The European Union’s Proposed Carbon Equalization System : Can It be WTO Compatible?

Among the issues that have fuelled the debates on the climate-trade interface in the run-up to Copenhagen, perhaps the most contested one is the proposed use by developed countries of border measures on imports from countries (read ‘major-emitting’ developing countries) not implementing comparable GHG (green house gas) emissions reduction policies on the grounds of addressing the risk of what has been coined as ‘carbon leakage’. It is argued that if stringent domestic climate action causes their firms to relocate to other countries with less stringent or no carbon constraint, or to lose market share to firms from countries having low emission standards, then the emission reduction achieved in countries imposing stringent measures will be offset to a great extent by an increase in emissions elsewhere. In keeping with the above arguments, law makers in both the US and the EU have proposed introduction of carbon tariffs in order to obviate the disadvantages that their domestic products may face vis-à-vis imports as a result of emission reduction measures being adopted by them. A highly controversial issue pertaining to such carbon tariffs is whether they could be compatible with the WTO (World Trade Organization) commitments of the countries introducing such measures. This concern has found reflection not only in the post-2012 climate-energy package of the EU itself, but also in the debates on the domestic climate legislations in the EU and US. Against this backdrop, this paper makes an attempt to analyze the WTO compatibility or otherwise of the border measure proposed by the EU in its post-2012 climate-energy package