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CENTER FOR CLEAN AIR POLICY

Draft

June 2007

Trade Incentives Role in Encouraging Greater Participation in a Post-2012

Climate Agreement

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Mark HoudasheltJake SchmidtMatthew OgonowskiDiana Movius

Center for Clean Air Policy page i

Acknowledgments

Mark Houdashelt (Policy Analyst), Jake Schmidt (Manager International Program, Senior Policy Analyst) Matthew Ogonowski (Senior Policy Analyst) and Diana Movius (Policy Associate) at the Center for Clean Air Policy (CCAP) prepared this draft paper as an input to CCAP’s Dialogue on Future International Actions to Address Global Climate Change (the Future Actions Dialogue) July 2007 meeting. The authors appreciate the assistance and input provided byAaron Cosbey (the International Institute for Sustainable Development), and by Jonathan Hepburn and Mahesh Sugathan (the International Centre for Trade and Sustainable Development).

Center for Clean Air Policy page 1

I. Background and ContextA critical element of an effective post-2012 international response to climate change is the creation of incentives which encourage countries to act aggressively (Schmidt and Helme, 2007). The willingness of a country to undertake an international commitment to reduce its greenhouse gas (GHG) emissions will depend partly on the extent to which the country considers it in their best interest to take such actions. This is an especially important issue for developing countries, where a robust package of incentives may provide more impetus for undertaking and achieving aggressive GHG emissions reductions. A range of incentives—including carbon market financing, technology demonstration and deployment support, reduced risk of climate impacts, etc.—may be enough to encourage such actions.

One controversial aspect of the current climate change debate in the U.S. and Europe surrounds the possible imposition of some type of trade penalty, such as a border tax adjustment or carbon allowance requirement, on products imported from countries that do not agree to take on future climate commitments. Much research has gone into the feasibility and WTO compatibility of the various options (see Cosbey and Tarasofsky 2007; Pauwelyn, 2007) because such measures would be contentious and would likely be subject to challenge under the WTO.1

An alternative tactic is to offer developing countries positive incentives to take on some type of commitment to reduce their future GHG emissions. In this paper, we discuss the use of trade incentives for this purpose, which is apparently not without precedent. It has been reported that Russia agreed to ratify the Kyoto Protocol, thus officially bringing the treaty into effect, only after the EU provided sufficient assurance that it would support Russia’s accession into the WTO.2

II. The Forum for Climate-Trade IncentivesTrade incentives could be provided to developing countries as a part of multilateral negotiations – through either the WTO or some other forum – bilateral treaties, or unilateral actions on the part of developed countries. Realistically, it is probably too late to introduce climate change considerations into the Doha round of the WTO negotiations, and even so, these negotiations require agreement on a broad range of trade issues and equal treatment of all WTO Members, so targeting incentives to specific developing countries is probably infeasible (unless these are based on development objectives).3

Thus, for the post-2012 timeframe, negotiating venues outside the WTO are more attractive. Even with the GATT and WTO in effect, bilateral/regional trade agreements are common – as of October 15, 2006, 366 regional trade agreements have been notified to GATT/WTO, of which 214 are in force – and are still being pursued. In fact, when WTO talks were suspended in July of 2006, the U.S., the EU, Brazil and India all decided to concentrate instead on bilateral trade agreements. This stance may have changed since the WTO negotiations resumed.

1 Aaron Cosbey, private communication, May 10, 2007; see also Charnovitz (2003).2 See Cosbey and Tarasofsky (2007) and Pauwelyn (2007) for specific sources in which this was reported.3 Aaron Cosbey, private communication, May 10, 2007.


However, even though the WTO may not be the best forum for linking climate and trade, the ongoing WTO trade negotiations can provide clues to what developing countries are aiming to achieve through more liberalized trade. In addition, the WTO negotiations serve as a baseline for bilateral climate-trade negotiations because any developing country that agrees to take on climate commitments in exchange for trade liberalization will expect greater concessions on the part of developed countries than those that they are expecting to attain through the final Doha agreement. In the following sections, we examine some of the important negotiating issues in the current WTO trade negotiations and attempt to discern what potential trade incentives might be attractive enough to encourage greater greenhouse gas reductions in developing countries.

III. Agricultural Trade and the “Three Pillars”4

Agriculture is the key component of the Doha Development Agenda (DDA), accounting for about two-thirds of all goods-related trade distortion policies. With respect to agricultural trade, the Doha Ministerial Declaration states that, “we commit ourselves to comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic

4 Unless otherwise noted, this information has been taken from WTO (2004), Fergusson (2007) and Hanrahan and Schnepf (2007).

WTO Basics

The WTO is a successor to the General Agreement on Trade and Tariffs (GATT) and currently has 150 members, including all of the major GHG-emitting developing countries. The latest round of trade negotiations, the Doha Round, began in November of 2001 and is known as the Doha Development Agenda (DDA) due to the greater role being played by developing countries. These negotiations are addressing a number of trade issues, including the opening markets for agriculture, services, environmental goods and services, manufactured goods; antidumping regulations; special and differential treatment for developing countries; and revision of other trade rules. Trade ministers have agreed that the outcome of the DDA must be a single agreement; in other words, consensus must be reached on all issues.

At the Hong Kong Ministerial Conference, WTO Members agreed upon the basic components of trade liberalization in agriculture, services, and manufactured goods. Focus then shifted to the specifics, or “modalities” – the numerical targets and timeframes for their achievement – for each component. Disagreements about these modalities have caused the current negotiations to bog down.

The Doha Ministerial Declaration contains two important features, requiring:o Special and differential treatment for developing countries (this generally

means lesser requirements for opening their markets, and/or longer timeframes for meeting targets); and

o Consideration of non-trade concerns in the negotiations (including environmental issues).


support.” These three areas – export competition, domestic support, and market access – have become known as the “three reform pillars” of the agricultural negotiations under the WTO. These three pillars are discussed further below.

The Framework Agreement for Agriculture, adopted on July 31, 2004, set the stage for the negotiations to focus on “modalities” – the specific, quantitative ways in which each of the three reform pillars would be liberalized by both developed countries and developing countries. Four groups have submitted proposals for these modalities: the U.S., the EU, the G-10 (nine developed countries that are net importers and subsidize domestic agriculture), and the G-20 (more than twenty developing countries, including all of the major GHG-emitting developing countries). In addition, two other groups of countries have been influential in the agricultural negotiations – the G-33, a group of 46 developing countries that wants to protect their small-scale farmers; and the Cairns Group, made up of 19 countries, both developed and developing, that are efficient exporters and want maximum and rapid agricultural trade liberalization.5

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III.A Export competitionThe primary export competition barrier is direct subsidies for exports. However, food aid, subsidized export credit and insurance, and trading by state enterprises are also concerns for some countries, as these provide avenues that could be used to circumvent reductions in direct subsidies.

