From Collision to Vision: Climate Change and World Trade

8/8/2019 From Collision to Vision: Climate Change and World Trade

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From Collision to Vision:

Climate Change and World Trade

A Discussion Paper

World Economic Forum

November 2010

Ad Hoc Working Group on Tradeand Climate Change


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The views expressed herein represent a collation o various viewpoints emerging rom aseries o discussions among the participants of the Working Group on Trade andClimate Change. Although the observations and proposals in this document enjoysupport, they do not necessarily refect the individual institutional viewpoints o any o thecompanies or institutions that took part, or o the World Economic Forum.

World Economic Forum

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2010 World Economic ForumAll rights reservedNo part o this publication maybe reproduced or transmitted inany orm or by any means, including photocopying or recording, or by any inormationstorage and retrieval system.

REF: 251110


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Contents

From Collision to Vision: Climate Change and World Trade | 3

Preface 5

Summary of Conclusions 7

1. Conclusion One

2. Conclusion Two

3. Conclusion Three

4. Conclusion Four

5. Conclusion Five

Working Group on Trade and Climate Change Participants 18


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Preface


The World Economic Forum is pleased to release this discussion paper, From Collision to Vision:Climate Change and World Trade, developed by an ad hoc Working Group o members o the Forums Global AgendaCouncils.

In recent years, as countries have begun to grapple with the challenge o global warming, ears have arisen that somenational and international actions under consideration may conlict with the body o international trade law that hasevolved since World War II and been enshrined in the World Trade Organization.

The Working Group deconstructs this important question, providing an overview o the relevant legal landscapeand making a number o practical suggestions that governments could undertake to pre-empt a clash betweenenvironmental and trade objectives. Indeed, the paper goes urther and oers ideas that would help to ensure that thesetwo important agendas are mutually reinorcing.

This discussion paper illustrates the role o the Global Agenda Council community as a platorm or interdisciplinarythought and collaboration. We salute and thank the Working Group members, who are drawn principally rom theForums Trade and Climate Change Councils, or having taken this important initiative.

Special thanks are due to the Chairman o the Working Group, James Bacchus, or his inspired leadership in ramingand drating the initial version o the paper. We are also grateul or the support provided by a number o colleagues atthe Forum, in particular Associate Director Lara Birkes as well as Environment Initiatives team member Brindusa Fidanzaand ellow, Jan Schierkolk. Their tireless eorts ensured that the process delivered.

We hope that this discussion paper will stimulate an earlier and more inormed debate among policy-makers and othersabout how the international climate change and trade regimes should be designed to complement rather than conlictwith each other.

Richard Samans

Managing DirectorDominic Waughray

Senior Director, Environmental Initiatives


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6 | From Collision to Vision: Climate Change and World Trade

Avoiding a Collision between Trade and Climate

Change

The irst best solution is an early conclusion o aneective and comprehensive global climate changetreaty

Important to avoid protectionist border measures innational laws and regulations

Need to minimize likelihood o divisive WTO disputes

Need or WTO members to negotiate green spaceto allow or enactment o national measures tocombat climate change

Greening the WTO to Help Address Climate

Change

Eliminate taris on environmental goods andservices

Harmonize standards and technical regulations toenhance energy eiciency and promote sustainability

Balance innovation and access to speed the transero new clean technologies

Green government purchases o goods and services

Prohibit subsidies or ossil uel

Legalize environmental subsidies that encourage thedevelopment o green technologies

Use the evolution o GATT and WTO as a modelor building eective global architecture to combatclimate change


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Summary of Conclusions


Scientists tell us that 2010 is likely to tie 1998 as the hottest year on record. The ice is melting. The seas are rising. Theweather is behaving everywhere in new and ominous ways.

Climate change continues, and worldwide eorts to conront climate change continue as well. One among many urgentquestions raised by these continuing eorts is how best to avoid a collision between advancing trade and combatingclimate change. Such a clash seems increasingly likely, given the gridlock in global talks and the growing ears thatcompetition will suer i sweeping regulatory reorms are implemented during these hard economic times.

There is no way o avoiding linkage between trade and climate change. Economically, environmentally and, not least,politically these two signiicant areas o global concern are linked inextricably. Given this link, the world must somehowind a way to continue to lower barriers to trade while also combating climate change. The alternative is what someoresee as a train wreck a rapidly approaching collision between the international rules that govern world trade andthe national and international means being constructed and employed to conront climate change.

A collision between trade and climate change would be disastrous or both.

To help prevent such a collision, the Working Group on Trade and Climate Change was convened at the initiative andunder the auspices o the World Economic Forum. Members o the working group come rom all parts o the world.Members number those with experience and expertise in trade, climate change and all aspects o global governance.

Members are united by their common commitment to sustaining and strengthening the rule-based multilateral tradingsystem o the World Trade Organization. They are united also by their shared conviction that climate change is real, andthat it is the most urgent o all the many urgent issues acing humanity.

