THE CLIMATE-TRADE INTERFACE :

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1 GLOBE EU OCCASIONAL PAPER on THE CLIMATE-TRADE INTERFACE : Trade Related Environmental Measures (TREMs) and the WTO President of GLOBE EU : Vice-President of GLOBE EU : Team Leader, Climate-Trade : Parliamentary Coordinator : Anders Wijkman, MEP Satu Hassi, MEP Caroline Lucas, MEP Quentin Huxham, GLOBE EU. ACKNOWLEDGEMENT This paper was prepared by Quentin Huxham on behalf of GLOBE EU. In the preparation of this paper, GLOBE EU is profoundly indebted to the huge contribution, both intellectual and legal, of Elena Dzhurova, Master in Law and Economics of the Universities of Sofia University "St. Kliment Ohridski" and Europa-Universität Viadrina, without whom this paper would never have been possible.

2 Trade Related Environmental Measures (TREMs) and the WTO Introduction The concept of Trade Related Environmental Measures (TREMs) was first formally enshrined in international trade law in the TNC Decision of 15 December 1993 on Trade and Environment, in accordance with which WTO Member States are required to identify the relationship between trade measures and environmental measures, in order to promote sustainable development, which stressed in particular the need for rules to enhance positive interaction between trade and environmental measures, for the promotion of sustainable development 1. TREMs were then formally incorporated into the WTO legal order by the Decision on Trade and Environment taken by Ministers on the occasion of the signing of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations at Marrakesh on 15 April Beyond confirming formally the Decision taken by the TNC the previous December, Ministers explicitly laid down that the objective was to make international trade and environmental policies mutually supportive (our emphasis), including those pursuant to multilateral environmental agreements 2. 1 The TNC Decision adopted on 15 December 1994 reads in part as follows: the need for rules to enhance positive interaction between trade and environmental measures, for the promotion of sustainable development, with special consideration to the needs of developing countries, in particular those of the least developed among them; and the avoidance of protectionist trade measures, and the adherence to effective multilateral disciplines to ensure responsiveness of the multilateral trading system to environmental objectives set forth in Agenda 21 and the Rio Declaration, in particular Principle 12; and surveillance of trade measures used for environmental purposes, of trade-related aspects of environmental measures which have significant trade effects, and of effective implementation of the multilateral disciplines governing those measures; 2 The Ministerial Decision of 15 April 1994 reads in part as follows: that, within these terms of reference, and with the aim of making international trade and environmental policies mutually supportive, the Committee will initially address the following matters, in relation to which any relevant issue may be raised: the relationship between the provisions of the multilateral trading system and trade measures for environmental purposes, including those pursuant to multilateral environmental agreements;

3 Although the trade law fraternity around the WTO may still not yet have fully taken this on board, the effect of that decision was, in practice, to reverse the burden of proof under the WTO s legal system when it comes to TREMs compared to the situation as it was before under the old GATT, in that the pursuit of sustainable development is an explicit part of the WTO s fundamental remit, which was not the case for the General Agreement. The complication is, however, that the fundamental principles of the original General Agreement still apply and since 1995 when the WTO formally came into being, the precise legal interraction between the trade and environmental communities has yet to be properly tested in the case law. The proposal of recommendations on whether any modifications of the provisions of the multilateral trading system are required on the basis of the open, equitable and nondiscriminatory nature of the system was supposed to have been the responsibility of the Committee on Trade and Environment (CTE) set up by the 1994 Decision, but it has to date yet to make any such recommendations. the relationship between environmental policies relevant to trade and environmental measures with significant trade effects and the provisions of the multilateral trading system; the relationship between the provisions of the multilateral trading system and: (a) charges and taxes for environmental purposes; (b) requirements for environmental purposes relating to products, including standards and technical regulations, packaging, labelling and recycling; the provisions of the multilateral trading system with respect to the transparency of trade measures used for environmental purposes and environmental measures and requirements which have significant trade effects; the relationship between the dispute settlement mechanisms in the multilateral trading system and those found in multilateral environmental agreements; the effect of environmental measures on market access, especially in relation to developing countries, in particular to the least developed among them, and environmental benefits of removing trade restrictions and distortions; the issue of exports of domestically prohibited goods; that the Committee on Trade and Environment will consider the work programme envisaged in the Decision on Trade in Services and the Environment and the relevant provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights as an integral part of its work, within the above terms of reference,

