INTERNATIONAL TRADE LAW

TOPIC:
Overview of WTO’s Environmental Protections
in Oil and Gas Trade

AFRICAN ENERGY LAW

PROJECT

NAME: MERCY ALAOFIN

PROGRAM: MSc LAW AND POLICY

INSTITUTION: TEESSIDE UNIVERSITY

DATE: 12/01/2023
Table of Content

Table of Content ........................................................................................................................................... 2

Abstract ........................................................................................................................................................ 3
Status of Oil and Gas Trade in the WTO ...................................................................................................... 4
Current Development in WTO Energy and Environmental Policy .............................................................. 5
Are Environmental Measures Compatible with WTO Trade Policies? ....................................................... 6
Recommendations ....................................................................................................................................... 8
Conclusion .................................................................................................................................................... 9
BIBLIOGRAPHY ............................................................................................................................................ 11
Abstract

In recent times and more urgently, the world has become more awake to environmental issues
and its impact on trade and the planet, especially plant and animal life. These environmental
issues include air, land and water pollution, waste management, ecosystem management,
maintenance of biodiversity, the management of natural resources, wildlife, endangered
species and climate change. But more particularly, this research focuses on the environmental
threats and impacts of the exploration, transportation, and production of fossil fuels (oil and
gas) which are high pollutants

The connectivity between trade and environment is undeniable as trade can only thrive in a
safe environment. The energy sector contributes over 70% of the world’s pollution1 with many
communities especially in the developing nations facing serious health and economic hazards as
a result of environmental degradations caused by the activities of oil exploration and
production multinationals. Currently, the WTO rules including the GATT does not consider the
energy sector as distinct, the general rules of trade are applied to trade in energy commodities
such as oil and gas. This research paper seeks to explore the current limited state of the WTO’s
environmental policy for oil and gas trade, the shortcomings and reasons for limited
development in this area, and lastly give recommendations for ways that the WTO can develop
a framework to set up a coherent and comprehensive framework of environmental justice to
hold members accountable to environmental standards in oil and gas trade, exploration and
production.

1
European Environment Agency: Energy and Climate Change ( Published 29/08/2017)
<https://www.eea.europa.eu/signals/signals-2017/articles/energy-and-climate-change> assessed on 2/1/2023
Status of Oil and Gas Trade in the WTO

Historically, the energy sector did not made a distinction between energy-related goods and
services. This is due to the perception that energy services were a value addition to energy goods,
which could not be handled separately. Through market reform brought about by the sector's
privatisation and liberalisation, the trade in products and services was conceptually separated. A
precise legal framework was therefore required to resolve this distinction. Oil certainly belongs
in the category of products because it is simple to store and transact internationally. Since the
1860s, crude oil has been traded internationally and is regarded as a global commodity.2

Crude oil trade serves as a vital link between the upstream and downstream sectors of the
industry, and crude oil prices inform both.3 Natural gas is the same way. It can be stored in its
gaseous form and is traded across international borders via pipelines, but it is increasingly being
liquefied for storage and transit to far-flung areas.

It is widely accepted under the WTO regulations that the General Agreement on Tariffs and Trade
(GATT) covers the production of energy goods, while the General Agreement on Trade in Services
(GATS) covers the transmission and distribution of energy-related services.4

The world's energy consumption and costs were far lower 60 years ago, when the GATT's
regulations were being established.5 Even though energy has always been a significant influence
in geopolitics, liberalising commerce in energy was not a political goal at the time. Since state-
run monopolies dominated a substantial portion of the market, it was strictly regulated by
territorial allocation. A small number of multinational corporations severely monopolised,
cartelized, and controlled international trade in energy resources and products. This explains why
energy is not treated as a separate industry under the General Agreement on Tariffs and Trade
(GATT) or the World Trade Organization (WTO) guidelines. It was thought that generally
applicable laws, such as those governing state trading, could properly address the energy trade.

2
Thomas Cottier, Olga Nartova and Sadeq Z. Bigdeli, International Trade Regulations and the Mitigation of Climate
Change: World Trade Forum (Frontmatter Cambridge University Press,
<https://www.wto.org/english/res_e/publications_e/wtr10_7may10_e.pdf> assessed on 2/1/2023
3
Energy Charter Secretariat, Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas (2007) p.
67.
4
WTO, Energy Services, Background Note by the Secretariat, S/C/W/52 (9 September 1998), para. 36
5
M. A. Adelman, ‘World oil production & prices 1947-2000’ (2002) 42(2) The Quarterly Review of Economics and
Finance 170.
Additionally, no sectoral agreements that have been developed after the Kennedy Round have
included a particular agreement on energy trade.6

