Proposals on Carbon-related Border Adjustment: Prospects for WTO Compliance

Recently the practice of border adjustment in international trade has attracted much interest in the context of climate change. The risk of carbon leakage, the competitive disadvantage of industries in countries introducing a cap on emissions and the desire to induce large greenhouse gases emitting countries to join international climate change mitigation actions are the main reasons for considering import restrictions on products with high carbon footprint originating from uncapped nations. The aim of this paper is to examine current proposals on emissions-related border adjustments measures - tabled in the EU and the US - using the WTO legal framework on border adjustment and detect possible legal flaws which could lead to conflict with WTO law in the future. Special scrutiny is given to the proposals on the requirement for importers to submit emission allowances at the border and allowance rebates on exportation. The key questions are whether regulatory distinction between products based on their carbon content is permissible under the national treatment obligation of Article III of the GATT and whether an emission allowance requirement can qualify as an indirect tax acceptable for adjustment. The test on WTO compliance presented in this paper shows that proposals to include reports in national cap-and-trade systems and suggestions on emissions allowance rebates on exports are vulnerable to WTO challenge. The weaknesses of an emission allowance requirement for importers lie in the peculiarities of an emission allowance requirement as a quasi-tax linked to non-incorporated Processes and Procuction Methods (PPMs), in the criteria chosen for import coverage or exclusions and in the implementation details. Proposals on allowance rebates contradict environmental objectives and risk getting in conflict with WTO rules on subsidies.