UK: EU, Competition And Trade Alert - Environment Protection Or Trade Protectionism?

Last Updated: 16 April 2008
Article by Jochen Beck

Would a carbon equalisation system to offset carbon leakage comply with international laws?

Interested entrepreneurs have claimed that a greenhouse gas emission allowance trading scheme (ETS) imposes high cost on Community industries. This could lead to a loss of market share to installations outside the Community not taking comparable action to reduce emissions. The European Commission's proposal for amending the ETS takes account of such claims and discusses – albeit vaguely – the introduction of a carbon equalisation system to prevent carbon leakage. Similar considerations are currently underway in the United States.

On 23 January 2008, the European Commission published its long awaited proposal for an amendment of the European Community's (EC) ETS Directive1 (the proposal). The proposal addresses concerns expressed by entrepreneurs that energy intensive industries subject to the ETS could be exposed to a significant risk of carbon leakage. If industries are not able to pass on the cost of required allowances in product prices, they might lose market share to installations outside the Community not taking comparable action to reduce emissions. Recitals (19) and (20) of the proposal address this issue. The Commission aims to identify the energy intensive industries likely to be subject to carbon leakage by no later than 30 June 2010. By June 2011, having consulted with social partners and in the light of the outcome of the international negotiations, it would then submit a report accompanied by the necessary proposals. Community industries at risk of carbon leakage could receive a higher amount of free allocation or an effective carbon equalisation system could be introduced with a view to putting Community installations and those from third countries on a comparable footing. The Commission demonstratively suggests that such a system could be applied by requiring the surrender of allowances. Any system would, however, have to be compliant with the international obligations of the EC, in particular the laws of the World Trade Organisation (WTO). Similarly, the U.S. Senate is currently looking into the possibility of subjecting importers to emission charges similar to those applicable to domestic producers2.

The Commission's approach is rather conservative and certainly does not fulfil the hopes of some entrepreneurs who had wished for a system of equalisation eg, in the form of border measures, to be included in the current proposal. In a recent letter to the European Union (EU), France and Germany, with the support of other Member States, have requested clarification on the ETS reform proposal3.

Legal Aspects

The views on whether a carbon equalisation system (whether in the form of taxes, laws or other measures applied at the border or internally) to counter potential carbon leakage would be compliant with WTO law vary widely. While some see little or no compliance issues arising, others fear that such measures are motivated by protectionist considerations and contest their legality under WTO laws. There is no doubt that such a system would, therefore, require its legal foundation to be embedded in an international agreement. Given the controversial views, it is worth looking at the legal basis of a carbon equalisation system under WTO law. An analysis of the compliance with WTO law of a carbon equalisation system imposed by a WTO Member as to offset carbon leakage, will likely include a review of such measures under Articles I, III, XI and XX of the General Agreement on Tariffs and Trade (GATT) depending on how such a system is constructed eg, in the form of taxes, laws or other measures and whether the measures apply at the border or internally.

Article I establishes the so-called 'general most favoured nation treatment' (MFN). Accordingly, WTO Members must apply duties, customs duties, taxes, regulations and import rules and internal laws and taxes equally to all other Members and cannot discriminate among like products imported from different Members. Article III establishes the so-called 'national treatment principle' whereby WTO Members cannot discriminate between imported and domestic products with regard to the imposition of internal taxes or the application of internal laws and measures. Under Article III:2 imported products shall not be subject to taxes of any kind in excess of those applied to like domestic products. Under Article III:4, imported products shall be accorded treatment no less favourable than that accorded to domestic like products. Article XI of the GATT prohibits quantitative import restrictions. Article XX of the GATT establishes general exceptions from these provisions.

From the relevant parts of Articles I and III of the GATT, it follows that any measures (whether laws, taxes, duties or other measures) applied at the border or internally must neither discriminate between like products originating in different WTO Members nor between imported and domestic like products. The emphasis hereby lies on the "likeness" of products. The WTO Dispute Settlement Body (DSB) established that the likeness of products is defined by physical characteristics, properties, nature and quality, end uses, tariff classification and consumers' perceptions and behavior but not by process and production methods (PPMs). Consequently, different PPMs per se cannot render two like products unalike.

While this distinction might appear academic, it has important consequences. Under Article III of the GATT, a WTO Member would be allowed to impose a 5% tax on eg, domestic desktop computers and a 10% tax on (imported) laptops. This would not be a violation of Article III if desktops and laptops were not considered like products. On the other hand, laptops manufactured domestically and abroad could not be subject to different taxes based on the manufacturing process used eg, more or less labour intensive. The same applies under Article I of the GATT with regard to laptops imported from different WTO Members.

