1 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change

1Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)

Trade and Environment Division, WTO

Trade and Climate Change

2

Part IV: National Mitigation

and Adaptation Policies and Trade

Implications

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Climate change mitigation measures

Key objectives

Improve energy efficiency and reduce

GHG emissions

Key policy instruments

Emissions and energy performance standards

and labelling

Regulatory instrument

Promote development & deployment of climate-friendly technologies

Financial mechanisms: R&D, fiscal, price and investment measures

Economic incentives

Internalize environmental costs

Carbon tax, emissions trading schemes

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Climate change mitigation measures

Key objectives

Improve energy efficiency and reduce

GHG emissions

Key policy instruments

Emissions standards, labelling on energy

performance

Key WTO Agreement

TBT Agreement

Internalize environmental costs

Carbon tax, emissions trading schemes

GATT

Promote development & deployment of climate-friendly technologies

SCM AgreementFinancial Mechanisms: R&D, fiscal, price and investment measures

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Outline of the presentation

Financial mechanisms for development and deployment of climate goods and technologies and increased used of renewable energy

Price and market mechanisms to internalize environmental cost

Technical requirements to promote the use of climate-friendly goods and technologies

Price and market mechanisms to internalize environmental cost

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Carbon tax: Key characteristics

Energy tax on Fossil Fuels

Different tax baseDifferent tax base

Carbon tax

Energy content (more heavy on oil and gas

Energy content (more heavy on oil and gas

Carbon content (more heavy on coal)

Carbon content (more heavy on coal)

“Implicit Carbon Tax”

“Implicit Carbon Tax”

Tax on the carbon content of fossil fuels, often combined with a tax on energy use

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Emissions trading scheme: Definition

System that

Fixes a cap on total emissions

Translates the cap into “allowed emissions” to cover emissions equal or

below the size of the cap

Creates a market in which these allowances can be traded at a price set

by the market

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Emissions trading scheme: Important design characteristics

Emission targetsOverall emission level (cap-and-trade)

Emission standard for each source (rate-base)

Number of participants and sectors covered

Type of gases covered

Allocation method

Free allocation based on historical emission levels (“Grandfathering”) or on emissions

per unit of output (“benchmarking”)

Auctioning

Linkages with other emission trading schemes

Flexibility mechanisms such as banking, borrowing

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Emissions trading scheme: Where?

European Union (the world’s largest GHG ETS), since 2005

New Zealand, legislation passed on 25 November 09

Australia? (Senate rejected a legislation on ETS)

United States: “American Clean Energy and Security Act of 2009” (ACES, Waxman-Markey Bill) approved by the

House of Representatives. Senate proposals still under discussion: Kerry-Boxer Bill; Kerry, Cantwell-Collins Bill;

Kerry, Graham, Lieberman and their Framework for Climate Action (released 10 Dec 09).

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Effectiveness: Carbon tax vs. ETS

ETSCarbon tax

Price is determined directly by the regulators through the tax rate

(exogenously)

Price is determined by the market (endogenously)

Quantity of emissions to be reduced is a result of measures adopted by

industry to reduce emissions (endogenously)

Quantity of emissions to be reduced is determined by regulators

(exogenously)

Environmental uncertainty?

Price uncertainty?

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Environmental effectiveness

2 key intended environmental effects of a carbon tax and an ETS

Direct effect, i.e. reduction of GHG

emissions, by setting a price on emissions

Indirect effect, through “recycling” of fiscal or auctioning revenues to

fund e.g. investment in more climate-friendly technologies

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Climate change border adjustments

Relevant WTO rules

Rationale

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Climate change border adjustments: Rationale

Emissions reduction policies

are not applied universally

Competitiveness loss

Carbon leakage

This may give rise to

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In particular for energy intensive industries

However, effects are still uncertain

Concern: enhanced competitiveness (economic) of non carbon constrained producers could lead to ‘carbon

leakage’ (environmental)

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Competitiveness

Ability of firms and sectors to maintain profits and market shares

Definition

Effects of climate change measures on competitiveness of sectors depend on a number of factors:

specific characteristics of the sector (e.g. trade exposure, energy-intensity).

design of the regulation (e.g. availability of alleviations and exemptions).

other policy considerations (e.g. energy and climate policies adopted by other countries).

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Carbon leakage

Increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries, i.e. the ratio of increased emissions in one region as the result of an emissions constraint introduced in another

IPCC Definition

Risk of energy-intensive industries relocating to countries with weaker environmental policies (“carbon havens”)

linked to differences in carbon price

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Border adjustment measures

To offset asymmetries in competitiveness

To avoid carbon leakage

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Climate change border adjustments: Relevant WTO rules

Key legal challenges for a case-by-case analysis

Coverage?

Consistency?

Justifiability?

The jury is still out and many questions remain unanswered!

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Importance to define the instrument at hand to determine relevant WTO/GATT provisions

A border adjustment to a tax?

A border adjustment to another carbon cost, e.g. an ETS?

Coverage?

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Two Situations

BTA on imports (equivalent to a domestic tax)

BTA on exports (i.e. a refund of domestic tax before exportation)

Implementation of the destination principleto ensure trade neutrality

The GATT Working Group on Border Tax Adjustments (1970)

Coverage?

