Unresolved Issues in WTO Law

Unresolved Issues in WTO Law
& climate change regulation
Issues that may affect WTOconsistency of climate measures
Environmental subsidies
Processing and production methods
Multilateral environmental agreements
Technical barriers to trade
Relationship between different WTO
Emerging climate change policies
• Two types of WTO concerns:
– Subsidies
– Discrimination (MFN, NT)
• Four types of measures:
– cap-and-trade approach
– standards-based policies, which require the adoption
of specific measures (eg labels) or set source-specific
emissions limits
– carbon taxes
– border tax adjustments
Environmental Subsidies
What if we apply
a tax on carbon footprints?
As we analyze the legal issues below, consider
whether differential tax rates based on different
carbon footprints would be consistent with WTO
subsidies law.
Applicable WTO Agreements
• SCM Agreement applies cumulatively with GATT
Articles VI and XVI.
• SCM Agreement does not preclude action ‘under
other relevant provisions of GATT 1994, where
appropriate’ (eg Art I:1 or III).
• Agricultural subsidies can raise issues under SCM
Agreement or Agreement on Agriculture.
• TRIMS Agreement (incorporates some GATT)
• Order of analysis: AoA, SCM, then TRIMS/GATT.
SCM Agreement
Actionable & prohibited subsidies
• Subsidy
– financial contribution by govt or any public body w/in
territory of Member
– benefit thereby conferred
• Prohibited (presumed specific)
– contingent on export: 3.1(a)
– contingent on use of domestic goods: 3.1(b)
• Actionable (if specific)
– multilateral action (WTO complaint)
– unilateral action (CVDs)
Art 1.1(a)(1)(i) financial contribution
• A ‘government practice’ (covers all acts of
governments or public bodies) involves
• a direct transfer of funds (financial resources and
other financial claims, not just money)
• eg grants, loans, equity infusion
• potential direct transfers of funds or liabilities (does
not depend upon the probability that a payment will
subsequently occur)
• eg loan guarantees
• Does our carbon footprint tax qualify?
Art 1.1(a)(1)(ii) financial contribution
• Govt revenue ‘otherwise due’
• requires comparison of fiscal treatment of comparable income of
taxpayers in similar situations
• a WTO Member is ‘free not to tax any particular categories of
revenues’: US – FSC (AB)
• Foregone or not collected
• eg fiscal incentives such as tax credits
• Different income tax treatment for foreign & domestic sales
(US – FSC)
• Exemption from duty on auto imports, conditional upon
domestic production requirements (Canada – Autos)
• Does our carbon footprint tax qualify?
Art 1.1(a)(1)(iii) financial contribution
• govt provides goods or services other than general
• Stumpage fees (US – Softwood Lumber IV, AB)
• or purchases goods
• Not purchases of services (US — Large Civil Aircraft
(2nd complaint), Panel)
• What if the government varies the cost of lumber
rights according the carbon footprint of the lumber
1.1(a)(1)(iv) financial contribution
• a government makes payments to a funding mechanism, or
entrusts or directs a private body to carry out one or more of
the type of functions illustrated in (i) to (iii) above which
would normally be vested in the government and the practice,
in no real sense, differs from practices normally followed by
• recognizes that (i) to (iii) could be circumvented by a
government making payments to a funding mechanism or
through entrusting or directing a private body to make a
financial contribution: (US – Softwood Lumber IV, AB)
1.1(a)(1)(iv): Private body vs. govt
• SCM Agreement distinguishes between subsidies made by ‘a
government or any public body’ and those made by a ‘private
• Financial contributions from private body only subject to SCM
Agreement if affirmative demonstration of link between
government and specific conduct of private body.
• A public body’s conduct can be attributed directly to the
State, whereas a private body’s conduct can be attributed to
the State only indirectly.
• US – Anti-Dumping and Countervailing Duties (China) AB
1.1(a) (2) financial contribution
• any form of income or price support in the
sense of Article XVI of GATT.