Together, members have spent much time in recent months examining at some length many o the complexities o

this urgent question. Intentionally, members have not addressed the economic and environmental dimensions o theinterrelationship between trade and climate change, which are thoroughly addressed elsewhere. Rather, they haveocused instead on the legal and structural dimensions o the linkage between trade and climate change because thatis where they see a collision between trade and climate change as most likely to occur.

In this report, the working group oers a summary o its common conclusions or global consideration going orward.A report on this question could easily, and justiiably, be lengthy. They have chosen instead to make the report shorterrather than longer in hope that it may be more widely read, and that it may be more useul to negotiators and otherinternational decision-makers as they continue to address the global challenge o climate change.

In brie, the conclusions are:

1. As with other aspects o climate change, the ideal solution or preventing a collision between trade and climate

change is the early conclusion o an eective and comprehensive global climate change treaty.

2. I there is no early conclusion o an eective and comprehensive global climate treaty on climate change, nationaleorts to conront climate change are likely to prolierate. These eorts must not include protectionist provisions, asresort to protectionism would lead to mutually destructive conlicts over trade.

3. In the working groups strong view, the members o the WTO should begin immediately to negotiate agreements toresolve the issues likely to arise rom the enactment o national measures on climate change rather than leave thoseissues to eventual resolution in WTO dispute settlement.

4. WTO rules should not be viewed solely as constraints on eorts to address climate change. WTO rules can andshould be used airmatively to help ight climate change.

5. The WTO can be a model or how the world structures the international eort to address climate change, evolution othe GATT and the move towards the needed conclusion o global agreement on a comprehensive climate treaty.


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1. Conclusion One


In what ollows, the working group examines, briely, each o these conclusions in turn.

1. Aswithmanyotheraspectsofclimatechange,theidealsolutiontoavoidacollisionbetweentradeand

climatechangeistheearlyconclusionofaneffectiveandcomprehensiveglobalclimatechangetreaty.

As economists would say, a global treaty on climate change is the irst-best solution to what is the ultimate globalissue. This working group agrees. An international price must be set on the carbon emissions that are causing themany calamities o climate change. A global approach is needed to address what is an inherently a global issue.Not only would this be by ar the best solution in dealing with climate change, it would also be by ar the best resultor trade and or the trading system. But, under any circumstances, it is crucial that like products not be treateddierently in international trade. Millions worldwide had hoped the world would conclude a global treaty in Copenhagenlast December. Millions hope that the world will continue to make progress towards concluding one in Cancun thisDecember.

When the world succeeds in concluding a comprehensive global climate treaty, the WTO-based trading system willneed to agree on how best to address the trade concerns that will arise rom the global regulation o carbon emissions.This will be especially needed i the new climate treaty includes the possibility o trade restrictions or trade sanctions asa means o ensuring compliance with climate commitments.

In such an event, the best option would be or the members o the WTO, using existing WTO rules, to adopt a decisionstating that certain careully deined measures restricting trade that were taken by WTO members and that wereconsistent with the global climate treaty would be deemed also to be consistent with WTO obligations or purposes oWTO dispute settlement.

I a legal mechanism were established under the global climate treaty or judging treaty compliance in the event o a

dispute, then such a judgment should be binding in the WTO. I not, then WTO panellists and, ultimately, the WTOAppellate Body would need to judge whether a WTO member had complied with the climate treaty beore theywould be able to conclude whether that member was excused rom compliance with what would otherwise be WTOobligations. Current WTO rules permitting WTO panellists to seek inormation and technical advice could be used toprovide them with any additional needed environmental expertise in WTO dispute settlement.

In this way, a collision between trade and climate change in WTO dispute settlement could be avoided. The world couldcontinue to lower barriers to trade while also combating climate change. And it could do so within the ramework o theinternational rule o law. The working group underscores its very strong conviction that the surest way the world has toavoid any collision between urthering trade and halting climate change is to conclude a global climate treaty the soonerthe better.


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2. Conclusion Two


2. Ifthereisnoearlyconclusionofaneffectiveandcomprehensiveglobaltreatyonclimatechange,nationaleffortstoconfrontclimatechangearelikelytoproliferate.Theseeffortsmustnotinclude

protectionistprovisions,asresorttoprotectionismwouldleadtomutuallydestructiveconflictsover

trade.

In the absence o a global climate treaty, the nations o the world will be let with the second-best solution osomething less than comprehensive global action on climate change. They will take unilateral measures, and many othese unilateral measures will aect trade in ways that will all within the scope o the various covered agreements thatcomprise the WTO treaty.

Especially worrisome rom a trade perspective is the ever-growing thicket o sub-national and corporate measures thatare being taken increasingly in various parts o the world in the name o addressing climate change. Many o thesemeasures are indeed helpul in combating climate change. The extent to which national governments are accountableas WTO members or some o these measures is open to debate. The ability o national governments to discipline manyo these actions that could aect trade is doubtul.

