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Emerging Climate Change Policies

The principal policy alternatives to address climate change fall under three categories: (1) the cap-and-trade approach; (2) standards-based policies, which require the adoption of specific measures or set source-specific emissions limits; and (3) carbon taxes.[1] Depending on the manner in which these policies are implemented, they may raise issues of WTO compatibility. If pollution permits are distributed or sold in a discriminatory manner, a cap-and-trade system could be inconsistent with the nondiscrimination obligations of GATT Articles I:1 and III:4. Similarly, if carbon taxes are applied in a discriminatory manner, there could be a violation of GATT Article III:2. If the revenue from carbon taxes is used to grant subsidies, those subsidies might be inconsistent with the SCM Agreement. Standards-based policies could also be implemented in a discriminatory manner, contrary to the GATT and the TBT Agreement. Environmental labels, such as those based on the carbon footprint of products, may be designed to favor domestic industry and may be inconsistent with these WTO Agreements.

A cap-and-trade system establishes a price on emissions through market forces. It places a limit on the combined emissions of a group of regulated pollution sources by creating a limited number of tradable pollution permits or emissions allowances for a given period and requiring firms to surrender a quantity ofallowances equal to their emissions during that period, without imposing particular limits on emissions from any given firm or source. The government distributes pollution permits to firms, for free or sold at auction. The firms can then sell a portion oftheir permits to firms whose cost ofreducing emissions is higher. The emissions cap can be imposed

“upstream” (on fossil fuels at the point of extraction, processing, or distribution) or “downstream” (at the point of combustion). A cap-and-trade system can gradually reduce the caps over time to encourage investment in emission-reducing technology.[2] Cap-and-trade systems are easier to harmonize internationally, since pollution permits denominated in units of carbon content of fossil fuels or CO2 emissions create a natural unit of exchange for harmonization.[3]

Carbon taxes are a market-based alternative to a cap-and-trade system. Both policies put a price on CO2 emissions. However, whereas a carbon tax sets the price of CO2 emissions, a cap-and-trade system sets the amount of emissions and allows the price of the emissions to adjust to meet the emissions cap. A cap-and-trade system provides more certainty regarding whether emissions targets will be met, but less certainty regarding the cost of meeting those targets. Conversely, a carbon tax provides less certainty regarding whether emissions targets will be met, but more certainty regarding the cost ofmeeting the emissions targets. Under a cap-and-trade system, the firms that face higher adjustment costs can be granted pollution permits that can be sold in the market. Under a carbon tax system, those firms can be granted tax exemptions or benefit from the redistribution of the tax revenue. Tradable tax exemptions and redistribution of tax revenue could provide the same level of distributional flexibility as a cap-and-trade system, but political and practical considerations may limit what can be done in practice.[4] Moreover, the manner in which economic benefits are distributed may raise issues regarding the compliance of the system with the SCM Agreement. The principal advantage of a carbon tax is that it eliminates the potential price volatility of a cap-and-trade system, while the principal disadvantage of a carbon tax is political resistance to new taxes.[5]

Standards—a command-and-control system—could be used instead of or together with a market-based cap-and-trade system. However, standards may be less effective and less efficient than a cap-and-trade system, because: (1) standards are likely to apply to new equipment only, thereby creating a disincentive to replace old equipment; (2) standards are unlikely to address all sources of emissions, due to administrative limitations and pressure on legislators to grant exemptions; (3) the lack offlexibility inherent in uniform standards does not permit taking into account variations in the cost of compliance; and (4) it is more difficult to mitigate the distributional implications of standards, meaning that the costs of compliance can vary significantly.[6]

In addition to the foregoing policy alternatives, countries may choose to apply tariffs or border taxes that discriminate between different products based on differences in national climate change policies or differences in the carbon footprints of products, or may provide direct subsidies to domestic producers. Concerns regarding the impact of carbon taxes on competitiveness can lead to the implementation of accompanying border tax adjustments or export subsidies to compensate for a lack of carbon taxes or equivalent measures in trade partners. As we noted in Chapter 2, the United States proposed to implement this type of system, in its Safe Climate Act.[7] The GATT consistency of such border tax adjustments is unclear.[8] Some companies have begun to measure the carbon footprint of their products and to display the results on their websites or on their packaging.[9] This trend coincides with a movement towards standards regarding the measurement of carbon footprints, and labeling and may facilitate the design and application of tariffs, border taxes, or other trade restrictions that are based on differences in the carbon footprints of products.

The EU enacted a biofuels directive to impose sustainability criteria and require certification of biofuels production according to their greenhouse gas emissions.[10] Malaysia and Indonesia account for the majority of biofuels made from palm oil, which would fall below the minimum EU requirement.[11] Brazil has complained about US and EU ethanol tariffs, which protect American corn-based ethanol and European ethanol made from sugar beets and wheat, and has sought their elimination in the Doha Round.[12] The United Nations Development Program has called for the elimination of these ethanol tariffs because Brazilian sugarcane-based ethanol reduces greenhouse gas emissions by up to 70 percent, compared to 13 percent for corn-based ethanol.[13] Brazil also has complained about US subsidies for corn-based ethanol and the EU has threatened to impose countervailing duties to address the same subsidies.[14]

  • [1] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” (accessed March 15, 2013).
  • [2] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” 7—8.
  • [3] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” 53.
  • [4] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” 49—51.
  • [5] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” 52.
  • [6] Robert N. Stavins, “A U.S. Cap-and-Trade System to Address Global Climate Change” 48—9.
  • [7] Fabio Morosini, “Trade and Climate Change: Unveiling the Principle of Common but Differentiated Responsibilities from the WTO Agreements” (2010) 42 George Washington International Law Review 713, 734-5.
  • [8] This issue has been analyzed elsewhere. In addition to Morosini, see Pauwelyn, “U.S. FederalClimate Policy and Competitiveness Concerns”; Richard G. Tarasofsky, “Heating Up InternationalTrade Law: Challenges and Opportunities Posed by Efforts to Combat Climate Change” (2008)2 Carbon & Climate Law Review 7, 11.
  • [9] Andrew Martin, “How Green Is My Orange?” New York Times, January 21, 2009 (accessed March 8, 2009).
  • [10] “EU’s Sustainable Biofuels Push Angers Malaysia, Brazil” (November 7, 2008) (accessed March 10, 2009).
  • [11] “EU Biofuels Regulation” Directive 2009/28/EC ofthe European Parliament and ofthe Councilof 23 April 2009 on the promotion of the use of energy from renewable sources and amending andsubsequentlyrepealing Directives 2001/77/EC and 2003/30/EC (Textwith EEArelevance), Art. 17 (accessed April 5,2013); Multa Fidrus, “Minister Lobbies EU over Palm Oil Restrictions” The Jakarta Post (accessed March 7, 2009).
  • [12] Bradley S. Klapper, “Brazil Weighs WTO Ethanol Case Against US” Associated Press (July 30,2008).
  • [13] Jim Lane, “Brazilian sugarcane head said EU, US, Argentine biofuel trade policies abouteconomic benefit, not global emission reductions” Biofuels Digest (January 17, 2008) (accessed March 8, 2009).
  • [14] Inae Riveras, “Biofuels Protectionism Trumps Climate Concerns” Reuters (January 16, 2008)(accessed March 8, 2009); United States—Domestic Support and Export Credit Guarantees for Agricultural
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