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Compatibility of the Carbon Border Tax with the Laws of the World Trade Organization
 
PIIS231243500022360-4-1
DOI10.18254/S23124350021651-8
Publication type Article
Status Published
Authors
Aida R. Salyakhova 
Affiliation:
University of Oslo
Tatarstan Academy of Sciences
Address: Russian Federation, Kazan
Journal nameEnergy law forum
EditionIssue 3
Pages76-79
Abstract

There are different ways to reduce CO2 emissions: in particular, CBT (carbon border tax) is designed to eliminate and combat the adverse effects of climate change. However, one should not ignore the fact that the existence of multilateral international agreements encourages countries to care about the planet and the environment, but also limits the scope of their legal autonomy to take action in various areas, including the policy of taking urgent action on climate change. The exact design of the CBT proposed by the European Commission is not entirely clear, and there is a high probability that it will contradict Article I or III of the GATT (General Agreement on Tariffs and Trade). Thus, it will be further assessed whether CBT can be subject to exceptions from GATT (Article XX). It is important to analyze whether a CBT policy can be formalized legally without contravening WTO law and without risking being prosecuted for this violation. Last but not least, it is very important to assess whether the exceptions to Article XX of the GATT can be used to justify a CBT. Two of those exceptions are particularly relevant to environmental measures, namely those contained in Articles XX(b) and XX(g) of the GATT. If the European Union (EU) wants to use environmental exemptions to protect CBT, the EU needs to remove two hurdles. First, the EU should establish a preliminary justification for the use of Article XX by showing that the sub-clauses apply. Second, the EU should then establish that the measure under consideration does not contradict the leading paragraph, known as the introductory part of Article XX, which means that it should not be arbitrary, unjustified or disguised restriction on trade. At the same time, it is necessary to consider whether CBT is a suitable tool.

Keywordsinternational energy law, foreign trade, carbon border tax
Received21.04.2022
Publication date30.09.2022
Number of characters11463
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1 In the European Union, it is planned to introduce a carbon border tax on the products of certain industries in 2026. In this regard, experts in the European Union are widely discussing the compatibility of the carbon border tax with the main rules of the World Trade Organization.
2 Here are some expert opinions. So, Jeannette Berseth believes that various methods aimed at reducing CO2 emissions can be developed. In particular, CBT is designed to eliminate and combat the adverse effects of climate change. However, one should not ignore the fact that the existence of multilateral international agreements encourages countries to care about the planet and the environment, but also limits the scope of their legal autonomy to take action in various areas, including the policy of taking urgent action on climate change.
3 The exact design of the CBT proposed by the European Commission is not entirely clear, and there is a high probability that it will contradict Article I or III of the GATT. Thus, it will be further assessed whether CBT can be subject to exceptions from GATT (Article XX). It is important to analyze whether a CBT policy can be formalized legally without contravening WTO law and without risking being prosecuted for this violation. Last but not least, it is very important to assess whether the exceptions to Article XX of the GATT can be used to justify a CBT.
4 Two of those exceptions are particularly relevant to environmental measures, namely those contained in Articles XX(b) and XX(g) of the GATT. If the EU wants to use environmental exemptions to protect CBT, the EU needs to remove two hurdles [1].
5 Other authors, Georg Zachmann and Ben McWilliams, believe that although CBT may be compatible with WTO rules, it may face legal problems in the WTO, will depend on complex preconditions that imply a compromise between political feasibility and effectiveness [2].
6 In order to identify the compliance of a carbon border tax with WTO rules, we will consider the basic principles of the WTO.
7 The basic principles of the WTO can be found in three agreements: 1) the General Agreement on Tariffs and Trade (GATT) for International Trade in Goods; 2) the General Agreement on Trade in Services (GATS); and 3) the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). There are five principles related to the articles of those three agreements that are of particular importance [3].
8 The first principle of the WTO is trade without discrimination (a member country cannot discriminate against another member country in relation to trade) [4].
9 The introduction of CBT can be considered as a discriminatory measure between the EU and non-EU states.
10 The second principle, freer trade through negotiation, is emphasized, for example, by Article XXVIII (Tariff Negotiations) of the GATT. Reducing trade barriers is one of the most obvious ways to encourage trade. Relevant barriers include customs duties (or tariffs) and measures, such as import bans or quotas that selectively limit quantities [5].
11 The third principle, predictability in trade, is important because the promise of stability and predictability in trade gives businesses a clearer idea of their future opportunities [6]. While the new taxes are not unpredictable, the EU needs to provide certainty about how CBT will work and which areas will be taxed.
12 The fourth principle, which promotes fair competition, is related to the first principle of non-discrimination. The WTO institute describes itself as ‘a system of rules dedicated to open, fair and undistorted competition’ [7].
13 The last principle: encouraging development and economic reforms in developing countries [8].
14 In our opinion, the authors correctly note contradictions with the GATT rules and GATT exceptions related to environmental protection.
15 Thus, Madison Condon and Ada Ignaciuk point out that two principles established under the GATT are important for CBT. Firstly, it is a national regime in accordance with Article III of the GATT, which requires that imported goods be treated no less favorably than domestic ones. Article I of the GATT establishes a second regime, the ‘most-favored-nation treatment’, according to which a border tax should not discriminate against imports from WTO member countries.
16 It is also noted that the term ‘like product’ is not defined in the GATT [9].
17 In addition, are products produced in an environmentally sound manner, for example, in accordance with the standards of the Kyoto Protocol and carbon-intensive goods, ‘like products’ [10]?
18 The authors note that in cases where a member’s national measure turns out to be incompatible with the GATT rules, the member defending this measure may seek justification in accordance with the exceptions listed in Article XX of the GATT. In this context, GATT Article XX on general exceptions sets out some specific cases in which WTO members may be exempt from GATT rules. Two exceptions are of particular importance for environmental protection: sub-clauses (b) and (g) [11]. Article XX(b) and (g) allow WTO members to pursue discriminatory policies that deny national treatment or are otherwise incompatible with WTO principles [12]. There are several cases from the 1990s, including the 1991 Tuna-Dolphin case, as well as the 1996 Shrimp-Turtle case, that are relevant to the case and set a precedent or guide for any future CBT litigation.

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2. Georg Zachmann and Ben McWilliams, A European Carbon Border Tax: Much Pain, Little Gain. Policy Contribution, no. 5. Available at: https://www.bruegel.org/wp-content/uploads/2020/03/PC-05-2020-050320v2.pdf 
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16. Tuna-Dolphin II case.
17. Tuna-Dolphin II case.
18. Tuna-Dolphin II case.
19. Bruce Nueling, The Shrimp-Turtle Case: Implications for Article XX of GATT and the Trade and Environment Debate, Loyola of Los Angeles International and Comparative Law Review (1999), p. 32
20. Bruce Nueling, The Shrimp-Turtle Case: Implications for Article XX of GATT and the Trade and Environment Debate, Loyola of Los Angeles International and Comparative Law Review (1999), p. 32
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23. Bruce Nueling, The Shrimp-Turtle Case: Implications for Article XX of GATT and the Trade and Environment Debate, Loyola of Los Angeles International and Comparative Law Review (1999), p. 32
24. Khristine Kaufmann and Rolf H.Weber, Carbon Related Border Tax Adjustment: Mitigating Climate Change or Restricting International Trade? DOI:10.1017/S1474745611000292.
25.  Agreement Establishing the World Trade Organization, Venezuela, Brazil versus US: Gasoline
26.  Agreement Establishing the World Trade Organization, Venezuela, Brazil versus US: Gasoline
27. Shrimp-Turtle case.

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