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U.S. trade worries may force action

|Written By Glenn Kauth

Dealing with climate change isn''t just about regulating greenhouse gas emissions. It also means crafting new rules on international trade, lawyers say.

'Future investment will be skewed to countries that don

"Politically it's going to happen. Especially with today's economy, it's not even hidden protectionism," says Bennett Jones LLP partner Milos Barutciski, speaking of probable U.S. moves to safeguard its own companies' competitive positions through trade barriers.

At issue is the disadvantage U.S. companies will likely face once the new U.S. administration makes good on its promises to bring in a cap-and-trade program to reduce greenhouse gas emissions. Regulating carbon will finally signal progress on climate change but will make products made in the United States more expensive than goods from countries without rules and targets.

The issue is particularly relevant since agreements such as the Kyoto Accord specifically exempt developing countries such as China and India from having to do much on climate change.

As a result, U.S. policymakers are worried about two potential problems. The first is that domestic producers will suffer unduly as their costs rise due to the need to buy emissions allowances or invest in new technology.

Secondly, they worry about the effectiveness of the regulatory regime since production - and greenhouse gas emissions - can simply shift elsewhere in what is called leakage. "Future investment will be skewed to countries that don't have the same rules," says Barutciski, adding that the result could be no net reduction in pollution.

But the risk of trade sanctions isn't just a worry for the industrializing developing countries, says Elisabeth DeMarco, a partner and head of the energy practice at Macleod Dixon LLP in Toronto.

With Canada perceived as a laggard on climate change, it could be a target for tariff and non-tariff barriers by the United States and elsewhere, she notes. As a result, Canada should be careful "to ensure that our goods are not prejudiced in the world market," she argues.

Already, the oil-sands industry has faced challenges from legislation such as last year's U.S. Energy Security Act. Aimed at preventing U.S. federal agencies from buying oil from sources that emit more carbon dioxide than conventional production, the legislation represented a veiled threat to Canada's petroleum industry over its record on greenhouse gases.

Now, DeMarco points out that President Barack Obama has been musing about a clean energy dialogue with Canada, something that could represent a similar approach to the act. Other countries, such as France, have threatened more aggressive

import tariffs on Canadian goods over the lack of action on climate change, she adds.

Canada and the United States have, of course, both changed their tunes recently with both Obama and Prime Minister Stephen Harper announcing their intentions to develop a North America-wide cap-and-trade system.

But, Barutciski notes, those good vibes don't necessarily signal the end of threats against Canada's access to the U.S. market, especially since a number of bills proposing trade sanctions against countries that don't go far enough on climate change have been making their way through Congress.

One of them, the Warner-Lieberman bill, would have imposed a tariff on imports at the border based on the amount of greenhouse gas emissions it took to produce a good. That legislation died recently in Congress, but Barutciski expects similar proposals to emerge. "This isn't just a Democrat or Republican issue. It's bipartisan," he says.

Of course, any trade restrictions run the risk of challenges through international bodies such as the World Trade Organization. The most-favoured nation principle in the WTO, for example, forbids members from discriminating amongst their trading partners through measures such as import restrictions.

In the so-called shrimp-turtle case, in fact, the WTO sanctioned the United States for arbitrarily imposing import restrictions on countries that it deemed to be harming turtle populations through the shrimp catch. So key to ensuring that any carbon import tariffs stand up to scrutiny will be applying the rules fairly. As a result, the U.S. government will likely give countries time to adapt before the tariffs take effect, Barutciski says.

But international trade agreements do make a number of exceptions to the general ban on import restrictions. The General Agreement on Tariffs and Trade, for example, contains two articles that could apply to barriers erected in the name of stopping climate change, Barutciski notes.

They include one dealing with measures "necessary to protect human, animal, or plant life and health," and another on actions "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption."

It's the latter article Barutciski believes the United States will turn to in formulating a trade regime against countries that don't impose equivalent greenhouse gas regulations on their domestic industries.

A likely justification would argue that by threatening the shorelines through the melting of the polar ice cap, for example, the lack of aggressive action on climate change represents a harm to natural resources such as endangered species.

It's a move Barutciski says would be clever since it essentially compels other countries to do something they've been reluctant to embrace or from which they've had exemptions under international agreements. In many ways, it would accomplish what frameworks such as the Kyoto Accord failed to accomplish through

negotiations.

"It's targeted at imports to cajole all our trading partners to adopt greenhouse gas regimes to the benefit of the global commons," Barutciski notes.

Besides a carbon tariff imposed at the border, other potential trade restrictions include selling allowances similar to the type domestic producers pay through cap-and-trade systems, subsidies, import restrictions, and licensing and labelling requirements.

Under an allowance program, importers would have to pay to bring products in from outside. The allowances would likely target carbon-intensive goods such as steel, aluminum, cement, and paper as well as other manufactured products that create a lot of emissions, Andrew Shoyer, a partner with Sidley Austin LLP in Washington, said at a recent Bennett Jones seminar on climate change and trade in Toronto.

Whether the United States would impose an allowance requirement would depend on how an exporting country's record on climate change compared to its own. Factors to consider include whether the other jurisdiction's greenhouse gas reductions matched or equalled U.S. emission cuts as well as its regulatory program and use of technology, Shoyer noted.

In Canada, of course, governments have already been mulling about potential regulations for years. The federal government has announced its intention to require companies to reduce their emissions on an intensity basis rather than a hard cap on greenhouse gases, something lawyers dealing with climate change believe won't stand up to scrutiny by the new U.S. administration.

As a result, Barutciski believes our petroleum industry will likely be the first target of any trade sanctions aimed at Canada. "Obviously, front and centre are going to be the oil-sands guys," he says.

And while Barutciski believes Harper and Obama are serious about negotiating a continental deal on climate change, he notes the U.S. House of Representatives will likely introduce new proposals on both greenhouse gas regulations and trade, especially since California Democrat and oil-sands critic Henry Waxman is now the chairman of the energy and commerce committee.

For that reason, Canada needs to be proactive about finding allies in Washington as well as keeping up to date on what equivalent action will mean under any U.S. proposals, he argues.

In the end, of course, the threat of trade implications may compel Canada to be more aggressive on emissions than it otherwise would be. As well, it, too, may seek to impose similar restrictions against importers of goods here in order to protect domestic industry.

"Now, there's no avoiding it," Barutciski says of the need for greenhouse gas regulations. "The population is in favour, and our biggest trading partner says if we don't do anything, we're going to hit you on the side of the head with a canoe paddle."

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