Trade lawyers and environmentalists have long debated whether international trade rules under the General Agreement on Tariffs and Trade (“GATT”) and, since 1995, the World Trade Organization (“WTO”), permit imported goods to be regulated on the basis of the conditions under which they are made. The debate centers around so-called processes and production methods, or “PPMs.” While some trade law experts believe that GATT and WTO rules permit PPMs under certain circumstances, the weight of opinion seems to be on the side of those who believe they do not.

Current legislative proposals in the United States and the EU to regulate imported goods based on their “carbon footprints” are stirring up the old debate about the legality of PPMs under international trade rules. In the United States, the most prominent such proposal was introduced by Senators Lieberman and Warner as part of the America’s Climate Security Act of 2007 (“ACSA”). Under ACSA, importers of certain greenhouse gas (“GHG”)-intensive goods would be required to provide special international allowances to cover the emissions associated with the manufacture of the imported goods. EU leaders have discussed the possibility of imposing “carbon taxes” or comparable import measures, but to date no such similarly sweeping requirement has been formally proposed or introduced.

Notably, however, the EU’s recent Proposed Directive on the Promotion of the Use of Energy from Renewable Sources took a step in this direction by setting forth environmental sustainability criteria for biofuel that could create disincentives for the importation of biofuel produced under conditions that harm carbon sinks such as forests and grasslands.

The proposed U.S. and EU import measures address the legitimate competitiveness concerns of industries in these jurisdictions that are likely to face increasing costs under declining GHG emissions caps that their foreign competitors may not face. The economic logic of the U.S. and EU import measures is to level the playing field by ensuring that the GHG emissions of the imported products are not externalized (at least not to the same extent as in the importing jurisdiction) to the disadvantage of the domestic industries producing the same products. The contemplated import measures would also, in theory, help induce exporting countries to adopt GHG emissions restrictions comparable to those in the importing countries.

The EU’s Environmental Commissioner, Stavros Dimas, recently in Washington for the second meeting of the EU-U.S. High-Level Dialogue on Climate Change, told reporters that it will not be necessary for the United States to impose import restrictions of the sort contemplated by the Lieberman-Warner bill because the world’s major economies can be expected to agree on a successor to the Kyoto Protocol, whose GHG commitments expire in 2012. However, it is far from clear if the “Bali Roadmap” process intended to lead to a successor agreement will result in any concrete commitments on the part of major developing countries to reduce their GHG emissions. Indeed, the notion of “common but differentiated responsibilities” for developed and developing countries is central to the Bali Roadmap discussions.

If Commissioner Stavros is right, the issue of the legality of the emerging PPMs under global trade rules may be moot. But if, instead, the U.S. and the EU impose substantial GHG emissions reductions and major developing economies do not, it seems inevitable that the U.S. and the EU will impose some sort of PPMs to address the adverse competitive effects to their domestic industries.

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