Only a few countries apply agricultural export subsidies, and during the 1995-2001 timeframe, almost 90% of these were used by the EU, which has since agreed to their elimination. At the Hong Kong Ministerial in December of 2005, WTO Members agreed that export subsidies and “export measures with equivalent effect” would be eliminated by 2013. Because this result is expected to be a part of any final Doha agreement, there are only a few minor remaining incentives related to export competition that could be linked to climate-related actions by developing countries.

III.B Domestic supportDomestic support measures generally fall into one of two categories:

o market price supports – government policies that allow producers to sell products domestically at prices higher than world market prices; or

o subsidies – payments to farmers to compensate for the loss in income that occurs when the world market price falls below a designated target price.

For the WTO negotiations, these measures are classified into “boxes” that depend upon their level of trade distortion:

o Amber box – the most trade-distorting forms of support, including payments to farmers that are based upon production levels (each country has an upper limit, or bound, for these measures);

5 Group memberships were taken from WTO (2004) and are accurate as of November of 2006.


o De minimis exemptions – support that would otherwise be classified in the amber box but is exempted because the total value of the support is less than some specified de minimislevel;

o Blue box – measures that are less trade-distorting than amber box measures because they only partially affect production levels; and

o Green box – support that is considered to have minimal effects on trade.

Under the WTO, only 35 nations have the right to use trade-distorting domestic support, but from 1995-2001, the U.S., the EU and Japan were responsible for more than 90% of global domestic subsidies. The EU is the primary user of support tied to production (the amber box), and this support is almost entirely in the form of market price supports. In the U.S., on the other hand, the amber box measures are more of a mix – market price supports are primarily used for peanuts, sugar and dairy products, while subsidies are used for other commodities, such as grains, cotton, rice and soy beans.

The Framework Agreement for Agriculture calls for ceilings to be negotiated on overall trade-distorting domestic support (amber box + de minimis + blue box), for reductions in amber box support and for lower bounds on de minimis support levels. The Framework also states that blue box support (currently unbound) will be capped, will be defined to ensure that it is less trade-distorting than amber box support and will be expanded to include some direct payments, such as U.S. counter-cyclical payments. A clearer definition of green box measures is also being pursued to ensure that support placed there is truly non-distorting.

At the Hong Kong Ministerial, WTO Members agreed to break countries into three bands, based upon the level of domestic support, and to require progressively smaller percentage reductions in both amber box support and the overall support ceiling for the highest, middle and lowest bands, respectively; however, the quantitative cuts for each band have yet to be decided. The EU alone was placed in the uppermost band, the U.S. and Japan constitute the middle band, and all other WTO Members reside in lowest band.

Although bilateral negotiations would not need to conform to any of these WTO support definitions or guidelines, the WTO negotiations provide some hints about where and how developing countries would like developed countries to reduce their domestic agricultural support. For example:

o The G-20 proposal generally calls for greater percentage reductions in both overall and amber box support than either the EU or U.S. proposals.

o The EU and G-20 (Brazil and India, in particular) want the U.S. to offer a greater degree of subsidy reductions, but in return, the U.S. wants the EU to improve its offer on market access and wants the G-20 to open its markets to a greater extent for agricultural goods, industrial products and services.

o The U.S. has proposed using the base period 1999-2001 to determine the bounds on overall and amber box support (the levels from which reductions will be made). However, this was a period of low agricultural prices, and thus high support, so most other countries favor a base period of 1995-2000.


Thus, the EU and the U.S. could pursue a variety of avenues to encourage developing countries to undertake greater climate mitigation efforts. For example, they could offer greater percentage reductions in domestic support levels; reductions in U.S. agricultural subsidies seem to be of particular interest to Brazil and India. In addition, the U.S. could agree to a base period that produces greater reductions on its part because the support bounds are lower. Quite often, the actual level of support provided can be much lower than the bound level, so the developing countries would likely prefer that a period of high agricultural prices be used to determine the support bounds.

Another option, suggested by Cosbey and Tarasofsky (2007), would be to place domestic support for biofuels and other agricultural products with a climate benefit in the green box (if production doesn’t harm forests and uses good farming practices); if this benefit was restricted to developing countries, it could prove quite attractive, since many of these countries are interested in biofuels, and this would give them the opportunity to grow these industries significantly.

III.C Market accessMarket access, the openness of a country’s market to imports, is the most contentious pillar and is also the most complex because all countries have some type of barrier to market access. In terms of trade impacts, this is also the most significant pillar, as it accounts for 80-90% of the cost of global agricultural trade distortion.

However, market access is a much larger issue for the EU than it is for the U.S. because the U.S. does not restrict market access as extensively as the EU does. At this point in the WTO negotiations, the U.S., the G-20 and the Cairns Group have expressed a desire for the EU to submit a more extensive offer on market access. The EU (with some support from India and the G-10) has refused to do so until other countries submit reform proposals for trade in non-agricultural areas (services and industrial goods).

The most contentious WTO issues related to market access are:o Tariff reductions;o Sensitive products;o Special products and the Special Safeguard Mechanism (SSM); ando Geographical Indications.

III.C.1 Tariff reductionsTariff reductions are being handled under the WTO by dividing tariff rates into four bands and then negotiating the modalities for reductions within each band. In terms of the tariff band boundaries and the tariff cuts within each band, the G-20 proposal falls between those of the U.S., which calls for the greatest tariff reductions, and the EU. Thus, based upon the proposed tariff modalities, it isn’t clear that there is any significant concession that the EU or the U.S. could offer to developing countries to encourage them to take a climate change commitment.

However, all of the tariff reductions being negotiated under the WTO are reductions to boundtariffs. These represent the maximum tariff rates that a country can apply to the respective


imports. In developed countries, the actual tariff rate used, the applied tariff, is often significantly lower than the bound tariff because the bounds are set at relatively high levels. In these countries, reductions in bound tariffs may or may not produce real improvements in market access (although they would be expected to do so over time as these bounds are lowered further). In developing countries, the bound tariff rates are often quite similar to the applied rates, so reductions in tariff bounds can have a much greater impact on access to developing countrymarkets. This is especially true for China, as very low tariff bounds were a requirement of its recent WTO accession.6 An offer by developed countries to reduce their applied tariffs, rather than their bound tariffs, may be of sufficient benefit to developed countries to serve as a climate incentive.