O particular concern, too, in the absence o a global agreement, is the possibility o the prolieration o national bordermeasures intended to address domestic ears o carbon leakage.

In every country in the world, one o the major obstacles to impose mandatory limits on harmul greenhouse gasemissions through national legislation is the potential impact o such limits on the international competitiveness o localirms. This is particularly so in those energy-intensive industries such as steel, glass, cement, aluminium, paper, pulp,chemicals and others that necessarily depend on carbon emissions in the process o producing their products. It isespecially so during this time o continuing worldwide economic distress. These and other domestic producers in everyWTO member do not want to ace emission limits or other carbon restrictions that their oreign competitors do not.

Equally, throughout the world, environmentalists and others who ardently avour such restrictions ear that merelyimposing restrictions on domestic producers will do nothing to reduce overall emissions because greener domesticproducts will simply be supplanted in the domestic marketplace by dirty oreign products. The air we breathe knowsno borders.

The common domestic ear is that i we act nationally, and not internationally, to address climate change, domesticproducers may ship jobs to another country where emission rules are more lax, and domestic consumers may buyimported products that are cheaper because the emission rules in another country are more lax.

There is widespread and increasing apprehension about the possibility o such carbon leakage. Economists disagreeabout the likely extent o carbon leakage, but hard economic times have only enhanced this apprehension. This concernis inspiring many countries to consider border measures aimed at restricting trade in less climate riendly products as

part o pending national measures to address climate change.

The danger is that border measures by one country could lead to counter-measures by other countries, and that thebattle against climate change could descend into the mutual sel-deeat o tit-or-tat trade wars. The danger, too, isthat enactment o border measures could lead as well to highly contentious litigation in the WTO that whatever itsoutcome could undermine the strength and the sustainability o the multilateral trading system.

Restricting trade in carbon-intensive products poses immense practical diiculties. In practice, or example, it wouldprove exceedingly diicult to calculate the carbon content o various products made in various countries by variousmeans and involving various pricing methods under various regulatory regimes. The bureaucratic burdens andadministrative costs would be unprecedented. In the working groups view, the considerable diiculties in calculatinganti-dumping duties or countervailing duties to subsidies in applying trade remedies in cases o unair trade practicespale in comparison.


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Conceivably, a national measure could be enacted to address climate change that might assuage domestic concernsabout carbon leakage in a manner consistent with existing WTO obligations. Depending on how it was ramed andapplied, this could, in concept, be true o a carbon tax on products i such a tax took the orm o a permitted border taxadjustment under existing WTO rules.

The purpose in this report is not to delve too deeply into the remoter recesses o WTO rules. That task is let to others.On this legal issue, it suices to say here: WTO rules permit a charge as a border tax adjustment on imported products;likewise, WTO rules permit a remission as a border tax adjustment on exported products. Only indirect taxes onproducts (such as sales taxes) may be adjusted at the border; direct taxes on producers (such as income taxes) maynot be.

There is no WTO case law that clariies whether an energy tax, such as a carbon tax, is a direct tax or an indirect tax.Nor is there any WTO case law that tells us whether a tax on inputs such as ossil uels that are not physicallyincorporated into a inal product is a tax that can be adjusted at the border under WTO rules. Depending on how thesequestions are answered by the members o the WTO, or by jurists in WTO dispute settlement, it could be possible tocrat a carbon tax in a way that would make osetting border tax adjustments consistent with WTO rules.

Direct regulation is another possible policy outcome. A national regulatory measure could require industries, armersand consumers could be required to use particular technologies and practices such as wind and solar energy toreduce carbon emissions. Realistically, a mix o emission trading and regulation could emerge. In the end, every nationwill make a dierent regulatory choice because every government has dierent domestic interests and diering domesticrelationships between local interests and government.

Still another possible policy outcome is the creation o cap and trade regimes through national legislation as a wayo using market orces to address climate change. To ease local ears o carbon leakage, restrictions on trade in dirty

imported products are widely envisaged as part o cap and trade and other national eorts to address climate change.

Such restrictions open the door to widespread trade retaliation. I one WTO member is ree to apply such borderrestrictions to products imported rom other WTO members, then similar restrictions can be applied to its own exportsby those other members. There is not one set o rules or us and another or them. There is one book o WTO rulesor all WTO members.

Moreover, the application o domestic measures aimed at minimizing carbon leakage by imposing restrictive bordermeasures on imports o carbon-intensive products would pose numerous potential problems under the GeneralAgreement on Taris and Trade (the GATT) that is part o the WTO treaty. The GATT violations in border measures couldbe legion.

For example:

Applying customs duties or any other duties or charges o any kind on imported products at levels above those that arebound by a WTO member in its WTO schedule o concessions is inconsistent with GATT obligations.

Applying an import ban, a quota, or any other prohibition or restriction on the import o a product rom another WTOmember other than duties, taxes or other charges is inconsistent with GATT obligations.