• Article XVI: any subsidy, including any form of
income or price support, which operates
directly or indirectly to increase exports of any
product from, or to reduce imports of any
product into, its territory.
Article 1.1(b) benefit
• ‘[N]ot all government measures capable of
conferring benefits would necessarily fall
within Article 1.1(a). If that were the case,
there would be no need for Article 1.1(a),
because all government measures conferring
benefits, per se, would be subsidies.’
• US — Softwood Lumber IV (AB)
Article 1.1(b) benefit
• ‘a financial contribution will only confer a
“benefit”…if it is provided on terms that are
more advantageous than those that would
have been available to the recipient on the
market.’ Canada – Aircraft (AB)
• Does our carbon footprint tax qualify?
– Article 1.1(b) could require an analysis of whether a benefit is
obtained from differential carbon tax rates, by whom, whether such a
benefit could have been otherwise obtainable in the marketplace, and
what the relevant marketplace is.
Article 1.1(b) benefit
• Competitive wholesale electricity markets will
rarely operate to remunerate adequately the
mix of generators needed to secure a reliable
electricity system that pursues human health
and environmental objectives through the
inclusion of facilities using solar photovoltaic
and wind technologies into the supply-mix.
• Panel Reports in Canada – Renewable Energy
and Canada – Feed-In Tariff Program
Article 1.1(b) benefit
• The absence of a general environmental
exception in the SCM Agreement makes the
role of the benefit analysis important in saving
clean energy subsidies from violating the SCM
• Can this analysis take into account that the
higher cost of clean energy incorporates the
externality of environmental harm, whereas
the lower cost of fossil fuel energy does not?
Does our carbon footprint tax
qualify as a prohibited subsidy?
• If both the domestic and imported products are substitutable inputs for
domestic production and the foregone revenue confers a benefit, there
could be a violation of SCM Agreement Article 3.1(b).
• This could be the case if countries diverge in their regulation and
reduction of carbon emissions, so that some countries engage in less
carbon-intensive production than others. Divergences in the carbon
intensity of production would probably lead to differential treatment of
imports, thereby raising issues regarding MFN treatment.
• The reference in footnote 1 to ‘the exemption of an exported product
from duties or taxes borne by the like product’ could indicate that Article
1.1(a)(1)(ii) is intended to apply to other cases where like products receive
different consumption tax treatment.
AoA, SCM & prohibited subsidies
• Export subsidy that violates AoA 3.3 & 8 (bc not
within limits in Member’s Schedule) also violates
SCM 3.1(a): US – Upland Cotton.
– Unlikely that export subsidy consistent with the AoA could
be impugned under SCM 3.1(a).
– AoA prevails where conflict: AoA permits certain export
subsidies, SCM prohibits all.
• BUT compliance with AoA domestic support
commitments violates SCM 3.1(b) if contingent on
use of domestic goods: US – Upland Cotton.
Multilateral &unilateral action
• Multilateral SCM Part III (actionable subsidies)
– Subsidy causes adverse effects in third country
markets (eg lost sales, price suppression)
– Need not quantify precise amount of subsidy
• Unilateral SCM Part V (countervailing
– Subsidy causes injury to the domestic producers
of like products
– Need to quantify precise amount of subsidy
Multilateral &unilateral action on
carbon footprints?
• Is failure to tax carbon a subsidy?
• Can we apply CVDs against products based on
their carbon footprint?
• Would the lack of a carbon tax be subject to
GATT Article III:4, TRIMS Article 2.1
• Canada – Renewable Energy and Canada – Feed-In Tariff
Program: FIT Program domestic input requirements.
• GATT Article III:8(a) did not exclude FIT Program from Art III:4;
procurement undertaken with a view to commercial resale.
• Benefit analysis saved the FIT Program from SCM 3.1(b)
• Inconsistency with GATT Art III:4 leaves open possibility of
justification under GATT Art XX, unlike SCM Agreement.
