I don't hear much talk in the U.S. (or around the world for that matter) these days about climate change in general, much less taking any action to deal with it. But some day the world economy might pick up, and perhaps then we will get back into issues related to how government measures in this area can be taken consistently with international trade rules. If and when that happens, here is a helpful new publication entitled "A Guide for the Concerned: Guidance on the elaboration and implementation of border carbon adjustment." An excerpt:
BCA AND WTO LAW
There are two key aspects of WTO law that are most relevant to border carbon adjustment: non-discrimination under the General Agreement on Tariffs and Trade (GATT) and subsidy law under the Agreement on Subsidies and Countervailing Measures (SCM).
The former dictates that imported goods must be treated no worse than “like” domestic goods (national treatment: Article III:2), and that there should be no discrimination among “like” goods on the basis of country of origin (MFN: Article I:1). GATT also contains a carve out from these requirements in Article XX (General Exceptions), which allows discrimination for a number of agreed purposes, including one that is particularly relevant for climate change protection: the conservation of exhaustible natural resources. However, Article XX also includes (in its chapeau) some general requirements for policy that must be met regardless of the validity of the exemptions, including the requirement that a measure does not represent “arbitrary or unjustifiable discrimination between countries where the same conditions prevail” or a “disguised restriction on international trade.” The chapeau tries to ensure that Article XX is available for legitimate environmental measures, but not for protection against competitiveness impacts.
With respect to import adjustment, the implications are that BCA cannot discriminate on the basis of country of origin; it cannot have, for example, exemptions based on national policies or practice. And it cannot discriminate between foreign and domestic goods that are “like,” with carbon-intense and low-carbon goods almost certainly being considered “like.” Any permutation of BCA will fail the latter test, so the legal questions would then centre on whether the regime passed the strictures of Article XX. The details of the scheme in question would be key, and while definitive guidance is impossible, case law gives us some strong indications:
• The regime would have to focus only on preventing leakage (i.e., an environmental goal), and not on preserving competitiveness.
• It would very likely have to be preceded by bona fide attempts at negotiating a multilateral solution.
• It would probably have to allow individual foreign producers to produce their own actual data, to challenge any benchmarks imposed.
• And it might have to allow exemptions to countries that had taken climate action comparable in effectiveness to domestic action.
Subsidy law in the WTO outright prohibits certain types of subsidies (e.g., those that are linked to export promotion) and allows challenges to other subsidies, focused on determining whether they cause harm to foreign producers. Border carbon adjustment applied to exports would be a prohibited export subsidy if the rebate were in excess of the costs borne by goods destined for domestic consumption. But there is no legal consensus (or even strong opinion one way or the other) on whether all export adjustment would constitute prohibited subsidies under SCM rules; it depends on whether the domestic scheme (whether a tax, a cap and trade or some other regulations) is considered legally an indirect tax. Such taxes, of which VAT is an example, can be legally adjusted for at the point of export, but direct taxes (such as payroll taxes) cannot, and carbon taxes fall into a legal grey zone in between.