Applying a measure that accords an advantage to some oreign products over other like imported oreign products isinconsistent with the obligation o most-avoured nation treatment in the GATT that is one o the undamental rules onon-discrimination at the heart o the multilateral trading system.

And applying a measure that treats imported products less avourably than like domestic products is inconsistentwith the obligation o national treatment in the GATT that is the other basic rule o non-discrimination. Under any

circumstances, it is crucial that a system not treat like products dierently.


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Some have suggested that such discriminatory measures will satisy GATT and other WTO rules i they are not appliedimmediately, but are applied only prospectively, conditionally and as a matter o discretion at some distant time in theuture i other countries reuse between now and then to adopt comparable limits on their carbon emissions. A readingo WTO case law suggests otherwise. Even a contingent measure could modiy the conditions o competition in thedomestic marketplace to the detriment o an imported product here and now. I it did, it would be inconsistent withGATT obligations.

Some have suggested, too, that such discriminatory measures could be justiied because green products and dirtyproducts are not like products, and that thereore these GATT obligations would not apply to trade in them. WTO caselaw has established that the process and production methods (PPMs) that enter into making a product can indeedhave a signiicance under WTO rules. But, in the event o WTO dispute settlement, PPMs are much more likely to beconsidered in determining whether there is a deence that excuses a violation than whether there is a violation in need oa deence.

Potentially, a deence exists in the GATT to a distinction based on the diering PPMs between carbon-intensive andclimate riendly products. Practically speaking, though, it would be exceedingly diicult or a WTO member to proveentitlement to this deence in WTO dispute settlement. Measures taken to ensure continued competitiveness in themarketplace are not environmental measures eligible or the GATT deence. And, even environmental measures thatare potentially entitled to the deence will not be upheld i they discriminate against oreign products in an arbitrary orunjustiiable way or i they are disguised restrictions on international trade.

Furthermore, similar issues o inconsistencies with obligations to accord national treatment and most-avoured nationtreatment would be raised by restrictive border measures that take the orm o technical regulations under the WTOAgreement on Technical Barriers to Trade. Such measures could become imposing obstacles especially to small irmsand small countries as they strive to develop green technologies. In particular, there is a real likelihood that labellingrequirements or green products could be used as pretexts or protectionism.

In addition, substantial concerns are raised by many suggested national measures o consistency with obligations in theWTO Agreement on Subsidies and Countervailing Measures grants, loans, tax breaks, sector-speciic concessions onregulatory requirements, ree carbon emissions allowances. All o these are being considered as ways to encourage thereduction o greenhouse and gas emissions in national legislation, and all could raise issues o compatibility with WTOrules on subsidies.

In particular, subsidies issues could be raised by national cap and trade regimes. For example, i a government madesome producers pay or carbon emissions allowances but gave other, avoured producers emissions allowances orree, this could create a subsidy that could be inconsistent with WTO rules. Although there is no deinitive case law onthis issue, there are compelling policy reasons or treating emissions allowances as subsidies covered by WTO rules.For, i such allowances are not treated as subsidies, governments will be ree to circumvent the existing disciplineson subsidies in WTO rules by using tradable emissions allowances to coner aid on avoured industries or agriculturalproducers.

The imposing list o questions about WTO rules that would have to be answered by jurists in the event o WTO disputesettlement arising rom national border measures is long indeed. Could subsidies granted in the orm o ree emissionsallowances i they exist be successully deended and justiied under WTO rules even i they are inconsistent withthose rules? To what extent do WTO rules assure developing countries o special and dierential treatment on climatematters? How does the concept o special and dierential treatment or developing countries under WTO rules relateto the concept o common but dierentiated responsibilities or developing countries under internationally agreedenvironmental rules?

Inevitably, these and other diicult questions would arise in international disputes over national border measures. Todate, none o these questions have been answered in WTO dispute settlement. Nor have numerous other similarly ar-reaching questions that would arise as well.

Our view is that they should not be.


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3. Conclusion Three


3. Intheworkinggroupsstrongview,themembersoftheWTOshouldbeginimmediatelytonegotiateagreementstoresolvetheissueslikelytoarisefromtheenactmentofnationalmeasuresonclimate

changeratherthanleavethoseissuesforeventualresolutioninWTOdisputesettlement.

The members o the WTO could simply let events take their natural course, and hope to resolve the internationaldisputes that will surely arise rom the enactment and the application o restrictive national border measures within WTOdispute settlement.

The world has every reason to have conidence in WTO dispute settlement. WTO jurists are more than capable oaddressing these issues i need be. When judging international trade disputes, WTO jurists have shown clear and dueregard, where appropriate, or environmental and other non-trade concerns.

But WTO jurists should not be asked how to discern the legal line between the competing claims o trade and climate

change with the all too scant guidance they have been given thus ar by the members o the WTO. They should notbe expected to clariy existing WTO obligations based on a ew terse words o treaty text illuminated only by decades-old rulings o GATT working parties that certainly did not oresee a global environmental challenge o the magnitude oclimate change.