• Unlikely Art XX could be invoked as SCM defense.
• Benefit approach creates possibility that non-discriminatory
clean energy subsidies could survive a WTO challenge.
‘Like Products’ and Processing
and Production Methods
The PPM Debate
‘like products’ is a key concept
• Which environmental concerns can be taken
into consideration to determine likeness?
• Non-discrimination obligations in:
– GATT Articles I:1, III:2 and III:4
– TBT Agreement
– term is not defined in these treaty texts
• SCM Agreement & Antidumping Agreement
– term is defined in these treaty texts
criteria to determine likeness
(not a closed list)
(1) The physical properties, nature and quality of the
(2) The extent to which the products may serve the
same or similar end uses in a given market;
(3) The extent to which consumers perceive and treat
the products as alternative means of satisfying a
want or demand; and
(4) Tariff classification (not determinative)
like products analysis
• Purpose: ‘to take account of evidence which
indicates whether, and to what extent, the products
involved are – or could be – in a competitive
relationship in the marketplace’.
• Relevant market: where the products compete.
• Competitive relationship between same products
may differ in different markets and market segments.
• Competitive relationship between products is the
central issue.
Can PPMs determine likeness?
(eg related to carbon footprint)
• Only characteristics of the product as such are
relevant: US – Tuna I (Mexico) (not adopted)
• If they compete in one segment of the market,
that is sufficient: Philippines – Distilled Spirits
• Access to dolphin-safe label required to
compete in US market: US – Tuna II (Mexico)
• Does this mean that carbon footprint PPMs
relevant if they determine competitive
relationship in all segments of the market?
Another possible route:
less favourable treatment
• Legitimate regulatory distinctions ‘based
exclusively on … particular product
characteristics or on particular processes and
production methods’ would not per se
constitute less favourable treatment within
the meaning of TBT Art 2.1.
• US – Clove Cigarettes (AB)
Other hurdles to overcome with
respect to carbon labels
• Accuracy of measurement of GHGs produced in the
life cycle of a particular product
• Extent to which the carbon label discriminates
between products from different countries based on
factors other than emissions or minimal differences
• Extent to which consumers consider carbon
footprints determining factor in a given marketplace
• In TBT context, whether the issuer of the carbon
label qualifies as international standardizing body.
GATT Article XX
General exceptions
• XX(g): measures ‘relating to the conservation
of exhaustible natural resources if such
measures are made effective in conjunction
with restrictions on domestic production or
• XX(b): measures ‘necessary to protect human,
animal or plant life or health’
Article XX(g): conservation of
exhaustible natural resources
(1) Is the climate an ‘exhaustible natural resource’?
(2) Does a sufficient jurisdictional nexus exist between
all WTO Members and the global climate?
(3) How should a panel determine whether a specific
measure relates to climate change?
(4) Are the measures ‘made effective in conjunction
with restrictions on domestic production or
‘exhaustible natural resources’
• Subject to evolutionary interpretation
• Include living and non-living natural resources
• AB and GATT panels have found following to
be exhaustible natural resources: clean air;
sea turtles; salmon; herring; tuna; dolphins
• Climate change measures could qualify as:
– Clean air (control of emissions; US Clean Air Act)
– Indirect conservation of living resources
– Stable climate as the resource
jurisdictional nexus
• US – Shrimp: AB found sufficient jurisdictional
nexus between migratory sea turtles and US
• Turtles spent part of migratory life cycle in US
• No ruling on whether there is a jurisdictional
limit implied in the language of Article XX(g)
• If there is, global effects of climate change
should be a sufficient jurisdictional nexus
‘relating to’
• Means ‘primarily aimed at’
• Examine ‘relationship between the measure… and
the legitimate policy of conserving exhaustible
natural resources’.
