Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



British Columbia's July 1, 2008 Carbon Tax and the WTO

On July 1, 2008, the carbon tax that is being imposed by the government of the province of British Columbia comes into effect.  The new provincial carbon tax adds almost 2.5 cents to a litre of fuel.  The carbon tax starts at a rate based on $10 per tonne of carbon emissions and rises $5 a year to $30 per tonne by 2012. The tax works out to an extra 2.4 cents a litre on gasoline, rising to 7.24 cents per litre by 2012.  The carbon tax on diesel and home heating oil will start at 2.7 cents per litre and increase to 8.2 cents per litre over the five-year period.

In this context, the speech made by WTO Director-General Pascal Lamy on May 29, 2008, to the European Parliament becomes important for British Columbia to consider.

"... Today, WTO Members have very different perceptions of what the trading system ought to do on climate change. While some would like to see the trading system curb its own “carbon footprint,” through the greenhouse gas emissions it generates in the course of the production, international transportation, and consumption of traded goods and services; others have different ideas.

Some would like to see the trading system offset any competitive disadvantage they suffer in the course of climate change mitigation. More specifically, they would like to see their economic burden shared more globally and proposed border measures proportionate to the costs they incur in curbing their own emissions.

And, of course, there are many different ideas floating on what these (quote unquote) “offsetting” measures may be, with most of the discussion naturally focussing on countries' most trade-exposed, energy-intensive, economic sectors like iron and steel and aluminium. For instance, while some are considering the imposition of domestic carbon taxes, with adjustment for those taxes at their border, others are contemplating emission cap-and-trade systems, with an obligation upon importers to participate in those systems.

...

Let us take the issue of the international trading system's carbon footprint for a start. Much is said in the press everyday about the carbon footprint of international transportation. In fact, a new and emerging concept is that of “food miles.” In other words, the desire of Western consumers to calculate the carbon emitted in the course of international transportation, with many already drawing the conclusion that it may be better to (quote unquote) “simply produce goods at home” to minimize emissions.

  • But that argument does not always stand up to empirical verification. In fact, this point has been most sharply demonstrated in a number of studies that were commissioned by the European Parliament itself. And I am indeed grateful for the Parliament's intellectual contribution to this debate.

  • First, it is a fact that 90% of internationally traded goods are carried by sea. And maritime transport is by far the most carbon-efficient mode of transport, with only 14 grams of CO2 emissions per ton kilometre. Shipping is followed by train transport, then road transport. Air transport has by far the highest CO2 emissions per ton kilometre (a minimum of 600 grams), illustrating the high relative climate impact of such transport.

  • In addition, the studies conducted on the “carbon mileage” of traded goods, have shown that the issue can often be counter-intuitive, if I may say so.

  • For instance, some studies show that a Kenyan flower that is air-freighted to Europe emits 1/3d of the CO2 of flowers grown in Holland. Now, I am not saying that this will always be the case, but surely this is an issue in need of case-by-case analysis, and empirical verification. In the case of food, in particular, we must not ignore the cost of greenhouses in colder climates, and of energy-expensive out-of-season storage.

    ...

  • Only a multilateral approach to climate change would allow us to properly address these issues. A multilateral agreement, that includes all major emitters, would be the best placed international instrument to guide other instruments, such as the WTO, as well as all economic actors on how negative environmental externalities must be internationalized. Only with such an instrument can we move towards the proper pricing of energy.

    Similarly, only such an accord could provide criteria for assessing when a measure at the country’s border is environmentally sound. In fact, an effective multilateral solution to climate change could and should do away with the need to (quote unquote) “offset” competitive disadvantages, when countries perceive themselves to be making equitable emission reductions. In other words, to be operating within an environmental architecture that would itself successfully level the playing field, based on recognized principles of international environmental law, such as Common but Differentiated Responsibility.

    Now, in working towards an international accord on climate change, countries will certainly have to reflect on the role of international trade within such an accord. Trade can lead to efficiency gains, allowing countries to specialize in what they are best at producing. And trade can also lead to economic growth, offering countries the possibility of investing this growth in pollution prevention and abatement if they take the political decision to do so. But for the benefits of trade to truly materialize; in other words, for its efficiency gains to also translate into fewer greenhouse gas emissions, the right environmental context must be set for trade. In other words, energy, among others, must be properly priced in taking into account the relevant products and production processes. It would then be incumbent upon the trading system to respond to such environmental rules as soon as they are crafted.

    In the absence of such parameters, it will be hard, if not impossible, for the WTO to develop a coherent position on the matter. Each of its members will have a different interpretation to offer on how the playing field may best be levelled. And I would caution against such an outcome; the world could end up with a real spaghetti bowl of “offsetting” measures that achieve neither nor trade nor environmental goals.
    ...

To this, I have only words of caution. As laudable as the objectives may be for such an approach, the consequences for international trade of conflicting national approaches could be dire — with exporters finding themselves confronted with a web of potentially conflicting requirements to fulfill. Worse, such approaches — precisely because they are unilateral — may not succeed in saving the planet. The planet's climate change problem — which is a global problem - will not be solved by only one or two players, deciding on their own to penalize the remainder of their trading partners. It could simply lead to a diversion of trade, that is, a change in trading patterns, with no significant reduction in emissions."

These comments warn of negative ramifications when governments may adopt of "go-it-alone" approach.  In B.C.'s context, it is clear that B.S cannot produce all the goods it needs - imports are necessary.  The carbon tax could put domestically produced goods at a competitive disadvantage to foreign goods if the carbon tax decreases the profit margin after costs on production and transportation are considered.  In a slow economic market, manufacturers need hep to sell abroad and compete domestically - has this been adequately considered?

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