Carnegie Endowment for International Peace

Can Trade Policy Support the Next Global Climate Agreement?: Analyzing the
International Trade and Environment Regimes
Author(s): Margaret Lay
Carnegie Endowment for International Peace (2008)

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Carnegie Can Trade Policy
Support the Next
PAPERS
Global Climate
Agreement?
Analyzing the
International Trade
and Environment
Regimes

Margaret Lay

Energy and Climate Program

Trade, Equity, and
Development Program
Number 96   n   September 2008

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© 2008 Carnegie Endowment for International Peace. All rights reserved.

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About the Author

Margaret Lay is a graduate of Grinnell College and a former junior fellow in the Carnegie
Endowment’s Energy and Climate Program and in its Trade, Equity, and Development Pro-
gram. She is currently a research assistant to the Federal Reserve Board of Governors.

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Contents

Summary 1

Introduction 1

Views From the Environment and Trade Regimes:

Perspectives on Areas of Conflict and Potential Synergy 2
The Environmental View of Environmental Trade Policy 2
The Trade View of Environmental Trade Policy 6

The Evolution of Environmental Trade Policy Within

the Environment and Trade Regimes 10
The Past Use of Trade Policy in Multilateral Environmental Agreements 10
Trends Within the WTO Dispute Settlement Mechanism
and Rules Negotiations on Environmental Trade Policy 14

Current Trade and Climate Proposals and Policy Options

for Further Climate-Related Trade Measures 21
Carbon Tariff Proposals in the European Union and the United States 21
Climate-Related Trade Restrictions and How They Could Work
Within the WTO 23

Conclusion 25

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Summary
The global trade and environment regimes have a rich history of conflicts and
synergies that holds important lessons for current initiatives to develop and
implement effective national and global climate policy. This paper explores the
relationship between the trade and environment regimes and asks how climate
negotiators can harness the powerful incentives of international trade to sup-
port the next global climate regime.

Introduction
The European Union recently threatened to impose a carbon tariff on goods
produced in countries where greenhouse gas emissions do not meet European
standards. Recent climate proposals in the United States have similarly included
measures that would require importers of carbon-intensive manufactured goods
from nations without comparable climate initiatives to purchase emissions al-
lowances. These proposals have stirred heated debate among trade and climate
policy makers. Proponents of freer trade fear that addressing these concerns
will lead down the “slippery slope” to protectionism. Many believe that the
proposals stem from the concerns of domestic carbon-intensive industry about
declining competitiveness as a result of pursuing expensive carbon emission
reductions. Climate policy makers, on the other hand, are attracted to the po-
tential of trade measures to reduce the migration of carbon-emitting indus-
tries to countries with less stringent climate policies. Trade restrictions limiting
the outsourcing of emissions may increase the effectiveness of any national or
global climate policy.
The prospect of using carbon tariffs to further climate policy is a new and
dramatic manifestation of a long-standing debate on the proper relationship
between trade measures and environment policy. The history of this relation-
ship holds important lessons for initiatives to develop effective national and
global climate policies. This paper examines that relationship. The first and
second sections consider the broad debate on trade and environment policy.
The first section examines the structure and objectives of the existing trade and
environment regimes to shed light on potential areas of conflict and synergy
between the two. The second section reviews examples of trade measures that
have supported environment policy. It first looks at how two multilateral en-
vironmental agreements employ trade-related measures. It then explores opin-
ion within the World Trade Organization (WTO) toward environmental trade
measures by considering WTO jurisprudence on environmental disputes and


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 | Can Trade Policy Support the Next Global Climate Agreement?

current relevant WTO treaty negotiations. This review of the historical rela-
tionship between trade and the environment reveals guideposts for the integra-
tion of WTO-consistent trade measures into climate policy. The third section
explores current proposals for integrating trade-related measures into national
climate policy. It considers the history of the relationship between the trade and
environment regimes and the guideposts set by the WTO, and it examines the
channels through which trade policy can support national climate policy and
suggests trade policies that could support global climate initiatives.

Views From the Environment and Trade

Regimes: Perspectives on Areas of
Conflict and Potential Synergy
Can trade policy be designed to support environmental objectives? Would re-
stricting trade on the basis of environmental concerns undermine fundamental
principles of the international trade regime? Does trade increase carbon emis-
sions or cause other types of environmental damage? Do the benefits from in-
creased trade outweigh its possible harmful effects on the environment? These
are some of the questions that color the conversation between the global trade
and environment communities.
This section details the concerns that environmentalists raise with respect
to freer trade and gives an overview of possible ways in which environmental-
ists could harness the incentive of international trade and the objectives of the
trade regime to protect the environment. It then explores the concerns of some
trade advocates toward using trade to support environmental objectives and
highlights those WTO rules that suggest synergies between trade and environ-
mental objectives.

The Environmental View of Environmental Trade Policy

From the standpoint of environmental advocates, international trade policy
could both threaten the environment and create important incentives to protect
it. It is useful to examine separately the concerns of the environmental com-
munity and the potential synergies between environmental objectives and the
multilateral trade regime.

The Concerns
Trade liberalization has several potential negative effects on the environment.
A primary objective of the global trade regime is to increase the volume of
global production. This, in turn, may lead to an increased exploitation of nat-
ural resources and higher levels of carbon emissions in the production pro-
cess. Transporting more goods longer distances will also result in the use of
more fossil fuels. Conversely, foreign investment and competition may intro-
duce cleaner production methods to developing countries, and the rules of the

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 Margaret Lay | 

international trade regime may require countries to abandon their protection of

carbon-intensive industries. The phenomenon of comparative advantage may
concentrate certain production in areas where the environmental cost is rela-
tively lower. The evidence is inconclusive on whether open borders increase or
decrease global carbon emissions, hurt or help the environment.
Some environmental advocates worry about a “race to the bottom” of envi-
ronmental standards: Nations that want to attract investment in carbon-inten-
sive industry will lower national environmental standards to lower production
costs; firms will escape the high costs of abiding by stringent environmental
policies by moving production to these pollution havens and then exporting the
goods produced to countries with higher standards; and industries in countries
with high standards will suffer a loss or lobby for lower standards. Thus, a struc-
ture of comparative advantage that fails to account for the environmental cost
of carbon emissions will enable the carbon emitted in the production of goods
to leak from countries with high standards to those with low standards.
The differential in environmental standards among countries that trade with
each other also leads to emissions leakage through consumption. National cli-
mate policies target production-based, rather than consumption-based, emis-
sions. Countries with aggressive national climate policies impose limits on the
level of carbon emissions emitted by domestic producers but not on the level
of carbon emitted to serve domestic consumers. Consumers in countries with
strict carbon policy will often buy carbon-intensive goods imported from de-
veloping countries—the production of which resulted in higher levels of carbon
emission than would have occurred had the good been produced under stricter
domestic carbon policy—because those imported goods are cheaper. When
they cannot control the carbon content of imports, national climate policy
makers in nations participating in global trade have difficulty limiting the size
of their country’s carbon footprint including consumption.
Efforts to measure the level of carbon traded across borders increasingly fo-
cus on the carbon “embodied” in international trade. The embodied carbon of
a good is the amount of carbon emitted throughout its lifecycle—in its produc-
tion, transportation, and consumption. A new study finds that international
trade embodies approximately 20 percent of global carbon dioxide emissions.1
This number is increasing. Another study concludes that Norway—a signatory
to the Kyoto Protocol, with its carbon dioxide production emissions stabilized
at 55 to 57 metric tonnes a year—increased the size of its carbon footprint
including consumption by 33 percent from 2001 to 2006.2 Open borders can
undermine national climate policy because they allow countries with stringent
environmental standards to outsource their carbon emissions.

Potential Synergies
Even in the face of these concerns, increased international trade, the rules of the
multilateral trade regime, and the incentives they present could be harnessed to

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 | Can Trade Policy Support the Next Global Climate Agreement?

support environmental objectives. Another primary objective of the multilat-

eral trade regime is to eliminate trade-distorting practices. Many such practices
may also be harmful to the environment; for example, subsidies to the fishing
sector may encourage unsustainable fishing practices, agricultural subsidies can
support environmentally harmful agricultural production, and tariffs on envi-
ronmental goods and services can restrict the dissemination of clean technology.
The rules of the multilateral trade regime are designed to facilitate the breaking
down of these trade-distorting practices. Here, the objectives of the multilateral
trade regime may lead to policies that also benefit the environment.
Further, global and national environmental policies could exploit the in-
centive structure created by countries’ desire to access international markets.
Increased market access can translate into increased demand for a nation’s prod-
ucts and enable it to expand production, income, and welfare. The last half cen-
tury of the expansion of international trade and the multilateral trade regime,
and the concurrent growth in many developing countries, has demonstrated
the power of this incentive. Nations have dramatically shifted their national
economic and trade policies so that they could be accepted into the WTO and
reap the benefits of expanded trade. These same incentives can be harnessed to
shape national climate and environmental policies and commitments.
Trade incentives and trade threats have convinced countries to join multi-
lateral environmental agreements (MEAs). Russia, for example, agreed to ratify
the Kyoto Protocol in exchange for EU support for its bid to join the WTO in
2004.3 The Montreal Protocol (discussed in the third section below) employed
a multilateral trade threat to encourage developing countries to sign it in 1987.4
The proposed EU carbon tariff is an example of a unilateral trade threat that
could convince the United States and China to cooperate with global climate
initiatives—but the success of this threat remains to be seen.
Trade incentives and tools can affect the behavior of firms as well as the cli-
mate policy of particular nations. Trade restrictions on environmentally harmful
products could encourage firms to reduce their production of those products by
shrinking the international market. The Stockholm Convention on Persistent
Organic Pollutants, for example, prohibits member countries from importing
banned substances unless the import is from another member country and des-
tined for environmentally sound disposal. The aim is to reduce the amount of
persistent organic pollutants that firms in both member and nonmember coun-
tries supply by systematically reducing the demand for those pollutants.5
Trade mechanisms could also appeal to a global firm’s need to improve ef-
ficiency by enforcing high environmental standards in key markets. Suppose
a critical threshold of countries were to enact trade restrictions according to a
unified system of stringent environmental standards. If the market that these
countries constitute is large enough, global firms will do what is necessary to
compete in it. These firms—even if they are making their products in nations
that do not adhere to the system of stringent standards—would have to abide

