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Bluebook 20th ed. James J. Nedumpara & Shiny Pradeep, Paying a Price for Carbon: Using Pigouvian Taxesin International Trade and Environmental Regulations, 4 Env't L. & Soc'y J. 1 (2018).

ALWD 6th ed. James J. Nedumpara & Shiny Pradeep, Paying a Price for Carbon: Using Pigouvian Taxesin International Trade and Environmental Regulations, 4 Env't L. & Soc'y J. 1 (2018).

APA 7th ed. Nedumpara, J. J., & Pradeep, S. (2018). Paying Price for Carbon: Using PigouvianTaxes in International Trade and Environmental Regulations. Environment, Law andSociety Journal (ELSJ), 4, 1-23.

Chicago 7th ed. James J. Nedumpara; Shiny Pradeep, "Paying a Price for Carbon: Using Pigouvian Taxesin International Trade and Environmental Regulations," Environment, Law and SocietyJournal (ELSJ) 4 (2018): 1-23

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Environment Law and Society Journal

PAYING A PRICE FOR CARBON: USING PIGOUVIAN TAXES ININTERNATIONAL TRADE AND ENVIRONMENTAL

REGULATIONS

James J. Nedumpara* and Shiny Pradeep"

INTRODUCTION

Climate change and rising greenhouse gas emissions are, perhaps, the greatest concerns facing

the planet Earth today. The IPCC fourth Assessment Report reflects the rising emissions of

greenhouse gases and states that the current mitigation practices are most likely to be

inadequate.' The rate of sea level rise in the last two decades has been unprecedented compared

to the temperature rise in the last two millennia. There is unequivocal evidence that the

increased greenhouse gases resulting in this change are a result of anthropogenic interference

with the atmosphere.2 Recognizing the alarming trends in global warming, the international

community has agreed to take collective action to combat climate change.3 As countries are

taking coordinated actions (with a few exceptions) to combat climate change 4 , new and

innovative ways of carbon restriction or mitigation are being explored. One of the viable and

cost-effective ways to achieve binding carbon restrictions is through the internalization of the

social costs of carbon or through Pigouvian taxes.' Such an approach entails imposing cost on

carbon emissions through various means, such as emission credits trading/ cap and trade or

imposition of carbon tax.

* Professor and Head, Centre for Trade and Investment Law, Indian Institute of Foreign Trade, New Delhi.Email: headctilkiift.edu [email protected].

** Assistant Professor, Centre for Trade and Investment Law, Indian Institute of Foreign Trade.1 IPCC Fourth Assessment Report, Working Group III; LEGAL ASPECTS OF CARBON TRADING, KYOTO,COPENHAGEN AND BEYOND, (David Freestone and Charlotte Streck, Eds., Oxford University Press) (2009), It isestimated that with the "current climate change mitigation policies and related sustainable development practices,global GHG emissions will continue to grow over the next few decades: CO 2 emissions between 2000 and 2030from energy use are projected to grow 45 to 110% over that period".2 IPCC, 2013: Summary for Policymakers. In: Climate Change 2013: The Physical Science Basis. Contributionof Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker,T.F., D. Qin, G.-K. Plattner, M. Tignor, S. K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley(eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.3 Report of the Conference of the Parties on its seventeenth session, held in Durban from 28 November to 11December 2011, FCCC/CP/2011/9/Add. 1 (Mar. 15, 2012).4 Supra note 2.5 The social cost of carbon can technically be defined as the marginal cost of the impacts resulting from emissionof one tonne of carbon, inclusive of non-market impacts on environment and human health, see IPCC, 2014:Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth AssessmentReport of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer(eds.)]. IPCC, Geneva, Switzerland, 151 pp; WTO-UNEP Report, Trade and Climate Change: A Report by theUnited Nations Environment Programme and the World Trade Organization, 90-110, (2009).

1I Vol. 4

Paying A Price For Carbon: Using Pigouvian Taxes InInternational Trade And Environmental Regulations 2

Of the various approaches explored so far, the emissions trading scheme (ETS) has been one

of the most innovative. The ETS creates a virtual market for carbon.6 In this approach, first, a

cap is set on the total amount of emissions that can take place in a given period of time,

generally, a year. Second, each corporation or firm is assigned a fixed quantity of emissions

that it can cause. The mechanism is such that if an organization exceeds its emissions, it will

have to pay the costs of the extra emissions. Also, if a corporation saves up on the emissions,

then it can sell the extra emission credits to other organizations. This essentially involves a

two-way approach, one is the incentive of saving up on emissions and trading them for certain

economic value; second is the incentive to avoid the high extra costs by exceeding the

permissible limit. While emission allowances trading and cap and trade are market based

mechanisms for controlling carbon emissions, they do not impose a price per se on the carbon

(more specifically carbon dioxide or its equivalent) emitted during production. In this regard

the carbon tax assumes significance. Carbon taxes are widely considered as good alternatives

for imposing the Pigouvian price on emissions in the absence of more attractive options. A

carbon tax imposes a price on the carbon emitted during production. In contrast, non-market

and non-price based mechanisms include technology advancement, thrust on performance

standards, etc. These are referred to as the command and control methods of regulating carbon

emissions.' In this approach, certain standards of emissions are fixed beyond which no further

emissions can take place or sanctions are imposed. There is no flexibility of selling and buying

permissible emissions.

The focus of this paper is specifically on various carbon mitigating measures. The article

examines whether the Members are capable of adopting unilateral measures for carbon

restrictions which apply extra-territorially and if so, to what extent? The articles also explores

whether such actions are likely to violate the acting state's obligations under the World Trade

Organization ("WTO"). The article outlines the utility of various approaches in addressing

carbon leakage and ensuring compatibility with the WTO legal framework.

6 Here, carbon refers to carbon dioxide as well as carbon dioxide equivalent emissions. The term 'carbonemissions' has come into usage in the context of the fact that carbon-dioxide is the most emitted greenhouse gas.I R. BALDWIN, M. CAVE & M. LODGE, UNDERSTANDING REGULATION: THEORY, STRATEGY AND PRACTICE, (2 nd

Ed., Oxford University Press) (2011); M. BOCHER, A theoretical framework for explaining the choice ofinstruments in environmental policy, 16-C FOREST POLICY AND ECONOMICS, 14-22 (2012).