• Requires ‘a close and genuine relationship of ends
and means’
• Examine ‘relationship between the general structure
and design of the measure…and the policy goal it
purports to serve’
• Measure based on MEA obligations likely to qualify
‘made effective in conjunction with restrictions
on domestic production or consumption’
• ‘made effective’ means a governmental
measure being ‘operative’, ‘in force’
• No empirical ‘effects test’
• Requirement of even-handedness in the
imposition of restrictions
• Equivalent terms in Spanish and French of
‘made effective’: ‘se apliquen’ and ‘sont
XX(b): ‘necessary to protect human,
animal or plant life or health’
• Issue 1: Does the policy goal fall within the
range of policies designed to protect human,
animal or plant life or health?
• Brazil – Retreaded Tyres: environmental
measures covered by Article XX(b).
XX(b): ‘necessary to protect human,
animal or plant life or health’
• Issue 2: Is the measure ‘necessary’ to achieve the
policy goal?
• Analyze in light of level of risk Member sets for itself.
• Involves weighing and balancing factors:
importance of the interests or values
contribution to the end pursued
trade impact
whether a WTO-consistent alternative measure which the
Member concerned could reasonably be expected to
employ is available, or whether a less WTO-inconsistent
measure is reasonably available
importance of interests or values
• Human life and health are ‘both vital and
important in the highest degree’: AB, EC –
• Environment is ‘important’: AB, Brazil –
Retreaded Tyres
• Climate change impacts on human life and
health, environment
contribution to the end pursued
• Measure must be ‘apt to produce a material
contribution to the achievement of its objective’
• ‘Marginal or insignificant contribution’ is not enough
• Indirect contribution via long-term economic
development does not qualify (Kuznet’s curve)
• Need to view the measure against the broader
context of a comprehensive strategy
• Can be quantitative or qualitative measurement
• But difficult to measure contribution of climate
change measures
AB, Brazil – Retreaded Tyres
‘the results obtained from certain actions—for
instance, measures adopted in order to
attenuate global warming and climate
change...—can only be evaluated with the
benefit of time’
trade impact
• Prohibitions have passed the test:
– EC – Asbestos
– Brazil – Retreaded Tyres
• But cumulative impact of a series of climate
change measures could together have much
more significant restrictive effects than a
measure considered in isolation.
alternative measures
• Must achieve same objectives as challenged measure
– difficult to argue if effect of measure might not be
revealed in the near future
• Must be WTO-consistent or less inconsistent
– Jurisprudence makes this moving target (subsidies instead
of trade restrictions after Canada—Renewable Energy?)
• Must be ‘reasonably available’ in light of interests or
values being pursued and desired level of protection
– Level of economic and technological development?
– Consultations or negotiations with other countries?
– What scientific evidence will be required?
Article XX chapeau
• Purpose is to prevent abuse of exceptions
• Do not apply measure in a manner that
• arbitrary discrimination between countries
where the same conditions prevail;
• unjustifiable discrimination between countries
where the same conditions prevail; or
• a disguised restriction on international trade
‘arbitrary or unjustifiable discrimination between
countries where the same conditions prevail’
(1) application results in discrimination
(2) discrimination is arbitrary or unjustifiable
– effort to negotiate (transboundary only?)
– flexibility of the measure (prevailing conditions)
– rational connection between objective and
reasons given for discrimination
(3) discrimination between countries where
same conditions prevail
Do paragraphs b and g
apply to different matters?
• Rule of effective treaty interpretation: avoid
redundancy, harmonious interpretation
• Term ‘necessary’ sets higher threshold than
term ‘relating to’
• Difference between ‘animals’ and ‘exhaustible
natural resources’?
• Difference between domestic and
transnational issues?
Technical Barriers to Trade
TBT Agreement
definition of ‘technical regulation’
• Must be met to apply Article 2
• Document must meet 3 criteria:
– (1) Applies to an identifiable product or group of
– (2) Lays down one or more characteristics of the
– (3) Compliance with product characteristics must
be mandatory.
‘technical regulation’ or ‘standard’?
• TBT Agreement applies to PPM labels.