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 Margaret Lay | 

by these standards to sell in this threshold market. Moreover, it is often ineffi-

cient for such firms to produce multiple lines of products, intended for distinct
markets, that adhere to different environmental standards. Thus, to improve
microefficiency, these firms may adopt the stringent environmental standards
for all production.
A shift in the behavior of global firms in developing countries could even
encourage a change in national environmental standards, just as high energy-
efficiency standards in California led to the improvement of these standards
throughout the United States. California, the first state to adopt efficiency
standards for appliances in 1977, set efficiency standards equivalent to the ef-
ficiency of high-performing appliances already on the market and upgraded
them throughout the 1980s. As more states followed California’s lead, national
appliance manufacturers, inconvenienced by diverse efficiency standards across
states, joined with efficiency advocates to lobby for a uniform national standard.
Thus California’s ambitious standards guided the development of a similar na-
tional standard.6 On the international market, firms face different efficiency
standards in different countries. Many MEAs seek to harmonize international
standards (box 1). The enforcement of high national standards through trade
restrictions could act as a similar guiding force on the international stage of ef-
ficiency standards, and likewise could provide the impetus for including emis-
sions standards in a multilateral climate agreement.

Box 1. Multilateral Environmental Agreements

Unlike international trade, which is governed by one identifiable multilateral trade regime, MEAs
arise to address particular environmental problems. Several organizations, including the United
Nations Environment Program and the United Nations Framework Convention on Climate Change,
are involved in developing and implementing MEAs.
An estimated 230 MEAs employ a variety of tools to address distinct environmental challenges.
Only twenty of these MEAs include trade restrictions. Six MEAs, all of which include trade restric-
tions and are monitored by the United Nations Environment Program, constitute the core multilateral
environmental initiatives. The Convention on International Trade in Endangered Species works to
ensure that international trade in endangered species does not further threaten the survival of those
species. The Montreal Protocol protects the ozone layer by controlling the production and consump-
tion of ozone-depleting substances. The Basel Convention on Hazardous Wastes controls the system
of the transboundary movement, disposal, and management of hazardous wastes. The Rotterdam
Convention on Pesticides and Chemicals facilitates the exchange of information on pesticides and
chemicals, and works to promote their environmentally sound use. The Cartagena Protocol aims
to protect biodiversity from the potential risks posed by living modified organisms resulting from
modern biotechnology. Finally, the Stockholm Convention works to protect humanity’s health and
environment from persistent organic pollutants.

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 | Can Trade Policy Support the Next Global Climate Agreement?

These MEAs are negotiated in separate forums, but they share common principles and char-
acteristics. Each is based upon the principle of “common but differentiated responsibility,” which
recognizes that countries contribute to the environmental problem at different levels and enjoy
different capacities to address it. Each MEA is driven by and updated according to scientific assess-
ments, and it is carefully tailored to the particular environmental problem at hand. These MEAs have
garnered widespread support within the international community, largely because of these com-
mon characteristics: They enjoy legitimacy based on scientific investigations, they were developed
through transparent and inclusive negotiations, and they recognize that developing countries may
have a limited capacity to contribute to the resolution of environmental problems.
The Kyoto Protocol, administered by the United Nations Framework Convention on Climate
Change, is the global climate agreement. It aims to reduce greenhouse gas emissions by setting
emissions reduction targets for each of its signatories. It shares many of the characteristics listed
above. Developed countries have stringent reduction targets, whereas developing countries are not
held to specific targets in the first commitment period for the protocol. Members are left to devise
national policies that will enable them to meet the protocol’s targets. The protocol does not include
specific trade-related obligations, but it has established several mechanisms to assist members in
meeting their reduction targets. These mechanisms include the Clean Development Mechanism,
which allows nations to implement projects in developing countries in exchange for emissions re-
duction credits, and Joint Implementation, which allows developed nations to work together on
projects to reduce emissions.
Numerous critics of the Kyoto Protocol argue that it is ineffective in stemming the risk of global
warming. The world’s largest polluter, the United States, has not signed the protocol or agreed to
limit its carbon emissions. As noted above, the protocol has limited enforcement mechanisms to
ensure that its members actually meet their assigned targets. The current commitment period for
the protocol expires in 2012, and international climate policy makers are investigating policy tools
that can be incorporated into an effectivive post-2012 climate regime. International trade policy is
one of these tools.

The Trade View of Environmental Trade Policy

In considering the trade view of environmental trade policy, it is again useful
to examine separately the concerns of the trade community and the potential
synergies between the rules of the multilateral trade regime and objectives of
environmental advocates.

The Concerns
Many in the trade community fear that environmental measures incorpo-
rated into trade agreements could be exploited for protectionist reasons. The
U.S. Trade Representative, Susan Schwab, argues that border tariffs and simi-
lar “trade restrictions run the risk of tit-for-tat retaliation and even an all-out
trade war where no one wins and everyone loses.”7 If the United States were
to restrict imports from China of goods produced in a more carbon-intensive
manner, China could retaliate by closing markets to U.S. goods. Tit-for-tat

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 Margaret Lay | 

policies would cause markets to contract and world economic activity to de-
cline. The WTO website describes this phenomenon as a “self-defeating and
destructive drift into protectionism.”8
Today’s multilateral trade regime was born, in part, in response to the “beg-
gar-thy-neighbor” policies that contributed to a drastic contraction of interna-
tional trade between World War I and World War II. Through these policies,
nations sought to curb domestic economic depression and unemployment by
focusing on domestic production and limiting imports. One example is the
United States’ Smoot–Hawley Tariff Act of 1930, which raised the average tariff
rate by 20 percent. Within two years, dozens of countries had enacted similar
protectionist policies. Between 1929 and 1934, global trade declined by 66
percent. A pillar of the multilateral trade regime is the belief that these tit-for-
tat trade policies impeded international cooperation and exacerbated the Great
Depression. The General Agreement on Tariffs and Trade (GATT) was negoti-
ated to prevent countries from increasing tariffs and likewise to prevent protec-
tionism from leading to another breakdown in international trade cooperation
and a contraction of the global marketplace.
Yet economic opinion has evolved over the past half century. Economists
increasingly recognize that government trade interventions are not inherently
market distortions; they can be valuable tools for correcting market imperfec-
tions and creating missing markets. Economic actors may not consider the true
cost of environmental damage. Economist Joseph Stiglitz describes the lack of
stringent environmental standards in the United States as a form of subsidy:
The U.S. refusal to restrict the emission of carbon dioxide and other green-
house gases unfairly lowers U.S. manufacturing costs. One of the core objec-
tives of the WTO is to establish a level playing field for its members. A carbon
tariff, by offsetting the implicit subsidy given by a lax climate policy, could be
seen to support this objective.9

Potential Synergies
The GATT and the Marrakesh Accords, the agreement creating the WTO,
recognize that policies in pursuit of the primary objectives of the trade regime—
open borders and a level playing field—may undermine another principle to
which the GATT and the Marrakesh Accords pay lip service: sustainable devel-
opment. The GATT of 1947 includes an exemption clause, Article XX, which
allows members to adopt trade policies that would otherwise be inconsistent
with the GATT if such policies protect human, plant, or animal life or health,
or protect exhaustible resources.
Since the WTO was established with the Marrakesh Accords in 1995, the
WTO Appellate Body, which rules on disputes between WTO members, has
become increasingly open to using Article XX to exempt environmental trade
measures. However, this exemption article has a limited range of applicability.
One question that is central to determining that range is: Can trade restrictions

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 | Can Trade Policy Support the Next Global Climate Agreement?