III.C.2 Sensitive ProductsSensitive products are products that a country is allowed to exempt from the tariff reductions specified by the modalities (the tariffs applied to these products are still supposed to be lowered enough to produce “substantial improvements” in market access). These products are generally protected through tariff-rate quotas (TRQs). A TRQ breaks up the imports of a product into two tariff-rate bins – the lower tariff rate is imposed until the specified import level, or quota, is reached; all imports above the quota level are then assessed the (usually much) higher of the two tariff rates.

One of the principle differences between the agricultural proposals that have been submitted is that the U.S. and the G-20 want no more than 1% of tariff lines7 classified as sensitive products, while the EU wants to be able to exempt up to 8% of tariff lines.8 The G-20 also proposes a “minimum access level” for sensitive products (6% of domestic consumption in the base year).

Of course, the agricultural goods that are currently the most heavily tariff-protected in developed countries are likely to be declared sensitive. These include sugar, dairy products, and beef in both the U.S. and the EU; and sugar, dairy products, and rice in Japan (Elliott, 2006). The degree to which these products can continue to be protected is heavily dependent upon the final percentage of allowed sensitive tariff lines. For example, permitting only 1% of tariff lines to be declared sensitive would allow the EU to continue to protect sugar and beef but not diary products (FAPRI, 2005).

Thus, a major trade concession by developed countries that is unlikely to be part of a final Doha trade agreement would be major TRQ reform – the removal, significant broadening, or capping of TRQs on these sensitive products; a commitment by certain developed countries not to place specific commodities in the sensitive category may be another viable option.

6 Jonathan Hepburn, private communication, May 18, 2007.7 A tariff line represents a specific product, so there are multiple tariff lines for a general class of product; for example, each type of cheese may be represented by a different tariff line.8 The extent to which sensitive products are allowed is a major – and perhaps the primary – determinant of the level of trade benefits that developing countries will be able achieve from reforms in market access. For example, recent World Bank models indicate that global trade gains fall by more than 75% from those of full trade liberalization when developed countries are allowed to classify 2% of their agricultural products as sensitive products and developing countries are allowed to exempt 4% of their products as “special” products (see Section 3.3.3). However, approximately half of these losses can be recovered if the above-quota tariffs used in TRQs are capped at 200% (see discussions in Polaski, 2006, and in Hanrahan and Schnepf, 2007).


III.C.3 Special Products and the Special Safeguard MechanismIn accordance with the Doha round’s call for special and differential treatment for developing countries, it has been proposed that developing countries be given the right to designate tariff lines as special products, based upon food security, livelihood security and rural development considerations. Under this, developing countries would be given more flexibility in reducing tariffs on these products. None of the current agricultural proposals provides any recommendations for how such products should be defined.

In addition, there is a special safeguard mechanism (SSM), which 39 WTO Members are currently permitted to use, that allows duties to be raised automatically on certain products if imports rise or prices fall to certain levels. The G-20 has proposed that only developing countries be allowed to use this SSM, while the EU wants it to be retained for developed countries to use for selected commodities.

Even though it supports the G-20 agriculture proposal, India insists on the need for a large number of special products. In fact, both China and India think that the rules regarding the designation of special products and the use of the SSM need to be flexible and must be adequate to protect small farmers, while Argentina argues for more limited flexibility.9 Although the U.S. is concerned with excessive use of the sensitive product, special product and Special Safeguard Mechanism classifications, restricting use of the latter two measures to developing countries and allowing developing countries to use them liberally could be an important component of a trade package used to encourage climate commitments from developing countries.

III.C.4 Geographical IndicationsThe E.U., India and some other countries want a mandatory list of “geographical indications” –product labels that can only be used when they accurately describe the origin or characteristics of a product (e.g., wine labeled as “Bordeaux” wine must truly come from Bordeaux). Other countries, including the U.S., prefer a voluntary list with no enforcement provision. For some countries, this is a make-or-break issue. For example, the EU has claimed that it won’t agree to any treaty that doesn’t address geographical indications. If India considers this issue as important as the EU does, U.S. agreement to a mandatory list of geographical indications could be an important part of a trade-climate link between these two countries.

III.D Status of the Agricultural NegotiationsThe primary stumbling block at this point is the market access modalities proposed by the EU, which are viewed as too lenient by the other groups. The EU has claimed that it cannot revise its proposal until other countries submit reform proposals for non-agricultural trade (services and industrial goods). Talks were suspended in July of 2006 due to an impasse among the G-6 (the EU, the U.S., Japan, Australia, Brazil, and India). In this case, the U.S. claimed that its substantial offer for reduced domestic subsidies hadn’t been reciprocated by agricultural tariff reductions by the EU and/or more open agricultural and industrial markets in Brazil and India. On the other hand, the EU and Brazil claimed that the U.S. offer would actually allow the U.S. to 9 Jonathan Hepburn, private communication, May 18, 2007.


have a higher level of trade-distorting domestic support than under the current agreement from the Uruguay Round. Talks have since resumed but little progress has been made toward a final agreement.

IV. Non-Agricultural Market AccessThe Doha Declaration also calls for the reduction or elimination of tariffs on industrial and primary products, with a focus on “tariff peaks, high tariffs, and tariff escalation,” and reductions in non-tariff barriers (import licensing, quotas, conformity assessment procedures, technical trade barriers, and other import restrictions). Tariff peaks are tariff rates greater than 15% –these are generally used to protect the manufacturing equivalent of the “sensitive products” discussed in Section 3.2.2 for agriculture.

So far, agreement has been reached on the general methodology and types of formulae that will be used to calculate tariff reductions, but the coefficients to use in these equations have not yet been decided. One of the key points of dispute is how different these coefficients should be for developed countries and developing countries. The U.S., Canada and Switzerland have proposed a 5 percentage point difference in these coefficients, but a group known as the NAMA-11 (Argentina, Brazil, Egypt, India, Indonesia, Namibia, the Philippines, South Africa, Tunisia and Venezuela) has instead proposed that this difference should be at least 25 percentage points and has suggested that a 35 percentage point difference be adopted. As with subsidies and agricultural tariffs, tariff reductions for manufactured goods will be calculated from bound tariff rates.

Another area of disagreement concerns exactly how tariff peaks will be reduced. The U.S. and the Cairns Group favor harmonization of tariff peaks, meaning that all similar tariff peaks are reduced by equal percentages. The EU and Japan want to allow countries the flexibility to attain the designated average level of reduction in tariff peaks without requiring similar cuts in tariff peaks for all products.

Thus, there are a number of concessions that developed countries could make with respect to NAMA to perhaps entice developing countries to greater climate change efforts, including:

o Larger tariff reductions for these goods;o Fewer sensitive products;o A greater degree of special and differential treatment for developing countries;o Harmonization of tariff peaks; ando Reductions in applied rather than bound tariffs.