Nor does the world have time to await judgments in disputes between trade and climate change on a case-by-casebasis. The political sensitivity on this issue in every part o the world is such that leaving WTO jurists to judge suchdisputes on a case-by-case basis may result in a perilous political overload o the WTO dispute settlement system.

The members o the WTO should address the issue o the nexus between trade and climate change throughnegotiations now, so that the likelihood o politically controversial litigation can be minimized later. The working grouprealizes that WTO members also have the vital, immediate and imposing task o successully concluding the long-delayed Doha Development Round o multilateral trade negotiations. The working group prioritizes this irst andoremost. All the same, it thinks that it is imperative that the members o the WTO address the issue o trade and climate

change without delay.

There are a number o speciic actions they could take.

They could green the GATT and other WTO agreements by rewriting long-standing WTO rules to take climate changeand other environmental considerations more ully into account. Agreeing on such a revision o existing WTO rules wouldrequire a consensus o all WTO members.

Or a coalition o the willing orming a subset o WTO members could commit to a set o rules on climate change thatwould be binding solely on them and would be enorceable in WTO dispute settlement. Ideally, such a coalition wouldinclude developed and developing countries alike. Other members could agree to these new rules later i they chose.This could take the orm o a plurilateral agreement under current WTO rules. A consensus o all WTO members wouldbe required to add it ormally to the WTO treaty.

Or WTO members could approve a waiver to WTO obligations or certain speciied actions to deal with the threat oclimate change. This would require approval o at least three-ourths o WTO members.

Or WTO members could approve a peace clause to the WTO treaty that would prohibit any challenges to WTOdispute settlement to certain national actions taken to address climate change while the world continues to worktowards conclusion o a global climate treaty. This could be done by adoption o a decision by WTO membersinterpreting the WTO treaty, which would require the support o three-ourths o the members.

The working group expresses no view at this time on which o these choices would be best. Instead, it observes thatthese choices can be made within the current structure o the WTO through the ongoing work o the WTOs Committeeon Trade and Environment. Through that Committee, a group o like-minded WTO members could emerge to examinethese and other alternatives, and to drat possible approaches or early consideration by all the members o the WTO.

This should be done immediately, or, as we see it, there is compelling need or serious negotiation immediately on

inding an eective way to create a green space that will allow the members o the WTO to proceed on the essentialwork o addressing climate change without running aoul o WTO rules. The alternative is a collision between thecompeting goals o trade and climate change in WTO litigation with unoreseeable results or trade and climate changealike.


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4. Conclusion Four


4. WTOrulesshouldnotbeviewedsolelyasconstraintsoneffortstoaddressclimatechange.WTOrulescanandshouldbeusedaffirmativelytofightclimatechange.

Trade can be green, and world trade rules can be tools to make it so. Those looking or ways to speed global actionto combat climate change should look in part to the WTO, as WTO rules can be used to hasten the spread o greentechnologies worldwide.

To date, most o the all-too-little attention paid thus ar to the connection between trade and climate change hasocused on how trade rules constrain national actions that would restrict international trade in products based onthe excessive carbon emissions in their production. As the working group has explained, in the absence o a globalclimate treaty, or possibly o an even-handed national carbon tax, such tempting deensive border measures could beinconsistent with WTO rules.

But WTO rules oer opportunities as well as constraints in the struggle to slow climate change, and these opportunitiesare currently being missed. The global eort to conront climate change must proceed in many orums and on manyronts. The World Trade Organization can and should be one o them.

Global implementation o climate riendly technologies is a key to the success o global eorts to conront climatechange. Access to green technologies by developing countries is central to this task. In particular, it is vital to increaseenergy eiciency in developing countries, which are only one-third as energy eicient as developed countries.

Trade negotiators have been trying to address this need or some time in the Doha Development Round. On theWTO agenda in the trade round are eorts to reduce or eliminate tari and non-tari barriers to trade in dozens oenvironmental goods and services, including everything rom wind turbines to solar water heaters to the thermostatsand the generators needed to operate renewable energy plants.

Eliminating the barriers to trade in green goods and services would help diuse them worldwide at the lowest possiblecost by reducing their prices. In addition, it would provide incentives and expertise needed to enable developingcountries to expand their production, use and export o climate riendly technologies.

Ideally, barriers to trade in green goods and services should be eliminated as part o an early and successul conclusiono the Doha Development Round. But, in our view, i such a conclusion does not seem imminent by March 2011, theoption o an early harvest should be pursued either on a plurilateral or multilateral basis. For example, the ForumsGlobal Agenda Council on Sustainable Energy proposed as part o the Forums Global Redesign Initiative the creation oa plurilateral, sustainable energy ree trade area (SEFTA.)

There is much more that ought to be on the global trade negotiating agenda to urther the cause o ighting climatechange.