be enacted against a product based on the process by which that product was
made, rather than its physical characteristics? This and other issues related to
Article XX’s applicability will be discussed in detail in the third section below.
Before the WTO was established, GATT jurisprudence clearly set the prece-
dent that process-based standards were not acceptable justifications for trade re-
strictions. However, jurisprudence within the WTO has been increasingly open
to accepting standards based on process and production methods (see the dis-
cussion of the Mexican tuna case in box 3 below). Furthermore, the Marrakesh
Accords include two agreements on standards and regulations that—of par-
ticular importance—are often interpreted to cover process-based standards: the
Agreement on Technical Barriers to Trade (TBT), which addresses technical
negotiations and standards, and its counterpart, the Agreement on Sanitary
and Phytosanitary (SPS) Measures, which addresses food safety and animal and
plant health regulations. These two agreements recognize that member coun-
tries can set environmental standards (including those that are process-based)
and restrict trade accordingly. They lay out specific directives to ensure that
standards do not restrict trade excessively, they call for transparency in estab-
lishing and implementing trade measures, and they encourage the international
harmonization of standards where possible.10
The 1994 Ministerial Decision on Trade and Environment constituted
another important treaty-based shift in the international trade regime that could
lead to more synergies between trade and the environment.11 It established the
Committee on Trade and Environment (CTE), which has specific mandates to
investigate the environmental impact of trade policy and to suggest modifica-
tions to trade rules that will most effectively promote sustainable development.
The CTE explores the relationship between trade and environment in all areas
of the WTO. It reports to and advises the General Council, one of the WTO’s
highest decision-making bodies and its top rule-making body.
The environmental policy community and scientific community have the
needed environmental expertise to be helpful in shaping the CTE’s discussion.
The United Nations Environment Program works to develop a coordinated
position in the environmental policy community on trade-related issues. Such a
coordinated position could enable environmental advocates to contribute more
to discussions within the CTE. While offering the trade community the advice
it seeks in the mandate of the CTE, the environmental community could also
help shape the environmental considerations of the trade debate.
The existence of an organization like the CTE with this role and position
within the international trade regime may appear to suggest a reconciliation of
the concerns of the trade and environmental communities. However, a closer
examination may lead to skepticism about the CTE’s effectiveness and scope.
Within the WTO, the CTE has no direct rule-making power; though it advises
the General Council, it cannot directly change the laws of the multilateral trade

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 Margaret Lay | 

regime. This position of the CTE in the WTO’s decision-making structure

indicates that environmental concerns are subordinated to larger trade issues.12
To address the CTE’s lack of rule-making power, the CTE Special Session
(CTE-SS) was created with the launch of the Doha Round of multilateral trade
negotiations. The CTE-SS can change WTO rules on the issues that WTO
members have chosen to transfer to it from the CTE. Yet these rules negotia-
tions have moved slowly. Both developed and developing countries are repre-
sented at the CTE-SS, but of course each group has different concerns about
trade and environmental policy. And though the CTE is open to all WTO
members, developed and developing countries have different levels of capacity
and access to environmental expertise, and thus have different levels of repre-
sentation in the CTE.13
In summary, the WTO rules regarding standards and regulations—the TBT
and SPS agreements—recognize the possibility that members will support do-
mestic environmental standards based on process and production methods by
restricting trade in environmentally harmful goods. Further, The WTO prefer-
ence for internationally agreed-upon standards encourages the climate policy
community to focus on consistent international standards. Though much of
the work on climate and environment policy must be done within the environ-
mental community, the existing environmental institutions within the WTO—
the CTE and CTE-SS—could provide an entry point for environmental leaders
to influence the trade and environment debate (box 2).

Box 2. The Origins of the World Trade Organization

The multilateral trade regime grew out of the economic tumult following the Great Depression
and World War II. The world’s top economists and policy makers envisioned an international eco-
nomic order built upon three pillars: the World Bank, the International Monetary Fund, and the
International Trade Organization (ITO). The ITO would monitor the trade aspects of international
economic cooperation. Its objective would be to avoid the proliferation of the “beggar-thy-neigh-
bor” trade policies—that is, trade measures aimed at curing domestic economic depressions and
unemployment by encouraging domestic production and limiting imports—that exacerbated the
global Great Depression in the 1930s. The fear is that trading partners will retaliate by banning im-
ports from countries that have closed domestic markets. Within the trade policy community, this is
considered “tit-for-tat” protectionism, which leads to a contraction of world markets and economic
activity. The multilateral trade regime works to avoid this dynamic by increasing international trade
cooperation and opening borders among nations.
The United States failed to ratify the ITO Charter, and the ITO never took form. In 1947, twenty-
three nations that had been involved in the ITO negotiations developed a provisional treaty—the
General Agreement on Tariffs and Trade (GATT)—that established the rules guiding the international
trade policies of its signatories. This treaty was the primary institution facilitating international trade
cooperation for fifty years. The GATT signatories reduced tariffs, opened borders, and updated the
international trade rules through seven rounds of negotiations.

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10 | Can Trade Policy Support the Next Global Climate Agreement?

In 1995, the Uruguay Round of multilateral trade negotiations established the World Trade
Organization. This organization fills the role of the failed ITO. Its central pillar, the Dispute Settlement
Mechanism (DSM), litigates disputes between World Trade Organization members. The multilateral
trade regime is dynamic; successive rounds of negotiations update GATT law, and litigation through
the DSM sets precedents on how those laws are interpreted.
The multilateral trade regime has five core principles: trade without discrimination, free trade
gradually through negotiation, predictability through bound tariff rates and transparency, promot-
ing fair competition, and encouraging development and economic reform. These principles have
led to an international trade regime that encourages the use of international standards, prohibits
quantitative restrictions on trade, and promotes sustainable development through trade. This re-
gime is commonly referred to as a rules-based system. The GATT determines the written laws of
international trade relations, whereas litigation through the DSM establishes common laws. This
structure establishes two access points to shape international trade law.

The Evolution of Environmental Trade Policy

Within the Environment and Trade Regimes
Although actionable trade measures that could support climate policy are still
being developed, interaction between trade policy and environment policy is
not new. This section details those situations in which trade and environmental
interests have come into contact in an attempt to shed light on how decision
makers can navigate the policy options before them without inducing a clash
between the two regimes. It first considers the trade-related measures of two
MEAs. It then explores WTO jurisprudence regarding unilateral environmen-
tal trade restrictions and the current initiatives of the Doha Round to address
concerns about trade and the environment.

The Past Use of Trade Policy in Multilateral

Environmental Agreements
Each MEA is tailored to the specific environmental challenge it is meant to ad-
dress; its enforcement mechanisms—trade related or otherwise—are designed
to account for the specific characteristics of that challenge. The threat of climate
change means that the next global climate regime will need to be significantly
different from and broader than existing MEAs. However, the experiences of
these MEAs provide valuable lessons for the negotiators of the next global cli-
mate agreement.
This subsection highlights two MEAs—the Convention on International
Trade in Endangered Species (CITES) and the Montreal Protocol for Ozone
Protection—and the mechanisms through which they integrate trade and envi-
ronmental policies.14 Many in the environmental community consider these to
be two of the most successful MEAs, and trade restrictions are integral to their
success. Yet each employs trade restrictions in a slightly different way.

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 Margaret Lay | 11

CITES, which entered into force in 1975, regulates trade in endangered spe-
cies so that it will not further threaten their survival. Trade restrictions form a
key component of the treaty; all importing, exporting, re-exporting, and intro-
duction from the sea of species covered by CITES has to be authorized through
a licensing system. Three annexes list all the endangered species covered by
CITES, categorized according to the level of protection they need.
The Conference of the Parties, the supreme CITES decision-making body, is
made up of representatives from all 172 CITES members. This body decides the
criteria that determine in which annex a species will be listed; Annex I includes
the species in immediate need of protection, Annex II includes the species that
are slightly further from extinction, and Annex III includes species that at least
one party to CITES protects under national policy. A member adds a species to
CITES by proposing and providing scientific justification for the species’ inclu-
sion in one of the three annexes during a regular meeting of the Conference of
the Parties. All members discuss and vote. The CITES secretariat, together with
the Conference of the Parties’ Standing Committee, is responsible for gathering
scientific findings and suggesting the appropriate trade restrictions to protect all
species listed in CITES annexes between regular meetings.15
CITES establishes guidelines for its members’ national-level enforcement
committees on monitoring the treatment of endangered species and enforcing
policies that protect endangered species. Individual member states issue import
and export permits according to these guidelines. The movement of a specimen
of a species listed in Annex I or Annex II requires both an export and an import
permit from the involved countries. Annex I permits are issued only in special
circumstances, when importing and exporting countries follow strict care and
protection guidelines. Annex II permits have less stringent requirements, but
they are also issued only when member countries can abide by specific monitor-
ing and protection standards. For species in Annex III, only export permits are
required. CITES also establishes quota systems for certain highly endangered
species, including the African elephant, the sturgeon, and the leopard. Though
species are added to the annexes and subject to quotas based upon their physi-
cal characteristics and the level of protection they need, trade permits are issued
based upon a country’s ability to abide by process-based standards—the moni-
toring and enforcement practices of the trading countries.
CITES also includes trade restrictions to enforce compliance with this moni-
toring and enforcement system—restrictions that are applicable to both par-
ties and nonparties. Trade restrictions are rarely enforced against nonparties;
instead, the CITES secretariat focuses on working with nonparties to achieve
remedial action. The parties to CITES are expected to provide documentation
that they are inspecting and enforcing international standards for catching those
endangered species that are listed. If these parties do not provide this documen-
tation, they are subject to punishment by the CITES secretariat.16

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12 | Can Trade Policy Support the Next Global Climate Agreement?

