Trade-related Measures Addressing Climate Change And WTO: Conflict And Coordination

This paper will undertake a study on the relationship between the trade-related measures addressing climate change and WTO rules from legal perspective. First, it analyzes the possible conflicts between them. Secondly, it seeks the effective means to resolve the conflicts. Lastly, it takes an overview of China's legislation and practice in related areas, summarizes the challenges and influences the various trade-related measures addressing climate change impose on China's trade, and provides the countermeasures.This paper consists of three parts, namely, the introduction, the main body and conclusion.The introduction provides an overview of the research background, the current research results domestically and abroad, the purpose and significance, the research methods, and the framework of this paper. The main body includes five chapters. Chapter one summarizes the issues of climate change we are confronted with currently, the international and domestic laws and measures addressing climate change, the influence between climate change and trade liberalization, and the relationship between the trade-related measures addressing climate change and WTO rules.Chapter two examines the relationship between carbon emission trading system and WTO rules. Currently, there're two types of carbon emission trading. One is based on allowances, also called cap-and-trade. The other is based on project, mainly including Clean Development Mechanism and Joint Implementation project based on Kyoto Protocol. The multilateral agreements related to carbon emissions trading within the WTO framework include GATT, GATS and SCM. The measures applied directly to the trade of carbon emission allowances fall outside the scope of GATT at least in short term since the allowances are not goods.However, it is not impossible that the trade of carbon emission allowances will be covered by GATT in the future. Specifically speaking, the measures applied directly to the trade of carbon emission allowances will conflict with the provisions of GATT in two situations. The first situation is that the quantitative restrictions on the trade of carbon emission allowances would violate Article XI of GATT. The second situation is that the import restrictions on the carbon emission allowances issued by certain countries would violate Article XI and Article I of GATT. However, the first type of measures would very likely be justified under paragraph (b) of Article XX of GATT if they are implemented appropriately. Nevertheless, it is more difficult for the second type of measures to be justified under paragraph (b) of Article XX of GATT. Moreover, the countries adopting carbon emissions trading system would very likely impose certain requirements or restrictions on related products, such as requiring that the exporting countries also adopt the similar system, since the production cost of the domestic products would be increased due to the application of carbon emissions trading system. Such measures undoubtedly fall within the scope of GATT because they are applied to tangible products.GATS does not apply to the measures affecting carbon emissions trading adopted by WTO members since the allowances could not be deemed as services. However, the CDM/JI projects should be deemed as services defined by GATS. Therefore, the measures affecting the investment and development of such projects taken by WTO members fall within the scope of GATS. Moreover, the CDM/JI projects should be classified as environmental services sector in the Schedule of WTO members. Besides, the measures affecting the trade of services related to carbon emissions trading also fall within the scope of GATS.Among all the components of the carbon emissions trading, what is relevant to SCM is the initial allocation of allowances. To allocate all of the allowances freely does not constitute subsidy, while to allocate part of the allowances freely constitutes actionable subsidy.As for carbon emissions trading, the challenges confronting China include two aspects. First, China may be confronted with unilateral trade restriction measures in the traditional areas of trade of goods and trade of services. Second, the export of CERs may be confronted with quantitative restrictions or other discriminatory measures. Furthermore, the measures applied to the investment and operation of CDM projects should be governed by the rules of GATS if such projects are deemed as services. Facing the above challenges, China should take countermeasures from the following four aspects: (1) to make full use of WTO rules to protect our country's interest; (2) to reinforce the legislation on controlling the emission of greenhouse gases; (3) to build carbon emission trading information exchanging platform and cultivate carbon emissions trading market; and (4) to establish carbon emission trading scheme when it is appropriate.Chapter three focuses on the relationship between border tax adjustment measures addressing climate change and WTO.Border tax adjustment measures include two types. One is to apply the same domestic tax to imported products as to like domestic products. The other is the rebate of tax with regard to exported products. Based on the objects of tax, border tax adjustment measures addressing climate change can be divided into two types. One is to apply carbon/energy tax directly to fossil fuels. The other is to apply carbon/energy tax to the imported products based on embodied carbon/energy.1 The former is aimed at the greenhouse gas emission during the consumption of the products, and the latter is aimed at the greenhouse gas emission during the manufacturing process of the products. Since the former is indirect tax applied directly to imported products, it will not violate WTO rules as long as the tax rate applied by the WTO members to imported fossil fuels is not higher than that applied to like domestic fossil fuels, and the tax rate applied to the fossil fuels originating from one WTO member is not higher than that applied to the like fossil fuels originating from any other country. The latter is essentially in conflict with WTO rules, since it creates discrimination among like products. Therefore, WTO members must ensure that such measures meet the requirements of Art.XX of GATT so that they could be justified. If citing paragraph (b) of Art.XX, the WTO member should pay special attention to the requirement of"necessity". If citing paragraph (g) of Art.XX, the WTO member should pay special attention to the requirements of"relating to……"and"in conjunction with restrictions on domestic production or consumption". Lastly, such measures must meet the requirement of the chapeau of Art.XX, namely, not to constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.Rebate of carbon/energy tax upon export can also be divided into two types in accordance with the basis. One is rebate of carbon/energy tax