Publications

Trade and Investment Rules for Energy

I. Maintaining open Markets - Border Measures and Energy Trade

Issues and Challenges

Governments appear to be moving toward legislation that would establish a "price" on GHG emissions and apply some form of Border Tax Adjustment (BTA) on imported goods as part of broader environmental measures. As this report is being written, comprehensive U.S. climate change legislation (the Waxman-Markey bill) has passed the House of Representatives and is under active consideration in the U.S. Senate. The current version of the bill will apply border taxes on carbon intensive imports from countries that do not have comparable carbon reduction laws in force.

The rationale behind the Waxman-Markey bill and proposals in other jurisdictions is that these kinds of border measures: (a) will level the playing field by equalizing the treatment of imports from countries who have failed to implement GHG reduction policies and whose industries do not bear the same burden as industries already subject to domestic carbon reduction obligations; and (b) eliminate or reduce the transfers of GHG emissions from regulated to unregulated jurisdictions (the "carbon leak" phenomenon).

Notwithstanding the objective of combating climate change, taxing carbon intensive imports and their production processes entails potentially deleterious impacts on international trade, particularly for energy and energy-related products. Curtailing energy trade, in turn, will retard economic development and exacerbate the current economic crisis. The Task Force therefore sees a need to balance environmental concerns with ensuring economic revival and a return to global prosperity through the continued availability of the energy resources needed to accomplish these objectives.

Together with economic considerations, the use of BTAs on carbon emitting goods and processes raises legal issues involving the GATT and the WTO Agreement. Whether such border measures are legal has never been tested before a GATT or WTO dispute settlement panel. Their introduction would almost certainly result in protracted trade litigation, causing additional uncertainty for global trade at a time when ensuring the free flow of goods and services is essential for global economic recovery.

With these immediate issues before it, the Task Force concluded that it was both necessary and timely for WEC to set out its views on the possible use and application of border measures related to CO2 emissions. Agreeing that urgent international action is needed on climate change, the Task Force believes that, at the same time, national CO2 reduction policies must be carefully crafted to be fully consistent with the GATT and the WTO Agreement and avoid disrupting markets for energy and energy products.