XX (b), (g) and Everything in Between

The interaction between trade and climate has become a legal and geopolitical hotbed. The European Union (‘EU’) recently decided to introduce a carbon tariff, which would result in hiked prices for imports made through carbon-intensive practices.

It is likely that such carbon tariffs would fall foul of free-trade obligations encoded in the WTO’s primary multilateral agreement, the General Agreement on Trade and Tariffs (‘GATT’). The GATT is a multilateral agreement designed to facilitate equitable free trade among States. It is designed to prevent unfair trade barriers. To this end, it contains exceptions that allow measures geared towards protecting the environment. GATT Article XX and its sub-paragraphs contain these exceptions.

Out of the sub-paragraphs, (b) and (g) protect measures which are:

(b)  necessary to protect human, animal or plant life or health;
(g)  relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

Thus, the scope of these exceptions is crucial to determine the legality of environmental measures such as the EU’s carbon tariff. In this post, I examine a recent decision by the WTO Panel in EU-Palm Oil, which dealt with the aforementioned rules. I rely on previous Dispute Settlement Body (‘DSB’) jurisprudence to argue that the panel misapplied GATT Article XX. First, I explain the factual backdrop to the dispute. Then, I argue that the Panel incorrectly interpreted and applied the tests for the respective sub-paragraphs of Article XX, thereby effectively altering its scope.

What Happened in EU-Palm Oil?

In 2018, the EU released a directive mandating all EU countries to increase the share of renewable energy in their overall energy consumption. Simultaneously, it stipulated that ‘high risk biofuels’ which displace land use for agricultural purposes would not be counted towards these renewable energy targets. In pursuance of this, France introduced a tax on entities that released such fuel in France. Malaysia challenged these two measures (the EU’s directive and France’s tax) before the WTO’s DSB. It alleged that its biofuel products were unfairly discriminated against, and the directive and tax violated the “most-favored nation” obligation of equal treatment encoded in the GATT (para 7.1238).

The Panel decided that the measures clearly violated the EU’s free trade obligations. However, the EU and France relied on the exceptions found in Article XX(b) and (g), arguing that the measures were justified in the interest of environmental protection. To understand this claim, we must look at the structure of Article XX.

Article XX is divided into two elements – the chapeau (i.e. the introductory text) and sub-paragraphs (a) – (j). The sub-paragraphs list specific non-trade interests which may justify the violation of a GATT obligation. To successfully claim an Article XX exception, the country’s measure must first fall within any one of the sub-paragraphs and then comply with the requirements of the chapeau (p.22).

The Panel held that the measures fell under both these sub-paragraphs. However, it further held that the directive did not comply with the chapeau, which prohibits “arbitrary or unjustifiable discrimination between countries where the same conditions prevail.” As a result, the EU was ordered to alter its directive to bring it in conformity with its trade obligations (para 7.626). I argue that the application of Article XX(b) and XX(g) is incorrect and dilutes the scope of Article XX. Before this, we must first understand the difference between the two sub-paras.

Unpacking the Differing Scope of XX(g) and XX(b)

XX(b) and (g) are easily confused because the interests covered in them contain a notable degree of overlap. Arguably, protecting a measure protecting “plant and animal life” could also conserve “exhaustible natural resources.” For instance, the EU’s carbon tariffs are designed to reduce carbon emissions, which in turn conserves natural resources like clean air and the environment, while also contributing to the preservation of endangered fauna and flora. Despite this overlap, the sub-paragraphs are different in crucial respects – in the tests required to invoke them. Confusing their specific requirements can alter the applicability of the exceptions.

The first difference lies in the thresholds required to invoke them. XX(b) uses the word “necessary”, while (g) uses the words “relating to”. The WTO’s Appellate Body (‘AB’) has earlier held that WTO members could not have intended for these different words in Article XX to express the same degree of connection/proximity with the measures (p.22). This preserves the principle of effective treaty interpretation, according to which the interpretation of a treaty must not result in a redundancy or nullity. If this is the case, how exactly are these thresholds different?

The AB has held that “necessity” in XX(b) is close in meaning to “indispensable.”(para 161) Among other factors, the necessity test requires a consideration of whether the measure is “apt to produce a material contribution” to plant, animal or human interests and whether it is the “least restrictive” measure (para 161). A contribution can be material only if it is not “marginal or insignificant.” This is supplemented by the “least restrictive” analysis; if it is shown that a measure could achieve the same objective with lesser restrictions, XX(b) cannot be claimed. From these factors, it is evident that the ‘necessity’ threshold in XX(b) is concerned with the impact and effect of the measures.