One example of punishment by the CITES secretariat is that of the ban on

caviar it enacted in January 2006. In that year, the CITES secretariat delineated
the measures sturgeon importers and exporters should implement to address
the serious population declines of the Beluga sturgeon—the fish from which
Beluga caviar is taken. Exporting countries must adopt a common manage-
ment plan, prove that their fishing techniques are sustainable, and implement
monitoring plans providing details of stock levels. Importing countries must
ensure that all imports are from legal sources, establish registration systems for
their domestic processing and repackaging plants, and establish rules for label-
ing repackaged caviar. Virtually all trade in Beluga caviar was banned in 2006
because the five main producers—Azerbaijan, Iran, Kazakhstan, Russia, and
Turkmenistan (of which all but Turkmenistan are parties to CITES)—refused to
provide adequate information about the sustainability of their sturgeon catches.
CITES abandoned the strict bans in January 2007. The secretariat decided that
the five main producing countries had improved their monitoring programs
and scientific assessments, and it allowed them to sell 96 tons of caviar in 2007
(15 percent below the pre-ban level set in 2005).17
Bolstered by scientific research and a multilateral consensus, CITES has
enjoyed international credibility for thirty years. Following CITES’ successful
pattern, more recent MEAs have included similar trade provisions. Thus, the
MEAs concerned with hazardous wastes, harmful pesticides and chemicals, per-
sistent organic pollutants, and the perpetuation of harmful biodiversity prod-
ucts have, like CITES, created regulation and standardization systems based on
export and import permits to control international trade in these products with
the intention of eventually phasing out their production.
The Montreal Protocol, signed in 1987, aims to phase out substances that
deplete the atmosphere’s ozone layer, specifically chlorofluorocarbons (CFCs)
and hydrochlorofluorocarbons (HCFCs). The protocol includes two mandatory
trade restrictions. First, trade is banned between signatories and nonsignatories
in the substances controlled by the protocol. Second, trade is banned between
signatories and nonsignatories of products containing any of the controlled
substances, such as refrigerators and air conditioners. This was done, in part,
to prevent trade leakage of CFCs and HCFCs. The protocol also allows—but
does not require—member countries to ban imports of products produced us-
ing controlled substances, such as computers with circuits cleaned using CFCs.
This third provision was the most contentious trade-related measure included
in the Montreal Protocol.18
The Montreal Protocol has a minimum participation clause: It only came
into force when enough countries to account for two-thirds of CFC consump-
tion signed it. No country would be required to enforce trade restrictions, and
thus risk a significant import-market reduction, until a critical mass of countries
enforced them. This made the trade threat credible. Before the trade restrictions
were included in the draft of the protocol, several developing countries were

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 Margaret Lay | 13

refusing to sign it, jeopardizing its passing. Directly after the inclusion of the
trade restrictions, these countries signed it. The negotiators representing these
countries revealed to the lead negotiator for the protocol that its trade restric-
tions were the prime factor motivating their shift in position. These restrictions
were implicitly designed to convince developing countries holding out on sign-
ing the protocol to participate in the multilateral ozone treaty. Because partici-
pation in the protocol was virtually full, these restrictions were never enforced,
and no country that was a party to the GATT (or, later, the WTO) has ever
issued a complaint against them.19
Before including trade restrictions in the Montreal Protocol, the negotia-
tors discussed whether these restrictions complied with international trade rules
with the GATT secretariat.20 The secretariat confirmed that, under Article XX
of the GATT, trade restrictions were permissible, if they could be considered
necessary to protect human, animal, or plant life or health; or if they are related
to the conservation of exhaustible natural resources.21 Yet after the Montreal
Protocol was signed, including its trade restrictions, the GATT secretariat sig-
nificantly revised its opinion. Despite the fact that no country ever launched a
complaint against these restrictions in the GATT or then the WTO, the GATT
secretariat issued a statement that these restrictions were unnecessary. It argued
that (1) the protocol could have been negotiated to reduce CFCs without in-
cluding trade restrictions and (2) the protocol’s trade restrictions were intended
to protect domestic industry. The secretariat argued that these restrictions pro-
vided compensation to CFC producers in participating countries by allowing
them to receive extra profits from selling the diminishing quantities of CFCs.
According to the secretariat, the restrictions discriminated against nonparties.
The secretariat’s statement, however, neglected to note that CFC-producing
industries in participating countries were actually taxed on the extra profits they
gained under the protocol.22 Though the secretariat does not wield the power
to make decisions within the international trade regime (contracting parties
negotiate the rules, and the dispute settlement panels and Appellate Body de-
termine GATT/WTO jurisprudence), its opinion reveals fears within the trade
community about environmental trade measures.
This reaction of the GATT secretariat to the Montreal Protocol’s trade re-
strictions highlights several concerns that resonate today within the trade policy
community. First, the secretariat argued that the protocol could have achieved
its objectives without including the trade restrictions, underlining the strict “ne-
cessity test” to which environmental trade restrictions are held: Trade restrictions
are legal only if they are virtually indispensable to the environmental objec-
tive of the overarching policy and they are imposed in a way that is as least
trade distorting as possible. The most contentious trade restriction—the ability
of parties to the protocol to ban trade with nonparties in products produced
using CFCs—highlights the concern about standards related to the process and
production methods of a good. The GATT secretariat’s fear that the trade

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14 | Can Trade Policy Support the Next Global Climate Agreement?

restrictions were intended to close domestic markets to nonparty producers and

allow CFC producers in signatory countries to reap the benefits underlines the
protectionist concern. Although these trade restrictions—intended to avoid free
riding—were dubbed “unnecessary” and “protectionist” by the GATT secretariat,
they have never been disputed in the GATT or WTO. Further, they contributed
to a global ozone treaty that successfully garnered multilateral cooperation.

Trends Within the WTO Dispute Settlement Mechanism and

Rules Negotiations on Environmental Trade Policy
To gauge the realistic opportunities for shaping trade policy to support environ-
mental objectives, this subsection examines WTO jurisprudence on unilateral
trade restrictions through the Dispute Settlement Mechanism (DSM). It first
describes the DSM, the articles of the GATT that are relevant to environmental
trade disputes, and DSM jurisprudence with respect to these articles in the con-
text of environmental trade disputes. (Box 3 describes several key environmen-
tal trade disputes.) It then discusses the current treaty rules negotiations that
are relevant to the concerns of environmentalists. It questions whether these
negotiations follow the progressive trend of WTO jurisprudence.

Box 3. The Evolution of WTO Jurisprudence Through Environmental Disputes

This box reviews four WTO disputes that reveal precedents within the organization regarding exemp-
tions for environmental trade policy from the rules of the multilateral trading system. Environmental
trade policy can be exempted from WTO rules under paragraphs b or g of GATT Article XX. Paragraph
b exempts trade measures that are necessary to protect human, animal, or plant life or health.
Paragraph g exempts trade measures that are related to the conservation of exhaustible natural re-
sources. As the DSM special panels and the WTO Appellate Body consider whether a trade measure
meets these qualifications, questions about process-based standards and extraterritoriality often
arise. In this way, litigation trends in environmental disputes also reveal WTO precedents on these
two important issues. If a trade measure qualifies for exemption under paragraph b or g, the DSM
panel then considers whether the measure meets the specifications of the introductory chapter
(“chapeau”) of Article XX by looking for embedded discrimination or protectionism. The evolution
of litigation in these rulings reveals a DSM that increasingly supports policy space, under paragraphs
b and g, for members to enact environmental trade policy. However, the DSM has also set strict
guideposts for environmental trade measures on the issues of discrimination and protectionism.

The Mexican Tuna Case, 1994

The Mexican tuna case of 1994 is often considered the first precedent-setting environmental trade
dispute. The United States enacted an import ban against Mexican tuna that were not caught in
a dolphin-safe manner. The GATT dispute settlement panel ruled that these U.S. trade restrictions
constituted discrimination against similar products and thus were illegal. The panel also decided
that because these U.S. trade restrictions aimed to enforce national U.S. standards for tuna-fishing

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 Margaret Lay | 15

practices among Mexican fishers, they violated Mexico’s national sovereignty. The panel warned
that any lenience on either of these issues—enforcing standards based on process and production
methods and extraterritoriality—could lead down the “slippery slope” to protectionism and the
unilateral imposition of national standards on other countries. Such lenience would undermine the
fundamental principles of the multilateral trade regime by decreasing predictability in international
trade markets and policy. (Source: WTO Environmental Disputes, http://www.wto.org/english/tra-
top_e/envir_e/edis00_e.htm.)

The U.S. Gasoline Case, 1995

The U.S. gasoline dispute in 1995 was the first environmental case decided through the WTO’s
DSM. Under the U.S. Clean Air Act, the United States prohibited gasoline refiners from selling
gasoline that was less clean (below a “refinery baseline”) than the gasoline each refiner sold in
1990. Each domestic refiner established an individual refinery baseline that was equivalent to the
quality of gasoline it sold in 1990. Foreign refiners were subject to a refinery baseline set by the U.S.
Environmental Protection Agency, which was intended to reflect the average quality of gasoline in
1990. Imports of gasoline below this refinery baseline were banned.
The DSM special panel ruled that this import restriction was not justified under paragraphs b
or g of GATT Article XX. In particular, although the panel recognized clean air as an “exhaustible
natural resource,” it argued that the refinery baseline was not a measure related to its conservation
and thus did not satisfy paragraph g. The Appellate Body overturned this ruling, claiming that the
refinery baseline was indeed related to the conservation of clean air and qualified as an exemption
under paragraph g. However, the Appellate Body argued that because foreign producers were sub-
ject to different standards than domestic producers, the policy was discriminatory and did not meet
the qualifications of Article XX’s chapeau. With this ruling, the Appellate Body pushed the boundar-
ies of paragraph g, but it continued to hold environmental trade policy to a stringent interpretation
of discrimination. (Source: “United States—Standards for Reformulated Gasoline,” Report of the
Appellate Body, AB-1996-1, WT/DS2/AB/R, April 29, 1996.)