V. Antidumping10

Trade remedies, such as antidumping (AD) laws, are designed to protect domestic industries in which goods are being exported by other countries at less than fair market value; these laws are seen as a way to “level the playing field” by the countries that impose them but are often viewed as protectionist by other countries. Trade remedies are a critical issue in current WTO

10 Unless otherwise noted, all information in this section was taken from Jones (2005).


negotiations, as some Members have claimed that revising the rules on Antidumping and on Subsidies and Countervailing Measures is the primary requirement for their acceptance of any trade agreement. Basically, the current dispute over antidumping can be classified as the U.S. vs. “Friends of Antidumping” (FoA). The latter is a group made up of the EU, Brazil, Chile, China, Colombia, Costa Rica, Hong Kong, India, Israel, Japan, Korea, Mexico, Norway, Singapore, Switzerland, Thailand, and Turkey.

The primary areas of contention with respect to antidumping are: Zeroing – when determining the weighted average export price, merchandise is broken up

into averaging subgroups, and sometimes a group will show a negative (rather than a positive) dumping margin, indicating that goods in that subgroup are not being dumped; rather than using this negative value when computing the overall dumping margin, the U.S. uses a zero value instead; this is known as zeroing and the Friends of Antidumping would like to see it banned.

The lesser duty rule – this is the imposition of a duty less than the full dumping margin if this lower duty is sufficient to offset the injury to the domestic industry; the lesser duty rule is encouraged by the current AD Agreement, but developing countries would like to see it become mandatory.

Price undertakings – these occur when an exporter voluntarily agrees to change prices or cease exports to the area of interest to eliminate harm to domestic producers; some developing countries want price undertakings to be mandatory in developed countries when dealing with AD issues with developing countries.

Clearer definitions and specific methodologies for determining AD injury. Sunset of AD orders – AD orders currently expire after 5 years, with an extension

possible after review; many members want automatic termination after 5 years or more explicit rules regarding extension criteria.

Many of the developing country members of the Friends of Antidumping would like to see “special and differential treatment” for developing countries in the form of mandatory price undertakings, raising the AD margin at which dumping is considered to be significant, and making the cost of AD proceedings cheaper when developed countries are dealing with developing countries.

Figures 1 and 2 show the leading Antidumping initiators and targets, respectively, among WTO Members between January of 1995 and June of 2005. Surprisingly, even though India is a member of the FoA, it initiated more AD petitions than any other country during this time period. China was the leading target of AD initiations and thus probably has the most to gain from revisions to the AD Agreement.

Within the WTO, the resolution of trade remedy disagreements is likely to involve trade-offs with concessions in other trade areas. Unfortunately, the U.S. Congress is so averse to weakening the country’s trade-remedy laws that even significant concessions by other countries in other trade areas may not suffice. This doesn’t bode well for the prospect of using AD incentives to encourage developing countries to take greater action against climate change. However, zeroing is neither required nor prohibited by U.S. law, so a ban on zeroing may be possible without Congressional approval.


Figure 1. Leading initiators of Antidumping petitions among WTO Members from January 1995 throughJune 2005. Source: Jones (2005).

Figure 2. Leading targets of Antidumping petitions among WTO Members from January 1995 through June 2005. Source: Jones (2005).

VI. Trade in Environmental Goods and Services11

Another goal of the Doha round is more liberal trade in environmental goods and services (EGS).12 This could have significant impacts in the climate arena because, aside from their

11 Unless otherwise noted, information in this section is largely taken from Howse and van Bork (2006).


potential role as trade incentives, increased use of many of these goods (unlike most agricultural and manufactured goods) can directly mitigate climate change.

Traditionally, EGS have included only certain “clean” technologies and goods and services used for pollution control, abatement or remediation; eligible technologies are generally specified through a simple list. Both APEC and the OECD have prepared such lists of EGS – the APEC list is based upon a more traditional, narrow definition of EGS, while the OECD list uses slightly broader criteria for inclusion. The United Nations Conference on Trade and Development (UNCTAD) has proposed a list that includes environmentally-preferred products (EPPs) as well.13, 14 EPPs are goods that have environmental benefits during their production, use and/or disposal.

The WTO negotiations on trade in environmental goods and services are currently focusing on the definitions of EGS. The key questions being debated are:

Should EGS be specified through a list-based or a project-based approach? Should products that are more environmentally friendly than their counterparts when

used and products that are manufactured in a more environmentally-friendly manner be included as EGS? The latter products can be controversial if their classification is based solely upon their processes and production methods (PPMs).

How should dual-use products – products that have both an environmentally beneficial use and an environmentally-benign (or even environmentally harmful) use – be included?

How is technological progress over time taken into account?

Based upon WTO submissions, this is what the largest GHG emitters among the developing countries want with respect to trade in EGS:

China originally suggested a two-list approach (as well as technology transfer improvements). Under this approach, all countries would be required to reduce or eliminate tariffs and non-tariff barriers for EGS on a Common List. Each developing country would then also construct a Development List, made up of EGS chosen from the Common list, that would be exempt from or subject to lower tariff reductions in that country.15 More recently, however, China has shifted its stance in favor of the environmental project approach proposed by India.16

India has put forward the “Environmental Project Approach” to get around the problem of dual-use products and products that are not used predominantly for environmental purposes (e.g., consumer appliances). This approach calls for binding but temporary elimination or reduction of trade barriers in goods (including spare parts) and services used for specific “environmental” projects. Eligible projects would be broadly defined

12 Paragraph 31(iii) of the Doha Ministerial Declaration specifically requires “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.”13 This list was an attempt to include more goods exported by developing countries (Cosbey and Tarasofsky, 2007).14 EPPs are defined as “products which cause significantly less ‘environmental harm’ at some stage of their life cycle than alternative products that serve the same purpose, or products the production and sale of which contribute significantly to the preservation of the environment.”15 WTO document TN/TE/W/42; submitted July 6, 2004; accessed at www.wto.org on May 24, 2007.16 Howse and van Bork (2006); Mahesh Sugathan, private communication, May 23, 2007.


by the Committee on Trade and Environment Special Session (CTESS), and specific projects would be submitted by Designated National Authorities for approval.17

Brazil would like to see improved market access for goods that have low environmental impacts (e.g., natural fibers and colorants and other non-timber forest products; and renewable energy, including ethanol and biodiesel), goods that are derived from or incorporate cleaner technologies (e.g., flex-fuel engines), and/or other products that are of special interest to developing countries (e.g., EPPs as defined by the UNCTAD list).18

Argentina opposes the UNCTAD definition of EPPs because this would include EGS based upon PPMs. Argentina instead has proposed an integrated approach – made up of parts of the approaches suggested by India and Brazil – that is basically a project-based approach that also includes some EPPs.19

Any robust list-based approach must utilize lists that are “living” or dynamic to take into account technological advances and obsolescence (this is already becoming a problem with the APEC and OECD lists). To date, no developing country has submitted a list of proposed EGS because most of the developing countries support the project-based approach submitted by India, and they feel that the simple act of submitting an EGS list endorses the list-based approach.20 The India approach is appealing to these countries because it addresses the problems of dual use (only products and services used in environmental projects are eligible) and technological advances over time (for any project, previously-eligible technologies that have become obsolete can be excluded and new technologies can be added), while also enhancing technology transfer.