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GATT Article II.2(a) provides for the possibility of imposing at any time on the importation of any product:

A charge equivalent to an internal tax in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in

whole or in part.

GATT Article III.2 covers “internal taxes or other internal charges of any kind”

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Submit emissions credits acquired abroad to cover the emissions during the production

process of the imported good


Hold emission allowances, up to the amount of CO2 emitted during the production of

imported products and applied on a per unit basis to each good

Potential requirements on importers

A border adjustment to a regulation, e.g. an ETS?

Coverage?

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GATT Article III.2

Can the price paid by an industry to participate in an ETS be qualified as an “internal tax or other internal charge of any kind”, covered under Article III.2?

GATT Article III.4

Can an ETS be seen as a measure covered by Article III:4, i.e. as a law, regulation and requirement affecting the internal

sale, offering for sale, purchase, transportation, distribution or use?

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With basic principles, e.g. non

discrimination Most Favoured Clause

National treatment

Prohibition to discriminate between “like” products

Consistency?

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Non discrimination principle (GATT Article III):

Imported products shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in

excess of those applied, directly or indirectly, to like domestic products.

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Prohibition to discriminate between “like” products

Except if...

Consistency?

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Under certain conditions, Members can adopt trade-related measures aimed at

protecting the environment

WTO rules, as confirmed by jurisprudence

the right of Members to take regulatory measures to achieve

legitimate policy objectivesEssential to maintain

a balance betweenthe rights of other WTO Members

under basic trade rules

Justifiability?

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Climate change border adjustments and WTO rules

Justifiability?

Several disputes on measures that sought to achieve a variety of

policy objectives

Conservation of clean air from air pollution

Protection of human health from risks posed by asbestos

Conservation of sea turtles from incidental capture in commercial fishing

Protection of human health from risks posed by the accumulation of waste tyres

WTO jurisprudence has confirmed that WTO rules do not trump environment, as long as…

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Climate change border adjustments and WTO rules

Justifiability?

…as long as several carefully crafted conditions are respected…

Environmental measures must not be applied in a manner which constitutes

a means of arbitrary/unjustifiable discrimination or

a disguised restriction on international trade

Environmental measures must not be applied in a manner which constitutes

a means of arbitrary/unjustifiable discrimination or

a disguised restriction on international trade

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Implementation is key!

Justifiability?

Major practical challenges in implementation

in assessing product-specific emissions

fluctuations of the carbon price

First best option is a successful multilateral agreement!

existence of carbon leakage…

Financial mechanisms for development and deployment of

climate goods and technologies and increased used of renewable energy

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Rationale

May therefore need to be reinforced by national policies

Development & deployment of new CC friendly technologies

May be occurring at a slower pace than desirable from an

environmental point of view

Cost of renewable energy is generally not competitive with wholesale electricity and fossil fuel prices

Negative factors

Environmental externality: without cost, no direct incentive to find ways

to reduce emissions

Learning cost

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Type of support

2 main types of support

Incentives to promote invention of new climate-friendly technologies and goods

Incentives to encourage the deployment of climate-friendly goods and technologies and the

increased use of renewable sources of energy

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Incentives to promote inventions of new cc technologies

GrantsSupport development of new technologies,

e.g. to finance research on renewable energy technologies

Awards (ex post or ex ante)

e.g. in the context of a competition to recompense for an innovation

Example: In Korea, the Automobile Low Emission Technology Development Support funded research institutions developing, inter

alia, hybrid vehicles for use as public shuttle buses

Example: Bright Tomorrow Lighting Prizes (US) to develop technologies for a new “21st Century Lamp” to replace 60 watt

incandescent light bulbs and PAR 38 halogen lamps

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Incentives to promote deployment of CC technologies & renewable energy

3 main types of financial

support

Fiscal measures

Price support

Investment support

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Fiscal measures(e.g. tax reductions, tax credits)

To increase consumption of

certain technologies

To facilitate investment in production of CC goods &

renewable technology

Example: Chinese government’s reduction of income taxes for producers of wind and

biogas power projects

Example: reduction in value-added tax (VAT) for small

hydroelectric, wind and biogas power generation plants in China

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Price support

Feed-in tariffs(regulated min. guaranteed price per

Kwatt-hour paid by electricity company for renewable energy fed into the

national electricity grid by a private independent producer)

Net metering(If power a consumer’s renewable energy

equipment supplies to the national electricity grid > what it takes from the

grid the consumer receives a credit for that amount on future energy bills)

Examples: United States, certain provinces in Canada,

Thailand and Mexico

Examples: United States, Germany, Spain, Italy, France,

Thailand and China

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Investment support(to reduce the capital cost of installing and deploying

renewable energy technologies)

Capital GrantsPercentage of costs of installing climate-friendly technologies is returned to the investor as a capital grant, resulting in significant reductions in overall cost of

such technologies

Favourable lending conditions

Or low-cost financing with subsidized interest rates for investors in climate-

friendly technologies

Examples: Indian Solar Loan Programme; In Bangladesh, micro-financing institutions Proshika and