The Necessity of Carbon Regulation on Imports

The OECD Environmental Outlook to 2050 (released in 2012) highlights that "unless the

global energy mix changes, fossil fuels will supply 85% of the energy demand in 2050".8 The

impact of this fossil fuel based energy consumption would be "disastrous". The report reaffirms

that "the costs and consequences of inaction are colossal, both in economic and human terms ".9

Earlier, the OECD Environmental Outlook to 2030, which was released in 2008 placed the

'present global greenhouse gas emissions' in the category of the red-light list, implying that

the issues would need to be addressed on an urgent basis."o The report, which had been

formulated with a focus on the economic and environmental trends towards 2030, also

recognized that the costs of policy inaction are likely to be high and "without new policies, we

risk irreversibly damaging the environment"." Therefore, countries are required to act

urgently.12 The course of action for efforts towards mitigation and adaptation to climate change

has been the creation of a comprehensive international legal framework with universal

application. While the Kyoto Protocol was a significant step in this direction, not much could

be achieved in its aftermath.13 After years of negotiations and many failed attempts, some

tangible outcome was finally found in the Paris Agreement14 signed in 2015 and brought into

force in 2016.15 The good news was that the unprecedented meeting of world leaders at the

2 1st Conference of the Parties to the UN Framework Convention on Climate Change (COP-21)

reflected the intense urge towards the completion of an agreement for keeping global

temperature rise within the range of 1.5 0- 20 C. 1 6 The not-so-good news is that no concrete

mechanism has been developed for bringing out the required reductions in greenhouse gases

8 OECD Environmental Outlook to 2050: The Consequences of Inaction, (OECD Publishing, Paris) (2012),available at https//dx.doior/1 0.1787/9789264122246-en.9 Id.10 OECD Environmental Outlook to 2030, (OECD Publishing, Paris) (2008), available atlit tp:/d x .do i. 0r D/10. 17,87/9,782 6 40 405719 )en Z_" OECD Environmental Outlook to 2030, Summary in English, (OECD, 2008).12 Nicholas Stern, The Economics ofClimate Change: The Stern Review (Cambridge, Cambridge University Press,2007), 478. Lawrence H. Goulder & Andrew R Schein, Carbon Taxes v. Cap and Trade: A Critical Review, 4(No.3) Climate Change Economics, World Scientific Publishing Company, (2013); Christine Kaufmann & RolfH. Weber, Carbon-related border tax adjustment: mitigating climate change or restricting international trade?,10 (4) WORLD TRADE REVIEW, 497 - 525, (Oct. 2011).13 Lavanya Rajamani, Addressing Loss and Damage from Climate Change Impacts, ECONOMIC AND POLITICALWEEKLY, Vol. 50, Issue No. 30, (Jul.25, 2015)." UNFCCC, Decision 1/CP.21, Adoption of the Paris Agreement, (UN Doc FCCC/CP/ 2015/10/Add.1, Annex.(Jan.29, 2016).15 See Lavanya Rajamani, The 2015 Paris Agreement: Interplay Between Hard, Soft and Non-Obligations,JOURNAL OF ENVIRONMENTAL LAW, VOLUME 28, ISSUE 2, 337-358 (JUL., 2016).16

d

Vol. 4


in a fixed duration of time. In fact, the 'intended nationally determined contributions'

("INDCs")-the mechanism developed in the Paris Agreement-which countries have

undertaken fall significantly short of the standards that are required to keep the temperatures

under the agreed limits of 1.50 to 20 C by the end of the century. In the absence of any concrete

international legal mechanism, the sensitivity and urgency of the matter requires countries to

put in best efforts unilaterally. Moreover, it is recognized that the global objective of 20 C

average temperature rise above pre-industrial levels would only be achieved if countries agree

to take action to phase out their carbon emissions by the second half of the century.17

In the backdrop of the prevalent international efforts in carbon reduction and mitigation,

Carbon tax has been recognized as one of the efficacious and viable means to restrict

greenhouse gas emissions by economists worldwide." According to the OECD:

If governments are serious..., the core message of this reform must be that the the

cost of C02 emissions will gradually increase, creating a strong economic

incentive to reduce the carbon entanglement and to shift towards a zero carbon

trajectory...A central feature of such an approach is placing a price on carbon.19

[emphasis supplied]

Climate change policies that many developed, developing and emerging economies have begun

to undertake need to be consistent, coherent and cost-effective.20 Long term success and

sustainability of these measures can only be ensured if they keep the cost of climate action to

a minimum. There is also evidence that carbon-pricing approaches play an important role in

promoting investments in low carbon technologies.2 1 However, this can only be achieved if the

domestic opposition is minimized and the competitive playing field for domestic and foreign

industrial sectors is levelled. Thus, pricing carbon and devising policy measures to address the

17 Climate and Carbon Aligning Prices and Policies, OECD Environment Policy Paper No. 1, (Oct.2013),available at http//vww.oecd-i~libr~ rv.oro.docserver/dowroad/5k3zI1 lhi 6r/e~d~xie=115819i~da nm=u~hcksurn=BBEEO2DB9D179977244F2BOBE2B6 3C2.18 Catrina Rorke & Josiah Neely, Adjusting a Carbon Price at the Border, R STREET POLICY STUDY No. 108,(Sep. 2017).19 d.20 Supra note 17.21 OECD (2010a), Taxation, Innovation and the Environment, (OECD Publishing, Paris), available athttp:.//Idxdoiorg/10.1/87/978926408763 ; OECD (2012e), Energy and Climate Policy: Bending theTechnological Trajectory, OECD Studies on Environmental Innovation, (OECD Publishing, Paris), available athtt //dx~doior/1O.1787/9789264174573ei; (Ed. Ha1i6, I. et al) (2010), Climate Policy and TechnologicalInnovation and Transfer: An Overview of Trends and Recent Empirical Results, (OECD Environment WorkingPapers, No. 30) (OECD Publishing, Paris) available at l.ttp//dx.doior 10. l787/5km33buggcd0-e.


adverse effects of domestic carbon pricing would result in increased incentives worldwide for

reducing emissions and promote investment in green technologies at the international level.

However, enacting unilateral carbon pricing measures would not be free from complexities.

Any domestic climate change regulations, for example, in the form of carbon taxes or emissions

allowances would result in decrease in competitiveness of the domestic industry in the enacting

State and thus result in domestic opposition to such policies. Therefore, while countries are

free to enact carbon tax legislations so far as their domestic industry is concerned, there are

some pressing concerns which make it imminent that equivalent measures are enforced with

respect to imports also. The reasons for countries adopting such import measures are multiple.

