Climate Policy, WTO Rules, and the Fork in the Road

By Matt Porterfield
November 2, 2023

As Yogi Berra observed, predictions are hard to make, particularly about the future. But that hasn’t stopped critics of Senator Bill Cassidy’s recently introduced “Foreign Pollution Fee Act” (FPFA) from suggesting that, if enacted into law, it would likely be found to violate the rules of the World Trade Organization (WTO). Assumptions about the vulnerability of FPFA to a trade challenge appear to be based on past narrow interpretations of the WTO’s environmental exceptions. There are, however, other WTO defenses that could apply to the FPFA. Recent jurisprudence suggests that climate measures may be entitled to broad protection under the essential security exception of the General Agreement on Tariffs and Trade (GATT). And another exception for intergovernmental commodity agreements could apply to the FPFA’s provisions regarding “international partnership agreements.”

The FPFA would impose a fee on certain imported industrial and energy products based on their emissions intensity compared to competitive products produced in the United States. It would not, however, as Senator Cassidy has stressed, include a correlating charge on those domestically produced products. Critics contend that the bill would accordingly be found to be impermissibly discriminatory.  

One initial problem with this critique is the assumption that the WTO’s dispute settlement process will be in a position to make findings on the status of the Act, given the ongoing incapacity of the WTO’s Appellate Body. But even assuming that the Appellate Body comes back online, it’s still far from clear that the Cassidy bill would be found to be “WTO-inconsistent.”  The WTO is facing serious challenges to its legitimacy and would likely want to avoid positioning itself as an obstacle to aggressive action on climate change. 

The WTO rules do include nondiscrimination standards, including prohibitions under the General Agreement on Tariffs and Trade (GATT) on discrimination both against products from other WTO Member countries (the “national treatment” rule) and between competitive products from different WTO Members (the “most favored nation” rule). It could also be determined to breach the limits on tariffs that the United States has agreed to.

But these rules are subject to exceptions, including the environmental exceptions for measures “necessary to protect human, animal or plant life or health” (Article XX(b)) or “related to the conservation of natural resources” (Article XX(g)). These provisions have been at the center of the debate over the relationship between trade rules and environmental measures since the creation of the WTO nearly 30 years ago. The first case decided by the Appellate Body, in fact, addressed the application of the environmental exceptions to regulations issued by the U.S. Environmental Protection Agency under the Clean Air Act.

The Appellate Body has at times opened the door to an expansive reading of the environmental exceptions, noting that a WTO Member country may in theory limit access to its market based on whether another Member agreed to comply with certain policies. But in practice, the Appellate Body has interpreted the environmental exceptions narrowly over the years, particularly by finding environmental measures to violate the requirement that they not constitute “arbitrary or unjustifiable discrimination . . . or a disguised restriction on trade.” As a result, although the Appellate Body has considered defenses under Article XX(b) twelve times, and Article XX(g) eight times, it has only upheld a measure based on one of the environmental exceptions in two cases (not a batting average that Yogi would approve of). Accordingly, skepticism about whether the FPFA would be covered by the environmental exceptions is understandable.

But Articles XX(b) and XX(g) aren’t the only exceptions to the WTO’s rules. One provision that could offer significant protection for the FPFA and other climate policies is the exception under Article XXI(b)(iii) for measures that a country “considers necessary for the protection of its essential security interests … taken in time of war or other emergency in international relations” (emphasis added). Presumably climate change would qualify as an “emergency in international relations,” given that the WTO has recognized the threat it poses to geopolitical stability. And once the existence of a qualifying emergency has been established, recent reports by WTO dispute settlement panels have clarified that the test under Article XXI(b) is “partly self-judging,” meaning that the country imposing the measure would be entitled to near complete deference in determining whether a particular action it takes with regard to its essential security interests is necessary.

Another potentially broad source of protection for the FPFA could be found in Article XX(h)’s exception for “intergovernmental commodity agreements” (ICAs), which are agreements between governments to control the trade in specific products. ICAs can be used both to ensure price and supply stability and to address environmental concerns. The FPFA provides for the United States to enter into “international partnership agreements” with other countries that agree to implement similar foreign pollution fees. If the United States and partnership countries were to structure these agreements as ICAs, they would be considered within the scope of Article XX(h) unless the agreement was rejected by the consensus of all WTO Members—including the participants in the agreement.

The FPFA is part of a new suite of climate and trade proposals that seek to tackle the 25% of global emissions that are associated with internationally traded goods. These policies are distinguished by their focus on reducing global emissions by uniting a broad set of political interests—economic, geopolitical, and environmental. Because these policies will inevitably raise concerns about WTO compliance, Congress is faced with a choice. It could take an overly cautious approach and avoid any climate policies that present the potential for conflict.

Alternatively, it could take another path. One that recognizes that trade policy is an essential tool for lowering global emissions and that there are strong—if largely untested—WTO defenses available for aggressive climate policies. And as Yogi would say, when you come to a fork in the road, take it. 

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