Among the developed countries, the EU and Japan take fairly broad views of EGS, but the list suggested by the U.S. is much more restricted. Thus, the U.S. perhaps has the most to offer to developing countries to facilitate GHG emissions reduction commitments.

Most of the benefits from more liberal trade in traditional EGS would flow to developed countries because the tariffs on these goods are already low there; the primary barriers to trade in these EGS are in developing countries. Thus, it would appear to be in the best interest of developing countries to expand the list of eligible EGS if their goal is to achieve greater access to developed country markets. Developing countries in Asia would benefit most from reduced tariffs on EPPs, and anecdotal evidence suggests that China would be interested in freer trade in energy-efficient appliances.21 Nevertheless, nearly all countries have rejected EGS based upon their processes and production methods, even though these would provide the greatest export benefits to developing countries. Most developing countries fear that allowing “like” goods to be separated based upon any environmental processes and production methods would open up avenues to discrimination between “like” products based upon other processes and production methods, either environmental or perhaps even labor-related.22

17 WTO documents TN/TE/W/51 and TN/TE/W/67; submitted June 2, 2005, and June 12, 2006, respectively; both accessed at www.wto.org on May 24, 2007.18 WTO document TN/TE/W/59; submitted July 7, 2005; accessed at www.wto.org on May 24, 2007.19 WTO document TN/TE/W/62; submitted October 11, 2005; accessed at www.wto.org on May 24, 2007.20 Mahesh Sugathan, private communication, May 23, 2007.21 Hu Tao, private communication, March 9, 2007.22 Mahesh Sugathan, private communication, May 23, 2007.


A particular concern with EPPs based on processes and production methods is the (in)ability of customs inspectors to distinguish them from their less environmentally-friendly counterparts. Harmonization of selection criteria, such as energy-efficiency performance, is also a problem that could possibly be solved through development of reliable, consistent eco-labels. Environmental duty draw-backs – rebating import duties after it is verified that the good is being used in an environmentally-beneficial way – could be used here as well. In any case, addressing these types of concerns would be much easier in bilateral negotiations than through the WTO.23

The WTO forbids outright bans of products due to their unsustainability of production,24 but it’s not clear whether discriminating similar products based upon their efficiency of production (or the GHG emissions associated with production) would be allowed. However, countries can set standards for products if these are applied to all “like” products, regardless of their country of origin, and they don’t obstruct trade unnecessarily. One consideration with respect to energy-efficiency considerations is that once a tariff has been reduced on a particular good, it cannot be raised again, so this good will continue to receive preferential treatment even if a more environmentally-friendly version is later developed.

The Agreement on Subsidies and Countervailing Measures used to contain a provision regarding non-actionable subsidies – subsidies that could not be challenged or countervailed with trade-restricting measures by other countries – and these included some environmental subsidies. However, this provision expired in 1999, but something like this could be revived and revised to specifically address climate change and perhaps restricted in use to developing countries only (see Cosbey, 2007, and Cosbey and Tarasofsky, 2007).

VII. Trade in Services25

Trade in services is governed by the General Agreement on Trade in Services (GATS), a part of the overall DDA. Unlike trade in goods, most services trade is not “cross-border,” so the GATS divides it into four categories, depending on the mode of service delivery:

o Mode I: cross-border supply – similar to traditional trade in goods;o Mode II: consumption abroad – the consumer must travel to the country of the supplier to

obtain service;o Mode III: commercial presence – the supplier establishes a branch in the consumer’s

country to provide service; ando Mode IV: presence of natural persons – the supplier sends personnel temporarily to the

consumer’s country to provide service.

The scope of a country’s trade in services is spelled out in its Schedule of Commitments (SC), which specifies both horizontal (all-sector) and sector-specific commitments for national treatment and market access in service sectors and subsectors. The DDA negotiations aim to revise the rules for trade in services and to broaden the SCs.

23 Ibid.24 See Webb, Tim. “Biofuels: The great green corn,” The Independent, May 6, 2007 (accessed on May 7, 2007, at http://news.independent.co.uk/business/analysis_and_features/article2516619.ece). 25 Unless otherwise noted, information in this section has been taken from Cooper (2005).


Under the WTO, trade in services is being negotiated under a “request-offer” approach – each country requests what it wants from the other countries, the other countries then make counteroffers, and negotiations continue until agreement is reached. To date, little progress has been made. Initial offers were few and not of high quality; many were not even “binding” (i.e., as liberal as current practices), and some specific service sectors were often designated as “sensitive” and thus excluded from offers. A few countries have made their initial counteroffers public, but neither the specific requests that sparked the counteroffers nor the countries making these requests have been divulged, so it is difficult to determine exactly what developing countries may be seeking in terms of concessions from developed nations.

However, developing countries have openly criticized the U.S. offer as being insufficient. They claim that the offer only liberalizes commitments in service sectors that will benefit U.S. interests alone. The most strident objections by developing countries (and by India, in particular) are that the U.S. should make greater concessions regarding services where the supplier sends personnel temporarily to the consumer’s country to provide service (so-called Mode IV services). However, because this would require changes in U.S. visa policies, it is viewed as an immigration issue by Congress, and Congress has previously objected to including immigration-related issues in trade treaties. Nevertheless, since Mode IV services trade makes up less than 1% of global trade in services, perhaps this area provides an opportunity for concessions by the U.S. to be used as a climate commitment incentive for some countries.

Developing countries are also looking for special and differential treatment for their own service sectors. Because developing countries have less-developed service sectors, they are more protective of service providers than developed countries. In addition, East Asian countries are very interested in rules revisions (with respect to subsidies, safeguard measures, etc.) for trade in services, but little progress has been made in this area. Some developing countries have refused to improve their offers for trade in services unless the U.S. and the EU agree to further reduce agricultural subsidies.