New green technologies are everywhere subject to mandatory technical regulations and to voluntary standards o allkinds. They are submitted to conormity assessment procedures used to determine whether technical requirementshave been ulilled. They can be aected by labelling schemes, by bans and by other prohibitions.

All o this alls under WTO rules. Those rules encourage the international harmonization o standards and technicalregulations. Such harmonization would spur the distribution o green technologies worldwide, enhance energy eiciencyand promote sustainability. Harmonization should not be merely encouraged by WTO rules; it should be a speciic goalo the WTO agenda.

In the past decade, more than 200,000 patents were registered worldwide or solar, biomass, uel cell, ocean, wind,geothermal and other new green technologies. These innovations would not exist without the legal assurance thatintellectual property rights will be protected. Appropriate protection o intellectual property rights is vital to the uture o

developed and developing countries alike.


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WTO rules protect patents and other intellectual property rights worldwide. WTO rules also aspire to an appropriatebalance between encouraging innovation and allowing reasonable access to innovation through the transer anddissemination o new technologies. Striking the best balance between innovation and access to the new greentechnologies needed in every part o the world to address climate change should likewise be a speciic goal o WTOnegotiations.

Signiicant opportunities or spreading clean technologies and reducing carbon emissions exist worldwide in untoldbillions o dollars o government procurement. Government purchases must avour climate riendly goods and services.Toward this end, we should green the WTOs Government Procurement Agreement.

Lastly, there are opportunities or greening trade in the WTO rules on subsidies. The subsidies rules ensure thatinternational trade is not distorted unairly by governmental support, which is conditioned on exports or on the use odomestic instead o imported goods, or which is targeted to avoured domestic industries.

Governmental subsidies lower costs or local producers and thus let them sell their products or lower prices. This canreduce access to local markets or competing oreign producers, and it can give local producers an unair advantage inexporting to other markets.

At the same time, and unquestionably, grants, tax breaks and other governmental subsidies can help acceleratesuccess in the struggle against climate change by inspiring innovation and by jump-starting the development anddeployment o clean technologies.

Every year between US$ 700 and US$ 800 billion is spent on ossil uel subsidies by countries worldwide. Widespreadpublic subsidies that encourage continued high-carbon consumption should be curtailed nationally. Domestic subsidiesor carbon-emitting ossil uel consumption should be notiied to the WTO and included in the WTOs trade policy

reviews o the trade policies and practices o WTO members. They should be measured by the WTO in cooperationwith the Organisation or Economic Co-operation and Development. Fossil uel subsidies should be made subject tocountervailing duties under WTO subsidies rules.

In contrast, subsidies that ease the necessary transition to low-carbon economies should be encouraged internationally.We must continue to be careul not to distort trade through subsidies. At the same time, we should encourage climateriendly subsidies that are not acades or protectionism and that support governments in redoubling their use o nationalpolicy instruments to address legitimate climate concerns.

This is not a new idea. As agreed in the Uruguay Round o trade negotiations that established the WTO 15 years ago,subsidies rules allowed assistance to promote adaptation o existing acilities to new environmental requirements, andprovided that no trade actions could be taken against such assistance. Regrettably, this enlightened WTO permissionslip or environmental subsidies expired ater ive years, in 2000.

Today, the challenge o climate change, to say the least, justiies the restoration o space under WTO rules to meet newenvironmental requirements. An exemption or environmental subsidies that urther the ight against climate changeshould be created anew by the members o the WTO. Such an exemption is especially needed to avert the increasinglikelihood o mutually sel-deeating disputes among WTO members over subsidies intended to spur the domesticdevelopment o new green technologies. This issue, too, should not be let to WTO dispute settlement.

In the long term, new alternative sources o energy will be cheaper and more sustainable then carbon-emitting oiland coal. In the short term, however, they are not. In the short term, new sources o energy will ind success in themarketplace, only i they are subsidized in some way by governments. WTO rules should permit and acilitate thisessential transition.


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5. Conclusion Five


5. TheWTOcanbeamodelforhowtheworldstructurestheinternationalefforttoaddressclimatechange,evolutionoftheGATTandtheandmoveforwardtowardstheneededconclusionofglobalagreementon

acomprehensiveclimatetreaty.

Copenhagen was indeed a disappointment to all who ervently hoped or a comprehensive global treaty on climatechange. The Copenhagen Accord is not a binding legal agreement. It includes no binding commitment to reducegreenhouse gas emissions, and no binding agreement by any country to any speciic emissions target. It includes notimetable or concluding such a binding agreement. Even so, the three short pages o the Copenhagen Accord canpoint the way orward on climate change.

Contrary to many pessimistic predictions in the immediate atermath o the Copenhagen Conerence, China, India anddozens o other countries met the 31 January deadline set out in the accord or listing their voluntary targets or limitson carbon emissions in an international registry. Buoyed by these national commitments, international attention hasincreasingly turned since to determining how developing countries will pay or meeting these targets.

