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Section 202(a)(1) of the Clean Air Act, 42 U.S.C. § 7521 (a) (1) requires the EPA to set “standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.” In addition to this, and as a consequence of the Supreme Court decision in Massachusetts v.

Environmental Protection Agency (2007), the EPA, in 2009, formally declared that carbon dioxide and five other heat-trapping greenhouse gases are relevant pollutants endangering public health. After an examination of the scientific evidence and the assessment of numerous public comments, the EPA ruled that greenhouse gases threaten the public health and welfare of the American people, and that emissions from on-road vehicles are equally contributing to the detected threat. Its endangerment findings cover emissions of the six key greenhouse gases: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons, and sulphur hexafluoride (EPA, 2009b).

The EPA findings are perceived as systemically shifting the baseline in US environmental policy.

Given the assessed disproportionate impact of climate change on the health of certain sectors of the population – such as the poor, the very young and elderly, those already in poor health, and indigenous populations dependent on natural resources –, the EPA’s regulatory categorization of greenhouse gases as a matter of public health is of substantial importance. See for an analytical nexus between climate change and human health IPCC (2007); World Health Organization (2003). As the perspective of US climate legislation shifts from diffuse global endeavours to mitigate carbon dioxide emission, to the domestic concerns of American public health, the legitimacy of federal legislation on emission reductions will increase accordingly. In this regard, the findings are likely to promote the civil understanding of regional emissions trading discourses on various levels in the near future.

Linking Global Trade and Climate Change Mitigation The provision of multi-level conditions for the supply of interdependent public goods entails complex legal constraints in a variety of fora: in trade, environment, energy and investments. The failure of the international political community to successfully adopt a post-Kyoto Agreement in Copenhagen, Cancun, and Durban, has furthered the re-conceptualization of Border Carbon Adjustments (BCA) as a matter of climate change mitigation policy. For the sake of enhancing cross-institutional coordination on climate change, the interlinkages between the post-Kyoto climate regime and the Global Public Goods and Asymmetric Markets: Carbon Emissions Trading and Border Carbon Adjustments institutional order of the World Trade Organization (WTO) appear to be of crucial importance. On the one hand, climate change and climate policies affect trade, while trade and trade liberalisation simultaneously affect climate change. On the other hand, the different regimes are subject to a number of overlapping policy processes such as supranational trading of emission allowances, unilateral policies and measures (cf. border tax adjustments, subsidies, and technical standards), and the transfer of climate-friendly goods, services and technologies (Biermann et al., 2010, p.3; van Asselt and Biermann, 2007; Zelli, 2007; Vranes, 2009).

Even though diametrically opposed positions have been expressed at the UNFCCC conferences with respect to the re-integration of trade measures, its decentralized function to level the playing field has repeatedly been restated. While a group of developing countries favoured the restriction of the use of unilateral trade measures as part of climate change policies, the EU opposed any provisions that would question the parties’ right to apply trade measures in the context of climate change mitigation.

As unilateral action to combat anthropogenic climate change may place different actors – such as the European Union – at a competitive disadvantage compared to international opponents, ‘border carbon adjustments' have been brought into play.’ In general, the imposition of carbon adjustments is repetitively claimed by policy-makers, while they simultaneously express their fear that high levels of internal climate policies – such as EU ETS – will lead to competitiveness problems for domestic industries.

‘Carbon tariffs’ as border taxes on imports from foreign energy intensive industries are therefore understood as encountering carbon leakage, reflecting a never-ending discourse on the legality of border adjustments under WTO law (Zane, 2011, p.204).

Reassessing the Legal Nature of Border Tax Adjustments Border tax adjustments (BTAs) constitute a classical economic instrument of foreign trade (Ricardo, 1951). BTAs were intended to harmonize the international taxation of products in conformity with the destination principle. According to this fundamental principle of international trade, goods should be subject to taxes within the countries where the goods are used or consumed. Back traceable to the 18th century, border adjustments permitted domestic authorities to implement their own regimes of national taxation, whilst assuring that goods moving in international trade are neither exempt from taxation, nor subject to double taxation. In other words, BTAs allow an internal tax to be imposed on imported products as well as the remission of internal taxes on domestic products destined for export (Birnie et al., 2009, p.728; Petersmann, 2008, p.143). The Organization for Economic Co-operation and Development’s (OECD) 1970 Working Party on Border Tax Adjustments has properly defined border tax adjustments 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).” (GATT, 1947) Adopted in the aftermath of the Second World War to re-stabilize the functioning of international trade, the 1947 General Agreement on Tariffs and Trade (GATT) still remains the “permanent institutional basis for the multilateral world trading regime.” (Trebilcock and Howse, 2005, p.23).

Even though the GATT was institutionally replaced by the WTO in 1994, it provides effective supervision of trade restrictions and prevents protectionist measures for the sake of promoting global competition. Therefore, the legality of trade-restrictive measures such as BTAs are subject to legal assessments under the GATT provisions (Zane, 2011, p.206; Matsushita et al., 2003, p.169).

Moritz Hartmann

On a general account, border tax adjustments are perceived as being legal under the GATT under limited circumstances for internal taxes. Thus Article II:2(a) states that contracting parties are allowed to impose on the importation of any product “a charge equivalent to an internal tax (...) consistently with the provisions of paragraph 2 of Article III.” In this regard, Article II:2(a) regulates the legality of customs duties, and clarifies that BTAs are falling under Article III:2 – even if they are collected at the respective border (Superfund case, 1987, paragraph 5.2.3).