• Whether measure is ‘technical regulation’ or
‘standard’ not determined by whether legally
permissible to sell product without a particular label.
• Factors to determine whether ‘technical regulation’:
– law or regulation enacted by a WTO Member
– prescribes or prohibits particular conduct
– specific requirements that constitute the sole means of
addressing a particular matter
– nature of matter addressed by measure
TBT Agreement Article 2.1
• Combines national treatment & MFN
• Treatment no less favourable
– modifies conditions of competition to the detriment of
imported products?
– legitimate regulatory distinction or discrimination?
– emissions from different fuels could be subject to different
taxes where different emissions pose different risks
– different treatment of products, based on PPMs such as
differences in carbon footprint
• Like products (unless based on origin of products)
TBT Agreement Article 2.2
• Does regulation pursue a legitimate objective?
– Includes national security requirements; the
prevention of deceptive practices; protection of
human health or safety, animal or plant life or
health, or the environment
• Does regulation fulfil the legitimate objective?
– level at which Member seeks to pursue particular
– degree of contribution regulation makes to
achieve legitimate objective
TBT Agreement Article 2.2
• Does regulation create unnecessary obstacles
to international trade?
– (1) trade-restrictiveness of technical regulation;
– (2) degree of contribution to achieve objective;
– (3) risks non-fulfilment would create in light of
• available scientific and technical information (does not
require conclusive scientific evidence)
• related processing technology or
• intended end-uses of products
TBT Agreement Article 2.2
alternative measures
• Comparison of measure with possible alternative
– in light of nature of risks & gravity of consequences that
would arise from non-fulfilment of legitimate objective
• Application to climate change, key issues
– availability of scientific information, scientific uncertainty
– capacity of country to reduce GHG emissions depends on
PPM technology it has available
– gravity of consequences should provide greater leeway to
reject proposed alternatives
– standard of proof re proximate cause difficult issue
TBT Agreement Article 2.2
alternative measures
• Should be measures respondent can take, not
measures beyond its control that would
require consultations or negotiations.
• Alternatives should be:
– less trade restrictive
– make equivalent contribution
– reasonably available to the relevant country given
economic and technological capacity
TBT Agreement Article 2.4, 2.5
International standards
• Article 2.4: use ‘relevant international standard’ as
basis for technical regulations, except when such
standard would be an ineffective or inappropriate
means for the fulfilment of the legitimate objectives
pursued by the Member.
• Article 2.5: rebuttable presumption of compliance
with Article 2.2 where technical regulation for
explicitly mentioned legitimate objective in
accordance with relevant international standards
Relevant international standard
• Standard in climate change MEA might qualify if
membership is open to all WTO Members.
• Can be ineffective or inappropriate for the fulfillment
of the specific objective as defined by Member: US –
• A standard is used as a basis for a technical
regulation when it is used as the principal
constituent or fundamental principle for the purpose
of enacting the technical regulation: EC – Sardines
Relevant international standard
Article 12.4
• ‘Developing country Members should not be
expected to use international standards as a
basis for their technical regulations...which are
not appropriate to their development,
financial and trade needs’.
• Might entitle them to more leeway, but
provision is not mandatory.
MEAs and Article XX
• MEAs on climate change probably relevant to
determine consistency of climate change
measures with GATT Article XX and TBT
• Unlikely GATT Article XX will be applied to
SCM Agreement, Agreement on Agriculture or
TBT Agreement.
• Article XX application to provisions in other
agreements in Annex 1A case-by-case.
PPMs, subsidies
• PPMs may be relevant re ‘like products’ in GATT
Articles I and III, SCM Agreement, Antidumping
Agreement and TBT Agreement
• Environmental subsidies OK if:
– Actionable: not specific = no unilateral or multilateral
– Export subsidies: comply with Agreement on Agriculture
– Import substitution subsidies:
• comply with SCM Agreement (benefit issue) and
• Agreement on Agriculture
• BUT can still violate TRIMS and GATT (Article XX defense?)

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