Compatibility of environmental protection with free trade and/or investment has been important in both the environmental and trade fields. The Committee on Trade and Environment of the WTO has under discussion the relationships between the provisions of the multilateral trading system and trade measures for environmental purposes, including those pursuant to multilateral environmental agreements (MEAs). Also under discussion are the relationships between environmental policies and measures with significant trade effects and the provisions of the multilateral trading system. Some analysts suggest that the WTO is not an appropriate forum to resolve these questions and propose the establishment of a multilateral environmental organization for this purpose (Esty, 1994).

The UNFCCC is one of more than 200 multilateral and bilateral international environmental agreements (MEAs) whose compatibility with free trade and investment is debated (UNEP, 1983, 1991). More than 20 MEAs incorporate explicit trade measures.⁸⁸ Other MEAs address the need to co-ordinate restrictions on conduct taken in compliance with obligations they impose and the expanding regime of trade and investment law under the WTO/GATT umbrella.⁸⁹ UNFCCC Article 3.5 (UNFCCC, 1992), following GATT Article XX, stipulates that “Parties shall co-operate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties ... Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”

There are no presently cited cases of trade claims against measures enacted in widely subscribed MEAs like the CITES or the Montreal Protocol. Neither the UNFCCC nor the Kyoto Protocol now provides for specific trade measures. The debate over conflicts between trade and MEAs stems from the prospect that trade-related measures might be enacted to limit trade in polluting products and in endangered species, or trade in goods created by means of polluting processes and production methods (PPMs). MEAs could also require general or specific trade measures to sanction non-Parties to the MEA or non-compliant MEA members.

IET under Article 17 of the Kyoto Protocol has raised questions of WTO compatibility. Early analysis concludes that the rules governing the transfer and mutual recognition of allowances are not covered by WTO because they are neither products nor services (Werksman, 1999).⁹⁰ However, several domestic policies and measures that may be taken in conjunction with the Kyoto Protocol might be considered to pose WTO problems, such as excessively restricting trade regulations, GATT-inconsistent border charges, or illegal subsidies.⁹¹

National programmes of permit distribution for emissions trading (see Section 6.2.2.3) or national environmental aid (subsidies) might benefit domestic firms or sectors over importers or foreign competitors (Black et al., 2000).⁹² In addition, a Party or group of Parties (as part of the national implementation programmes) might apply taxes or environmental policies and measures in a way that arguably discriminates against WTO trade partners. Environmental regulations, taxes, or voluntary measures could be challenged as indirect forms of protection that fall disproportionately on imported products. Recent cases suggest more cases could be argued under the agreement on Technical Barriers to Trade (TBT) rather than GATT.⁹³

Trade-related environmental measures traditionally pose problems for the multilateral trading regime. Considerations of sovereignty favour the autonomy of WTO Parties to set health or environmental standards for all products, domestic or imported, consumed in their national territories. Each country has broad discretion to introduce its own policies and measures, including energy efficiency standards and import restrictions, to protect its environment and/or its people’s health, subject to GATT Article 3 (national treatment). However, more debatable is whether GATT permits a government to place restrictions or bans on the import of goods or services, themselves not dangerous or polluting, that are produced outside its borders through PPMs that do not meet its national environmental regulations or standards. PPM issues may be characterized as “clean products produced through dirty processes”. As MEAs increasingly utilize trade measures to prevent non-members from free-riding, the consistency of such trade measures with the relevant GATT articles (Article XX, in particular) has been questioned when they are based on the lack of corresponding PPM requirements in the exporting countries (Murase, 1995, 1996). At present, the relation between WTO-compatible environmental measures and MEAs remains unsettled. It is also unclear whether WTO law is neutral in its treatment of alternative trade-related measures (e.g., standards, taxes, and subsidies).

Prior to 1995, when GATT 1994 replaced GATT 1947 under the WTO agreement, six panel reports involved environmental issues related to trade measures under Article XX (Ahn, 1999). The Appellate Body under the revised WTO dispute settlement system has since decided two further cases.⁹⁴ While none of these disputes challenged the environmental objectives pursued by the governments concerned, all rulings found that the contested trade restrictions were in some respect discriminatory or unnecessarily trade restrictive. However, more recent rulings, including those of the Appellate Body, have narrowed or rejected earlier panel interpretations that had held PPMs either per se inconsistent with the intent of GATT or highly restricted by the terms of Article XX.

The GATT Panel rulings in the Tuna–Dolphin I dispute read Articles XXb and XXg so as to preclude provisional justification for extraterritorial PPMs as inherently arbitrary measures destructive to the system of international trade.⁹⁵ The panel in the Shrimp–Turtle dispute also explicitly held that the US shrimp embargo belonged to the class of measures (PPMs) that threatened the multilateral trading system and therefore violated the terms of the Chapeau of Article XX. However, the WTO Appellate Body overruled the Panel’s view in the Shrimp–Turtle case. The WTO indicated implicitly that it does not categorically disallow the use of extrajurisdictional PPMs.⁹⁶ Although the import restrictions in question applied to shrimp harvesting practices and not to any characteristic of the shrimps themselves, the Appellate Body treated the measure as provisionally justifiable. It considered the legality of the specific restrictions, which were held to be invalid under the prohibition of the Chapeau of Article XX of discriminatory and arbitrary measures. The US embargo was ruled overly broad, its enforcement inflexible in considering the conservation effects of other nations’ shrimping practices, disparate in its treatment of other nations, deficient in due process, and put into effect without sufficient good-faith efforts to secure wider multilateral acceptance of its exclusionary programme (Berger, 1999).

Although as yet there is no universally accepted interpretation of the Shrimp–Turtle Appellate Body decision, some analysts suggest the holding implies PPMs no longer violate WTO by their very nature (Ahn, 1999). Others argue such a conclusion is premature legally or has been insufficiently debated and tested in the scientific literature (Jackson, 2000). In either case, the ruling did not refer to important questions relevant to the interaction of WTO and the UNFCCC and/or Kyoto Protocol. It is unclear whether national PPMs need only be enacted by Parties to an MEA in their compliance programmes, or whether each particular PPM, its mode of application, and/or its sanction scheme are the subjects of multilateral accord. Nor is it certain how widely the multilateral agreement that supports the PPM must be subscribed to make it WTO compatible.⁹⁷

Parties to MEAs might base national climate programmes on pollution taxes rather than product or PPM standards. WTO law does allow compensating charges or border adjustments to similar imported products to equalize the tax burden on domestic production. While direct taxes (wages, incomes) may not be compensated on imports or refunded on exports, certain indirect taxes, such as sales taxes or excises, may be adjusted at the border.⁹⁸ Indirect environmental taxes levied on a locally polluting product like imported fuel or gas guzzling automobiles, as long as not in excess of charges imposed on like domestic products, would be WTO consistent. Analogous indirect taxes, equal to domestic taxes, imposed on non-locally polluting imports produced through foreign process and production methods that were environmentally damaging have been approved in the GATT dispute settlement process.⁹⁹

Nevertheless, some border charges on products manufactured through GHG-intensive PPMs might be WTO inconsistent. Although specific taxes on final products (e.g., fuels) and on “goods physically incorporated” into final products (e.g., a feedstock or catalyst) may be adjusted at the border, so-called hidden taxes on inputs, such as transport, machinery, advertising, or energy entirely consumed during production, have not been legally adjustable. Current practice is not fully symmetrical in its treatment of regulatory standards and taxes as environmental instruments.¹⁰⁰

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