Green Taxes and the WTO: Creating Certainty for the Future

I. INTRODUCTION On August 21, 2008, China announced a tax that classifies vehicles by engine size, taxing larger engine vehicles at a higher rate than vehicles with smaller engines.1 It is anticipated that the tax will disproportionately affect imported vehicles, since imported vehicles in China tend to have larger engines. Consequendy, the US and EU, two major exporters of large engine vehicles to China, are expected to file a World Trade Organization ("WTO") complaint2 alleging that China's engine size tax violates Article 111:2 of the General Agreement on Trade and Tariffs ("GATT"), which bars discriminatory tax measures.3 Article III of the GATT implements the nondiscrimination doctrine. The nondiscrimination doctrine obligates WTO members to treat competing domestic and foreign products equally with respect to internal (nontariff) taxation.4 However, the precise reach of Article 111:2 in regulating members' authority to impose internal taxes on industries and products is unclear under existing WTO jurisprudence.5 Confusion over Article III:2's reach will become problematic in light of current global concerns over climate change and energy shortages. In response to these environmental and energy concerns, nations are expected to promulgate green taxes that incentivize lower energy consumption and emissions.6 These green taxes may be facially nondiscriminatory since tiiey are unlikely to explicidy classify and tax products by national origin. However, green taxes may in effect impact importing nations disproportionately, thereby raising issues about compliance with Article 111:2. China's engine size tax creates precisely this dilemma of disproportionately impacting imports, thereby risking noncompliance with Article 111:2. To further complicate matters, GATT Article XX permits various enumerated exceptions to other GATT provisions, including Article Ill's nondiscrimination provisions. Of particular relevance are Article XX(b) and (g). Togedier, Article XX(b) and (g) articulate Article XX's environmental exceptions.7 However, the scope of Article XX has been limited by its preamble, or chapeau.8 The chapeau ensures that Article XX is not abused by member states to avoid GATT obligations.9 China's engine size tax might present the first of what will likely be many green tax disputes in die coming years. The interplay between Article 111:2, environmental concerns, and Article XX is expected to create numerous and difficult WTO disputes. The WTO's possible adjudication of a dispute concerning China's engine size tax would set important precedent. This Comment seeks to determine what types of green taxes should be acceptable given die WTO's case law, and what factors should be relevant to this determination. The Comment is divided into seven sections. Section II explores the confusion surrounding the WTO's jurisprudence over Article 111:2. Section III discusses Article XX's exemptions from the GATT and Article III, particularly the environmental exemptions embodied in Articles XX(b) and XX(g), and explains how Article XX's chapeau narrows the scope of diese exemptions. Section IV discusses the WTO's adoption of die "precautionary principle" and how this doctrine may signal greater WTO deference to domestic environmental policies. Section V merges the previous three parts and advocates for a step-bystep test that a WTO Panel should use in evaluating a "green tax" dispute. Section VI applies this proposed test to the Chinese engine size tax and draws some conclusions on what types of green taxes will comply with die GATT. Section VII concludes that facially neutral green taxes should usually be upheld by die WTO. II. GATT ARTICLE 111:2 Article 111:2 presents a potential obstacle to green taxes by prohibiting all internal or nontariff tax measures that discriminate against foreign imports. Article 111:2 provides, The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, direcdy or indirecdy, to internal taxes or other internal charges of any kind in excess of those applied, direcdy or indirecdy, to like domestic products. …