Under the accord, the United States and other developed countries agreed to provide an additional US$ 30 billionduring 2010-2012 to support mitigation and adaptation activities to contain climate change in developing countries.I meaningul actions are taken by developing countries, with transparent results, the developed countries havecommitted urther to a goal o jointly mobilizing US$ 100 billion annually by 2020. The accord calls or the establishmento a Copenhagen Green Climate Fund and a high-level panel to examine ways o meeting this ambitious inancing goal.

To be sure, many uncertainties remain about whether and how the spare prose o the Copenhagen Accord can becomethe basis or an emerging global architecture to address climate change. Nevertheless, in Bonn, Paris, Oslo, Tianjinand elsewhere, eorts to identiy and secure this needed inancing are continuing even as pessimism prevails about theprospects or early conclusion o a comprehensive climate treaty.

Few expect the conclusion o such a treaty through the UN process in Cancun. As a practical political matter, ewbelieve that a multilateral progress will be possible unless and until the United States takes national action to limit itscarbon emissions. Unortunately, such action by the United States does not, at this time, seem at all imminent.

As we see it, the urgency o addressing climate change does not allow the world to wait on action by any one country.Those in the world who are willing must work together to ind the way orward. Moreover, in the working groupsview, the world will be much more likely to ind the way orward internationally on climate change by learning rom theinternational experience, over long decades, o building the multilateral trading system.

Members o the working group all hope or practical reorm o the United Nations process so that the UN can be a moreeective orum or concluding a global climate treaty. The working group expects to see evidence o progress towardssuch reorm in Cancun. The UN process will continue to be central to climate negotiations. But, in the working groups

view, the UN process can, and must, be supplemented worldwide.

At least initially, the best way orward on climate change is most likely to be through separate agreements on some butnot all climate issues among some but not all countries. In the atermath o the Copenhagen Conerence, a series opartial agreements on key aspects o climate change is most realistic as a strategic approach towards the ultimate goalo concluding a truly global climate treaty. Given the urgency o climate change, coalitions o the willing among theworlds countries should go orward even i all countries cannot yet ind the needed consensus to go orward globally.

The gradual historical evolution o the General Agreement on Taris and Trade with just 23 original contractingparties in 1948 into todays World Trade Organization with 153 member countries and other customs territories, andcounting may be a worthy model in many respects or the emerging international legal architecture or climate change.

Climate change is the ultimate environmental issue. Yet, the key to combating climate change successully is tounderstand that it is undamentally an issue requiring international economic cooperation. So the lessons learned

through the decades in international economic diplomacy are highly relevant to addressing climate change.


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Over time, the nations o the world have been able to build a successul world trading system because the tradingsystem has been constructed to provide ongoing incentives or international cooperation. Countries have receivedbeneits in exchange or participating in the system. Cooperation within the system has created more national beneits.These additional national beneits have in turn inspired more international cooperation.

The same can be done in addressing climate change. As has been done during the decades with trade, an eectiveglobal approach to climate change can be constructed by proceeding, issue by issue, country by country and case bycase, towards the shared end o global agreement on a comprehensive and eective international system that will bindand serve all. This can be done by providing national beneits in exchange or participating, and i more national beneitsare created as a result o urther and ongoing cooperation. At the same time, national policies to reduce greenhousegas emissions vary widely in their eicacy, transparency and GATT-consistency; WTO Members and other countries areencouraged to use policy instruments that do not unairly burden trade.

A plural approach seems to be contemplated in the Copenhagen Accord. Language in the three pages establishes thebasis to address important climate-related issues such as deorestation, mitigation unding and technology transerthrough separate mechanisms among coalitions o the willing. These could unction side by side with an emissionsagreement and with a more ocused, more limited UN process in a plural approach towards attaining a shared globalend. These plural agreements could later be incorporated by reerence into an eventual comprehensive climate treaty.

One good place to start could be the orests. Between 15 and 20% o all greenhouse gases worldwide result romdeorestation. Eighty thousand acres o tropical rainorest are lost every day. An area the size o Costa Rica is lost todeorestation every year.

There was near consensus in Copenhagen on the need to move orward immediately with an agreement to haltdeorestation without waiting on the conclusion o an overarching global agreement on climate change. Since then,additional early unding has been promised by the United States and others to save the orests. Investors around the

world are eagerly awaiting a concrete orest plan with the inancing to support it.

The REDD eort on reduced emissions rom orest degradation and deorestation seeks to save the orests byencouraging lows o inancial assistance rom developed to developing countries that agree to preserve their existingorests. There is opportunity or moving orward now with REDD as what the WTO would call a plurilateral agreement.

Another good place could be the 17-member Major Economies Forum on Energy and Climate Change (MEF),consisting o major emitting countries, perhaps reporting to the G20 group o industrial countries. Conceivably, the MEFcould become a coalition o the willing that could ashion a plurilateral emissions agreement including most o theglobal sources o carbon emissions. To succeed, such an agreement would need to take ully into account the legitimateconcerns o both developed and developing countries.

