Trade and Investment Rules for Energy
I. Maintaining open Markets - Border Measures and Energy Trade
GATT Limitations and Restrictions on the Use of BTAs
Article II, paragraph 2 of the GATT governs the use of BTAs. That provision allows the use of border taxes (in addition to bound customs duties) subject to the requirement that an equivalent domestic tax is applied to a "like" domestic good, and that the measure does not favour domestic products by protecting them from international competition. This BTA provision has historically been used in narrow circumstances, notably for application of Goods and Services Taxes (GST), Value-Added Taxes (VAT), excise taxes and other like measures on imported goods - but always with the proviso that such taxes are equivalent in every respect to taxes applied internally to the same or similar domestic product.
Some of the legal literature and discussions in international organizations have suggested that the BTA rule in Article II has broader application, and can be part of the armament governments can use in the battle against climate change. These proponents argue that BTAs can be used to tax environmentally "unfriendly" goods as well as carbon related Production and Process Methods (PPM) used to make those goods. A series of GATT and WTO cases are frequently cited in support of these arguments, including the 1987 Superfund case, the 1998 Shrimp-Turtles case, and the 2001 Canada-E.U. Asbestos case.
Notwithstanding these arguments, the Task Force finds no GATT or WTO decision that directly addresses the use of BTAs in relation to climate change or GHG reduction policies. Contrary to some of the foregoing arguments, none of the oft cited GATT and WTO panel decisions addresses the applicability of BTAs to deal with GHG reduction, either by taxing the goods or the production methods or PPMs used to make those goods. Thus, the Task Force concludes that jurisprudence offers doubtful support for the proposition that unilateral border taxes are consistent with GATT Article II when applied as part of national GHG reduction implementation measures.
A review of Article II in the context of the GATT as a whole reinforces this conclusion.
Article II was intended for specific cases - to equalize manufacturing, excise and value-added-type taxes applied internally to goods entering the country. Use of BTAs for purposes of carbon reduction stretches these GATT provisions beyond their intended scope.
Moreover, BTAs are only allowed if they meet the non-discrimination requirements of the GATT. If a border tax is applied to carbon related imports and not to the same or similar domestic goods in exactly the same manner, or if the tax has a heavier commercial effect than a tax applied to like domestic goods, it would contravene Article II.
Similarly, if a border tax were not applied to the same imported products from all sources in equal fashion - that is, if it discriminates between goods from different countries on the basis of their domestic GHG reduction policies or measures - it would offend the "Most Favoured Nation" (MFN) principle under GATT Article I.
While Article II allows BTAs as a charge equivalent to an internal tax on the same kind of product, there is a difference between that and the PPMs used to make that product. On its face, Article II only allows BTAs on imported "products" and makes no reference to taxes that reach down to the production process used to make those products.
Domestic cap-and-trade systems, such as in the Waxman-Markey bill and the E.U. Emissions Trading System, are arguably not "taxation" measures. It is therefore unlikely that these would fall within Article II as an internal "tax" that can justify a tax adjustment on imports. It is even less likely that border taxes on imports from countries where cap-and-trade systems do not exist would be legal under GATT.
In addition to these legal uncertainties, national GHG emission policies that extend beyond the border - for example, internal restrictions on use, sale or distribution of the goods after importation - have to meet the national treatment obligations under GATT Article III, including the requirement that no measure can be applied that denies imports "equal competitive opportunities" to those accorded to domestic products. That rule is found throughout GATT and WTO case law. The Task Force does not need to cite these cases here. However, it is useful to refer to one of many pronouncements on this issue from the well-known Japan - Alcoholic Beverages case (1996) in the WTO, where the panel said,
"The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures . . . Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products. The intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given."
The conclusion is that imported goods with the same or similar physical and other characteristics, end uses and, importantly, that compete in the same markets as domestic goods, must be given fully equivalent treatment by the importing country. Equality of treatment means full and undiminished application of both MFN and national treatment as set out in the General Agreement. It also means that imports cannot be denied the same "competitive opportunities" accorded to domestic goods in the local market. Any BTA or other measure that failed to respect this fundamental rule would be contrary to the GATT and the WTO Agreement.
The "General Exceptions"
Tariff bindings and non-discrimination treatment of imports are fundamental treaty obligations under the GATT and the WTO Agreement. The question is whether WTO members can override these obligations and tax carbon on imports through recourse to certain GATT provisions that allow "exceptions" to otherwise applicable treaty obligations.
These exceptions are contained in GATT Article XX and can be invoked by WTO members under very narrow circumstances, the most relevant being to apply laws or other measures "(b) necessary to protect human, animal or plant life or health" and "(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption." Importantly, these exceptions require not only that the measure meet these specific criteria, but also that it not be a disguised trade restriction or applied in a discriminatory manner otherwise contrary to the GATT. The Article XX exceptions are the focus of debate in the context of climate change and carbon reduction measures that apply at the border.
There is a vast amount of GATT and WTO case law regarding these exceptions. Generally speaking, because they allow departures from treaty obligations, dispute settlement panels have applied stringent conditions to their use. These conditions prevent the abuse of these exceptions and the frustration of the liberalized trade foundations of the GATT and the WTO Agreement. As stated by the WTO Appellate Body in the 1996 United States-Gasoline case,
". . . while the exceptions of Article XX may be invoked as a matter of legal right, they should not be so applied as to frustrate or defeat the legal obligations of the holder of the right under the substantive rules of the General Agreement."
Successive panel rulings have consistently followed this doctrine and held that governments bear the burden of justifying any measure taken under these exceptions, and demonstrating that the measure is both necessary and directly connected with the need to protect human life or health or truly is a conservation measure. An important illustration of this approach is the recent decision of the WTO Appellate Body in the case of Retreaded Tires (the E.U. versus Brazil in 2007), where the Appellate Body elaborated on the kind of scientific and other evidence required to justify an exceptional trade restriction under Article XX directed to protecting human life or health.
Even with this jurisprudence, the case law leaves several questions involving these exceptions unanswered, particularly in the context of the Kyoto Protocol or other national GHG reduction measures. Until the jurisprudence evolves or some form of international consensus emerges, these points remain unsettled. Even when a case is decided, all aspects of the issue may not be resolved. In the meantime, there is a danger that governments may be enacting measures of one sort or another in the context of the UNFCCC and the Kyoto Protocol and the COP-15 Copenhagen meeting in 2009 that may have negative effects on energy trade.
GATT and WTO Parties Can Rely on Their Treaty Rights
While membership in the WTO and the GATT is close to universal with some 153 members, a more restricted number of States are parties to the UNFCCC and the Kyoto Protocol. As a matter of treaty law, legal obligations under these climate change treaties are not binding on non-parties. Thus, should BTAs be used to implement carbon reduction obligations by Kyoto Protocol parties, those measures could not apply to States outside the Kyoto system. Those States, if members of the WTO, would be entitled to rely on their GATT rights should BTAs be applied that were inconsistent with GATT/WTO obligations. Moreover, all WTO members, whether party to the Kyoto Protocol or not, would be entitled to challenge impermissible BTAs in the WTO Dispute Settlement Body under the same circumstances.