Overall, the greatest incentives that developed countries could offer here appear to be three-fold – providing greater market access to developing countries in more service sectors (including reducing the number of “sensitive” sectors), allowing more Mode IV market access (especially in the U.S.) and allowing a high degree of SDT for developing countries.

VIII. Key Trade IssuesIn this section, we will explore in turn the three key questions that must be considered before pursuing the trade incentive avenue for achieving greater climate change mitigation efforts from developing countries. These are:

1. What are the benefits to developing countries from trade liberalization?2. What is the best pathway for offering trade incentives to developing countries?3. What barriers must be overcome to offer trade incentives?


VIII.A What are the benefits to developing countries from trade liberalization?Do trade concessions actually provide sufficient incentive for developing countries to take on climate commitments? Models indicate that developing countries as a group gain little from Doha-like trade liberalization (only China benefits by more than 1% of GDP). Even full trade liberalization only increases global GDP by about 0.5%. Some have used these results to argue that a lot of effort is being expended during the Doha Round negotiations for relatively little potential benefit.

Recent models (e.g., Polaski, 2006) indicate that developing countries, both as a group and individually, benefit more from liberalization of trade in manufactured goods than from agricultural trade liberalization (see Figures 3-5 below); Argentina is the lone exception. This occurs for two reasons. First, the most efficient agricultural producers take advantage of the increased market access, but the agriculture sector in many developing countries consists of subsistence farmers that can’t easily access global trading markets. Second, many of the potential agricultural trade benefits are precluded by the exemptions provided to sensitive products.

Figures 4 and 5 show that all of the major GHG-emitting developing countries – e.g., Argentina, Brazil, China, India, Indonesia, Mexico and South Africa – show net gains from more open trade in manufactured goods. Of these countries, only Argentina, Brazil, Indonesia and South Africa benefit from more liberal agricultural trade, and except in the case of Argentina, these benefits are much lower than those associated with trade reform in manufactured products.

Figure 3. Changes in GDP for trade liberalization in either agricultural or manufactured goods alone.26

Source: Polaski (2006).

26 See footnotes 25 and 26 for specific details of these trade scenarios.


Figure 4. Changes in Income due to Agricultural Trade Liberalization Only.27 Source: Polaski (2006).

Figure 5. Changes in Income due to Manufacturing Trade Liberalization Only.28 Source: Polaski (2006).

27 This scenario includes the elimination of export subsidies; a 33% reduction in domestic support in all countries; and a reduction in applied tariffs for agricultural goods of 36% in developed countries and 24% in developing countries.


However, these figures only show what happens if trade is liberalized globally for all types of goods. Polaski (2006) has also examined which sectors in each developing country would most benefit from or are most harmed by trade liberalization. Table 1 breaks up these trade impacts by sector in seven of the larger developing countries and illustrates two important points regarding freer trade:

o in any given sector, the gains/losses are not distributed equally among the developing countries; and

o the gains/losses vary substantially across the sectors in any specific country.

Table 1. Sectors Showing Significant Changes in Net Exports due to Trade Liberalization29

Sector China Indonesia IndiaSouth Africa

Brazil Mexico Argentina

Grains ● ● ● ○ ○ ●Oilseeds ● ● ●● ○ ●●Fruits, vegetables ○ ●Other crops ○ ○ ○ ●Livestock ○Meat, dairy products ● ● ● ●● ● ●Sugar ● ●Processed foods ● ● ○ ● ● ○ ●Beverages, tobacco ●Forestry, fishery ●Crude oil, natural gas ○ ○ ● ●Textiles ○ ● ●● ○ ○ ○ ○Apparel ●● ●● ●● ○○ ○Leather, footwear ●● ●● ● ○ ○ ○ ○Other manufactures ○ ○ ○ ○ ○Wood, paper products ○ ● ○ ○○ ○ ● ○Petroleum, coal, mineral products

○ ○ ○ ○○ ○ ○

Chemical, rubber, plastic products

○○ ○ ○ ○○ ○○ ○

Metals, metal products

○ ○ ○ ●● ○

Motor vehicles, other transport equipment

○ ○ ○ ● ●

Electronic equipment ●● ○ ○ ○ ○ ●● ○Other machinery ○○ ○ ○ ● ○○ ● ○Key: changes in net exports are represented by ●● if gain is more than 0.1% of GDP, by ● if gain is between 0.01% and 0.1% of GDP, by ○ if loss is between 0.01% and 0.1% of GDP, and by ○○ if loss is greater than 0.1% of GDP.Source: Polaski (2006).

Thus, even though more open markets in apparel would seemingly be of great benefit to China, India and Indonesia, this would significantly reduce exports from Mexico (and to a lesser extent 28 This scenario includes a reduction in applied tariffs for manufactured goods of 50% in developed countries and 33% in developing countries.29 The trade scenario modeled here assumes elimination of agricultural export subsidies and 33% reductions in domestic support for agricultural products in all WTO countries. In addition, applied tariffs for both agricultural and manufactured products are reduced by 36% in developed countries and by 24% in developing countries.


Argentina). And even though China benefits greatly from liberalized trade in manufactured goods, these gains are concentrated in only three specific types of products – apparel, leather and footwear, and electronic equipment – which evidently swamp the export losses accrued in the majority of manufactured good categories.

While it may seem intuitive that such would be the case, the information presented in Figures 3-5 and in Table 1 makes it clear that the greatest trade incentives can be provided to developing countries by dealing with each country individually and by targeting specific goods in each country. The question then becomes: what is the best way to do this?

VIII.B What is the best pathway for offering trade incentives to developingcountries?

As mentioned previously, pursuing multilateral trade incentives through the WTO would probably not be a fruitful way to encourage climate change mitigation commitments from developing countries. Even grouping developed countries into one bloc to negotiate trade issues with individual developing countries would likely be unproductive because of difficulties in getting the U.S. and the EU, for example, to agree on what concessions to make.30 However, two other pathways hold some promise for success.

The first of these is bilateral trade negotiations between individual pairs of developed countries and developing countries. The second would be a unilateral but targeted opening of markets by an industrialized nation. The trade benefits from either of these approaches have the potential to provide significant benefits to developing countries because each could target specific commodities. For example, markets could be opened only to products that are important to subsistence farmers in developing countries, and assistance could be provided to help them better access the market as well. While WTO negotiations don’t deal in specific commodities, Table 1 illustrates the effects of a specific trade liberalization scenario on the net exports in economic sectors of selected high-emitting developing countries. Although these results are only valid for the specific scenario modeled, models of this type can provide insight into the categories of goods for which trade concessions by developed countries would be most beneficial to developing countries.

