mechanisms such as banking, borrowing

10. Emissions trading scheme: Where?
European Union (the world’s 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. 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 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. Climate change border adjustments
Rationale
Relevant WTO rules

14. Climate change border adjustments: Rationale
Competitiveness loss
Emissions reduction policies are not applied universally
This may give rise to
Carbon 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
Competitiveness
Definition
Ability of firms and sectors to maintain profits and market shares
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. Climate change border adjustments: Rationale
Carbon leakage
Increase 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 another
IPCC Definition
Risk 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 competitiveness
Border adjustment measures
To avoid carbon leakage

19. Climate change border adjustments: Relevant WTO rules
Coverage?
Key legal challenges for a case-by-case analysis
Consistency?
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 provisions
A 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 good
Potential requirements on importers
Hold 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.2
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?
GATT Article III.4

25. Climate change border adjustments: Relevant WTO rules
Consistency?
National treatment
With basic principles, e.g. non discrimination
Most Favoured Clause
Prohibition 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” products
Except if...

28. Climate change border adjustments: Relevant WTO rules
Justifiability?
WTO rules, as confirmed by jurisprudence
Under certain conditions, Members can adopt trade-related measures aimed at protecting the environment
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

29. Climate change border adjustments and WTO rules
Justifiability?
Conservation of clean air from air pollution
Conservation of sea turtles from incidental capture in commercial fishing
Several disputes on measures that sought to achieve a variety of policy objectives
Protection of human health from risks posed by asbestos
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. 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

31. Climate change border adjustments: Relevant WTO rules
Justifiability?
Major practical challenges in implementation
 in assessing product-specific emissions
 fluctuations of the carbon price
existence 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 view
Development & deployment of new CC friendly technologies
May therefore need to be reinforced by national policies
Environmental externality: without cost, no direct incentive to find ways to reduce emissions
Cost of renewable energy is generally not competitive with wholesale electricity and fossil fuel prices
Negative factors
Learning cost

34. Type of support 2 main types of support
Incentives to promote invention of new climate-friendly technologies and goods
2 main types of support
Incentives 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 technologies
Grants
 Example: In Korea, the Automobile Low Emission Technology Development Support funded research institutions developing, inter alia, hybrid vehicles for use as public shuttle buses
Awards (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 measures
3 main types of financial support
Price support
Investment support

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: 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 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 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 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. 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. Agreement on Subsidies and Countervailing Measures
Relevant WTO rules
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)

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

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

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

46. Emissions/ energy efficiency standards and regulations can be…
Key Characteristics
Emissions/ energy efficiency standards and regulations can be…
Based on design
Based on performance
Defining products
Defining processes
Mandatory
Voluntary
Public
Private
Minimum 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)
Scope
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)

48. Key compliance tools: Labelling
Most OECD countries (energy-efficiency labelling)
Scope
Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia
Product’s energy performance/emissions levels while in operation
Information covered
e.g. EU, Australia, Canada and US require energy-efficiency labels for several household appliances
Product’s entire life-cycle, including its energy efficiency
e.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 food
The 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 models
Type of instrument
e.g. for household appliances in Australia, EU, Canada, US, Brazil, Tunisia, China, Thailand and Korea
Endorsement labels
 Seals of approval assuring consumers that a product meets certain criteria
e.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 fulfilled
give consumers confidence in the integrity of products
Objectives
add value to manufacturers’ marketing claims

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

53. Key compliance tools: Restrictions and prohibitions
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
Bans & regulatory measures to prevent the use of fluorinated GHGs (HFCs, PFCs, SF6) (e.g. Austria, Denmark, Switzerland & EU)
Examples
Ban 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 equipment
In 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 tools
Behavioural changes of consumers and manufacturers
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. Relevant WTO rules? Agreement on Technical Barriers to Trade / GATT
Non discrimination
Key principles include
Avoidance of unnecessary trade barrier
Harmonization

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