First, the domestic industries of carbon-restricting countries would face a price disadvantage

as compared to the industries of countries with no carbon-restriction policy in place. The

impact is likely to be more adverse on highly energy driven industries like iron and ore, steel,

aluminium, paper and pulp, etc. These industry sectors are highly energy intensive,

instrumental in trade (referred to as "energy intensive and trade exposed 'EITE') and are likely

to face a rather pronounced impact in competitiveness, from the loss of profit resulting from

increased electricity and other costs.22 Second, there is a high risk of industries shifting to no-

carbon -regulatory jurisdictions for reduced costs (referred to as 'carbon leakage'). This would

cause (i) a nullification of (or even increase in) carbon emissions reduction by shifting the

emission jurisdiction23 (ii) loss to the carbon-restricting economy by decrease in income, jobs,

etc., (iii) domestic pressures in carbon-restricting states are likely to go up during the transition

phase as a result of increased business costs, and (iv) countries with no carbon regulations

might continue to take advantage as a result of the emission reductions of other countries,

referred to as 'free-riding'.24

Due to these factors, it becomes indispensable that carbon-regulatory costs/charges are also

imposed on imports. However, carbon costs on imports are most likely to be perceived as

22 Julia Reinaud, Climate policy and carbon leakage Impacts of the European Emissions Trading Scheme onAluminium, (OECD-International Energy Agency Information Paper, Oct. 2008); Andrei Marcu, ChristianEgenhofer Susanna Roth & Wijnand Stoefs, Carbon Leakage: An overview, (CEPS Special Report No. 79., Dec.2013).2 3 d24 Joost Pauwelyn, Carbon Leakage Measures and Border Tax Adjustments under WTO Law (Graduate Instituteof International and Development Studies (IHEID), Georgetown University Law, Mar.23, 2012) available atfile:///C:fLsers/ /Dow oads/SSRN-d2O26879pdf.; Jennifer Hillman, Changing Climate for Carbon Taxes:Who's Afraid of the WTO? (Climate and Energy Policy Paper Series, The German Marshall Fund of the UnitedStates, Jul. 2013); Joel P. Trachtman, WTO Law Constraints on Border Tax Adjustment and Tax CreditMechanisms to Reduce the Competitive Effects of Carbon Taxes, RFF DP 16-03 (Resources for the FutureDiscussion Paper Jan.25, 2016); Also see Supra note 18.

5 Vol. 4


obstructing free trade and consequently violating the WTO non-discrimination obligations. To

ensure that they are not deemed protectionist, they must be in consonance with the enacting

state's fundamental WTO obligations. To be covered within the WTO legal framework,

Carbon-regulatory charges on imports can be designed either as import duties under Article

11:1 (b) or as 'border tax adjustments' under Article 11:2 (a) and Article 111:2 of the General

Agreement on Tariffs and Trade, 1994 ("GATT").

A. Border Measures on Carbon

In view of the fact that climate regulatory policies applicable only to domestic industry would

be faced with many obstacles in their implementation, it becomes essential to implement such

policies to the domestic and import sectors alike. This is also important to preserve the

competitiveness of the domestic industry. Thus, the carbon pricing policies imposed by

regulating States must be adjusted at the border for imports as well as exports. To put it

differently, the imports from carbon-free regulatory jurisdictions must be equivalently taxed as

their domestic counterparts and the taxes on exports must be rebated. Enacting these regulatory

policies (in the form of additional tax or charge) at the border on imported products (to level

the playing field for their domestic counterparts) is referred to as 'border tax adjustment'. It

must be noted that exports can similarly be rebated to level the playing field in the States to

which the carbon-intensive products are being exported. One important point to mention at this

stage is that although a BTA measure specifically refers to the imposition of tax or additional

charge at the border, border adjustment can also be made in case of other regulations such as

emissions trading rules.

The GATT Working Party Report on Border Tax Adjustments has provided a succinct

definition of Border Tax Adjustment.

Border Tax Adjustments can be defined as any fiscal measures which put into effect,in whole or in part, the destination principle (i.e. which enable exported products

to be relieved of some or all of the tax charged in the exporting country in respect

of similar domestic products sold to consumers on the home market and which

enable imported products sold to consumers to be charged with some or all of the

tax charged in the importing country in respect of similar domestic products).25

25 GATT, Reportby the Working Party on Border Tax Adjustments, L/3464 (20 Nov, 1970), the OECD Definitionon Border Tax Adjustments has been cited in this report.


This definition in effect lays down the destination principle of taxation. The destination

principle is a fundamental concept of international taxation and states that the value-added

taxes on products should be levied in the country in which the goods are sold or consumed.

Based on this principle, exports are levied zero value-added tax, whereas as imports are levied

tax equivalent to that levied on domestic products. On the flipside, exports get a rebate on the

domestic tax paid in the home country or the country of production. The underlying rationale

for such balancing of import and export prices is to level the playing field at the international

level. Thus, border tax adjustment measures can be both import based or export based. This

paper primarily focuses on import-based BTA measures on carbon.

B. Border Measures and WTO Obligations

After a regulating jurisdiction has decided to implement a BTA measure on carbon, there are

certain substantive WTO requirements to be met.2 6 It must be considered that although BTA is

a good-faith regulatory policy enacted for environment protection objectives, it would most

likely have a restricting and distorting impact on international trade. There is a high probability

of such a measure to be challenged before the WTO. It, therefore, becomes important that the

BTA measure is designed in such a way that it maintains compatibility with the WTO legal

framework. One of the viable ways of designing the measure would be to structure it as the

import equivalent of the domestic carbon tax. This would preclude the measure from being

perceived as trade protectionist by WTO member States.2 7

1. The measure be imposed on 'products'

Article III explicitly stipulates that the measures in the form of taxes, regulations and laws can

be imposed only on imported 'products'. It must be noted that such a measure is not applicable

26 See Patrick Low, Gabrielle Marceau & Julia Reinaud, The Interface between the trade and climate changeregimes: scoping the issues, ERSD-2011-1 (Staff Working Paper, Economic Research and Statistic Division,WTO, 2011); Gary Clyde Hufbauer & Jisun Kim, The World Trade Organization and Climate Change: challengesand options, (Working Paper Series WPO9-9, Peterson Institute of International Economics, Washington, 2009);Aaron Cosbey, Border carbon Adjustment: questions and answers (but more of the former) (Background paper,International Institute for Sustainable Development, 2009); Mathew Genasci, Border Tax Adjustments andEmissions Trading: the Implications ofInternational trade law for policy design, 33 CARBON AND CLIMATE LAWREVIEW (2008); Timothy E. Deal, WTO Rules and Procedures and their implication for the Kyoto Protocol,(United States Council for International Business Discussion Paper, 2008); Ernst-Ulrich Petersmann,International trade law and International Environmental Law: Environmental Taxes and Border Tax Adjustmentin WTO Law and EC Law, ENVIRONMENTAL LAW, THE ECONOMY AND SUSTAINABLE DEVELOPMENT: THE

UNITED STATES, THE EUROPEAN UNION AND THE INTERNATIONAL COMMUNITY (Richard L. Revesz et al. eds.,Cambridge: Cambridge University Press, 2008).27 Pauwelyn and Hillman, supra note 24.

