Cap and Trade Rules
Climate Change Is A Trade Issue, Too

By James Bacchus
Forbes Magazine
March 24, 2009

Unilateral U.S. moves could cost billions in trade sanctions.

As part of his sweeping agenda for change, President Obama is seeking limits on
carbon emissions. Rightly so. Even in these times of economic peril, there is no
more imperative issue facing humanity than climate change.

But largely ignored thus far in the debate over climate change is the fact that
climate change is not only an energy and environmental issue. It is also a trade
issue. Any action on climate change will affect international trade obligations
that bind the U.S. and more than 150 other members of the World Trade Organization.

Yahoo! BuzzIgnoring this fact in shaping our response to climate change could
prove to be an expensive mistake. In particular, if international negotiations
falter, and if the U.S. acts on its own to combat climate change, the failure of
U.S. legislation to comply with WTO law could expose U.S. goods and services to
economic sanctions by our trading partners. Those sanctions could cost billions
of dollars--annually.

The need to act now, not later, on climate change has been underscored by a
newly released assessment by the U.S. Geological Survey, concluding that the
U.S. faces the possibility of much more rapid climate change by the end of the
21st century than previous studies have suggested.

Hopes are high for action on climate change as Barack Obama settles into the
White House. Our new president has been clear. He favors mandatory targets for
cutting the carbon emissions that are the leading cause of global warming. He
aims to reduce those emissions by 80% by 2050. And he wants the U.S. to lead the
way toward a global treaty that would achieve these goals.

Reports from the latest round of United Nations-sponsored talks in Poznan,
Poland, heighten these already high hopes. With the U.S. fully engaged at long
last, the world seems to be making progress, inch by belated inch, toward
concluding a new treaty on global warming to replace the 1997 Kyoto Protocol.

Any trade restrictions imposed by a WTO member on another WTO member in
compliance with a new global treaty on climate change would surely be upheld
under WTO rules if both members had agreed to that treaty. Those who assume that
WTO rulings will be "anti-environment" have evidently not read previous rulings,
or not realized their positive implications for global environmental protection.

But what if growing economic fears frustrate international progress toward a new
climate change treaty? If that happens, the U.S. Congress (and probably
California and other states) may want to impose limitations on emissions
unilaterally--perhaps in part to inspire global action. This is where the
potential exists for violations by the U.S. of international trade law.

Any unilateral effort to put a price on carbon--such as through a "cap and
trade" system or a direct carbon tax--could place U.S. products--especially such
carbon-intensive products as steel, cement, glass, paper and chemicals--at a
competitive disadvantage if foreign products are not required by their
governments to pay that same price.

Moreover, placing an additional price on carbon domestically could cause
domestic production to shift overseas and domestic consumption to shift to more
carbon-intensive imports if no comparable action is taken outside the U.S. This
"leakage" would undermine the environmental aim of reducing levels of greenhouse gases.

It makes sense then, both competitively and environmentally, to impose trade
restrictions as part of any domestic legislation on climate change. Bills that
have already been introduced in Congress and in state legislatures would do just
But any unilateral U.S. actions on climate change that included trade
restrictions would unquestionably be challenged by one or more of our trading
partners in the WTO. So it makes sense also to craft legislation in ways that
would survive scrutiny in WTO dispute settlement.

For example, the additional carbon price imposed on domestic products can be
imposed also under WTO law on like imported products as an offsetting "border
tax adjustment." But any such adjustment will be legal under the WTO only if
imposed on products, and not on producers.

Likewise, any discrimination in the legislation will run afoul of WTO law if it
discriminates in favor of domestic producers over foreign producers of like
products, or if it discriminates in favor of some foreign producers of like
products over others.

Furthermore, tax rebates on exported products, emission allowances, and other
contributions by government to assist domestic industries affected by new carbon
restrictions will need to comply with WTO rules on subsidies.

Some trade restrictions that would otherwise violate the WTO treaty can be
excused under WTO rules for environmental reasons--but only if they are truly
environmental measures and only if there is no arbitrary or unjustifiable
discrimination in their application.

If careful consideration is given to WTO rules when crafting domestic climate
change legislation, WTO obligations can be met. But if WTO obligations continue
to be ignored in the climate change debate, the U.S. may well lose when that
legislation is challenged in the WTO--at great expense to American workers and
businesses--and with unwelcome and unforeseeable consequences for both trade and
the environment.

James Bacchus is a former Democratic member of the Congress from Florida, a
former chairman of the Appellate Body of the World Trade Organization, and
author of the book Trade and Freedom. He practices law in Washington with the
firm Greenberg Traurig.


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