Further research is needed to determine which of the two preferred pathways is optimal, as circumstances may dictate which is most feasible for any given pair of developed and developing countries. However, it will be critical to gain the buy-in of each interested developing country because some may be wary of “getting burned,” as they believe occurred in previous rounds of trade negotiations.31 From this viewpoint, an actual trade treaty would probably be seen as more concrete and enforceable than promises of unilateral trade concessions. In any case, to gain the trust of the developing countries, implementation of the trade concessions by developed countries would likely need to precede the climate efforts of developing countries.

30 Aaron Cosbey, private communication, May 10, 2007.31 Ibid.; for example, in the Uruguay round, developed countries made concessions on intellectual property rights and opened their service sectors in exchange for greater access to developed country markets for agriculture and clothing, which was largely unfulfilled (Elliott, 2006).


VIII.C What barriers must be overcome to offer trade incentives?In many ways, an informal agreement for unilateral trade action on the part of a developed country would be the more expedient way to proceed, but this option presents a number of possible challenges under GATT and WTO rules. In this respect, there are three relevant articles of the GATT that apply:

o Article I – this article requires that all WTO members be given Most Favored Nation (MFN) trade status.

o Article III – this article requires that trade measures not discriminate against imported products with respect to “like” domestic products nor discriminate between “like”products from different countries.

o Article XX – this article allows exceptions to the requirements of Articles I and III under certain circumstances.

Any unilateral trade concessions made by a developed country would be subject to challenge under the WTO. Article I of GATT would be an issue if more favorable trade parameters were offered to one or only a few countries. Article III would be an issue if markets were opened to products from some countries but not to “like” products from others. More leeway is allowed under these Articles for formal trade treaties than for unilateral actions by nations.

Therefore, to prevent a challenge under Article I, the trade concessions made by a developed country would need to be applicable to all WTO trade partners. For specific types of products, such as meat and dairy products, this may prove acceptable, since the model results of Table 1 indicate that at least the seven countries included therein would experience a net benefit. However, a more targeted approach would still be preferable.

To avoid a WTO challenge under Article III, the products being favored by the trade concessions would need to be shown to be “unlike” those of other countries.32 So there may be a viable argument for certain products to be discriminated based upon climate change impacts or consumer preferences for environmental goods, for example.

Should a trade concession be found to violate either Article I or Article III of the GATT, it could still be allowed if it qualifies for an exemption under Article XX. There are three parts of Article XX that could be interpreted in a manner favorable to the climate:

o The initial phrase – “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade,”

o Article XX(b) – measures “necessary to protect human, animal or plant life or health;” oro Article XX(g) – measures “relating to the conservation of exhaustible natural resources if

such measures are made effective in conjunction with restrictions on domestic production or consumption.”

With respect to border tax adjustments, Pauwelyn (2007) argues that the first of these options is the most likely to prevail, and the arguments posed there are equally relevant in terms of trade 32 Cosbey and Tarasofsky (2007) describe WTO dispute precedents that allow products to be classed as “unlike” due to factors such as the risks associated with the physical characteristics of a product, or consumer tastes and habits.


concessions. Basically, if a trade concession is made to a country that takes on a climatecommitment, then it can be argued that “the same conditions do not prevail” in this country as in a nation with no obligation to reduce its emissions. Of course, this may require that a similar concession be made to all countries that agree to reduce emissions, but Pauwelyn proposes that this trade measure could be tailored to developing countries based upon considerations of SDT or the level of economic development in the exporting country.

An exemption under Article XX(b) is straightforward – if a trade measure is designed to mitigate climate change, it could be argued to be necessary to protect health or the environment. For an exemption under Article XX(g), a case needs to be made that the atmosphere is an exhaustible resource (see Pauwelyn, 2007), and some type of domestic GHG emissions reduction effort –such as a carbon tax or a cap-and-trade program – would need to be in place or accompany the implementation of the trade measure. Whether either of these arguments would succeed is uncertain.

Finally, should a trade concession be found to violate either Article I or Article III of the GATT and not qualify for an exemption under Article XX, then a party could pursue a WTO waiver for climate-related trade measures; this would be similar to the waiver granted for the Kimberly Process for diamonds (Cosbey and Tarasofsky, 2007).

Of course, any WTO dispute must be initiated by a Member nation, so if no country feels that their trade prospects have been damaged by the concessions made to another country, there will be no dispute to resolve, even if the trade measures involved would be found to violate GATT principles. Thus, the optimal way to pursue unilateral trade-for-climate would be to offer incentives that benefit specific countries without harming others, a task that may prove difficult.

Bilateral trade negotiations may prove more difficult than adoption of unilateral measures by developed countries because they would require working through the details of a written treatyand getting these treaties approved by the appropriate legislative bodies. However, the WTO tends to defer to such treaties, so the likelihood of a WTO challenge to the parameters of such a treaty would probably be significantly less than in the case of unilateral action.

IX. SummaryThe Doha round of the WTO negotiations provide some indications of the types of trade incentives that developed nations could offer to developing countries to encourage them to make greater efforts to reduce their GHG emissions. 33 These include:

For agricultural domestic support:o Reduce overall support to a greater extent (especially by the U.S.);o Reduce amber box support to a greater extent (especially by the EU);o Use a more favorable base period than proposed by the U.S.; and

33 More specific details of what developing countries would request from developed nations in terms of more open trade in specific commodities or products is not readily available. Trade experts have indicated that such information is generally only divulged during bilateral trade negotiations, and although the U.S. is currently negotiating a handful of bilateral or regional free-trade agreements, none of these involves major GHG-emitting developing countries.


o Allow developing countries to classify climate-friendly subsidies in the green box.

For agricultural market access:o Reduce applied (rather than bound) tariffs;o Set a smaller bound on the number of sensitive products (especially by the EU);o Eliminate the special safeguard mechanism for developed countries;o Provide greater flexibility for developing countries with respect to special

products; ando Make geographical indications mandatory.

For non-agricultural market access:o Reduce overall tariffs to a greater extent;o Allow fewer sensitive products;o Provide a greater degree of special and differential treatment for developing

countries;o Harmonize tariff peaks; ando Reduce applied (rather than bound) tariffs.

Antidumping:o Ban zeroing;o Make use of the lesser duty rule mandatory;o Make use of price undertakings by developed countries mandatory;o Require automatic sunset of antidumping orders, as well as clearer rules for their

extension;o Raise the margin at which antidumping is considered significant; ando Lower the cost of antidumping proceedings for developing countries.