4 In the absence of any such recommendations, the purpose of this note is to examine the nature of the relationship between any such TREMs adopted in the future, whether taken unilaterally by the EU or another, single WTO Member State, or as part of a global MEA such as the UNFCCC, and the general legal principles contained in the General Agreement of 1947, albeit as seen through the prism of the establishment of the WTO in The ultimate objective is identical to that contained in the original 1994 Decision, to make international trade and environmental policies mutually supportive, notwithstanding the absence of explicit case law, notably relating to GHG emissions restrictions/bans from fossil fuel use, to guide us. The particular point of departure for this note is that relating to the need to combat climate change, regardless of whether the negotiations in the run-up to the Copenhagen COP at the end of next year succeed or not, especially addressing such urgent issues as carbon leakage, enforcement of emissions reduction commitments and the compliance regime under any future climate-related MEA, but the general principles will apply regardless of the particular global environmental issue concerned. TREMs and the WTO interface The WTO compatibility of a TREM will be assessed principally in accordance with the provisions of Art. XX of GATT/WTO, the Agreement on Technical Barriers to Trade (the TBT Agreement) and the Agreement on the Application of Sanitary and Phytosanitary measures (the SPS Agreement). In the context of the approaching Copenhagen Conference and the question of how to handle the WTO compliance of any measure designed to enforce a future Global Agreement on emissions reduction, we should examine the principles of GATT/WTO that would apply in accordance with three distinct scenarios: fully global participation; broad, but not complete participation and limited participation (e.g. as under the Kyoto Protocol currently in force). The general concept of non-discrimination is incorporated in Art. I of the GATT/WTO (the so-called most favoured nation, or MFN clause) and Art. III of the GATT/WTO

5 (the so-called national treatment clause). The MFN clause lays down that WTO Members States must treat equally like products originating in or destined for the territory of all other WTO Member States, whereas the national treatment clause prohibits the discrimination between imported and domestic like products. Additionally we have to consider the provisions of Art. XI (dealing with quantitative restrictions) which prohibits all restrictions other than duties, taxes or other charges such as quotas and import or export licences on the trade in any products. These legal principles apply equally and no single one of them can be interpreted as an overriding principle. Moreover when applying these principles, the products at issue would first be assessed to ensure that they classify as like products. For WTO purposes, the international classification of products for tariff purposes requires like products typically having the same physical characteristics, the same end-use, the same tariff classification and last but not least they should be perfectly substitutable. However the GATT/WTO case law does not make the distinction between "like products" in accordance with their production and processing methods (PPMs), which may determine whether the "like product" is sustainable or not. WTO Legal Assault Course : TREMs in practice. The WTO does permit certain specific exceptions to these general principles. In order for a TREM to be WTO-compatible, first of all, the measure has to fall within the scope of Art. XX. The sequence of steps in applying these exceptions requires that first the inconsistency with the rules established in Art. I, Art. III and Art. XI be assessed and then it must be demonstrated that the measure would qualify under one of the exceptions explicitly listed in Art. XX, which, for a climate-related TREM, would be : (b) necessary to protect human, animal or plant life or health; (d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement...; (g) relating to the conservation of exhaustible natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption.

6 This necessary requirement prohibits a Member State from adopting a measure that is inconsistent with any other WTO provision if any alternative measure, which is not inconsistent with other WTO provisions, can reasonably be employed by that Member State. However, this necessary test is not whether the "policy underlying the measure" is necessary but, rather, whether the "measure" is necessary to achieve the stated policy objective. The precise meaning of the phrases "relating to" and "in conjunction with" are critical to this assessment : the term "relating to" means that a measure must be "primarily aimed at the conservation of exhaustible natural resource"; the term "in conjunction with" in paragraph (g) is to be interpreted in a way that ensures that the scope of permissible trade restrictions taken under that provision corresponds to the restrictions on domestic production or consumption; a trade measure could, therefore, be considered to be made effective "in conjunction with" production restrictions only if it was primarily aimed at rendering effective these domestic restrictions. Article XX(g) also includes an "even-handedness" requirement relating to the balance between the measure and domestic restrictions. This is going to be particularly relevant in terms of restrictions on GHG emissions from fossil fuel use which is less than a 100% ban. This is clearly going to be extremely important for the implementation of GHG emissions reduction commitments from the use of fossil fuels, as this will inevitably restrict the trade in fossil fuels. There is nothing in the case law to indicate that a ban on, or severe restriction of, trade in fossil fuels essential for the kinds of emissions reduction commitments that are currently being considered within a 2050 timeframe, would necessarily fail to pass the Art. XX(g) test, but nor is it certain to pass, even if imports are treated identically to domestic production, if any. On the other hand, if the TREM treats imports no less favourably than domestic products, even theoretical ones, there may not even be a breach of Art. III to require Art. XX. Even if the measure qualifies under one of the exceptions in Art. XX, it still has to pass the "chapeau test", designed to prevent the abuse of the exceptions. Thus under the "chapeau provision", all three requirements should be satisfied: the measure should not