7 Vol. 4


to 'processes'. In this respect, the GATT Working Party Report on Border Tax Adjustment

clarifies the position as follows:

The Working Party concluded that there was convergence of views to the effect that

taxes directly levied on products were eligible for tax adjustment. Examples of such

taxes comprised specific excise duties, sales taxes and cascade taxes and the tax on

value added... Furthermore, the Working Party concluded that there was

convergence of views to the effect that certain taxes that were not directly levied on

products were not eligible for tax adjustment. Examples of such taxes include social

security taxes and payroll taxes.28

A carbon tax can be direct or indirect, depending upon whether it is levied at the production

stage or the consumption stage, respectively. 29 As has been stated above, since a BTA measure

is imposed in the country of consumption, therefore a BTA essentially has to be a consumption-

based tax. This mandates that the domestic carbon tax also be indirect, i.e. applied on

products.30 Moreover, since the tax in such a case would be applied on the carbon (or

greenhouse gases) emitted during the production, it is in the nature of what are called hidden

taxes or 'tax occultes'. Tax occultes are consumption taxes levied on auxiliary materials used

in the manufacture of goods. What this implies is that these taxes are imposed on materials

which are involved at some stage of production but not present in the final product. However,

ambiguity persists with respect to the nature of these taxes. The GATT Working Party Report

on Border Tax Adjustments discussed this point but did not conclusively decide it.31 It observed

that "there was a divergence of views with regard to the eligibility for adjustment of certain

categories of taxes" such as 'tax occultes' in which taxes on energy, machinery and transport

were included.3 2

An indirect tax is applicable on products as against process or production methods. Imposing

a carbon tax at this stage essentially implies that the products embody the carbon emissions

28 Supra note 25.29 C.K. Harper, Climate Change and tax policy, B.C. INT'L & COMP. L.REv.30 (2007), 411 at 429; Robert Howse& Antonia L. Eliason, Domestic and international strategies to address climate change: an overview of the WTOlegal issues INTERNATIONAL TRADE REGULATION AND THE MITIGATION OF CLIMATE CHANGE, WORLD TRADE

FORUM, (Cottier, et.al. eds., Cambridge University Press, 2009), 60.30 Howse & Eliason at 60, supra note 29.31 In the Report, the GATT Working Party concluded that there was convergence of views to the effect that taxesdirectly levied on products were eligible for tax adjustment. Examples of such taxes comprised specific exciseduties, sales taxes and cascade taxes and the tax on value added. Furthermore, the Working Party concluded thatthere was convergence of views to the effect that certain taxes that were not directly levied on products were noteligible for tax adjustment. Examples of such taxes comprised social security charges whether on employers oremployees and payroll taxes, Supra note 25. See James J. Nedumpara, Energy Security and WTO Agreements inWTO, TRADE AND ENERGY SECURITY (Sajal Mathur eds., 2015).32 Para 15, Id.


that took place during the production stage. There is a long running debate as to whether

products can be distinguished based on their production methods in the matter of carbon tax.

The genesis of this debate in the GATT/WTO parlance started with the ruling of a GATT panels

in US- Tuna I. 33 The GATT Panel held in this case that under GATT, products cannot be

distinguished based on their process or production methods.3 4 The Panel made the following

key observation:

Under the national treatment principle ofArticle III, contracting parties may apply

border tax adjustments with regard to those taxes that are borne by products, but

not for domestic taxes not directly levied on products. Consequently, the Note Ad

Article III covers only internal taxes borne by products. The Panel considered that

it would be inconsistent to limit the application of this Note to taxes that are borne

by products while permitting its application to regulations not applied to the

product as such.35

Such a situation calls for an accurate identification of the carbon emissions in the entire

manufacturing-cycle of the product. Identifying the 'carbon footprints' (i.e. the carbon that was

emitted during their manufacture) is a complicated task. Moreover, the position that prevails

as of date is that non- product related process or production methods cannot be applied in case

of a carbon tax. However, Steve Charnotvitz clarifies the point that not all non-product related

PPMs can be weighed on the same scale.

To sum up this intricate debate, while a tax levied on process or production methods can largely

address issues such as carbon leakage, it would leave the issue of competitiveness unaddressed.

There is also considerable ambiguity as to whether a carbon tax can be imposed on a product.

Therefore, whether a domestic carbon tax is levied on a 'product' or a 'process' becomes a

determining factor in whether a BTA measure can be imposed at all or not on the corresponding

imports.

Importantly, it must be noted that the basis for applying a border tax adjustment does not

depend upon the purpose and objective behind the implementation of a tax but on the

classification of the tax as direct or indirect.3 6 The GATT Panel in the US Superfund held

33 GATT Panel Report, United States-Restrictions on Imports of Tuna, DS21/R, (3 September 1991), BISD39S/155, at 5.13. [hereinafter US-Tuna].3 4 Id.; Konrad Von Moltke, Reassessing like products in Trade, Investment and the Environment, PROCEEDINGSOF THE ROYAL INSTITUTE OF INTERNATIONAL AFFAIRS CONFERENCE CHATHAM HOUSE 178 (Halina Ward andDuncan Brack, Eds., London, Oct., 1998).35 Supra note 33.36 Report of the Panel, United States - Taxes on Petroleum and Certain Imported Substances para 5.2.4 (L/6175 -34S/136) (Jun 5., 1987) (adopted June 17, 1987) [hereinafter US-Superfund].

9 Vol. 4


that "whether a sales tax is levied on a product for general revenue purposes or to encourage

the rational use of environmental resources is... not relevant for the determination of the

eligibility of a tax for border tax adjustment". 37

37 Td.


2. The National Treatment Requirement for BTA under Article III

Once a country decides to implement a BTA measure corresponding to a domestic carbon tax,

it becomes essential that it fulfills all the requirements under Article 111:2. One of the primary

requirements is to establish that the imported products (on which BTA is imposed) are 'like'

the domestic products (on which a corresponding domestic carbon tax has been imposed).

According to the Ad Note to Article 111:2, it can also be established that the products are directly

competitive/substitutable.

The Ad Note states:

A tax conforming to the requirements of thefirst sentence ofparagraph 2 would be

considered to be inconsistent with the provisions of the second sentence only in

cases where competition was involved between, on the one hand, the taxed product

and, on the other hand, a directly competitive or substitutable product which was

not similarly taxed

There are two different degrees of similarity required for products to be treated equally under

Article 111:2. The first sentence requires the products to be 'like' whereas the second sentence

requires them to be 'directly competitive or substitutable'. In US-Superfund, the GATT Panel

cited the 1970 GATT Working Party Report on Border Tax Adjustments and reiterated that

the term 'like' should be examined on a case-by-case basis and that one of the possible methods

to determine likeness would be to compare end-uses of the products in a given market. The

later WTO Panels and Appellate Body have carved out some tests tojudge likeness of products.

In EC- Asbestos, the Appellate Body stressed on these four factors: (i) the physical properties,

nature and quality of the products; (ii) their end-uses; (iii) consumer's perception; and (iv) the

tariff classification of the products. In a different context, while elaborating on the requirement

of 'competitiveness', a WTO panel has underlined that according to the ordinary meaning of

the terms, "the products are 'competitive' or 'substitutable' when they are interchangeable or

if they offer 'alternative ways of satisfying a particular need or taste'".3 8 It is opined that the

requirement of likeness tends to be more stringent and requires a higher degree of affinity. This

can be deduced from the requirement of 'equivalence' of taxes in the former case and merely

'similarity' in the latter.3 9

38 Panel Report, Korea - Taxes on Alcoholic Beverages, para. 10.40. WT/DS75/R WT/DS84/R (Sept. 17,1998),In this Case, the Appellate body held the matter of likeness of products to be a jurisprudential question which isbased on providing national treatment for ensuring equality of opportunities and may be inferred from common-sense considerations of consumer behavior and empirical economic analysis of substitutability.39 Howse and Eliason, supra note 29, 60.