The Shrimp-Turtle Case, 1997

The 1997 shrimp-turtle case echoed the dynamic of the U.S. gasoline case. Under the U.S.
Endangered Species Act, the United States enacted trade restrictions against imports of shrimp
caught by trawlers that did not use a turtle-excluder device, intended to protect five species of en-
dangered turtles that migrated through U.S. waters. Though the special panel initially ruled that the
trade restriction was not justified under paragraphs b or g of Article XX, the Appellate Body over-
turned this ruling. It argued that sea turtles could be deemed an “exhaustible natural resource” and
that these production-based standards were necessary for their protection. However, the Appellate
Body maintained that the United States had discriminated against India, Malaysia, Pakistan, and
Thailand in its imposition of the restriction; the United States had provided countries in the Western
Hemisphere with financial and technical assistance in starting to use the turtle-excluder devices, but
it had not offered equivalent assistance to the plaintiffs.
Through this ruling, the Appellate Body expanded the notion of national territory that was es-
tablished by the Mexican tuna case. The United States was allowed to enforce these process-based

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16 | Can Trade Policy Support the Next Global Climate Agreement?

standards because they protected turtles migrating through U.S. waters. The Appellate Body issued
a statement encouraging WTO members to take bilateral, plurilateral, or multilateral action through
trade policy to protect the environment. Yet again, the Appellate Body clearly indicated that envi-
ronmental trade policies cannot discriminate among trading partners. (Source: WTO Environmental
Disputes, http://www.wto.org/english/tratop_e/envir_e/edis00_e.htm.)

The Brazilian Tire Case, 2007

The 2007 Brazilian tire dispute crystallized the precedent initiated in the U.S. gasoline and shrimp
turtle cases. Brazil enacted a ban on importing retreaded tires, which are closer to turning into
waste than new tires. The accumulation of waste tires presents health risks, and waste tire fires that
generate toxins could ignite and are difficult to put out. The objective of this policy was the “reduc-
tion of the risk of waste tire accumulation to the extent possible.” Brazil did not conduct expensive
policy and economic analysis to prove that the trade ban was necessary to fulfill this objective;
rather, it justified the ban on the basis of logical, deductive reasoning. The Appellate Body accepted
this reasoning and found the ban to be justified under paragraph b of Article XX as necessary to
fulfill this environmental objective. The Appellate Body ruled, however, that Brazil could not invoke
Article XX because, in practice, the import ban discriminated against EU producers. The Brazilian
retreaders, citing violations of their fundamental rights, had managed to receive numerous court
injunctions that allowed them to bypass this import ban and import retreaded tires from countries
and manufacturers of their choosing.
With this ruling, the Appellate Body has clearly announced its support for a WTO member in
creating national environmental standards and in enforcing them as the member sees fit. In accept-
ing Brazil’s deductive argument, the Appellate Body has made it easier for developing countries
that do not have the funds and expertise necessary to conduct extensive policy analyses to enact
environmental trade policies. However, the guidepost for discrimination remains high; discrimina-
tion against products based on production standards or physical characteristics will only be legal
when it is justified by the same environmental rationale as the trade measure itself. Some argue
that this reveals a DSM that encourages environmental action through trade but focuses on block-
ing protectionism and discrimination: “While trade can and will be unequivocally trumped by good
faith nontrade policy measures, at least those catering to key societal interests such as health and
the environment (trade seems a distant second), this must happen without discrimination and must
not otherwise be abused as a trade policy measure (trade catches up)” (BRIDGES Monthly Digest,
February 2008, http://www.ictsd.org/monthly/bridges/BRIDGES_12-1.pdf).

The Dispute Settlement Mechanism

The DSM is the central pillar of the WTO. Through it, WTO members challenge
other members’ trade policies and—if the policies are ruled inconsistent with
WTO law—enact quantifiable punishment by enacting trade penalties. A
WTO member can bring a complaint against another member’s trade policy
to the DSM if bilateral negotiations prove insufficient to resolve it. The DSM
creates a special panel to litigate the dispute, both parties argue their case
according to WTO law, and the panel releases an initial ruling. A party
dissatisfied with the panel’s ruling appeals to the WTO Appellate Body. This

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 Margaret Lay | 17

body consists of seven members, appointed for a maximum of two four-year

terms. Three of the seven members hear the appeal and update the special
panel’s legal interpretation of the GATT. They do not consider new evidence.
The case-by-case interpretation of WTO law that results from this dispute
settlement process sheds light on the evolving opinions within the WTO toward
four common themes that run through trade policy disputes: the question
of extraterritoriality, the question of process and production methods,23 the
question of nondiscrimination, and the question of protectionism.
These four themes dominate disputes on environmental trade policy. In pur-
suing disputes related to these four themes, plaintiffs—that is, those WTO
members that are complaining against the environmental trade measures im-
posed by another member—commonly appeal to GATT Articles I, III, IX, and
VIII (discussed below). In these disputes, defendants tend to appeal to GATT
Article XX, paragraphs b and g, and to the TBT Agreement (discussed below).
The WTO Appellate Body has recently overturned several rulings of the
special panels created to litigate environmental disputes—but it has disagreed
only with certain parts of these rulings. The areas of agreement and conflict be-
tween the Appellate Body and the special panels are indicative of areas of accord
and tension within the larger trade regime. The Appellate Body has tended to
agree with the special panels on whether or not an environmental trade policy
is discriminatory or protectionist, suggesting that the WTO is united in its firm
stance against discrimination and protectionism. Yet the Appellate Body has
consistently issued a broader interpretation of Article XX than the special pan-
els with respect to paragraphs b and g. In so doing, it has set a more permissive
precedent regarding the questions of process and production methods and of
extraterritoriality. Overall, the special panels have tended to uphold the status
quo while the Appellate Body’s legal interpretations have consistently stretched
the boundaries of environmental trade policy.
Among the fundamental provisions of the trading system that the WTO
Appellate Body interprets, GATT Articles I and III define and prohibit
trade discrimination among and against trading partners. Article I, which de-
fines the most-favored-nation principle, requires that the trade policies of all
WTO members award products from every country the same treatment at
the border. If a WTO member lowers customs duties on products from one
country, it must do so for products from all countries. Once a foreign product
has entered the domestic market, Article III ensures that it receives the same
treatment as an equivalent domestically produced good. The introductory
chapter (“chapeau”) of Article XX stipulates that a trade policy can only qualify
for exemption if it does not constitute disguised protectionism or arbitrary or
unjustified discrimination.24
Many WTO Appellate Body rulings on environmental trade disputes—such
as the shrimp-turtle and U.S. gasoline cases discussed in box 3—have found
that specific environmental trade measures discriminate against foreign goods

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18 | Can Trade Policy Support the Next Global Climate Agreement?

or among trading partners, and that these measures thus do not meet the quali-
fications for exemption under the chapeau to GATT Article XX. To further
complicate the identification of discrimination, Articles I and III do not clearly
define “equivalent products.” Many environmental trade policies limit trade
in products because they were produced in an environmentally harmful way,
such as the EU carbon tariff or the trade ban on goods produced using CFCs
suggested in the Montreal Protocol. The question of the legality of trade dis-
crimination based on process and production methods is at the core of many
environmental trade debates. The Mexican tuna and shrimp-turtle cases are
examples of conflicting rulings on this issue.
Article IX of the GATT prohibits quantitative restrictions on trade, such as
bans and quotas. Many trade policies designed to support environmental objec-
tives employ quantitative restrictions—for example, the ban on trade in prod-
ucts containing CFCs under the Montreal Protocol and the issuance of export
quotas for endangered species enforced by the CITES secretariat. GATT Article
VIII prohibits government subsidies. Some subsidies, such as those to the agri-
cultural and fishing sectors, promote the unsustainable use of natural resources,
and many environmentalists believe that they should be eliminated. However,
other subsidies, such as those used to promote the adaptation of existing facili-
ties to new environmental technologies and requirements, are beneficial to the
environment. Until 1999, these subsidies were considered nonactionable (that
is, permitted) under the Agreement on Subsidies and Countervailing Measures.
This provision has since expired, and these environmental subsidies are techni-
cally inconsistent with multilateral trade law.25
Environmental trade measures may violate the laws discussed above.
Defendants in WTO cases tend to appeal to Article XX of the GATT or to
the TBT and SPS agreements. GATT Article XX, the exemption clause, is the
most powerful tool available to defendants concerned with environmental trade
policy. This article allows a trade measure to be exempted from GATT law if it
is necessary to protect plant, animal, or human life or health (paragraph b); or
is related to the conservation of exhaustible resources (paragraph g). However,
the chapeau to Article XX stipulates that a trade measure that meets these re-
quirements must meet two further conditions: It cannot constitute disguised
protectionism, and it cannot constitute arbitrary or unjustified discrimination
among WTO members.
Recent litigation on environmental disputes has revealed that the WTO
Appellate Body is increasingly open to qualifying environmental trade
measures as necessary to protect plant, animal, or human life or health; or to
conserve exhaustible resources. Yet the Appellate Body continues to make a strict
interpretation of what constitutes disguised protectionism or discrimination.
The result is that very few environmental trade policies pass through the DSM
unscathed. This dynamic is evident in the shrimp-turtle, U.S. gasoline, and
Brazil tire disputes.

