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An indispensable feature of carbon reduction plans – including those of the Canadian government, the European Union and the incoming Biden administration – are border tax adjustments to counter “carbon leakage” – products manufactured in countries that do not have comparable carbon pricing and greenhouse gas reduction policies. They affect the domestic political acceptability of these plans.

Thus, the federal government’s new climate change policy (A Healthy Environment and a Healthy Economy), announced last week, says: “Border carbon adjustments level the playing field across jurisdictions: they put a carbon fee on imports from countries that either do not have carbon pricing or price it too low so that those products face the same costs as those supplied by domestic producers who pay a price on carbon pollution. As such, border carbon adjustments can help maintain competitiveness while also encouraging other countries to step up and take effective action to reduce emissions.”

Because we are talking about cross-border trade, a big question is how global trade rules under World Trade Organization Agreement applies to these border measures – i.e., import surcharges or levies on the targeted goods.

The problem is that WTO rules, incorporating provisions from the 1947 General Agreement on Tariffs and Trade (GATT), were drawn up at a time when no one was talking about or had even heard of climate change. Even when the Agreement was under negotiation in the Uruguay Round in the early 1990s, carbon emissions and global warming issues were only a faint glimmer in the background. The focus, as in all previous negotiating rounds, was on market liberalization, reducing tariff rates and non-tariff barriers and controlling export subsidies on agricultural and manufactured products.

The result is that the WTO Agreement contains only a few scantily drafted and largely unsatisfactory provisions for environmental issues. One of them, taken from the 1947 GATT, gives governments some leeway, but only as a narrow exception to iron-clad obligations to keep markets open and not discriminate against imports in any way. That provision, called “General Exceptions,” allows WTO members to disregard those obligations if “necessary” to protect human or animal health and provided the measures are non-discriminatory or not a disguised trade restriction.

Over the years, a few dispute settlement panels have had to deal with these exceptions, mostly regarding U.S. conservation measures protecting dolphins and sea turtles. Their decisions unleashed a vast amount of academic writing on their implications for future WTO disputes over environmental or carbon reduction measures. What all that illustrates is the inadequacy of WTO rules for dealing with the enormity of the global climate change emergency.

A related but equally unresolved question involves the PPM issue. PPMs refer to “production processes and methods,” and the rules say that if a product is identical to a like or directly competitive domestic good, it cannot be treated differently at the border. In other words, even if you do not approve of the PPMs used in its manufacture – say, by means of substandard labour laws or by the use of carbon-intensive processes – other than paying normal duties, the imported good cannot be taxed or treated differently than the domestic one. In this view, border tax adjustments would be discriminatory and offend WTO rules.

As with the torrent of legal and academic writing on sea turtles and dolphins, there is a vast amount of academic discourse on the PPM issue. Much of it – though not all – comes to the conclusion that border tax adjustments would be acceptable under WTO rules where they applied to goods made by carbon-intensive or environmentally degrading methods because, it is argued, these would make the goods “unlike” domestic products made under stricter environmental regimes. However, there is no consensus on how a PPM can be measured and converted into a quantifiable border tax.

Assuming the WTO dispute settlement system is restored to functionality – the Trump administration has refused to agree on appellate body appointments – future panels could accept the legitimacy of climate change border-tax adjustments under these kinds of arguments. The jurisprudential history has shown that, even in the limited cases of sea turtles and dolphins, panels have been creative and willing to apply existing rules to approve national measures in the context of contemporary environmental challenges. That provides some comfort and, in a positive sense, validates the ability and flexibility of the multilateral system in dealing with today’s environmental issues. We can hope but will have to await developments.

An important element here involves the intentions of the Biden administration to reverse President Donald Trump’s disdain for international agreements and to reengage U.S. institutional support for the WTO. Notably, president-elect Joe Biden’s green plan puts a strong emphasis on border-tax adjustments. Indeed, its political acceptability will to a large extent be dependent on selling the plan’s ability to confront carbon leakage and level the playing field for U.S. companies bearing an increased financial burden. Ottawa’s climate change plan will face similar political elements in Canada. It will be interesting to see how this plays out in the multilateral context.

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