Competitiveness, Leakage and Comparability: Disciplining The Use of Trade Measures Under a Post-2012 Climate Agreement

As the United States, the European Union and other Annex I Parties prepare legislation to cap greenhouse gas emissions post-2012, their policymakers are under increasing pressure from domestic constituencies to include trade measures as part of domestic climate policy. This paper analyzes the trade measures contained in draft domestic climate policies emerging from the U.S. and the EU, describes the objectives of these measures, assesses how they might be imposed and discusses their implications for both a future climate agreement and the international trading system.

We find that:

• Trade measures have been included in draft climate legislation in the U.S. and considered in the EU in an effort to achieve several policy objectives: to protect domestic industry from competition (“competitiveness”), to prevent greenhouse gas polluting industries from moving overseas (“leakage”) and to punish non-parties to a future climate agreement (“free-riding”).
• Neither the United Nations Framework Convention on Climate Change (UNFCCC) nor the World Trade Organization (WTO) authorizes the use of trade measures as a means of protecting domestic industry from competition. The UNFCCC and WTO share a set of common principles that discourage the use of unilateral trade measures that are arbitrary, unjustifiable or disguised restrictions on trade.
• It may be possible to design trade measures that are sufficiently targeted and equitably applied to prevent emissions leakage in a way that would be consistent with WTO principles. But the UNFCCC has yet to consider whether preventing emissions leakage justifies the use of trade measures.
• Leading U.S. proposals are intended, in part, to encourage broader participation in multilateral climate negotiations. Yet as currently designed a developing country Party to a post-2012 international climate agreement that was in full compliance with its commitments under that agreement, could still face trade measures if the U.S. determined that the Party’s climate policies were not “comparable” to its own.
• If such trade measures were implemented, a trade dispute would likely arise, and a WTO dispute settlement panel could be forced to choose between a result that either required the U.S. or EU to dismantle a central part of their climate legislation, and one that allowed the trade measure to stand, but in doing so undermined the UNFCCC’s legitimacy as the global standard-setting body for climate policy.

This paper suggests that it would be both reasonable and appropriate for the UNFCCC Conference of the Parties (COP) to articulate a set of principles applicable to any trade measures used to advance the Convention’s objective, in order to avoid and help resolve any disputes that might arise under the WTO or elsewhere.