Using International Trade Regulations to Combat Climate Change

The Economic Strategy Institute has published a new report on how to use trade measures to limit carbon emissions, combat climate change, and ensure a level playing field for international competition.

For too long, many American business and political leaders have fought a holding action against committing the United States to serious efforts to control global climate change and reducing greenhouse gas emissions. That their doubts about the veracity of climate change science and the role of human activity as the cause of climate change have now been disproved is of little comfort, because the delay in addressing this serious challenge has left the US ill-prepared to set the global agenda for regulating greenhouse gas emissions. The climate change deniers, though now cowed, have done serious damage to the long term economic and political influence of the US, as other countries have moved ahead with new policies and regulations that could set the terms of future mitigation efforts in ways that undermine US economic strength and international influence.

As the US dithered, the rest of the world moved ahead with a variety of regulatory efforts to mitigate climate change. While many of these efforts, most notably the Kyoto Protocol, were severely flawed, much progress has been made in laying the groundwork for efforts to reduce greenhouse gas emissions through the use of carbon taxes and cap and trade emissions schemes. Moreover, attention is being increasingly turned to issues of enforcement. One of the fatal flaws of Kyoto was that neither the United States nor the leading emerging market economies were party to the agreement. But market access can be a powerful inducement to change. Thus, policy makers in the EU and elsewhere are realizing that international trade regulations can be used to enforce environmental rules – even in countries not bound by existing environmental rules or treaties. Exporters who depend on foreign markets can be forced to meet tough new regulations. The time and study put into these labors has put the EU in the driver’s seat in terms of setting the agenda for future mitigation efforts. The US – and particularly US businesses - risk being forced to adapt and comply with regulations which they had no part in devising and they risk being left behind as new technologies transform new products and production techniques.

Dealing with climate change is thus a critical priority for the US. Not only are the environmental consequences of inaction dire, but the long term economic and regulatory consequences of not proactively responding to climate change are even more pressing. If the US does not act, it will cede to the EU the role of setting global standards and regulations. More to the point, US policy makers need to recognize that, because of the size and strength of US markets, the US is in fact in a strong position to impose emissions regulations that will be adopted the world over. The way to do this is by using trade measures to force exporters to reduce their emissions if they wish to sell their goods and services in the US.

WTO rules need not stand in the way of concerted efforts to limit the use of greenhouse gases. Indeed, many WTO rules could serve to make environmental protections more effective by ensuring that such protections are universally applied around the globe. Allowing major developed or industrializing nations to opt out of environmental restrictions, as Kyoto does, will fail to combat climate change and could also lead to disruptive economic changes as polluting industries are confronted with incentives to move to jurisdictions with little or no environmental legislation.

Therefore taxes and other trade measures can and should be undertaken to encourage other countries to restrict emissions of greenhouse gases, and to lay the groundwork for an enforcement mechanism that would allow new international environmental agreements to function smoothly. Indeed, trade measures may prove to be the only effective way of ensuring broad international compliance with emissions regulations.

In particular, attention must be paid to the fact that any remedy – be it carbon taxes, cap and trade systems, or other measures - must be applied universally, without discriminating against international producers or favoring domestic ones. One important finding of this study is that any emissions permits issued under a cap and trade system must be auctioned off, rather than allocated, in order to conform to WTO rules that prohibit subsidies. Still, WTO rules and regulations should not be seen as a hindrance to efforts to introducing environmental regulations. They leave upon a wide range of policy tools with which individual countries can take steps to limit their own GHG emissions and those associated with the imports they purchase.

The key to implementing effective and efficient policies to combat global warming lies in effectively using WTO rules and regulatory procedures to support and accelerate the effort to reduce global greenhouse gas emissions. This paper examines some of the underlying legal issues and precedents shaping the relationship between the international trade regime and new efforts to combat climate change, and makes some substantive policy recommendations. The U.S. can still provide global leadership on the issue of climate change, but time is of the essence. If the U.S. does not act now, we will cede first mover advantage to European regulators.

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