Publications

Trade and Investment Rules for Energy

I. Maintaining open Markets - Border Measures and Energy Trade

Background

Trade and Climate Change
Both the UNFCCC and the 1997 Kyoto Protocol recognize the interplay between open markets and the commitments to reduce GHG emissions. The UNFCCC states in Article 3 that Parties "should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth." Importantly, the Kyoto Protocol provides that Parties "shall strive to implement policies and measures . . . in such a way as to minimize adverse effects, including . . . effects on international trade . . ." (Article 2, paragraph 2). The Task Force interprets these provisions as exhorting governments to maintain open markets and adhere to basic GATT rules as they implement national climate change policies.

The 192 States that ratified the UNFCCC meet annually in the Conference of Parties (COP) to agree on measures to implement the emission reduction targets under the Convention. At COP-13 in 2007, Parties adopted the Bali Action Plan, which sets out a negotiating process to achieve agreement on the next phase under the UNFCCC, following the expiration of the initial Kyoto implementation period in 2012. The next UNFCCC milestone will be COP-15, to be held in Copenhagen in November and December of 2009, with the objective of reaching international agreement on a post-2012 climate change agenda.

Border Measures under Consideration
The idea of using BTAs to deal with carbon emissions has been gaining momentum over the last number of years. A proposal to use border taxes as part of European GHG reduction measures had been passed by the European Parliament in 2007. While that proposal was not included in the E.U. Council's recent decision of 6 April 2009 on the revised European climate energy package, it illustrates the currency of various kinds of border tax measures under consideration in dealing with climate change issues.

Major climate change bills had been debated in the U.S. Congress, pre-dating the current Waxman-Market bill. The previous Lieberman-Warner bill was the most comprehensive of these and would have created a cap-and-trade system and required importers of goods from countries without a "comparable" system to purchase emission allowances at the American border. The bill failed to secure enough support in the Senate to ensure its passage, and it and similar proposals died with the end of the last session of the Congress in early 2009.

Under the new Congress, the situation has changed. The Waxman-Markey bill (the "American Clean Energy and Security Act of 2009") passed the House of Representatives in June 2009 and is now proceeding through the Senate. Under this bill, border taxes in the form of "import allowances", at some future point, will be applied to carbon-intensive imports into the U.S. that are not subject to similar measures in the exporting country. The rationale is to counter "carbon leakage" - that is, production moving from jurisdictions that impose CO2 reduction measures to jurisdictions that do not have these requirements or whose laws are less stringent. However, these measures are as much aimed at international competitiveness concerns facing American industries that bear internal carbon reduction obligations versus those foreign competitors that do not bear the same burdens.

Whatever the motivations, knowledgeable experts have concluded that BTAs along the lines discussed in the E.U. and the U.S. (and in other jurisdictions) could contravene treaty obligations under the GATT and the WTO Agreement. Given these concerns, and given the unsettling effect of potentially protracted trade litigation in the WTO, such measures could further hinder the international flow of energy and energy-related goods.