On the other hand, “relating to” in XX(g) is a much lower threshold. For the measures to ‘relate to’ the conservation of these resources, we must consider whether they are “primarily aimed at” its conservation (para 2.231). They need not be effective, but must have a “substantial” or a “close and genuine relationship of ends and means” with the conservation (para 5.105). Thus, the emphasis in XX(g) is on the design and objectives of the measure.

The second difference lies in the additional requirement present in XX(g); that the restriction must be “made effective in conjunction with domestic restrictions”. This requirement is essentially of even-handedness in application to both domestic and international markets. Unlike XX(b), it does not require a scrutiny of the extent to which it contributes to the conservation of resources. It merely stipulates that the measures be applied to domestic markets as well, regardless of the precise distribution of burdens between the two markets (para 5.136).

From this analysis, two important distinctions emerge. First, the thresholds to be reached under XX(b) and (g) differ fundamentally. Underlying (b) is an effect-based test, and underlying (g) is a design-based test. Second, any conservation under (g) requires a basic scrutiny of whether the restriction applies to the country’s own domestic market as well.

The Panel’s (Mis)Understanding of XX(b) and XX(g)

The Panel in Palm Oils made two errors in its application of XX(b) and (g) which demonstrate that it misunderstands the scope of the different sub-paras. First, instead of applying XX(b)’s impact-based approach, the panel focuses on the design of the measure. While dealing with the need for a material contribution, it noted that it was “not possible to quantify the extent to which [the measures] contribute to the objective” (para 7.1281). It proceeded to hold that “the measures by design had a limiting effect on EU demand for high-risk biofuel and were thus “apt to make a material contribution.” (para 7.1280) Thus, it relied on the measures’ design to conclude that they would make a material contribution.

However, this approach ignores the impact-based approach of the ‘material contribution’ prong of the necessity test. The AB has held that a material contribution can be demonstrated either ‘quantitatively or qualitatively’ (para 146).  The Panel in EU-Palm Oil offers no engagement with how the ‘design’ of the measures would result in either a qualitative or a quantitative impact. At best, it seems to infer this from the ‘design’ of the measures.

Second, the Panel conflates the threshold for XX(b) and XX(g). This is evident when it conflates the “material contribution” prong in XX(b) for the ‘relating to’ prong XX(g).  It notes that “the measure is apt to make a material contribution to the objective […] and for this reason, […] the [measure] is one ‘relating to’ the conservation of exhaustible natural resources” (para 7.1286). Not only does it conflate the two thresholds, but it also ignores the fact that XX(b) and XX(g) are directed towards fundamentally different interests. As explained above, not only do the two have differing scopes of protection, but the proximity that they require the measures to have with them also differ. Conflating them is thus analytically and practically important for the purposes of the analysis under the sub-paras.

A deeper appreciation of these thresholds and the differential requirements to meet them are important also because they alter the nature of the examination conducted under the chapeau. The examination under the chapeau of Article XX proceeds as follows: after assessing the sub-paragraphs, panels must proceed to examine whether the measure constitutes “arbitrary or unjustifiable discrimination between countries where the same conditions prevail.” However, which conditions are the “same” can only be adjudicated in reference to the analysis in the sub-paragraphs. For instance, if a measure is claimed under XX(b), “same conditions” would prevail if the conditions with reference to plant or animal life are similar. The AB has emphasized that whether “same conditions” exist is construed with reference to the respective sub-paragraph under which the measure is saved. (para 5.299) Thus, the sub-paras act as anchors tied to the discrimination analyzed under the chapeau. Appreciating their differences remains all the more critical.

Conclusion

The GATT’s environmental exceptions will likely come to play a more significant role in trade law jurisprudence. The Panel’s Report EU-Palm Oil is one of the WTO’s latest says on the scope of this exception. In this article, I have relied on the DSB’s previous jurisprudence and argued that the Panel failed to appreciate the differing scope of sub-paras (b) and (g) in Article XX of the GATT. Missing this difference could alter the scope of these exceptions. Since the AB is currently at an impasse, it is unlikely that we will see a swift resolution soon. Nevertheless, in a world with an ever-increasing interface between climate and trade, even the slightest extension in this jurisprudence matters.