On June 12, GMF hosted a luncheon for congressional staffers on how climate policies and the multilateral trading system could interact or even come into conflict.  Specifically, the luncheon focused on two issues: 1) whether the granting of free emissions allowances to certain industries could be viewed as providing prohibited subsidies, and 2) whether border adjustments would violate WTO rules prohibiting discrimination based on the national origin of the a good or related rules limiting the amount of border taxes that can be charged on imports.  The event featured the two trade policy experts, Steven Charnovitz, associate professor at the George Washington University Law School, and Warren Maruyama, former general counsel at the Office of the United States Trade Representative and currently a partner at Hogan and Hartson, who expressed their personal views on the trade and climate policy debate. GMF Senior Transatlantic Fellow Jennifer Hillman moderated.

Charnovitz and Maruyama discuss interaction of trade and climate

Steve Charnovitz presented the view that climate change bills currently being debated in Congress may not present insurmountable legal conflicts with the existing rules of the World Trade Organization (WTO). He argued that while it is difficult to predict how a complaint regarding climate change legislation would come out, he questioned whether a challenge to free emissions allowances is likely, given that we live in a world of subsidies, which diminishes the political feasibility of one country challenging another country's climate change related subsidies.  He also noted that GATT Article XX (which provides an exemption from the WTO rules for policies relating to the conservation of natural resources or the protection of human, animal or plant life or health) could be invoked to justify a border adjustment, provided the legislation was carefully crafted to meet the overall requirements of Article XX.

Warren Maruyama argued, in contrast, that the potential for border adjustments and free allowances in the current proposed climate bills would not stand up under WTO scrutiny.  He contended that while a carbon tax would be WTO compatible, a cap-and-trade system would not. In particular, he expressed concerns that the current legislation would be viewed as providing an improper export subsidy if free allowances are granted to companies that export their goods and that the border adjustments would violate the provisions limiting import tariffs and quotas or export restraints.  He expressed concern that the Article XX exemption could not be successfully invoked because the legislation would be seen as a disguised restriction on international trade. Both Steve and Warren agreed that one way to avoid challenges to climate change legislation would be to negotiate a "peace clause" whereby countries would agree not to dispute one another's climate regimes for a certain amount of time, provided that they were implemented within certain agreed upon criteria. Warren was, however, more skeptical about the likelihood of reaching an agreement on such a "peace clause".

Participants discussed the need for the WTO and the international climate negotiations to coordinate on trade related climate issues. Participants agreed that reaching multilateral environmental agreements can significantly reduce environment-related trade disputes, citing the Montreal Protocol as a successful example. Participants also agreed that negotiating a global climate agreement that includes strong emission reductions commitments from all major emitters, including China and India, would be the best approach to minimizing climate-related trade disputes.  Questions focused on how to bring about coherence between the WTO and the climate change systems and the timing of any potential disputes over conflicts between the two. Given the proposed date of 2025 for the implementation of border adjustments and the need to wait for subsidies to produce discernible adverse effects, one participant doubted that disputes would arise for at least 10-15 years, if at all. A number of staffers were interested in the positive precedent for a "peace clause" that arose in the Uruguay Round with respect to agricultural subsidies.  Both Steve and Warren noted that while challenges might have been brought to the Montreal Protocol, none were and further noted that no challenge has been brought to the European Union's emissions trading system, despite the fact that it contains many of the same potential conflicts with WTO rules as the pending U.S. legislation.