11 I Vol. 4


This national treatment requirement under Article III has the underlying objective that imports

must not be unfairly discriminated against, as compared to the domestic products. The decisive

issue here is that based on the prevailing interpretation of 'like' and 'directly

competitive/substitutable products', whether the WTO would permit different treatment being

accorded to products, based solely on the carbon intensity of their production methods. In

India-AdditionalDuties, the WTO Panel suggested examining whether "the border charge and

the internal tax in question serve a relative or comparable function or role in imposing a

financial assessment on a particular product by virtue of the nature of that product, not because

that product happens to be either imported or manufactured domestically".4 0 In case of a carbon

tax and the BTA, it would be difficult to differentiate between, for example, the less carbon

intensive domestic products and the more carbon intensive foreign products based on their

nature. The end result products, manufactured from different carbon-intensity methods, would

most likely be identical so far as their characteristics, end uses and consumer perception (at

least in the beginning when the consumers are ignorant about the production methods

employed) are concerned.

In Japan -Alcoholic Beverages,4 1 the issue related to differentiation of domestic and imported

alcoholic beverages based on different production methods. While the Appellate Body held

that the alcoholic beverages manufactured through different methods were like products and

the different rates of duty on domestic and imported products were discriminatory, it made

quite an interesting observation with respect to the ambit of likeness under Article III: 2:

[T]here can be no one precise and absolute definition ofwhat is "like ". The concept

of "likeness" is a relative one that evokes the image ofan accordion. The accordion

of "likeness" stretches and squeezes in different places as different provisions of

the WTO Agreement are applied.

Similarly, in Philippines - Distilled Spirits42 , the main issue was whether the Philippines could

tax sugar cane-based alcoholic beverages at lower rates than similar-tasting alcoholic

beverages using other raw materials. The Panel and Appellate Body found that the differences

in raw materials were insufficient to make these products 'not like' for the purposes of Article

o Appellate Body Report, India -Additional and Extra-Additional Duties on Imports from the United States, para168. WT/Ds360/Ab/R (Oct. 30, 2008) [hereinafter India-Additional Duties]."Appellate Body Report, Japan-Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS1O/AB/R,WT/DS11/AB/R (Oct. 4, 1996) [hereinafter Japan-Alcoholic Beverages]; Appellate Body Report, EuropeanCommunities- Measures Affecting Asbestos and Asbestos-Containing Products, pam 88, WT/DS135/AB/R(March 12, 2001) [hereinafter EC-Asbestos Case].42 Appellate Body Report, Philippines-Taxes on Distilled Spirits, WT/DS396/AB/R; WT/DS403/AB/R (Dec.21,2011) [hereinafter Philippines-Distilled Spirits].


III:2.43 The rulings in Japan - Alcoholic Beverages and Philippines - Distilled Spirits, might

suggest that differences in carbon usage may not be sufficient to create a distinction between

the products. However, one noteworthy point which Trachtman makes is that such a

competition-based approach seems plausible in the case of revenue raising non-Pigouvian taxes

like those on alcoholic beverages, because "there is no regulatory policy for the distinctions".

However, adopting such an interpretation would not be a rational approach in the case of BTAs

or other Pigouvian Taxes which are implemented for the furtherance of a specific regulatory

policy.4 4 In short, a competition based approach, which is prevalent in the GATT/WTO non-

discrimination context, may not be the appropriate benchmark in the context of carbon taxes-

a Pigouvian tax.

One crucial point to be noted here is that the word 'like' features in multiple provisions of the

WTO covered agreements and is used contextually. Therefore, the interpretation developed in

the jurisprudence employing one particular provision should not mutatis mutandis be applied

to another provision. Due care and caution must be exercised in ascribing meaning to the terms

taking into consideration the peculiarity of the provision, its context and the prevailing

circumstances. So far as the present context is concerned, the 'likeness' of the products is

required to be judged from a completely novel and distinct angle and the past 'competition

based' benchmarks need not be ideal standard.

There is further requirement that the taxes imposed on the domestic and the imported products

be equivalent or similar. The requirement is simple: that imports not be discriminated against.

In case of a carbon tax, this requirement would be fulfilled by ensuring that the tax levied on

carbon emissions as a result of manufacturing of products in foreign countries cannot be more

than that levied in carbon emissions from manufacturing similar products domestically.

Explaining the underlying basis of the equivalence requirement under Article 111:2 , the Panel

in US- Superfund noted that such a requirement "obliges the contracting parties to create

certain competitive conditions for imported products in relation to domestic products".46 The

Panel also noted that any change in such competitive relationship in contravention of the

provision would be regarded as an 'ipso facto' nullification or impairment of the benefit

4 Id.; Panel Report, Philippines-Taxes on Distilled Spirits, WT/DS396/R; WT/DS403/R (Aug.15, 2011).4 Trachtman, supra note 24.451d.; EC-Asbestos, supra note 41.46 Supra note 37.

13 Vol. 4


accruing under the General Agreement and thus a prima-facie breach of the GATT obligations.

The case concerned the validity of a legislation imposing taxes on petroleum and on certain

feedstock chemicals as well as the articles manufactured by such chemical derivatives.

Examining the requirement under Article III: 2, the Panel underlined that the provision does

permit the imposition of an internal tax on the condition that a same or higher tax is applied to

the domestic products either directly or indirectly.47 The Legal Drafting Committee during the

Geneva Session of the Preparatory Committee elaborated upon the ambit of 'equivalent':

[Iff a [charge] is imposed on perfume because it contains alcohol, the [charge] to

be imposed must take into consideration the value of the alcohol and not the value

of the perfume, that is to say the value of the content and not the value of the

whole. 48

An integral part of the analysis in determining whether the charge is justified under Article

11:2(a) is that whether a charge is imposed "in excess of' a corresponding internal tax.4 9 With

respect to the requirement under Article 11:2(a) that the measure be "imposed consistently with

the provisions of paragraph 2 of Article III", the Appellate Body in India - Additional Duties

highlighted that the phrase must be read and interpreted in a manner that imparts meaning to

the assessment of whether the charge and internal tax are "equivalent"." This case concerned

certain additional and extra-additional duties in addition to the basic customs duty imposed by

India on imports of liquor and other products from the United States. While United States

claimed the violation of GATT Articles 11:1 (a) and (b) by India, India sought to justify its

measures under Article 11:2 (a) stating that similar domestic charges in the form of excise

duties, value- added taxes as well as sales taxes were already in place. The Appellate Body,

while interpreting Article 11:2 (a), held that the additional duty was not justified as it resulted

in import charges in excess of the excise duty imposed on domestic products.

