Among the problems confronting climate change policymakers is the danger that attempts to limit global emissions could violate longstanding rules under the World Trade Organization (WTO). Rules outlined in the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), apply to all goods traded between members. This chart shows which climate policy options under discussion in governments, academic institutions, and international organizations are compatible with GATT articles and which, if implemented, may be the subject of future disputes at the WTO.
Carbon Border Adjustment Mechanisms (CBAMs) impose levies on imported products manufactured using processes that emit large quantities of greenhouse gases. Many countries are likely to adopt CBAMs as they address climate change, but it is unclear whether CBAMs are compatible with WTO rules.
The GATT article on quotas (Article XI) permits trade restrictions only in the form of duties or applied taxes. Policies that set quantity limits on, or ban, certain imports would clearly violate this article. GATT Article I on General Most-Favored-Nation Treatment stipulates that tariffs cannot discriminate against some trading partners over others, posing a separate legal threat to the use of CBAMs. The social cost of carbon is not currently recognized as dumping or a subsidy under GATT rules that permit antidumping and countervailing duties (Articles II, VI, and XVI). As a result, trading partners could retaliate against a country that imposes duties on carbon-intensive goods.
Because no specific GATT articles refer to CBAMs, such measures could also violate most favored nation or national treatment requirements if the same products from different origin countries are subject to different levies, or if domestic producers gain unfair advantages over foreign firms.
Domestic policies that are applied uniformly across products produced locally and abroad, and between trading partners, are much more compatible with global trading rules. Carbon taxes applied to both domestic goods and imports are justified under GATT Article III on National Treatment on Internal Taxation and Regulation, while cap and trade systems and carbon performance regulations have an ambiguous standing under GATT provisions.
Policies that are incompatible with GATT requirements can still be justified under the GATT's exemption provision. Article XX on General Exceptions allows exemptions for measures relating to the conservation of an exhaustible natural resource. However, the onus is on the member to demonstrate the policy meets this criterion and is not applied to arbitrarily discriminate against foreign firms or specific trading partners.
This PIIE Chart is based on Gary Clyde Hufbauer, Steve Charnowitz, and Jisun Kim's book, Global Warming and the World Trading System.