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 Margaret Lay | 19

The TBT and SPS agreements set boundaries for WTO members to enforce
national environmental standards and regulations through trade policy. These
agreements include provisions designed to ensure that related trade policies are
not overly trade restrictive. Environmental standards and regulations must be
developed through a transparent and scientific process, and quantitative restric-
tions (bans and quotas) enforcing those standards should be avoided when pos-
sible. The agreements encourage the use of international and multilateral, rather
than unilateral, environmental standards. Trade advocates are concerned that
an ad hoc system of national standards would undermine the WTO’s objective
of creating a consistent, predictable international trade environment.
“Extraterritoriality” is a concern related to the unilateral imposition of stan-
dards; trade policies that in effect hold other nations to domestic standards
could be considered to infringe upon their national sovereignty. Recent WTO
Appellate Body rulings, notably in the shrimp-turtle case, have expanded the
notion of “territory” to allow WTO members to enact trade measures that af-
fect environmental standards in other countries. Jurisprudence has evolved so
that questions of extraterritoriality and of process and production methods no
longer present absolute roadblocks.

Rules Negotiations
The boundaries defining acceptable environmental trade policy appear to be
expanding through dispute settlement jurisprudence. Yet formal treaty negotia-
tions, the products of consensus discussions among all WTO member coun-
tries, have produced fewer results. Both the Uruguay Round text and the Doha
Round mandate pay lip service to the importance of sustainable development
to the multilateral trade regime. However, there has been little tangible progress
in negotiations toward trade law that effectively supports environmental trade
policy. Though dispute settlement rulings indicate that environmental stan-
dards based on production methods are legal, WTO members shy away from
mentioning process and production methods in formal discussions, much less
writing a provision into the WTO treaty. Because past rounds of rules negotia-
tions have created an organizational structure that includes the Committee on
Trade and Environment, at first glance these rounds appear to have been geared
to address the issues in the trade and environment conflict. Yet the limited
scope of discussions within the CTE suggest otherwise.
Under the Doha Round mandate, the CTE considers three issues, the discus-
sions of which take place in “special sessions.” The first issue is the relationship
between the rules of the WTO and the rules of MEAs. Can a WTO member
enact trade restrictions, dictated by an MEA, against another WTO member
that has also signed the MEA? Can it do so if the other WTO member is not
a signatory to the MEA? The answers to these questions are critical to under-
standing whether trade restrictions in a future climate treaty would be compat-
ible with WTO law. The scope of related discussions within the CTE is limited

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20 | Can Trade Policy Support the Next Global Climate Agreement?

to the applicability of WTO rules when both parties involved are signatories
to the MEA in question. They thus do not address an issue critical to the trade
and environment debate: Can the environmental policy community use trade
restrictions to keep nations in line that refuse to sign MEAs?
The second item on the Doha agenda of the CTE is to discuss specific
mechanisms of collaboration between the WTO and the MEAs’ secretariats.
Some forms of cooperation between the two already exist: The CTE holds in-
formation sessions for the members of the MEAs’ secretariats, and the WTO
secretariat collaborates with the MEAs’ secretariats to exchange documents and
provide technical assistance to developing countries on issues that are important
for trade and the environment.
The third item on the CTE’s agenda for the Doha Round is to discuss the
elimination of tariffs and nontariff barriers on environmental goods and ser-
vices. This issue, arguably, has seen more progress than the other two items on
the CTE’s agenda. The elimination of trade barriers is one of the core principles
of the multilateral trade regime. This issue has received more attention within
CTE discussions, in part, because both the United States and the European
Union support liberalization in environmental goods and services. Yet the out-
look for multilateral liberalization of trade in environmental goods remains un-
certain. Currently, CTE discussions remain in the preliminary stage: they are
focused on agreeing upon a method of defining environmental goods and ser-
vices. Developed countries favor a “list” approach, in which members propose
goods and services that are used for environmental purposes to be classified as
“environmental.” Many developing countries, conversely, support a “project”
approach, which would define environmental goods based on their use in envi-
ronmental projects. Neither approach encourages the inclusion of goods on the
basis of whether they were produced in a less environmentally harmful manner.
Most WTO members are hesitant to embark upon discussions of process and
production methods with respect to environmental goods and services, partly
in fear of setting a precedent for introducing this concept to other parts of the
WTO treaty negotiations.26
Some initiatives within the Doha Round that affect trade-related measures
in environmental policy are outside the CTE’s mandate. The elimination of
subsidies to the fisheries sector is discussed as part of the rules negotiations.27
These subsidies distort trade and encourage unsustainable fishing practices. At
the same time, they are fundamental to the livelihoods of many small fishing
communities in developing countries. It is a sensitive issue, and a final decision
on the fisheries subsidies requires a consensus. Thus the negotiation process
on this issue has been slow. The current rules draft would make many types
of subsidies to the fishing sector illegal. Some subsidies would be permitted,
but they would need to be linked to an international standard for fisheries
management systems. The draft also exempts least developed countries from
the ban on subsidies. The “Friends of the Fish”—which include the United

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 Margaret Lay | 21

States, Australia, Brazil, and New Zealand—support eliminating these subsi-

dies, whereas large fishing nations, such as Japan and the EU, argue that the
subsidies are important to the livelihoods of fishing communities.28 If the Doha
negotiations succeed in eliminating subsidies to the fishing sector, they could
lay the groundwork for eliminating other environmentally harmful subsidies.
However, any success achieved in the Doha rules negotiations will only come to
fruition when the Doha Round concludes.
Through dispute settlement rulings, the multilateral trade regime has be-
come increasingly open to shaping trade policy in such a way as will achieve
environmental objectives. Yet treaty negotiations have, to a large extent, failed
to incorporate this standpoint into the written laws of the WTO. The evolution
of litigation jurisprudence may be a necessary first step toward changing the
rulebook of the multilateral trade regime to allow policy space for environmen-
tal trade policy. Ultimately, treaty negotiations would be necessary to prevent
backsliding in the relationship between the trade and environment regimes.

Current Trade and Climate Proposals and Policy

Options for Further Climate-Related Trade Measures
This consideration of the broader debate on trade and the environment sheds
light on the discussion of climate policy that currently dominates the environ-
ment and trade policy communities. In short, how can trade measures be used
to support climate policy in a way that is consistent with the multilateral trade
regime? This section discusses current proposals for integrating trade-related
measures into national climate policies. It explores the channels through which
these measures can bolster climate policies. And in the context of the broader
debate on trade and the environment, it discusses additional measures that
could be integrated into the next global climate regime.

Carbon Tariff Proposals in the European Union

and the United States
The proposals to integrate trade measures into climate policy that have received
the most attention in recent months have been the national-level carbon tariff
proposal for the European Union and the Lieberman–Warner Bill in the United
States Senate. Both these proposals involve unilateral trade measures and have
been shelved for the near future.
French president Nicholas Sarkozy first proposed an EU carbon tariff in
2007 as a mechanism to offset the costs to European firms of complying
with European climate policy. In January 2008, the European Commission
considered including the tariff as a component of its 2008 climate change action
plan. This proposal met internal resistance. EU trade commissioner Peter
Mandelson spoke out against the carbon tariff, declaring that trade restrictions
are “not the way forward” for climate policy. Britain’s energy minister, Malcolm

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22 | Can Trade Policy Support the Next Global Climate Agreement?

Wicks, argued that a carbon tariff could be used as a “secret weapon” to bring
about the rise of protectionist interests in Europe.29 The EU action plan was
released on January 23 without the proposed carbon tariff. Yet Commission
president José Barrosso threatened to reconsider the tariff in 2011 if key coun-
tries—namely, the United States and China—fail to cooperate with post–Kyoto
global climate initiatives.30
The Lieberman–Warner Climate Security Act, the climate legislation at the
forefront of debate in the United States, also included trade measures. This bill
would have required importers of carbon-intensive goods from countries that
fail to take “comparable” action against climate change to purchase emissions
allowances. The president would decide which countries had taken comparable
action on climate change. The bill was pulled from congressional consideration
on June 6, 2008.
These EU and U.S. approaches both relied on “border” measures enacted
against imports of carbon-intensive goods. Such adjustments could support cli-
mate efforts with three mechanisms: (1) by assuaging the competitiveness con-
cerns of domestic carbon-intensive industry, (2) by reducing emissions leakage,
and (3) by minimizing free riding. The first mechanism is primarily political;
measures to reduce carbon emissions are expensive and will likely meet resistance
from those that have to pay the cost if their competitors are not subject to the
same requirements. A carbon tariff could be used to garner the support of those
necessary constituencies that must incur the costs of emissions reductions.
The second mechanism—reducing emissions leakage—bolsters the environ-
mental effectiveness of climate policy. When carbon-intensive goods and ser-
vices are free to flow across borders, the carbon emissions reductions achieved
in a nation that pursues an aggressive climate policy may “leak” to other coun-
tries with less stringent carbon regulation. This nullifies the climate impact of
the emissions reductions in the original country. Emissions leakage can occur
through several channels: the relocation of production, the restructuring of
consumption, or changes in the price of energy. Rather than incur the costs
of reducing emissions, carbon-intensive firms may relocate to countries where
climate regulations—and thus the cost of abiding by them—are lower. Thus
carbon emissions, along with production, simply relocate to nonregulated
countries, and carbon-intensive goods are exported to countries with higher
emissions standards. Consumers in countries with stringent climate policies
may opt to buy those imported goods produced in countries with less stringent
climate policies because they are cheaper than goods produced at home. As
energy demand decreases in countries with strong climate policies, the price of
energy on the global market may decline, and energy consumption in countries
without strong energy and climate policies may then increase to meet the de-
mand for cheap, carbon-intensive products. Trade measures have the potential
to internalize the environmental costs of carbon emissions in countries that do
not impose a financial burden on their own emitters to account for the envi-
ronmental externalities.

