Climate Change and the Trading System: After Doha and Doha

Abstract

The international trade dispute over Ontario’s “green energy” policies is a harbinger of similar problems to come; an early example of the emerging conflict between industry rules aimed at reducing greenhouse gas emissions, and existing trade deals between national governments. We live in a world without formalized and sweeping multilateral climate change treaties between major economies, but one with many sweeping trade treaties between them. That discrepancy is setting up the conditions for more trade disputes in the future. Governments have every incentive to position climate change policies, as Ontario has, as support for new growth industries and the creation of local “green jobs.” But they also have every incentive to want to prevent the leakage of those envisioned economic benefits to outside parties, at the very least when those outside parties come from places that do not share the burden of climate change mitigation. The current trade-law framework has lent itself to the interpretation, by arbitration panels, that “free riders” — that is, industries and countries that bear little to no responsibility for shouldering the costs of climate change policies — are nevertheless entitled to share in the commercial benefits that may be created by climate policies in jurisdictions that do make efforts to reduce carbon emissions. In short, if a corporation or state-owned enterprise from a country lacking climate change policies wants to take advantage of the economic benefits of Ontario’s feed-in-tariff program, it would seem there is little Ontario can do to stop it, without running afoul of trade agreements. The result is a worst-case scenario. The problem of climate change continues to worsen, while governments — national and sub-national — face disincentives for implementing regulations and subsidies that might help mitigate the problem. This is because they cannot be sure that they will not be left to shoulder the cost while foreign actors, without similar environmental commitments, take advantage of the attendant economic benefits. There is also the real possibility that some governments may disguise anti-trade motives by cloaking them under the cover of environmental policy. These conflicts need not happen and, if we are committed to slowing climate change, it cannot be allowed to happen. The global trading community must find ways to exempt domestic climate change policies from traditional tariff and trade commitments, while also guarding against the potential abuse of that exemption. One possibility is exempting from tariff restrictions “border carbon adjustments” (BCAs), which apply varying tariffs to goods moving across borders based on the carbon emitted across the supply chain. The corporate sector’s increasing sophistication in quantifying supply-chain emissions, as part of corporate competitive efforts, makes BCAs more feasible for governments to implement. And there is already some evidence to suggest that BCAs can be accommodated within the current WTO rules, although some bending of the rules may be required. Still, the climate change threat is grave and urgent. If ever there was a reason to bend global trade rules, accommodating earnest climate-change-mitigation efforts is arguably the best one yet.