At least one world leader seems to think that, at least to some extent, the trading system can be a model or a globalstructure to conront climate change. In Copenhagen, the United States and others highlighted the act that the accord

calls or provisions or international consultations and analysis under clearly deined guidelines that will ensure thatnational sovereignty is respected. When asked what orm the international consultations and analysis will take,President Barack Obama gave as an example: What takes place when the WTO is examining progress or lack oprogress that countries are making on various commitments.

Evidently, President Obama o the United States was reerring to the trade policy review mechanism o the WTO,which involves periodic reviews and recommendations relating to compliance by WTO members with their WTOobligations. In our view, the trade policy review mechanism (TPRM) o the WTO has delivered more in theory than inpractice; it could be signiicantly improved as it relates to trade. To make a mechanism like the TPRM eective or use inmonitoring climate change compliance, incentives must be created so that all involved recognize the value o investingin the success o a policy review mechanism modelled on the TPRM. In trade, the TPRM and the WTOs enorcementsystem did not appear spontaneously; instead, they arose in tandem with core members making demandingcommitments and recognizing that the beneits they expected rom cooperation required a more eective system or

monitoring and enorcement. Nevertheless, the WTO practice o trade policy reviews, i improved on, may well be auseul model or eorts to address climate change.


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One o the most important lessons rom the history o the GATTs evolution into the WTO is that serious and successulinternational cooperation can begin with small groups ocused on generating beneits or the members who chooseto belong to the club. As those members gain conidence in the beneits they receive rom cooperation, the clubobligations can be expanded over time to include more obligations and more members. This is how the GATT became,over time, the WTO.

A mechanism that reviewed climate promises country by country could create transparency around those promisesand around their national ulilment. It could create the expectation that national promises would be kept. It could createmutually reinorcing pressures among nations or keeping national promises that would make it much more likely thatthose promises would in act be kept. For the most part, this was the cumulative experience over several decades o thecountries that were contracting parties to the GATT.

But, in time, the contracting parties o the GATT concluded that they needed the binding and enorceable judgements

about national compliance with trade obligations that they have now as members o the WTO. And, as the tradenegotiators eventually did, climate negotiators will have to consider, sooner or later, how to make binding andenorceable judgments about whether climate promises have been kept by individual countries.

In looking to the trade experience as a model, climate negotiators will need to consider the consequences i theconclusion o a review is that a country is acting inconsistently with a climate commitment. The aim is or measurable,reportable and veriiable commitments. But what i a climate promise is broken? Penalties will be needed. Disputeresolution will be needed. The world will need an eective dispute settlement mechanism or climate change. Theexperience and structure o the trading system should prove useul as an example to climate negotiators.

The gradual evolution o the world trading system over more than hal a century should give conidence that the worldcan work together to build the needed global architecture or conronting climate change. But it should also give pause.The world does not have hal a century to address climate change. The world must address it now. The common

counsel to all those everywhere who are making decisions about addressing climate change is thus start now.


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Participants in the Working Group

on Trade and Climate Change


Chair: James BacchusPartner, Greenberg Traurig, USAMember o the Global Agenda Council on Trade

Dan EstyDirector, Yale Center or Environmental Law and Policy, USAMember o the Global Agenda Council on Benchmarking Progress

Gary Clyde HufbauerReginald Jones Senior Fellow, Peterson Institute or International Economics, USAMember o the Global Agenda Council on Trade

Robert Lawrence

Proessor o Trade and Investment, Harvard Kennedy School, USAMember o the Global Agenda Council on Trade

Jean Pierre LehmanProessor o International Political Economy, IMD, SwitzerlandMember o the Global Agenda Council on Trade

Beatriz LeyceguiUndersecretary or International Trade Negotiations o MexicoMember o the Latin America Regional Agenda Council

Ricardo Melndez-OrtizChie Executive, International Centre or Trade and Sustainable Development (ICTSD), Switzerland

Member o the Global Agenda Council on Trade

*Bill ReinschPresident, National Foreign Trade Council (NFTC), USA

David VictorProessor & Director, Laboratory on International Law & Regulation School o International Relations & Paciic Studies,University o Caliornia, San Diego (UCSD), USAEnergy Security Global Agenda Council

*Yuqing ZhangProessor o Law, Beijing Zhang Yuqing Law Firm, Peoples Republic o China

*These representatives were invited to join the Working Group on an individual expert basis.


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The World Economic Forum is an independentinternational organization committed to improvingthe state o the world by engaging business,political, academic and other leaders o societyto shape global, regional and industry agendas.Incorporated as a not-or-prot oundation in 1971,and headquartered in Geneva, Switzerland, the Forumis tied to no political, partisan or national interests.(www.weorum.org)

From Collision to Vision: Climate Change and World Trade

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