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Global Warming: The Gathering Storm

Russia resurrects the Kyoto Protocol and the prospect of either mandatory CO2 emissions cuts for U.S. utilities, or the start of a global trade war.
Fortnightly Magazine - August 2004

percent of the emissions reduction commitments of Annex 1 countries under the Kyoto Protocol for the 2008-2012 period. For these reasons, the EU-Russian WTO agreement makes economic sense for both sides.

The Potential Trade War

There is little question that CO 2 reduction measures will increase the cost of energy in the EU, Japan, and the other industrialized nations that have ratified Kyoto. As a result, Annex I countries that have not undertaken comparable measures to reduce greenhouse gas emissions, including the United States, Canada, and Australia, will enjoy a competitive advantage in the form of lower energy costs and, in turn, lower costs of production. A fundamental impact of Kyoto therefore will be a global imbalance in the costs of production among the United States, Australia, and virtually the rest of the industrialized world. This imbalance will prompt the EU to seriously examine the option of imposing some form of countervailing duty on U.S. imports to compensate for the disadvantage and to fund additional CO 2 offset projects under the CDM mechanism.

The EU clearly is concerned about the potential for competitive harm associated with the recent greenhouse gas emissions program, noting that EU emissions allowance trading scheme (ETS) "has the potential to lead to even further increases in power prices that could cause significant damage to EU competitiveness, especially for energy intensive industries such as pulp and paper, iron and steel, cement and lime, chemicals and others. ... It is essential that this situation be monitored and actions taken if these industries become disadvantaged." 7 Several non-governmental organizations also have advocated for trade sanctions against the United States, arguing that:

Until the U.S. ratifies and implements the Kyoto Protocol, there cannot be fair and free trade with the U.S. and the U.S. will be in clear violation of the WTO Agreement on Subsidies and Countervailing Measures. 8

Recent WTO Successes Against the U.S.

Nor is there any reason to question that the EU will use trade sanctions as a hammer when it finds that the U.S. has garnered an unfair competitive advantage by subsidizing exports. Two recent examples, the sales corporation/extraterritorial income (FSC/ETI) and the steel import cases, demonstrate that the EU will use trade sanctions when necessary to force a change in U.S. behavior. In both cases, the EU successfully implemented countervailing duties of several billion dollars that were upheld by the WTO Appellate Body. In both cases, the United States underestimated the EU's resolve to impose trade sanctions, and the sanctions prompted the United States to act quickly to remove the subsidies. 9

Favorable WTO Precedent

Economic and political conditions heighten the risk of EU trade sanctions. Whether such trade sanctions could withstand challenge before the WTO is a key question. In this regard, the General Agreement on Tariffs and Trade of 1994 (GATT) generally prohibits trade restrictions except under very limited exceptions, such as where a member country subsidizes a specific industry. However, even where an actionable subsidy cannot be established, Article XX(g) of GATT allows a member to impose measures on imports that relate to the