WTO Legal Issues Arising from Carbon Border Measures: An Introductory Primer

Abstract

Carbon border measures (CBMs) are an important tool for integrating climate and trade policy. At the same time, however, they raise novel issues for the World Trade Organization (WTO). Although these issues may present themselves as legal issues, they are significant diplomatically and politically for a number of reasons. First, U.S. allies, the European Union (EU) in particular, are politically invested in the WTO as the center of a rules-based international trading system. Allies are therefore reluctant to adopt or acquiesce to measures that do not have a plausible justification under WTO rules. Diplomatic engagement on allies’ policies, such as the EU’s forthcoming CBM, is thus most effective when it is informed by WTO issues. Second, U.S. allies have perceived the United States under the Trump administration as actively undermining the WTO. They therefore would be especially sensitive now to U.S. policies, such as a potential U.S. CBM, that could fly in the face of WTO rules. Third, U.S. allies, led by the EU, are eager to rebuild the WTO’s Appellate Body (the lynchpin of the WTO’s dispute settlement system), which the Trump administration incapacitated following years of bipartisan discontent with the body. CBMs present a challenge to this endeavor. If the Biden administration adopts CBMs that cannot at least plausibly be justified before the WTO’s dispute settlement system, reviving dispute settlement at the WTO will be considerably more difficult. Preemptively thinking through WTO legal issues with CBMs may thus smooth the diplomatic and political path for adopting such measures and presenting them to both the U.S. business/environmental communities and U.S. allies. For simplicity, this memo focuses on the General Agreement on Tariffs and Trade (GATT), the cornerstone of WTO rules. Additional analysis under other WTO rules, such as the Technical Barriers to Trade Agreement or the Agreement on Subsidies and Countervailing Measures, can be provided upon request. The GATT follows a system of primary rules with which members must comply unless an exception to those primary rules applies. This memo discusses briefly why CBMs are likely to violate the GATT’s primary rules, before turning to issues that arise in justifying a CBM under GATT exceptions. We conclude with a discussion as to why the approach we’ve argued for elsewhere1 is perhaps particularly well suited to being defended under GATT exceptions.