From the conclusions of a paper entitled "Environmental Effects of International Trade" by Jeffrey Frankel of the Kennedy School:
Concluding recommendations regarding trade penalties in climate legislation
The central message of this section of the report is that border measures to address leakage need not necessarily violate the WTO or sensible trade principles, but that there is a very great danger in practice that they will.
I conclude with some subjective judgments as to some principles that could guide a country’s border measures if its goal were indeed to reduce leakage and avoid artificially tilting the playing field toward carbon-intensive imports of non-participating countries. I classify characteristics of possible border measures into two categories, which I will name by color (for lack of better labels):
(1) the “Black” category: those that seem to me very dangerous, in that they are likely to become an excuse for protectionism; and
(2) the “White” category: those that seem to me reasonable and appropriate.
The Black (inappropriate) border measures include:
• Unilateral measures applied by countries that are not participating in the Kyoto Protocol or its successors.
• Judgments as to findings of fact that are made by politicians, vulnerable to political pressure from interest groups for special protection.
• Unilateral measures that seek to sanction an entire country, rather than targeting narrowly defined energy-intensive sectors.
• Import barriers against products that are further removed from the carbon-intensive activity, such as firms that use inputs that are produced in an energy-intensive process.
• Subsidies – whether in the form of money or extra permit allocations -- to domestic sectors that are considered to have been put at a competitive disadvantage.
The White (appropriate) border measures could be either tariffs or (equivalently) a requirement for importers to surrender tradable permits. The principles include:
• Measures should follow some multilaterally-agreed set of guidelines among countries participating in the emission targets of the Kyoto Protocol and/or its successors.
• Judgments as to findings of fact -- what countries are complying or not, what industries are involved and what is their carbon content, what countries are entitled to respond with border measures, or the nature of the response – should be made by independent panels of experts.
• Measures should only [be] applied by countries that are reducing their emissions in line with the Kyoto Protocol and/or its successors, against countries that are not, either due to refusal to join or to failure to comply.
• Import penalties should target fossil fuels, and a few of the most energy-intensive major industries: aluminum, cement, steel, paper, glass, and perhaps iron and chemicals.
If countries follow these guidelines in enacting border penalties, they may be consistent with the avowed goals of preventing leakage and undue loss of competitiveness and are unlikely to fall afoul of the WTO. If they do not follow these guidelines – the more likely outcome – they can be inconsistent with these goals, and with the WTO as well.
Unfortunately, I think he may be right about the way things will operate in practice.