For that purpose, however, it remains unclear what sort of internal taxes are eligible for border tax agreements. Since its origin in 1947, the GATT has upheld its basic distinction between taxes imposed on products (indirect taxes) and taxes on various forms of income and the ownership of property (direct taxes). In addition, as regards process-related indirect taxes, the aforementioned 1970 GATT Working Party could reach no consensus on categorizing so-called taxes occultes – including taxes on energy, advertising, machinery, and transport – in the context of border tax adjustment eligibility (Biermann and Brohm, 2004, p.293). In accordance with Article VI:4, only taxes imposed on products are therefore eligible for BTAs (Birnie et al., 2009, p.729). As the US Superfund case has initially inferred, and as has been confirmed in the framework of other disputes, the legal eligibility of taxes levied on products depends on its consistency with the national treatment standards of Article III However, as the GATT does “not distinguish between taxes with different policy purposes,” it is required that ‘like’ imported and domestic products are equally taxed (Matsushita et al., 2003, p.167;

Superfund case, 1987, paragraph 5.2.4; see further Japan – Taxes on Alcohol Beverages, 1996, paragraph 6.22, Argentina – Hides and Leather, 2001, paragraph 11.144) Environmental Concern and Carbon Taxation Based on the rationale of sustainable resource allocation, environmental taxes seek to manipulate the global overuse of public goods, or other natural resources, by imposing additional charges to discourage the consumption of goods and services that entail environmental harm. From this perspective, environmental taxes are theoretically combining regulatory patterns of global trade and environmental protection. As environmental taxes are considered to encourage producers to develop ecological production methods, green taxes are promoting the inclusive implementation of the polluter pays principle, which holds that the polluter should bear the expenses imposed upon society by exploiting under-priced natural resources (Birnie et al., 2009, p.728). Green taxes, in this regard, allow for both balancing economic competition and regulatory flexibility, as well as ecological consumption and sustainable resource use. Even though taxes have traditionally served as a means of assuring governmental expenses, global trade regimes increasingly resort to taxes for the sake of behavioural control: the more upstream the taxes are tied to the production process, the bigger the impact of taxes on controlling environmental behaviour. The regulatory shift from command-and-control regulation to price-based, indirect policy instruments therefore ensures that market prices reflect the full cost of production and consumption to society (Petersmann, 2008, p.137).

In spite of their regulatory and multi-level attractiveness, environmental taxes are subject to several concerns. As environmental taxes tend to cause complex networks of regulatory competition, the imposition of taxes would require a level of institutional maturity surpassing most international institutions (Louka, 2006, p.26). In addition, environmental taxes are understood as being a regressive instrument of policy choice, affecting developing countries the most, and causing an industrial backlash. The latter would be caused by the fact that nation states implementing environmental taxes are losing their competitive economic position on a global scale, and their industries would suffer in comparison to industries in countries without such taxes.

Trade restrictions and supranational agreements are therefore brought into play to enforce international cooperation for the protection of global public goods (Birnie et al., 2009, p.728; Esty, 1992, pp.32–36).

Global Public Goods and Asymmetric Markets: Carbon Emissions Trading and Border Carbon Adjustments Carbon Border Adjustments From the above it can be seen that carbon border adjustments constitute a conceptual regulatory companion to the regulation of global trade distortions and polycentric environmental protection. As concern in industrialised countries has been raised that unilateral action in climate change policies could foster carbon leakage or asymmetric competition, numerous calls for carbon border adjustments have been made, particularly in the European Union and the US (Zane, 2011, p.204; Biermann and Brohm, 2004; Herman, 2009, p.196). While the economic literature has often shown that such schemes of carbon border adjustments, in theory, should have a role to play in reducing greenhouse gases, the legal literature is more ambiguous with regard to the legal consistency of carbon border adjustments in GATT/WTO law (for an economic account, see Burniaux et al., 2010; Ismer and Neuhoff, 2007; McKibbin and Wilcoxen, 2009; for legal examinations of carbon adjustments Burniaux et al., 2010; Howse and Eliason, 2009, pp.48–94; Aguilar, 2007, pp.356–367; Cendra, 2006, pp.131–145; Ruddigkeit, 2009; Sindico, 2008). Given their unilateral imposition, border adjustments are conceived – in the sense of economic efficiency – as being a regulatory tool characterized by simplicity and effectiveness, helping to reduce competitive advantages from countries with lax environmental mechanisms, and providing a vital link between trade regulation and climate change policies. Carbon border adjustments are to be implemented in several forms, including taxing imports produced under less stringent climate constraints or forcing importers of goods to surrender emission allowances under domestic emission trading schemes ( see the claim that the ‘GATT is not hostile to the environment but agnostic’, Esty, 1992, p.35). Nonetheless, the compensatory effect of border adjustments for domestic environmental regulation – such as the EU ETS – is put in question, and the functional feasibility of carbon adjustments is challenged (Petersmann, 2008, p.142). The ambivalence as to whether the imposition of carbon border adjustments is legal under the GATT reflects the possible violation of the Article III rule not to restrict trade based on specific production and process methods (Potts, 2008). But as the GATT allows for exceptions of restrictive trade measures for the purpose of environmental protection (Article XX), carbon border adjustments could be designed in such a way that an Article XX(b) (“related to the conservation of exhaustible natural resources”) or Article XX(g) (“necessary to protect (…) life or health”) exemption could be granted. The chapeau of Article XX specifically refers to measures taken in good faith in order to protect legitimate interests, and provides regulatory flexibility to take into account differing situations in different countries (Ahner, 2009, p.11; WTO Appellate Body, 1998, paragraph 158; Brazil - Measures Affecting Imports of Retreaded Tyres, 2007, paragraph 542).

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