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 Margaret Lay | 23

The third mechanism through which border adjustments can support na-
tional climate policy is by discouraging free riders. The climate is a global public
good; carbon emissions in one country will damage the climate for the rest of
the world. Reducing carbon emissions is the most expensive environmental
challenge the world faces today; the incentive to reduce emissions must be sig-
nificant if all countries are to contribute. EU president Barrosso’s threat to re-
consider a carbon tariff in 2011 was designed, in part, to encourage the United
States and China to implement strict climate policies and to cooperate with
global initiatives.
Trade policy could be a powerful tool in addressing these issues and in creat-
ing an incentive structure that will strengthen the global climate regime. Yet
multilateral initiatives to develop climate-related trade measures are lacking,
and unilateral initiatives to include trade restrictions in national climate poli-
cies have some serious limits. For example, if the measures discussed above had
been implemented, both the European Union’s and the United States’ carbon
tariffs would have been applied uniformly to goods from offending countries.
Efficient and inefficient firms alike in those countries would have been pun-
ished. Such a policy mutes the incentive for individual firms in countries with
low carbon emissions standards to independently follow more efficient pro-
duction practices. Additionally, a recent study argues that restricting trade in
carbon-intensive products between the United States and countries with less
stringent carbon standards would not provide a strong enough incentive to
change the carbon-emitting behavior of firms in the less-regulated countries or
to induce those countries to join a multilateral climate regime.31
Amid concerns about protectionism and skewed incentives to firms in de-
veloping countries resulting from these national-level tariff proposals, the trade
and environment policy communities appear to be headed for a major clash
over climate-related trade measures. Yet this paper’s examination of the history
of the earlier use of multilateral and unilateral trade measures to support envi-
ronmental policy suggests that trade measures could be designed to build upon
the synergies between the two regimes. Climate policy makers who are aware of
the synergies could develop trade-related measures that support climate policy
and are consistent with the concerns of the multilateral trade community.

Climate-Related Trade Restrictions and

How They Could Work Within the WTO
Some trade maneuvers aiming to protect the environment and combat climate
change will indisputably be legal under the laws of the multilateral trade re-
gime, whereas others will meet resistance from the trade policy community.
A core objective of the WTO is to eliminate trade-distorting practices.
Because some of these practices are also harmful to the environment, their
elimination would be in line with the goals of the environmental regime. For
instance, the current Doha Round negotiations aimed at eliminating fisher-
ies subsidies and breaking down barriers to trade in environmental goods and

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24 | Can Trade Policy Support the Next Global Climate Agreement?

services are multilateral trade initiatives, born within the trade regime to meet
its objective of freer trade, that will have the side effect of benefiting the envi-
ronment. Trade negotiations aimed at reducing the agricultural subsidies that
exacerbate unsustainable farming practices would also fall into this category.
The elimination of trade-distorting practices is the province of trade negotia-
tors, not environmental advocates. Yet the environmental and scientific policy
communities can indirectly influence negotiations on the elimination of en-
vironmentally harmful trade-distorting practices. They can increase awareness
within the trade community of unsustainable practices that are being subsidized
by WTO members and encourage further research and development efforts to
produce more environmentally sustainable goods and services.
Environmental policy makers can take some trade-related environmental steps
independent from trade negotiators. These steps include creating a multilateral
climate regime that restricts trade in carbon-intensive products. The restriction
of trade based upon production methods is one of the most contentious envi-
ronmental trade policies within the trade regime. Yet the argument is increas-
ingly being accepted within the trade regime that the environmental impact of a
product is an important characteristic for consumers and is therefore relevant to
product standards. WTO Director-General Pascal Lamy has committed WTO
support to the next global climate treaty: The “WTO tool-box of rules can
certainly be leveraged in the fight against climate change, and adapted if govern-
ments perceive this to be necessary to better achieve their goals.”32 Those seek-
ing to strengthen the multilateral environmental regime have the opportunity
to capitalize on these openings within the trade regime and to develop a global
climate agreement that considers process-based international standards.
It is important to underscore that the stakeholders in the trade regime will
be more likely to support those trade-related climate measures that are devel-
oped through a multilateral consensus rather than through ad hoc national cli-
mate policies. The WTO’s objective of predictability and consistency in trade
relations would be bolstered by the multilateral consensus on climate trade
maneuvers. In the absence of an international climate agreement with specific
trade-related obligations, trade-related measures intended to protect the cli-
mate are more controversial. Trade restrictions according to production-based
standards may be acceptable if established within a transparent international
framework, but they will likely be challenged when only part of a particular
state’s national climate policy.
Nevertheless, in the absence of global action, many states do enact trade-re-
lated measures that support national environmental policy, and many of these
measures are not disputed in the multilateral trade DSM. If an environmen-
tal trade measure that flouts certain articles of the GATT is challenged in the
WTO, it will be exempted under Article XX only if the nation can prove that it
is necessary to protect human, plant, or animal life or health, or that it is relat-
ed to the conservation of exhaustible resources. Even a quantitative restriction,

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 Margaret Lay | 25

typically anathema to trade advocates, may be legal if it also fulfills the prerequi-
sites that it is nondiscriminatory and cannot be used for protectionist purposes.
For the goals of the climate regime, however, a quantitative restriction may
not be ideal; a system of process-based standards could be more effective in
encouraging individual firms to reduce their carbon emissions. Process-based
standards will face fewer challenges from the trade community if they are devel-
oped transparently and enforced with a system of international efficiency stan-
dards rather than quantitative restrictions or bans applied to specific countries.33
Such a system would allow only the most efficient firms in carbon-intensive
industries to export to the global market, thus encouraging efficient practices.
A quantitative restriction against China, conversely, would limit exports from
even the most efficient Chinese firms in carbon-intensive industries, stifling
their incentive to improve efficiency.
Unilateral, process-based trade sanctions that are intended to leverage coun-
tries to join multilateral climate initiatives may be more effective when the
sanction wielder is engaged with the process of multilateral climate negotia-
tions. The European Union may have the moral standing to enforce unilateral
trade measures to support its national climate policy and shape the post-2012
multilateral climate treaty. The United States may not.

Conclusion
The most effective way to exploit the synergies between the multilateral trade
and climate regimes would be to incorporate a multilateral system of efficiency
standards into the next global climate treaty. Unilateral trade restrictions may
also be warranted to induce cooperation, reduce leakage, and discourage free
riding by countries that do not have a coherent climate policy. But unilateral
trade restrictions must be employed with care. The WTO’s rules will likely al-
low nondiscriminatory trade restrictions designed to reduce emissions leakage
and protect the global climate. But these rules will not condone trade restric-
tions intended to protect domestic industry.
The world’s trade and environment regimes have a rich history of syner-
gies and conflicts; it appears inevitable that climate negotiators will meet the
global trade regime as they pursue policy tools that effectively address the threat
of climate change. Climate policy makers must emphasize the value of trade
mechanisms in controlling emissions leakage—rather than in protecting do-
mestic industry—to abide by the rules of the global trade regime. As climate
negotiators work to harness powerful trade incentives, the adaptability of the
global trade regime will again be tested.

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 Margaret Lay | 27

Notes

1 Glen Peters and Edgar G. Hertwich, “CO2 Embodied in International Trade with
Implications for Global Climate Policy,” Environmental Science & Technology, vol. 42,
no. 5 (2008), pp. 1401–1407.
2 Rasmus Reinvang and Glen Peters, “Norwegian Consumption, Chinese Pollution: An
Example of How OECD Imports Generate CO2 Emissions in Developing Countries,”
WWF Norway, http://www.ntnu.no/eksternweb/multimedia/
archive/00030/Norwegian_Consumptio_30439a.pdf.
3 “Russia Backs Kyoto to Get on Path to Join the WTO,” Washington Post, May 22,
2004, http://www.washingtonpost.com/wp-dyn/articles/A46416-2004May21.html.
4 Richard Elliot Benedick, Ozone Diplomacy: New Directions in Safeguarding the Planet
(Cambridge, Mass.: Harvard University Press, 1998), pp. 242–243.
5 United Nations Environment Program, “Trade-Related Measures and Multilateral
Environmental Agreements,” 2007, http://www.unep.ch/etb/areas/pdf/
MEA%20Papers/TradeRelated_MeasuresPaper.pdf.
6 Craig Canine, “California Illuminates the World,” OnEarth, Spring 2006,
http://www.nrdc.org/onearth/06spr/ca1.asp.
7 BRIDGES BioRes, “Climate Change: Schwab Opposes Potential Trade Measures,”
March 7, 2008, http://www.ictsd.org/biores/08-03-07/story3.htm.
8 See the WTO website, http://www.wto.org.
9 Joseph Stiglitz, Making Globalization Work (New York: Penguin Books, 2006).
10 The TBT Agreement is generally considered to allow for product-related standards
based on process and production methods (PPM), provided that the standards meet
other criteria of the two agreements. It is still unclear whether the TBT Agreement
allows for non-product-related PPM standards. See Nathalie Bernasconi-Osterwalder
et al., Environment and Trade: A Guide to WTO Jurisprudence (London: Earthscan
Publications / CIEL, 2006), pp. 214–215.
11 The 1994 Ministerial Decision on Trade and Environment was adopted by trade
ministers at a meeting of the Uruguay Round of trade negotiations on April 14, 1994,
prior to the signing of the Marrakesh Accords.
12 Doaa Abdel Motaal, ed., “The Trade and Environment Policy Formulation Process,”
in Trade and Environment: A Resource Book, ICTSD Southern Agenda on Trade and
Environment, http://www.trade-environment.org/page/southernagenda/RB_1-2.htm.
13 Ibid.