upon export of fossil fuels, and the other is rebate of carbon/energy tax applied to the fossil fuels consumed in the production of the exported products. As for the first type, the exemption of exported fossil fuels from carbon/energy taxes, or the rebate of such duties or taxes in an amounts not in excess of those which shall accrue or have accrued, shall not be deemed to be export subsidies. The basis for the second type of carbon/energy tax rebate is the carbon/energy tax applied to the fossil fuels consumed in the production process of the exported products, which belongs to prior-stage cumulative indirect tax on goods or services used in the production of exported products, so the latter part of paragraph (h) of Annex I of SCM shall apply to such a situation. In other words, WTO members could exempt or return the carbon/energy tax applied to the fossil fuels consumed in the production of the exported products, even if the like products sold for domestic consumption can not enjoy such treatment. Of course, the amounts of exemption or rebate of carbon/energy taxes shall not exceed those which shall accrue or have accrued.As a big exporting country of energy-intensive products, China will undoubtedly suffer serious impact from border tax adjustment measures addressing climate change. Therefore, China should take countermeasures from the following aspects: (1) to adjust and optimize the energy sources, and improve energy efficiency ; (2) to adjust and optimize the pattern of export, and restrict the export of energy-intensive, pollution-intensive, and resources-intensive products; (3) to green the tax system, and reinforce the resource protection function of tax; (4) to reinforce the research of related WTO rules, and make full use of the WTO dispute settlement system.Chapter four considers the relationship between product carbon labeling and WTO. Product carbon label is a kind of environmental label which reveals the carbon footprint of certain products. Product carbon labeling can be divided into two types in accordance with the institution in charge of it. One is conducted by government, and the other is conducted by non-governmental bodies. Product carbon labeling conducted by government can be further divided into enforceable carbon labeling and voluntary carbon labeling. As compared with other kinds of product labels, product carbon label is prominent in revealing the production and process method which is not related to the product's characteristics.Product carbon labeling is mainly relevant to GATT and TBT. According to the general interpretative note to Annex 1A, the provision of TBT shall prevail in the event of conflict between a provision of the GATT and a provision of TBT. Enforceable carbon labeling conducted by government and related to consumption of products falls within the scope of TBT. The obligations for WTO members stipulated by TBT include: (1) most-favored-nation treatment and national treatment; (2) not to be more trade-restrictive than necessary to fulfill a legitimate objective; (3) to use relevant international standards as the basis for drafting technical regulations; and (4) the obligations related to transparency such as notice and consultation.Voluntary carbon labeling conducted by government and related to consumption of products also falls within the scope of TBT. The obligations for WTO members are provided by Art. IV and Annex III of TBT. The obligations for WTO members stipulated by GATT are mainly national treatment and most-favored-nation treatment. As for the product carbon labeling conducted by non-governmental bodies, WTO members also shall take such reasonable measures as may be available to them to ensure that non-governmental bodies comply with the code of good practice in Annex III to TBT. If the non-governmental bodies are controlled by the government in practice, and dependent on the government to a great extent, the product carbon labeling conducted by such non-governmental bodies shall be deemed to be actions of government. If such non-governmental bodies violate the obligations of national treatment and most-favored-nation treatment of GATT, the government shall assume the legal responsibilities accordingly.Currently, many scholars abroad suggest using product carbon labeling to urge China to adopt measures to reduce the emission of greenhouse gases. Accordingly, China should take countermeasures from the following aspects: (1) to promote the product carbon labeling domestically; (2) to seek mutual acknowledgement of product carbon labels with other countries or districts; (3) to take part in WTO negotiations on relevant issues initiatively so as to facilitate the formation of rules in favor of China.Chapter five analyzes the relationship between climate change subsidy and WTO rules. The adverse effect of climate change subsidy on trade is that the subsidy reduces the cost of domestically produced products so it impairs the market access chances of like products from other countries which do not provide such subsidies. Climate change subsidy can be divided into two types in accordance with the purpose. The first type is really aimed to address climate change, but its effect leads to discrimination towards producers abroad. Such kind of subsidies should be allowed to be used to a certain extent. The second type may have no real impact on climate change, but the result of domestic industry rent seeking. Such kind of subsidies should be prevented and prohibited by multilateral trade rules. However, many subsidies really aimed to address climate change may be classified as prohibited subsidies or actionable subsidies in accordance with the current subsidies rules, so this will limit the freedom of WTO members to adopt legitimate climate change subsidies. Therefore, it is necessary to reform existing WTO subsidies rules in order to provide adequate scope for legitimate subsidies. Currently, the feasible approach is to supplement subsidies rules with an explicit environmental exception along the lines of Article XX of GATT. Due to scientific uncertainties and interception of politics, it is difficult to draw a clear line between legitimate subsidies and protectionist subsidies. Thus, it requires that WTO panels and Appellate Body examine both the substantive context for and the process leading to the choice of the subsidy. Another point deserving attention is that the action of maintaining lax regulations on climate change shall not be deemed as a subsidy in accordance with existing WTO rules. Other WTO members are not empowered to take countervailing measures towards products originating from such countries. China should firmly hold the stance of not bearing enforceable obligations of reducing emission of greenhouse gases. Furthermore, China should firmly oppose to broaden the definition of subsidy so as to embrace the action of maintaining lax regulations on climate change.The last part identifies the main conclusions of the article.