An important feature that must be ensured while designing a BTA measure on carbon is that

the measure in its design, structure or effect should not result in any form of favour or

protection to the domestic production. This is the basic non-discrimination requirement

imposed under Article 111:1 of GATT which is required to be met while imposing a BTA

4 para 5.2.7, supra note 37.48 Id.4 See Appellate Body Report, Japan-Taxes on Alcoholic Beverages II, DSR 1996: I, 97, (Oct. 4, 1996).50 Para 172, supra note 40.


measure under Article 111:2. 51 Article III:1 stipulates that any law, regulation, charge or other

restriction "should not be applied to imported or domestic products so as to afford protection

to domestic competition". It needs to be highlighted that the object and the fundamental

purpose of Article III should be seen in the light of avoiding protectionism in the application

of internal tax and the corresponding regulatory measures. In addressing the issue of "so as to

afford protection" under Art. 111:2, second sentence, the WTO panels and the Appellate Body

have emphasized the importance of examining the "design, structure, and architecture" of the

measures. "Article III obliges members of the WTO to provide equality of competitive

conditions for imported products in relation to domestic products". 52 Moreover, the panel

in Japan - Alcoholic Beverages opined that "a tax system that discriminates against imports

has the consequence of creating and even freezing preferences for domestic goods."5 3 Thus,

while enacting a BTA measure in accordance with Article III: 2, due consideration must be

given to its structure, design and functionality to ensure that it does not run afoul of the non-

discrimination obligation.

C. Design and Operability of the BTA

Having discussed the requirements of a BTA Measure both under Article 11:2 (a) and Article

111:2, it is important to analyze which classification is likely to be more advantageous. There is

widespread agreement among scholars that carbon regulations are design and structure

dependent54 as specificity of the measure determines its WTO compatibility and

efficaciousness. Joost Pauwelyn opines that the criterion carved out for compliance under

Article 11:2 (a) is narrower and stricter compared to the criterion formulated under Article III:

2.55 As Pauwelyn notes, "to attract the more permissive GATT Article III, carbon taxes or

charges on imports should be designed in such a way that they are triggered not by importation

as such, but by the sale, offering for sale, distribution or use of imported products once these

products have cleared customs".56

51 In Japan Alcoholic Beverages, the Appellate Body noted that Article III:1 informs Article 111:2 through specificreference, supra note 41.52 supra note 41, at 16.53 Supra note 41, at pa .6.54 Supra note 24; also see Cosbey, supra note 26.5 Supra note 24, On the other hand, Jennifer Hillman opines that the two requirements under both the sectionsare essentially the same and it is important to meet the two requirements (like products and equivalent charges)for GATT compatibility rather than to decide which article should the BTA measure be made to fall under.56

Td

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On the WTO compatability of Pigouvian taxes, the jury is still out. Therefore, there is a need

to examine whether such measures could be justified under the General Exceptions of the

GATT.

D. Recourse to the General Exceptions Under the GATT

The WTO jurisprudence has well recognized the autonomy of WTO Members to undertake

domestic regulatory policies in pursuit of environmental preservation objectives, which might

have an adverse impact (to an extent) on other WTO Members.7 Article XX of the GATT

enshrines the general exceptions i.e., the conditions under which a measure/action of a Member

otherwise in violation of the GATT obligations is considered to be valid. If a border tax

measure applied by a country does not pass muster of the WTO requirements, then the enacting

Member shall have to invoke one of the conditions listed in the exceptions and also establish

that the domestic carbon tax and the corresponding BTA measure enacted by the country are

in compliance with the chapeau. As a matter of rule, the burden of proof lies on the party

claiming the exemption. The Appellate Body report on US - Wool Shirts and Blouses, has

clarified this position thus;

[T]he burden ofproof rests upon the party, whether complaining or defending, who

asserts the affirmative of a particular claim or defence. If that party adduces

evidence sufficient to raise a presumption that what is claimed is true, the burden

then shifts to the other party, who will fail unless it adduces sufficient evidence to

rebut the presumption.

The conditions under Article XX include measures taken by governments for policy reasons

such as protection of public interest, environment, human or animal life or health, etc. For a

carbon related BTA measure to be valid under Article XX, the pertinent conditions are those

listed in clauses (b) and (g) of the Article; measures necessary to protect human, animal or

plant life or health and measures relating to conservation of exhaustible natural resources

respectively. To meet the requirements of the two clauses for a carbon tax and the

corresponding BTA measure should not be very challenging for States. However, in addition

5 Appellate Body Report, Brazil-Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R (Aug. 15,2009).58 See Appellate Body Report, United States-Measure Affecting Imports of Woven Wool Shirts and Blouses fromIndia WT/DS/33/AB/R (adopted May 23, 1997), [ hereinafter US - Wool Shirts and Blouses] This ruling hasbeen applied by the Appellate Body in inter alia: India - Patent Protection for Pharmaceutical and AgriculturalChemical Products, para. 73-75, WT/DS50/AB/R (adopted on Dec. 19, 1997); European Communities MeasuresConcerning Meat andMeat Products (Hormones), para. 98, WT/DS26/AB/R, WT/DS48/AB/R, (adopted Jan. 16,1998).


to fulfilling either of these conditions, a member State would be required to comply with the

Chapeau requirements of Article XX. The Chapeau requirement are the additional disciplines

which need to be met once a measure meets any of the conditions laid down in the

subparagraphs of Article XX.

1. Seeking provisional justification- Measures necessary to protect human, animal or plant

life or health

There is enough evidence to suggest that climate change resulting from rising global

temperatures is going to pose a massive threat to the various life forms on earth.59 With respect

to protection of human health, there is a wealth ofjurisprudence in the WTO. InEC Asbestos,

the panel held that the policy measure imposed by the European Community was justified

under Article XX (b) taking into consideration the available scientific data which was

evidentiary of the health risks posed by the substance 'chrysotile' in question.60 The Appellate

Body also underlined that it was each Member's right to "determine the level of protection of

health that [it] consider[s] appropriate in a given situation". Moreover, it emphasized that there

is no mandate under Article XX(b) of the GATT "to quantify, as such, the risk to human life

or health ". 61 Interestingly, the present situation is different from that in EC - Asbestos in the

sense that the health risks posed from climate change are not as imminent as those posed by

the import and use of chrysotile asbestos in the EU. However, one common feature in the

present context and the Asbestos dispute is the wide recognition and confirmation of health

risks by scientific studies all over the world. Thus, the WTO dispute panels should not be much

hesitant in accepting the given facts and holding the validity of a carbon tax and the

corresponding BTA measure.