27

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28 | Can Trade Policy Support the Next Global Climate Agreement?

14 United Nations Environment Program, “Trade-Related Measures and Multilateral

Environmental Agreements,” 2007.
15 See the CITES website, http://www.cites.org.
16 United Nations Environment Program, “Trade-Related Measures and Multilateral
Environmental Agreements,” 2007; see also http://www.cites.org.
17 “Caspian Caviar Export Quotas Set, but Beluga in Limbo,” Environment News
Service, January 2, 2007, http://www.ens-newswire.com/ens/jan2007/2007-01-02-
05.asp.
18 See Scott Barrett, Environment and Statecraft (Oxford: Oxford University Press,
2003), p. 313; and Benedick, Ozone Diplomacy, p. 92.
19 See Barrett, Environment and Statecraft, 321–322; and Benedick, Ozone Diplomacy,
p. 242.
20 This occurred in 1987, before the creation of the WTO. The GATT Secretariat was
responsible for overseeing international trade rules.
21 Benedick, Ozone Diplomacy, p. 91.
22 Barrett, Environment and Statecraft, p. 322.
23 The “extraterritoriality” question is this: Can nations use trade restrictions to enforce
strict national environmental standards outside their territory? This could be inter-
preted as an intrusion on national sovereignty. The PPM debate asks whether trade
restrictions should be enforced against goods based on the process by which they were
produced, rather than their physical characteristics.
24 See http://www.wto.org.
25 If environmental subsidies were challenged in the dispute settlement mechanism, the
perpetrator could appeal to Article XX.
26 Nathalie Bernasconi-Osterwaler, Linsey Sherman, and Mahesh Sugathan,
eds., “Environmental Goods and Non-Agricultural Market Access,” in Trade and
Environment: A Resource Book, ICTSD Southern Agenda on Trade and Environment,
http://www.trade-environment.org/page/southernagenda/RB_2-6.htm.
27 The rules negotiations are negotiations on particular trade laws. The Doha Round
mandate dictates that the rules negotiations cover the Anti-Dumping Agreement; the
Agreement on Countervailing Measures, and, in this context, WTO disciplines on
fisheries subsidies; and WTO provisions applying to regional trade agreements.
28 BRIDGES BioRes, “Members Remain Divided on Fisheries Draft Text,” April 4,
2008, http://www.ictsd.org/biores/08-04-04/story3.htm.
29 BRIDGES BioRes, “Climate Change: Schwab Opposes Potential Trade Measures,”
March 7, 2008, http://www.ictsd.org/biores/08-03-07/story3.htm; “EU Aims to
Choke Carbon Emissions,” Time, January 23, 2008, http://www.time.com/time/
world/article/0,8599,1706123,00.html; “Barrosso Trade Threat on Climate,” BBC,
January 22, 2008, http://news.bbc.co.uk/2/hi/europe/7201835.stm.
30 BRIDGES BioRes, “EU Climate Strategy: Border Measures Remain an Option,”
January 25, 2008, http://www.ictsd.org/biores/08-01-25/story2.htm.
31 This is partly due to the fact that the United States does not have strong climate stan-
dards itself. See Trevor Houser et al., Leveling the Carbon Playing Field: International
Competition and U.S. Climate Policy Design (Washington, D.C.: Peterson Institute for
International Economics and World Resources Institute, 2008).

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 Margaret Lay | 29

32 Pascal Lamy, “Doha Could Deliver a Double-Win for Environment and Trade,”
remarks, Bali, December 9, 2007, http://www.wto.org/english/news_e/sppl_e/
sppl83_e.htm.
33 Jason Potts, “The Legality of PPMs under the GATT: Challenges and Opportunities
for Sustainable Trade Policy,” (Winnipeg: International Institute for Sustainable
Development, 2008), http://www.iisd.org/pdf/2008/ppms_gatt.pdf.

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 Margaret Lay | 31

About the Carnegie Endowment

The Carnegie Endowment for International Peace is a private, nonprofit or-
ganization dedicated to advancing cooperation between nations and promot-
ing active international engagement by the United States. Founded in 1910,
Carnegie is nonpartisan and dedicated to achieving practical results. Through
research, publishing, convening and, on occasion, creating new institutions and
international networks, Endowment associates shape fresh policy approaches.
Their interests span geographic regions and the relations between governments,
business, international organizations, and civil society, focusing on the econom-
ic, political, and technological forces driving global change.
Building on the successful establishment of the Carnegie Moscow Center,
the Endowment has added operations in Beijing, Beirut, and Brussels to its
existing offices in Washington and Moscow, pioneering the idea that a think
tank whose mission is to contribute to global security, stability, and prosperity
requires a permanent international presence and a multinational outlook at the
core of its operations.
The Endowment publishes Foreign Policy, one of the world’s leading jour-
nals of international politics and economics, which reaches readers in more
than 120 countries and in several languages. For more information, visit
www.CarnegieEndowment.org.
Global economic integration has produced rapid expansion of trade, invest-
ment, and production links between societies. At the same time, there has been
a backlash against globalization by those who see unwanted side effects on jobs
and income distribution. In developing countries there are growing complaints
that the anticipated benefits of liberalized trade and investment have not been
realized. These issues must be addressed if the world is to proceed to a deeper
economic integration that is widely embraced as a successful path for the twenty-
first century.
The Trade, Equity, and Development Program seeks to develop innova-
tive, workable solutions to the tensions now plaguing trade, globalization, and
development. The project works with governments, intergovernmental orga-
nizations, business, labor, and civil society to harness the forces of economic
integration to achieve economic growth that is widely shared.
For more information, visit www.CarnegieEndowment.org/trade.
Carnegie’s Energy and Climate Program engages global experts working in
energy technology, environmental science, and political economy to develop
practical solutions for policy makers around the world. The program aims to
provide the leadership and the policy framework necessary for minimizing risks
stemming from global climate change and reducing competition for scarce
resources.
For more information, please visit www.CarnegieEndowment.org/
energyandclimate.

31

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Carnegie Papers

Carnegie Papers present new research by Endowment associates and their collaborators from
other institutions. The series includes new time-sensitive research and key excerpts from
larger works in progress. Comments from readers are most welcome; please reply by e-mail
to pubs@CarnegieEndowment.org.

2008
Can Trade Policy Support the Next Global Climate Agreement? Analyzing
the International Trade and Environment Regimes (M. Lay)
The Russian World: Changing Meanings and Strategies (V. Tishkov)
The New Arab Diplomacy: Not With the U.S. and Not Against the U.S. (M. Ottaway)
Party for Justice and Development in Morocco: Participation and its Discontents
(A. Hamzawy)
International Labor Migration in a Globalizing Economy (R. Lucas)
Islam in Uzbekistan: Religious Education and State Ideology (M. B. Olcott, D. Ziyaeva)
Assessing Secretary of State Rice’s Reform of U.S. Foreign Assistance (G. F. Hyman)
The Draft Party Platform of the Egyptian Muslim Brotherhood: Foray Into Political
Integration or Retreat Into Old Positions? (N. J. Brown, A. Hamzawy)

2007
Incumbent Regimes and the “King’s Dilemma” in the Arab World: Promise and
Threat of Managed Reform (M. Ottaway and M. Dunne)
Implementing UN Security Council Resolution 1540: A Division of Labor Strategy
(M. Heupel)
Demilitarizing Algeria (H. Roberts)
Fighting on Two Fronts: Secular Parties in the Arab World (M. Ottaway and A. Hamzawy)
Sufism in Central Asia: A Force for Moderation or a Cause of Politicization? (M. B. Olcott)
China’s Economic Prospects 2006–2020 (J. He, S. Li, and S. Polaski)
A Face of Islam: Muhammad-Sodiq Muhammad-Yusuf (M. B. Olcott)
Requiem for Palestinian Reform: Clear Lessons From a Troubled Record (N. J. Brown)
Evaluating Political Reform in Yemen (S. Phillips)
PushingToward Party Politics? Kuwait’s Islamic Constitutional Movement (N. J. Brown)
Protecting Intellectual Property Rights in Chinese Courts: An Analysis of Recent Patent
Judgments (M. Y. Gechlik)
Roots of Radical Islam in Central Asia (M. B. Olcott)

2006
Illusive Reform: Jordan’s Stubborn Stability (J. Choucair)
Islamist Movements in the Arab World and the 2006 Lebanon War
(A. Hamzawy and D. Bishara)

For a complete list of Carnegie Papers, go to www.CarnegieEndowment.org/pubs.

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