In a briefing paper for the European Parliament's Temporary Committee on Climate Change, Ecologic analysed whether climate-related border adjustments are permissible under WTO law. Restrictions on international trade have been suggested as a means to address “carbon leakage” – the relocation of manufacturing activities (and thus greenhouse gas emissions) to states with less ambitious climate efforts and more relaxed environmental standards. The paper concludes that climate-related border adjustments are not, as a matter of principle, ruled out by international trade law, provided that certain conditions are met.

The legal assessment by Michael Mehling, Nils Meyer-Ohlendorf and Ralph Czarnecki is one element of the broader study “Competitive distortions and leakage in a world of different carbon prices“, commissioned by the European Parliament on legal aspects of climate-related trade measures under international trade law. The relationship between climate policy and international trade is complex. Prominent suggestions for addressing this concern include some form of restriction on international trade. Any such restriction, however, may be legally incompatible with applicable free trade regimes such as the WTO regime.

The study also analyses potential conflicts of such measures with multilateral environmental agreements. The study concludes that climate-related border adjustments are not as a matter of principle ruled out by the pertinent rules of international trade law, as long as certain conditions are met. However, legal uncertainties remain and will ultimately have to be clarified by the judicial bodies of the WTO.

The study [pdf, 1.3 MB, English] is available for download at the Website of the European Parliament.