Inventing Trade Remedies in Response to Climate Change

Abstract

The most likely source for international trade conflict in the next decade - and the greatest potential force for inducing structural change to the global trading system - is the continuing roll-out of climate change measures. Indeed, such conflict is likely even were a post-Kyoto global climate change regime to fail to develop. Trade conflict may be unavoidable in a world of uncoordinated and conflicting national responses to global climate change.

The international trade politics of GHG limits are complex. Both cap-and-trade and carbon tax approaches will increase the cost of production of energy-intensive goods. Some important categories of internationally traded goods, such as steel and cement, are particularly affected. The shock of cost escalation will drive local producers to scrutinize the cost of carbon paid by rivals producing in other countries. New cries of unfair trade will likely sound in the event that there are (as there likely will be) large disparities in the prices of carbon between different WTO members. Differentials in national carbon prices are artifacts of the GHG emissions caps implemented by various states. It is carbon price differentials which are at the heart of the international trade/climate change collision.

Assuming that some form of import restriction will be an inevitable accompaniment to domestic carbon emission limits, there is a range of tools available. Whatever the political appeal of border adjustments, their practical administration is daunting. Implementing border adjustments will likely involve high expense and considerable inaccuracy. Crude results will result in either ineffective discrimination or an unfair burden on trade. As such, a proposal for border adjustments may fall under its own weight. Occasional and exceptional measures - import restrictions as a trade remedy, modeled on anti-dumping duties, countervailing duties, and safeguard actions - may be a better solution than widely and routinely applicable border tax adjustments.