2. Seeking provisional justification- Measures relating to conservation of exhaustible

natural resources

The second condition to justify a BTA measure on carbon is clause (g) of Article XX which

exempts a measure relating to conservation of exhaustible natural resources. The natural

resource sought to be protected in the present case is the earth's atmosphere. An examination

of the jurisprudence developed in China-Rare Earths62, Canada-Measures Affecting Exports

" Supra note 2.60 Panel Report, EC-Asbestos, supra note 41.61 d62Appellate Body Report, China - Measures Related to the Exportation of Rare Earths, Tungsten, andMolybdenum, Pam 5.251, AB-2014-3, AB-2014-5, AB-2014-6, (Aug 7, 2014) [hereinafter China-Rare Earths].

17 Vol. 4


of Unprocessed Herring and Salmon (Canada - Herring )63, United States - Import

Prohibition of Certain Shrimp and Shrimp Products (US - Shrimp) 64 and the United States -

Standards for Reformulated and Conventional Gasoline (US - Gasoline)65 , wherein measures

were taken for conservation of rare earth products, salmon and herring stocks, turtles and clean

air respectively, suggests that a broad and evolutionary interpretation of the phrase 'exhaustible

natural resource' can be undertaken. In accordance, it can be stated that the sustainable levels

of atmospheric conditions constitute an exhaustible natural resource. It could also be argued

that less intensive carbon levels is a condition precedent for the sustenance of life itself.

However, the WTO jurisprudence has developed a sophisticated analysis for the application of

the environmental exceptions, especially Article XX(g).

In China - Rare Earths, the WTO Appellate Body observed, "[flor a GATT-inconsistent

measure to be justified under Article XX(g), the Member maintaining such a measure must

demonstrate compliance with all the different elements prescribed in Article XX(g)". 66 These

different elements of Article XX(g) have been extensively elaborated in the jurisprudence laid

down by the Appellate Body in China - Raw Materials. 6 In that case, the Appellate Body

analyzed step-by-step the various components of Article XX(g). With respect to the

requirement that the measure must relate to the conservation of exhaustible natural resources,

it employed the ordinary dictionary meaning of the term 'relate to' and observed that 'relate

to' implies "having some connection or being connected to". 6 8 Further, while elaborating upon

the meaning of 'conservation', the Appellate Body held that 'conservation' implies

"preservation of the environment, especially natural resources". 69 With respect to the second

component i.e. the measure be made effective in conjunction with restrictions on domestic

production and consumption, it highlighted that the meaning of the term 'effective' implied "in

operation at a given time" whereas the meaning of "in conjunction with" was ascribed as

"together with or jointly with". In the backdrop of the interpretation of the constituent terms of

63 Panel Report, Canada-Measures Affecting Exports of Unprocessed Herring and Salmon, BISD 35S/98, para4.6 (adopted March 22, 1988) [hereinafter Canada-Herring].64 Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products,WT/DS58/AB/R (Oct. 12, 1998) [hereinafter US-Shrimp].65 Appellate Body Report and Panel Report, United States - Standards for Reformulated and ConventionalGasoline, WT/DS2/9 (May 20, 1996) [US-Gasoline].66 Supra note 62.67 Appellate Body Report, China -Measures Related to the Exportation of Various Raw Materials, AB -2011-5(Jan 30, 2012) [hereinafter China-Raw Materials].6 81d, para 357.6 9

d


Article XX, it was held that the measure (here, the carbon regulation) must operate jointly with

restrictions on domestic industry. So far as the present context is concerned, as BTA is an

extension of an already enacted domestic legislation, it should qualify for the tests laid down

by this provision.

Moreover, in China - Rare Earths, the Appellate Body upheld the Panel's view that "the

analysis under subparagraph (g) does not require an evaluation of the actual effects of the

concerned measures". Therefore, the situation as it prevails as of date is that "while a trade

measure [does] not have to be necessary or essential to the conservation of an exhaustible

natural resource, it has to be primarily aimed at the conservation of an exhaustible natural

resource".7 0 Further, the WTO Appellate Body has reiterated that the "design and structure"

of the measure [export quotas therein] are the determining factors "in assessing whether the

" 71measure relates to the conservation of exhaustible natural resources".

Carbon taxes and the corresponding BTA measures, formulated and enacted by countries for

addressing climate changes issues and ultimately preserving the earth's environment could

qualify the criterion of this provision. But the application of the exception depend upon the

design, structure and method of application of the measure. In an important point that has been

noted in the Canada Herring Case and reiterated by the Panel in US Gasoline is that the very

purpose of inclusion of Article XX (g) in the General Agreement [GATT] has not been to

provide a wide scope for measures with trade policy purposes but to ensure that the

commitments under the General Agreement do not hinder the pursuit of policies aimed at the

conservation of exhaustible natural resources.72

An added condition for meeting the requirement under Article XX (g) is that the measure must

be "made effective in conjunction with restrictions on domestic production or consumption".

The Appellate Body in US - Gasoline has noted that "the clause is a requirement of even-

handedness in the imposition of restrictions, in the name of conservation, upon the production

or consumption of exhaustible natural resources".7 3 Such a requirement is most likely to be met

in the case of a carbon related BTA measure as the similar restriction would already have been

imposed on the domestic products in the form of the carbon tax.

71 Supra note 63.71 Supra note 62.72 Id, at para. 6.39.73 Supra note 65.

19 Vol. 4


3. Meeting the requirements of the chapeau of Article XX

The broad scope of the chapeau of Article XX chapeau was elaborated upon by the AppellateBody in the US - Shrimp case. It underlined that the chapeau is "but one expression of theprinciple of good faith" and further observed;

The task of interpreting and applying the chapeau is (..) essentially the delicate one

of locating and marking out a line of equilibrium between the right of a Member to

invoke an exception under Article XX and the rights of the other Members under

varying substantive provisions (e.g. Article XI) of the GATT 1994, so that neither

of the competing rights will cancel out the other and thereby distort and nullify or

impair the balance of rights and obligations constructed by the Members

themselves in that Agreement. 7

The Appellate Body in EC - Seals, noted that "the chapeau of Article XX imposes additional

disciplines on measures that have been found to violate an obligation under the GATT 1994,

but that have also been found to be provisionally justified under one of the exceptions set forth

in the subparagraphs of Article XX". 75 In US- Shrimp the Appellate Body has observed that

"[t]here are three standards contained in the chapeau: first, arbitrary discrimination between

countries where the same conditions prevail; second, unjustifiable discrimination between

countries where the same conditions prevail; and third, a disguised restriction on international

trade".6 Therefore, a carbon tax and the corresponding BTA measure would require to fulfil

the criterion of the Chapeau of Article XX, in addition to the conditions listed [under Article

XX (b) or (g) in the present context].