Environmental goods and services (EGS):o Broaden the list of EGS to incorporate more goods and services exported by

developing countries;o Adopt a project-based approach to defining EGS or develop some other means to

protect against trade preferences for dual-use products;o Reinstitute the provision on non-actionable subsidies in the Agreement on

Subsidies and Countervailing Measures only for EGS in developing countries Services:

o Provide greater market access in general;o Lower the number of service sectors declared to be “sensitive;”o Permit more Mode IV access to service sectors (especially by the U.S.); ando Allow a greater degree of special and differential treatment for developing

countries, so that they can better protect their nascent service industries.

In terms of maximizing the benefits to developing countries, it is clear that trade incentives need to be targeted in terms of both the developing country and the goods/commodities for which trade is liberalized. This could proceed through formal negotiation of bilateral trade treaties or through unilateral open-trade actions by developed nations. The latter would be open to greater scrutiny under the GATT/WTO, but there are a number of potential avenues for winning any associated WTO challenges or disputes.


Three other ideas are worth mentioning, but two would require more analysis. First, since a number of OPEC members and other countries are currently awaiting accession to the WTO, these countries could perhaps be encouraged to take some kind of climate commitment in return for developed country support for their WTO membership (Cosbey and Tarasofsky, 2007). This includes Iran and Kazakhstan, for instance, which are among the top ten GHG-emitting countries in certain energy-intensive sectors that would likely be part of a developing country sectoral approach to climate change mitigation in a post-2012 climate agreement.34

Second, many have suggested that including trade issues in the next climate change agreement would make climate-motivated trade measures less subject to challenge under the WTO. Since the Doha Ministerial Declaration specifically requires that non-trade considerations be taken into account, it is thought that the WTO would defer to a multilateral environmental agreement if itcontains specific language requiring or allowing trade-related measures to achieve its goals.

And finally, one caveat worth consideration is the following: if trade incentives are used to encourage any developing country to take on a climate commitment, will such incentives then be expected by every developing country before they agree to do the same? This would probably not be necessary if trade liberalization was simply one of a suite of incentives offered to developing countries to encourage stronger climate commitments. One possible such scenario is discussed in following section.

X. Trade Incentives in a Sectoral ApproachTrade incentives could conceivably be added to the Technology Finance and Assistance package that encourages developing countries to take stronger “no-lose” targets as part of a sectoral approach. In one possible scenario, the incentives would apply to goods produced in the particular sector in which a country agrees to take on a “no-lose” target; they would be made available to that country after it achieved a specified emissions intensity in that sector. An alternative would be to provide a sliding scale of incentives that kicks in at some base emissions intensity level and gets progressively more attractive as the emissions intensity in the sector improves.

To implement such a system, a number of potential questions and hurdles would need to be addressed. Some of these are simply practical in nature, such as:

o Are there existing tariffs or trade policies on the products produced in the sector?o Which developed countries apply these tariffs?o Which developing countries would most benefit from removal or reduction of the tariffs?o Is there a trade incentive that can be offered that is larger than the degree of trade

liberalization that the relevant developing countries hope to gain through any WTO negotiations occurring at the time?

o How would developed countries agree on the incentives to offer, make the package attractive enough to be of interest to developing countries, and then get approval by the relevant domestic legislative or regulatory entity in each country?

34 See Schmidt et al. (2006) for more details on this proposal.


o How would resistance from domestic producers be overcome? Products from some sectors, such as steel, serve as manufacturing inputs in other sectors, so the support from manufacturers in these other sectors may suffice.

Most of the other issues involve implementation of the trade incentives and are more substantial. The primary concern is whether there is a way to offer these incentives that is likely to survive a challenge under the WTO. These would primarily apply if a country (or the EU) decided to lower its trade barriers unilaterally (i.e., without a formal trade or other treaty). They are much less likely to be challenged if part of a bilateral or regional trade agreement.

As proposed here, the elements of a trade incentive package that would be most subject to WTO dispute are:

o The issue of process and production methods – as discussed previously in this paper, there is much controversy about whether the WTO will allow products to be distinguished based upon their processes and production methods, and developing countries, in general, are opposed to allowing such considerations.

o GATT Article I – Can a package be designed that offers incentives only to those countries that take a sectoral target? This would only be allowed under a formal regional or bilateral trade agreement because it would require that a case be made that there is a difference between two products produced with the same emissions intensity but in different countries, one of which is participating in the sectoral approach while the other country is not. An exemption to Article I under the initial phrase of GATT Article XX is possible, but this would require that some objective criterion be devised that shows that the “same conditions” do not prevail in the two countries.

Then there are the logistical issues:o Where would the threshold be set for implementation of the trade incentive? This would

have to be the same for all countries (again unless separate bilateral negotiations were used to set distinct thresholds for each country). In addition, the threshold could not be made stricter at a later date because the WTO does not allow tariffs, once lowered, to then be raised on that product later.

o To determine which goods are eligible for the trade incentive, would it be necessary to track the emissions intensity of production for each individual good, or would the average intensity of the country’s sector suffice?

o Should GHGs produced during transport of the product to the importing country be included?

o How would the emissions intensity of the product be verified?o How would customs procedures or classifications be changed to allow inspectors to

distinguish between products that meet the threshold and those that do not?

In terms of the emissions intensity threshold, it seems that the minimum threshold would be the average emissions intensity of the importing (developed) country. Otherwise, its markets would be opened to products that were produced with an emissions intensity greater than the intensity of production for domestic goods, and the net result would be an increase in global GHG emissions.


Labeling each product with its emissions intensity of production allows discrimination between “cleanly-produced” and “dirtily-produced” exports from the developing country, but cleaner exports wouldn’t guarantee a climate benefit. For example, a developed country could attempt to overcome the problem discussed in the previous paragraph – cleaner domestic goods being displaced by dirtier imports – by requiring that imported goods meet a specific emission intensity of production to receive the trade incentive. To make such a policy effective, the developing country would also need to show that its sector’s overall emissions intensity is improving before the trade incentives apply, with the further stipulation that only the “cleanly-produced” exports qualify for the incentives.

Of course, there is no real need to tie the trade incentives specifically to goods produced in the same sector in which the developing country takes a “no-lose” target, as greater trade incentives may be available in other sectors. For example, removal of tarrifs/barriers to agricultural goods could be used as an incentive to greater emissions reductions under the Sector-based approach in industrial sectors. In general, allowing greater flexibility in the trade incentive portfolio couldentice developing countries to adopt more stringent sectoral targets than they would if these incentives are restricted to the sector in question.


References

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Cosbey, A. 2007. “Scoping brief: Integrating climate change objectives in trade and investment law.” International Institute for Sustainable Development, Winnipeg, May 10.

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