7 be applied in a manner that leads to 1) arbitrary discrimination; 2) unjustifiable discrimination or 3) constitutes a disguised restriction on international trade. It is usually not only the nature of the measure itself that is at stake, but the manner and procedures in accordance with which the measure is actually applied as well as the underlying motivation. Here, again, it is far from clear that climate-related TREMs would necessarily pass this test, but so long as a GHG emissions ban from fossil fuel use applied equally to domestic products as well as imports, it was firmly founded in IPCC science and ideally supported by a global MEA with the broadest possible participation, there is a good chance, given that here we are at the outer boundaries of the state of the art of GATT/WTO case law, that a robust case could be put for its WTO-compatibility, given that the TNC Decision of 1993 and the Ministerial Decision of 1994 make explicit references to Agenda 21 and the Rio Declaration, in this case, Principle 8. Beyond the general principles, there is the question of whether the implementation of such a generalised TREM might constitute a breach of the TBT Agreement. Art. 2.2 of the TBT Agreement requires that Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade. For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create.... The Article has an indicative list of legitimate objectives which includes national security requirements; the prevention of deceptive practices; the protection of human health or safety, animal or plant life or health and the environment. Here again, while a climate-related TREM clearly qualifies as a legitimate objective in terms of being an environmental protection measure, a generalised import ban on fossil fuels would not qualify as a technical barrier to trade and thus be covered by the TBT Agreement, although a ban on GHG emissions from fossil fuel use, i.e. a requirement that all fossil fuel use would require carbon capture technology, might be. As this technology is still in its infancy, inevitably, the trade implications have never been tested in GATT/WTO.

8 As far as biofuels are concerned, it would appear that legislation that banned petrol and diesel manufactured from fossil fuels, but allowed chemically identical petrol and diesel from non-fossil fuels (e.g. animal fats and vegetable oils) would not fall foul of the like products test in the WTO. If true, this would make an enormous difference to the RES Directive s WTO-compatibility. Though strictly speaking not really relevant to a climate-related TREM, the SPS Agreement is nonetheless informative as it sets out the scientific basis for trade restrictive measures, as any climate-related TREM would have to be based on IPCC science. Art. 2.2 of the SPS Agreement requires that the measure must be necessary, based on a robust scientific justification, but if relevant scientific information is insufficient, provisional SPS measures can be taken. Members States however are obliged to seek additional information for a more objective risk assessment and review the SPS measure within a reasonable period of time. The TBT and SPS Agreements recognize the rights of WTO Member States to establish national requirements that are more stringent than international standards, even if the coverage of the "legitimate objective" to be accepted is different between the two standards, provided that such requirements conform to WTO rules that protect against unnecessary, unjustified, arbitrary and disguised discrimination towards the products of other WTO Member States. However the WTO rules do not expressly encourage the application of more stringent standards, but rather encourage the harmonization of standards. These two agreements do provide the appropriate principles for environmental protection because Member States can introduce or maintain trade-restrictive environmental measures even though the measures may not be in compliance with the legal principles of the General Agreement. Whether, however, the TBT or SPS Agreements will be applicable to any particular TREM will be determined by how that TREM is designed and drafted and that, at this stage, is still hypothetical, so remains to be seen.

9 Conclusions However, the most important conclusion to be drawn from these analyses is that a total GHG emissions ban from fossil fuel use should conform fully to Article III of the GATT/WTO, whereas anything less than a total ban would encounter significant WTO problems in so far as the allocation of the permitted fossil fuel use were to be carried out as between domestic producers and importers.