Grameen offer assistance to increase adaptability and reducing vulnerability to

the effects of climate change

Examples: In Canada, EcoENERGY Retrofit grants for

improving the energy efficiency of buildings

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Relevance to Trade

Governmental funding policies may have an impact on the price and production of low-carbon goods and technologies

Such policies lower the costs for producers, leading to lower product prices

Lower prices may reduce exporting countries’ access to the market of the subsidizing country or may increase

the exports of the subsidizing country

Lower costs of installing emission-reducing technologies enable

industries to maintain international competitiveness

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Agreement on Subsidies and Countervailing Measures

Key concepts include: •Definition of a subsidy (whether a financial contribution confers a benefit, whether the subsidy is specific to a certain industry)•Definition of an actionable subsidy (whether the subsidy

causes adverse effects to the interests of other WTO Members)

Relevant WTO rules

Technical requirements to promote the use of climate-

friendly goods and technologies

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Key Characteristics

Emissions/ energy efficiency standards and regulations can be…

Based on design Based on performance

Best used when few options for controlling emissions

Prevalent to improve energy efficiency in appliances and buildings more flexibility

Japan’s Top Runner Program (the energy performance of the most efficient model (e.g. household appliances) on the market is used

to set a target for all manufacturers.

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Key Characteristics



Defining products Defining processes

Mainly address energy efficiency & emissions related to

the use of the product

May result in direct environmental outcomes, as they improve energy efficiency or limit emissions to a certain level during production

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Key Characteristics




Mandatory Voluntary

Minimum Energy Performance Standards (MEPS) for appliances (Australia)

ENERGY STAR (United States)

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Key Characteristics




Mandatory Voluntary

Public Private

Minimum energy-efficiency performance standards for major

domestic appliances (Canada)

Leadership in Energy and Environmental Design (LEED) in the building sector (United States)

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Key compliance tools: Labelling

Most OECD countries (energy-efficiency labelling)

Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia

Also examples of voluntary energy labelling programmes for household appliances (E.g. Thailand, Hong Kong, China, India, Brazil)

Scope

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Scope

Most OECD countries (energy-efficiency labelling)

Many non OECD countries, e.g. South Africa, Argentina, Sri Lanka and Tunisia

Information covered

Product’s energy performance/emissions levels while in operation

Product’s entire life-cycle, including its energy efficiency

e.g. EU, Australia, Canada and US require energy-efficiency labels for several household appliances

e.g. Nordic Swan, German Blue Angel and the EU’s eco-label Flower

The issue of food miles

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How does trade affect GHG emissions?

Trade and transport?

“Food miles” may be a counter intuitive issue! (i.e. the distance food is transported from the time of its

production until it reaches the consumer)

It is only one dimension used in assessing the

environmental impact of food

The real carbon footprint of a product would need to look at its entire life-

cycle

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Comparative labels compare performance among similar

models

Endorsement labels Seals of approval assuring consumers

that a product meets certain criteria

Type of instrument

e.g. for household appliances in Australia, EU, Canada, US, Brazil, Tunisia, China, Thailand and Korea

e.g. Energy Star label (US), Brazil, Thailand and China (Certificate for Energy Conservation Product)

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Key compliance tools: Conformity assessment

to determine whether the requirements in standards & regulations are fulfilled

Objectivesgive consumers confidence in the

integrity of products

add value to manufacturers’ marketing claims

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Key compliance tools: Conformity assessment

Testing

Inspection

Type of instrument

Certification

Accreditation

Metrology

Ex post efficiency testing on labelled appliances (Electricity Generating Authority of Thailand)

In the building sector, the Leadership in Energy and Environmental Design (LEED) (US)

Mark that energy performance of regulated energy-using products has been verified (Canada)

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Key compliance tools: Restrictions and prohibitions

Bans & regulatory measures to prevent the use of fluorinated GHGs (HFCs, PFCs, SF6) (e.g. Austria, Denmark, Switzerland & EU)

Ban of certain less energy-efficient products, e.g. incandescent light bulbs in Australia, EU, Canada, Chinese Taipei & Argentina

Examples

to restrict the sale or prohibit the import of certain energy-inefficient products

Objectivesto ban the use of certain greenhouse gases in

the composition of products

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Environmental effectiveness

Increase in energy efficiency of products, e.g. electrical equipment

Measurement tools

Behavioural changes of consumers and manufacturers

In California, the energy use of refrigerators in 2000 was more than two-thirds lower than in 1974 (energy-efficiency standards are in place and

regularly updated since the late 1970s)

In the United States, recognition of the Energy Guide label was found to be quite good; however

understanding was limited, with respondents unable to determine which appliance was more energy-

efficient, based on the labels

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Relevant WTO rules?

Agreement on Technical Barriers to Trade / GATT

Key principles include

Harmonization

Non discrimination

Avoidance of unnecessary trade barrier

56Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor)

Trade and Environment Division, WTO

Trade and Climate Change

Documents

1 Vesile Kulaçoğlu (Director) & Ludivine Tamiotti (Counsellor) Trade and Environment Division, WTO Trade and Climate Change