Australia: Trade Rules And Climate Change

Last Updated: 8 April 2008
Article by Iain Sandford

Contrary to what some commentators might believe, the World Trade Organization (WTO) can accommodate measures focussed on protecting the environment. But it does impose important disciplines on those measures when they impact on international trade.

The balance may prove to be important as climate change measures around the world begin to impact on the conditions of competition between products from different countries.

In enunciating the objectives of the WTO when it was founded at Marrakesh in 1994, WTO Members recognised the need to protect and preserve the environment. Indeed, one of the preambular paragraphs of the Marrakesh Agreement Establishing the WTO observes:

"Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and affective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development…". (Emphasis added).

The 'trade and environment' discussion has been a slow-moving but serious feature of the WTO ever since.

The increasing momentum of policies around the world to address climate change, however, give rise to an increasingly difficult balancing act between WTO rules designed to proscribe discrimination in international trade, and climate change measures that seek to promote production practices that reduce greenhouse gas emissions.

The problem is that not all countries take the same approach to regulating emissions. For producers in some countries, carbon quotas and emissions trading regimes mean that environmental costs of production are embodied in the goods produced. Producers of the same or similar goods from other countries that do not require such costs to be internalised can enjoy a competitive advantage in markets where the two sets of goods compete.

The answer to this problem could be to reach some degree of universality in the way the world apportions the ultimate cost of environmental measures.

In the meantime, however, some countries are exploring the possibility of penalising imported goods to equalise the conditions of competition between 'green' domestic production and less green imports. In particular, some countries, including the United States and the European Union, have started to consider imposing border tax adjustments to do just that.

Whether such measures can be crafted in a manner that is consistent with WTO rules is an open question.

In principle, discrimination between different exporting countries or between imported and domestic production runs counter to WTO rules. On the other hand, certain environmental measures can be exempt from these basic rules, so long as they do not constitute arbitrary or unjustifiable discrimination or disguised restrictions on international trade.

The complexity of this area, and the possibility that some form of border tax adjustment may be compatible with WTO rules, means that this is an area of risk for exporters. This is an area that deserves close attention going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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