This principle would also apply to any carbon equalisation system designed to contravene carbon leakage. Different types of steel for example, such as stainless or metallic coated steel, would not be considered like products. They could therefore be subject to a differential treatment eg, different duties or taxes. Stainless steel produced in an environmentally friendly way would, by contrast, be a like product to stainless steel produced with high carbon emissions. Articles I and III of the GATT, as currently interpreted by WTO case law, would not allow different treatment of those products based on PPMs only.

Given the meaning of the term "like product", it is possible that a carbon equalisation system is found incompliant with Articles I and/or III (and in the case of quantitative import restrictions with Article XI) of the GATT. However, national measures by a WTO Member to offset carbon leakage may find a legal justification under Article XX.

Article XX of the GATT allows WTO Members to adopt or enforce measures necessary to protect human, animal or plant life or health (Article XX(b)) and relating to the conservation of exhaustible natural resources (Article XX(g)). Such measures must, however, not be applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or as a disguised restriction on international trade (chapeau of Article XX).

Compliance of a carbon equalisation system with Article XX of the GATT will very likely stand or fall with the exact wording and structure of the law. From the wording and past case law it appears that to be compliant with Article XX(b) and/or (g) and the chapeau of the GATT, a carbon equalisation system must aim at protecting human, animal or plant life or health and/or relate to conserving exhaustible natural resources and not at protecting a domestic industry's market share by raising its competitors' costs. It should also not be drafted so as to discriminate based on government policy (ie, whether a country has a system comparable to the EC ETS system in place) but rather be based on objectively determined production methods ensuring that individual producers/exporters produce in a manner that achieves the desired environment protection standard. It is furthermore questionable whether a carbon equalisation system that applies to a limited number of industries only fulfils the strict requirements of Article XX of the GATT. This could be interpreted as a protectionist measure if there is eg, a risk that the system would merely shift carbon leakage to other sectors rather than preventing it entirely.

However, given the restrictive trade impact of such measures, it seems unavoidable that the WTO dispute settlement system will be called upon to clarify the application of the relevant GATT Articles mentioned earlier and existing case law to carbon equalisation systems established to prevent carbon leakage.

Additional considerations

In this context, one must not forget that the WTO is a trade organisation. It establishes rules on trade in goods and services. It has, however, no competence to rule on environment protection. Such competence would need to be given to the WTO through an agreement by its Members. Furthermore, the decision making power given to the DSB is limited to reviewing the compliance of measures by WTO Members with the existing WTO law ie, whether these measures affect trade between WTO Members. The DSB can thereby interpret existing rules but cannot invent new law. Therefore, statements in the public domain to the effect that the DSB is unlikely to rule against or should not declare unlawful any measures implemented to protect the environment are misleading and overlook the very nature of the WTO. The DSB can only review whether a measure taken by a WTO Member affects trade and, if so, whether it might be justified under Article XX of the GATT for reasons of protecting human, animal or plant life or health and conserving exhaustible natural resources.

Relating to the legal implications under Article XX of the GATT discussed above, it is also questionable whether a carbon equalisation system that only applies to carbon intensive industry sectors makes economic sense. While such an equalisation system would probably help reduce or prevent carbon leakage in those industry sectors, they might harm downstream industries which are dependent on price efficient raw materials. If raw materials for the manufacture of downstream products are subject to increased costs, this will increase the production costs of domestic downstream products. Imports of a like downstream product from a country that does not have a system similar to the ETS in place will not bear these costs. There might consequently be a risk that a carbon equalisation system for energy intensive industries only will merely shift the carbon leakage from energy intensive products to downstream products. In the worst case this might encourage downstream industries to relocate their production outside of the country imposing a carbon equalisation system.

In the absence of international environment protection agreements establishing, as a side effect, a level playing field regarding environment protection related production costs, an effective system would, therefore, need to comprise all products, not only energy intensive products. Managing such a system poses significant difficulties at an administrative level.


Whilst beneficial to domestic energy intensive industries, a carbon equalisation system might have negative impact on downstream industries and consequently merely shift carbon leakage to such industries. Furthermore, any such system would be vulnerable to challenges under WTO law by negatively affected WTO Members. Past case law is not clear as to whether a carbon equalisation system could be found in compliance with WTO law. Considering the current stagnation of the Doha Round and the international controversial political debate on carbon emission reductions, unilaterally introducing a carbon equalisation system will likely become a very controversial issue globally that will push the WTO, a Trade Organisation, to its limits, as this has been the case in the past. Such a system should best be embedded in an international environment protection agreement rather than on unilateral measures.


1 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, COM(2008) 16 final, 23 January 2008.

2 See Financial Times, Carbon import tax could provoke trade war, 23 January 2008; Financial Times, Green barricade: Trade faces a new test as carbon taxes go global, 23 January 2008.

3 See Financial Times, EU urged to clarify emissions trading reforms, 17 February 2008.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.