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Policy Clash Looms between Trade and Climate

Author: Toni Johnson
March 12, 2008

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Canada’s ambassador sent a letter (PDF) to U.S. officials in February warning that an overly broad interpretation of the Energy Independence and Security Act, signed into law in December 2007, could actually prohibit the United States government from importing oil. The law prohibits the import of alternative fuels with higher greenhouse-gas emissions than conventional petroleum sources. Canada points out this might be read to include oil from tar sands, which makes up the bulk of the oil Canada sends to the United States. Canada is the largest single supplier of oil to the United States, thanks in part to the North American Free Trade Agreement (NAFTA).

The concerns raised by the Canadian embassy highlight a looming clash between climate change policy and U.S. commitments to free trade. After years in which the United States declined to take part in the multilateral approach to climate policy, symbolized by the Kyoto Protocol, U.S. lawmakers appear ready to push through climate change legislation. But lawmakers worry about U.S. competitiveness. They want to discourage industries from relocating abroad to avoid climate regulation. They also want to ensure foreign producers don’t get a “free ride” on greenhouse-gas regulations when U.S. industries are forced to comply. Under pending proposals (PDF), U.S. lawmakers are weighing several options that would penalize foreign trading partners if they do not take steps to reduce emissions during the production of commodities for the U.S. market. But the import taxes, labeling specifications, and requirements to purchase emissions permits being proposed are in conflict with the notion of free trade, say some experts. The European Union, in particular, is considering such measures (EurActiv), many of them directed at producers in the United States.

U.S. lawmakers and environmental advocates believe these measures would fall within World Trade Organization (WTO) rules covering environmental standards. But some experts disagree. Although the WTO allows discriminatory actions by members for environmental concerns, such measures must be proved not to be arbitrary, overly onerous, or merely using the environment as a means to erect covert trade barriers. International trade lawyer Bernd G. Janzen says that to date, the WTO’s rulings on these issues offer little in the way of guidelines for U.S. or other policymakers. A report from the National Foreign Trade Council, a U.S.-based trade advocacy group, points to a 1994 WTO ruling (PDF) that prevented the United States from imposing an auto import tax on based on fuel efficiency standards.

Gary Clyde Hufbauer, an economist at the Peterson Institute for International Economics, told U.S. lawmakers earlier this month that almost all environmentally based trade restrictions (PDF) stand a good chance of a WTO challenge. He says such restrictions could spark retaliation on U.S. exports. Sebastian Mallaby, director of CFR’s Center for Geoeconomic Studies, says the potential destabilizing force of green tariffs on existing international trade deals should be assessed before finishing a new round of global trade talks. The U.S. Chamber of Commerce, a powerful proponent of free trade, suggests a better climate policy solution would be liberalizing the trade of clean energy technologies (PDF). The Bush administration and European Union are both pushing for an end to clean-technology tariffs currently imposed by other countries. The administration has also warned against imposing the type of tariffs being proposed in Congress and the European Union.

A number of policy groups, including the Center for American Progress, suggest climate trade restrictions should be policy “tools of last resort.” Instead they suggest engaging countries in multilateral or bilateral climate agreements. A 2008 World Bank report notes that many climate measures focus on production methods and processes (PDF), which it suggests could be crucial to finding a regime that can pass WTO muster. The WTO recently upheld a U.S. ban on imported shrimp trawled without protective measures for sea turtles. In that ruling, the WTO noted that the disputants were all signatories of the same endangered species treaty. Such reasoning, the report says, could be applied to climate and trade policy clashes between nations.

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