The requirements of the chapeau are strict and difficult for parties to justify. In the history of

the GATT/WTO jurisprudence, there have been only two cases where parties have successfully

met the chapeau requirements. However, the application of a carbon tax and the

corresponding BTA is more likely to pass this test. As Hillman notes, the failing measures

usually included seeking refuge for protectionist policies. On the other hand, a BTA measure

7 World Trade Organization Committee on Trade and Environment, Note by the Secretariat, GA TTWTO DisputeSettlement Practice Relating to GA TTArticle AX, Paragraphs (b), (d) and (g) , WT/CTE/W/203, (March 8, 2002);para. 158, supra note 64.7 Appellate Body Report, European Communities-Measures Prohibiting the Importation and Marketing ofSealProducts, AB-2014-1 AB-2014-2, (May 22, 2014), para 5.296.76 Supra note 64.7 EC -Asbestos and US - Shrimp are the two WTO decisions where the chapeau requirements were completelyfulfilled by the parties.78 Hillman, supra note 24.


being enacted for the right reasons (for levelling the competitive playing field between

domestic and foreign industry) would not be deemed protectionist.

An equally important factor is to decide is whether a measure is disguisedly trade restrictive or

not is the 'extent of burden' imposed on the imports vis-a-vis the domestic products. In US

Shrimp, with respect to the question of the US legislation constituting disguised restriction on

international trade, the panel employed this approach and examined the degree of burden

imposed on domestic products and imports. Similarly, in case of a BTA measure, the

difference, if any, between the burden imposed on the imports compared to that on domestic

products will be a decisive factor in determining the disguised trade restrictiveness of the

measure.7 9

D. Use of Carbon Labels: Scope and Contested Issues

Besides carbon tax, 'Carbon-labelling' has emerged as one way of providing information about

the carbon emissions that occurred in the production of a good. This helps in raising awareness

amongst consumers regarding environmental sustainability of products and in making

informed choices, which, ultimately promotes transition to low-carbon consumption patterns.

As a mechanism in pursuit of climate change mitigation efforts, it is capable of working in

tandem with other regulations such as carbon tax, countervailing duties and other policy and

regulatory requirements. An example can be taken of carbon labelling mechanism employed

in the EU Legislation on Biofuels.so

Assessing carbon emissions in global production and supply chains appears to be a complicated

task. Taking into consideration the complex nature of cross-border production methods, the

need for carbon accounting becomes indispensable to operationalize carbon-labelling

mechanism. However, the inherent difficulty in assessing carbon emissions of products at each

stage imposes cost and competitiveness problems for small scale manufacturers in developing

and least developed economies. 81

7 Supra note 75, at Para 5.299." The Directive on the Promotion of the use of biofuels and other renewable fuels for transport, 2003/30/EC;Carbon Efficiency Labelling & Bio-Blending for Optimising Benefits of Biodiesel & Additive Use, available athttps://ec.europa.eu/energy/intelligent/projects/ The Carbon Labelling project implemented several labellingmeasures in Europe focused on transportation products and services with low C02 emissions. The projectpromoted biodiesel, low-viscosity lubricants and 'low carbon' freight services.8 Paul Breton, Gareth Edwards-Jones, Michael Friis Jensen, Carbon Labelling andLow-Income Country Exports:A Review of the Development Issues, 27 DEVELOPMENT POLICY REVIEW 3, 2009, 243-267.

21 Vol. 4


Another dimension that needs to be taken into consideration while labelling products in pursuit

of climate change regulations is the impact of such labelling on international trade, especially

as regards the WTO framework. This is based on the interrelationship between the labelling

requirements that governments would impose and the WTO international standards and

technical regulations on packaging and recycling requirement. The WTO agreement on

Technical Barriers to Trade (TBT) covers product standards and labelling and would be

applicable to the concept of environmental labelling also.82 WTO members by and large, agree

that labelling schemes are useful for informing consumers as well as economically efficient

and less restrictive as compared to other methods. However, there is a divergence of views on

the issue of non-product related process and production methods (npr-PPMs). Some member

States opine that discriminatory measures in the form of labels cannot apply in cases where the

production method does not leave an end trail in the product. On this, Pauwelyn notes that "the

carbon footprint of a product could still be found to be a 'product characteristic' or 'related'

process or production method".83 But this is a contentious issue.

It must be noted that there has been no consensus on the modality of providing information on

carbon emissions. Different schemes exploring various alternative methods of representation

of information have met with limited success. Simple labels can more often than not be

misleading and conflicting with policy objective of reducing emissions. On the other hand,

standard labels can be agreed upon which represent threshold levels of emissions or labels that

certify compliance with 'good environmental practice'." Costs of emission measurements pose

a big challenge for small stakeholders and would affect their competitiveness. This would

require that the details of any international or domestic regulation on carbon labelling are very

carefully carved out. Also, firms most likely would have to bear some costs on labelling of

carbon emission and, therefore the burden of such premium is likely to fall on the consumers,

at least partially.

82Understanding on Rules and Procedures Governing the Settlement of Disputes art. 1, Apr. 15, 1994, MarrakeshAgreement Establishing the World Trade Organization, Annex 1, 1869 U.N.T.S. 401, para 1.83 Pauwelyn, supra note 24,

Supra note 81.


CONCLUSION

According to various scientific studies, it is feasible to contain global warming below 20

Celsius if the GHG emissions are kept below 450 parts per million. This would require abating

17 Giga tonnes of CO 2 or equivalent emissions.15 This calls for serious efforts and approaches

on the part of not just the developed but developing countries also. Any future agreement or

regime that countries wish to create has to be more encompassing than any of the agreements

entered into till date, including the Kyoto Protocol or the Paris Agreement. 86

Carbon tax and Carbon labels are some of the viable approaches for restricting greenhouse gas

emissions. The foregoing analysis noted that it is possible for countries to undertake measures

such as carbon tax on a unilateral basis. Carbon tax is especially useful in preventing 'carbon

leakage' and inducing countries to enforce a price on carbon. In the absence of a carbon tax or

such other border adjustments, there is an incentive for a WTO Member to shift production to

a country that does not apply tax and thereby avoid any possible incidence of such a tax.

However, a border measure on carbon would most likely meet the WTO criteria if it is designed

and applied in a non-discriminatory manner. In particular, the concept of "equivalence" will

be severely tested. Equally challenging will be the determination of the content of carbon. Even

assuming that such a measure could infringe some of the non-discrimination provisions of the

GATT, it could still benefit from the environmental exception provided such a measure is

implemented in an even-handed manner and non-arbitrary manner.

Some other administration problems essentially relate to information of the production

technologies employed, certification of carbon-intensive production methods, assessing the

difference between rate of taxation in the country of production and the country of import, etc.

Some of these problems can be anticipated and taken care of before enactment of a carbon tax

and the corresponding BTA. There are likely to be others which would surface on the ground

level implementation of the tax. Nonetheless, none of these in an inhibiting factor large enough

to prevent governments, legislators and policymakers from conceiving, adopting and enacting

a carbon tax and the corresponding BTA on imports.

85 Per-Anders Enkcist, Tomas Naucle'r & Jerker Rosande, A cost curve for greenhouse gas reduction, MCKINSEY

QUARTERLY, (Feb., 2007).86 LEGAL ASPECTS OF CARBON TRADING, KYOTO, COPENHAGEN AND BEYOND, (Ed. David Freestone and

Charlotte Streck, Oxford University Press) (2009).

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