Global Trends by Martin Khor                                                                                                 

Monday 6 July 2009

Unfair to tax South’s imports on climate grounds

Developing countries are opposing a move by the United States Congress to impose charges on developing countries’ imports linked to their emissions of gases that cause climate change as this unfairly pushes the costs coping with climate change onto them.

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Can and should developed countries impose extra charges on the imports of developing countries based on the level of carbon dioxide and other Greenhouse gases that are linked to producing the imports?

This has become a burning issue, especially since the United States’ House of Representatives passed an energy bill (that deals mainly with climate change) at the end of June.

Part of that legislation (known as the Waxman-Markey bill) obliges the US President to place a charge on importers of certain products that come from large numbers of developing countries by 2020.

The importers will have to buy “allowances” for the emissions of the products they bring into the country.  In effect, this is like putting an extra tax or duty on the developing countries’ imports, and the rate depends on how much carbon dioxide is emitted during the manufacture of these products.

The bill’s advocates say this is needed so that the United States’ domestic firms, which will also have to pay for emission allowances, can maintain their competitiveness vis-à-vis imports.

The US bill will limit the total level of emissions for the country.  Since other developed countries are obliged to cap their emissions at a level still to be negotiated, the United States’ proposed import measure will apply only or mainly to developing countries.  Least developed countries are exempted, as also those developing countries accounting for a small share of the world’s total emissions.

The middle-income developing countries and those with large populations will be affected.  Importers of their heavily-traded energy-intensive products will have to buy emissions allowances, a measure that will raise the prices of the imports, which could affect their sales.

The products to be subjected to this new import charge are expected to include chemicals, iron and steel, cement, glass, lime, some pulp and paper products, and non-ferrous metals such as aluminum and copper

The two biggest developing countries – India and China – have already attacked this part of the Waxman-Markey bill as constituting disguised protectionism and being against the rules of the World Trade Organisation.

Under the bill, the import measures will be automatically applied by 2020, unless the President declares that the measures are against the national economic interest, and Congress approves this declaration.

The use of trade measures with the effect of blocking out developing countries’ imports on climate grounds is about to generate great controversy and may result in a severe blow to the WTO and the multilateral trading system, as well as sour the atmosphere in the negotiations taking place in the UN’s climate convention.

Many developing countries will read the US bill as an attempt to evade its commitment to assist developing countries, and instead to shift the burden of adjustment onto these developing countries.

Under the climate convention, only developed countries have to undertake legally binding commitments to cut emissions, in recognition that they are resposible for much of the emissions in the past.

Under the convention, the developed countries also committed to pay for the costs incurred by developing countries when they take actions on climate change.  The convention also says that the extent to which the developing countries act against climate change depends on the extent to which developed countries provide them with finance and technology transfer.

The import measures proposed in the US bill will be seen as an attempt to escape these provisions of the convention, and instead to push the costs of adjusting to a climate-friendly world onto the developing coountries.

Meanwhile controvery is brewing as to whether the proposed US measures are allowed in the WTO.  For a measure to be legal under the WTO, it must meet two tests.  Firstly, there must be “national treatment”, in that the local product is subjected to the same charges as the imported product.

Secondly, products that are like one another should be treated the same way.  But the term “like product” is taken to mean an imported good that has the same physical characteristics as the local good. Both should be charged the same rate.

In considering import taxes or charges, it is the physical characteristics of the import that should be considered, and not the processes and production methods (PPMs) that are used in making the product.

Many argue that since the climate-related charges to be imposed are based on PPMs (that is, on how much emmissions were generated by the production), this is not compatible with the WTO rules or spirit.

However, others point out that there have been a number of panel cases in the WTO on the PPM issue, and that the decisions of the panles have not been conclusive as to whether an import measure based on PPMs is allowed by the WTO.

If the measure does not clear thse two tests, its advocates can try a third method, which is to rely on Article XX of the GATT agreement, which allows for an exemption (from following the GATT rules) on environmental grounds, provided certain conditions are met.

Making use of this environmental exception to impose an extra tax on developing countries’ imports based on their pollution levels is unfair to developing countries, because their levels of development, access to financial resources and technology are much lower than those of developed countries.

As the veteran journalist C. Raghavan remarked some years ago, it is an imbalance and unfair to developing countries to have an environment exception to the rules (this favours the developed countries) while the WTO does not have an exception to the rules on developmental grounds (which would favour developing countries).

In any case, this issue can be expected to be brought up at both the WTO and the climate convention, as the developing countries are suspicious that the trade measures proposed in the US congrress would be used to unfairly block their exports.  It is one of the issues that will be hotly debated, and that will be for us for many years to come.