(refiles adding dropped word is in paragraph 1)
-- John Kemp is a Reuters columnist. The views expressed are his own --
By John Kemp
LONDON, July 6 (Reuters) - Words matter. Describing the trade provisions of the American Clean Energy and Security Act (HR 2454), approved by the U.S. House of Representatives last month, as a "carbon tariff", is convenient shorthand for a complex proposal, but lazy and wrong.
Tariff is an emotive word (redolent of Smoot-Hawley and the Great Depression). It is being used by officials in China, India and other developing countries to mobilise opposition. China has already denounced the proposals as likely to "seriously hurt the interests of developing countries" and "disrupt the order of international trade" [ID:nPEK280350].
But the measures in HR 2454 are not tariffs. They have been carefully structured as import permits specifically to ensure they are consistent with World Trade Organisation (WTO) rules.
Imports would be covered by an allowance scheme, similar to the domestic cap-and-trade programme.
Following the bill's approval by the House of Representatives, President Barack Obama indicated his uneasiness with potentially protectionist signal sent by the trade measures in HR 2454; the administration will press Congress to remove or dilute them before any eventual bill is sent for the president's signature.
But while the measures could be removed for political reasons, there is little chance of them being blocked on legal grounds by the WTO if enacted in their current form. China and other developing countries can bluster, but the trade measures in HR 2454 are almost certainly consistent with WTO rules [ID:nLQ371186].
IMPORT PERMIT SYSTEM
The permit scheme is set out in Title IV "Transitioning to a Clean Energy Economy" which would amend the Clean Air Act to create three new sections (766-768): * Section 766 commits the United States to negotiating an international agreement imposing binding emissions reduction targets "equitably" on all countries. It would include mechanisms to prevent business activity shifting from countries with stringent restrictions to jurisdictions with less robust ones ("carbon leakage").
* Section 767 requires the president to determine whether such an agreement consistent with these objectives has entered into force by January 2018. If not, the president must establish an "international reserve allowance program" unless both the president and the Congress agree to waive this provision.
* Section 768 creates a system of international reserve allowances (effectively emissions permits) which could be purchased, exchanged, transferred and banked in much the same way as the domestic emissions allowances envisaged by the bill's cap-and-trade provisions.
Under Section 768, importers would have to acquire permits before merchandise covered by the scheme could be sold in the United States. The price for these import permits would be set daily so that it is "equivalent" to the auction clearing price for domestic emission allowances.
LIKELY WTO CONSISTENT
The permit system has been carefully drafted to ensure that it is consistent with the major WTO rules in this area -- set out in the General Agreement on Tariffs and Trade (GATT) 1947 (as re-enacted in 1994):
* Article II (the "Most-Favoured-Nation" principle) prohibits WTO members discriminating among imports from different members of the organisation. It also prevents members raising tariffs or levying other charges in excess of the bound rates set out in each country's schedule of concessions. But the article specifically states: "nothing shall prevent any contracting party from imposing a charge equivalent to an internal tax imposed consistently with the provisions of....Article III".
* Article III (the "National Treatment" obligation) prohibits WTO members using taxes and regulations to discriminate against imports and in favour of domestic producers. Once imports have cleared border formalities, they must receive treatment no less favourable than domestic items. The crucial second paragraph of Article III states imports shall not be subject to taxes or other internal charges "in excess of" those applied to like domestic products.
This second paragraph is critical. It prohibits taxes and other charges "in excess of" those levied on domestic products -- but leaves open the way for countries to impose taxes and other charges up to this level in order to "level the playing field" should they wish to do so.
By requiring importers to buy allowances in a scheme similar to the domestic one, and at an "equivalent" price, the international allowances programme will treat imports no less favourably than domestic producers (so it should meet the national treatment obligation in Article III).
And by imposing a similar requirement on imports from all countries that have not joined an international emissions control agreement with the United States, it will not discriminate among other WTO members (so it should meet the most-favoured-nation requirements of Article II).
GATT/WTO JURISPRUDENCE
GATT/WTO case law in this area is limited, but the principles are clear. There is a long history of WTO members using "border tax adjustments" of various kinds to level the playing field between domestic producers and imported goods when domestic producers bear specific types of taxes (for example excise taxes on the production of alcohol or cigarettes).
The international reserve allowances programme is simply an ingenious mechanism for tying the cost of carbon emissions embodied within imports to the cost of domestic emissions established by the cap-and-trade programme.
If the international reserve allowances were eventually challenged by developing countries in the WTO's dispute settlement system, there is no reason to believe a dispute panel would find them inconsistent with the WTO agreements. Everything would depend on their implementation not intentionally or unintentionally discriminating against importers under Articles II and III. But providing the scheme was carefully executed there is no reason it should fail.
* http://graphics.thomsonreuters.com/ce-insight/TRADE-HR2454.pdf
* http://graphics.thomsonreuters.com/ce-insight/TRADE-LAW.pdf
* http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf
* http://www.wto.org/english/res_e/booksp_e/trade_climate_change_e.pdf