However, because fundamental WTO regulations apply to all types of commerce, they also do so
for the trade in energy goods and services.7 Even if they weren't primarily negotiated with energy
in mind, these regulations can now be enforced through the WTO dispute settlement process.
The energy industry differs from other industries in numerous ways due to specific
characteristics. First, the unusual physical properties of energy goods have an impact on the
storage, transit, and distribution methods. The existence of government involment and the
significance of state-owned corporations, which control several national energy markets, present
additional uniqueness.8

Current Development in WTO Energy and Environmental Policy

Although the WTO's environmental policy has been stagnant for years, GATT/WTO case law has
made one of its most remarkable change in the area of trade and the environment: after initially
condemning any unilateral international measure aimed at protecting the environment in US-
Tuna I (Mexico),9 it later stated in US-Shrimp10 that unilateral environmental measures infringing
on trade obligations shouldn't be discarded simply because they are unilateral. 11

Case law from the past and the present has a "friendlier" stance toward environmental issues
interfering with trade agreements. This new approach is greatly appreciated because it is evident
from the GATT’s provisions that the GATT's authors intended to prohibit "protectionism" rather
than rules that would have a detrimental impact on trade agreements.12

Coincidentally, the Doha Round of WTO negotiations saw the inclusion of the broader issue of
liberalising trade in environmental products and services (EGS) for the first time. The WTO
Committee on Trade and Environment held special meetings to conduct the negotiations, which

6
General Agreement on Tariffs and Trade (GATT) multilateral trade negotiations held between 1964 and 1967
in Geneva, Switzerland
7
O. Nartova, ‘Trade in Energy Services Under WTO Law: The Impact of Competition Policies’, PhD thesis, University
of Bern (2009)
8
Thomas Cottier, et al, (n2)
9
Mexico etc v US: ‘Tuna- Dolphine’ WT/DS381/AB/R
10
US Shrimp (Vietnam) Re unreported 22 April 2015 (WTO)
11
Aaron Cosbey, Petros C. Mavroidis, Heavy Fuel: Trade and Environment in the GATT/WTO Case Law Review of
European, Comparative and International Environmental Law, Vol. 23, No. 3, pp. 288-301, 2014. available at:
https://doi-org.ezproxy.tees.ac.uk/10.1111/reel.12089 Citations: 36)
12
ibid
were focused on identifying environmental goods that should be liberalised. 13 The Doha talks
also touched on the subject of energy. Members talked about energy as a distinct service sector
for the first time.14

Are Environmental Measures Compatible with WTO Trade Policies?

In accordance with the GATT, WTO members may adopt measures to safeguard the environment,
human health, and life so long as they do so in accordance with the GATT's rules or one of its
exceptions:15

- According to the Most-Favored-Nation Obligation (Article I), member states must treat
like goods produced by other members equally, i.e., they must not make distinctions
between similar goods produced by different members.
- Member states are required to set tariff levels under the Tariff Obligations (Article II), and
tariffs above certain levels are forbidden.
- In order to protect domestic production, member states are forbidden by the National
Treatment Obligation (Article III) from imposing "internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal sale, offering for
sale, purchase, transportation, distribution or use of products" on imported or domestic
goods.
Internal taxes and other internal charges cannot be applied to domestic or imported goods in a
way that violates the National Treatment Obligation principle in Article III, according to Article
III(2). As long as they are not discriminatory, the section supports that imports may be subject to
adjustable product taxes (such as domestic sales, value-added, and excise taxes), but not
producer taxes (such as payroll or income taxes, social security fees, or taxes on projects or
interests).16

Member states are prohibited from placing quotas, prohibitions, or other quantitative
restrictions on imports of goods from other member states (Article XI), unless the above
conditions apply. In some cases, adopting an import embargo on goods from nations without
carbon restrictions or imposing punitive import tariffs on such goods could be in violation of WTO
regulations, unless the country falls under one of the exceptions. The various exclusions from the

13
The World Bank, ‘International trade and Climate change: Economic, Legal and Institutional Perspective.
Environment and Development’ Pg 73-75
14
Thomas Cottier (n2)
15
The World Bank, ‘International trade and Climate change: Economic, Legal and Institutional Persppective.
Environment and Development’, 37
16
National Treatment on Internal Taxation and Regulation, 2012
aforementioned conditions are outlined in Article XX. In particular, two of these outliers have
bearing on environmental policies.

GATT-incompatible measures may be justified by WTO members under Articles XX(b) and (g),
respectively, if they are required to protect human, animal, or plant life or health or if they are
related to the conservation of exhaustible natural resources.17Additionally, the chapeau of Article
XX stipulates that these measures cannot be used to discriminate between nations where the
same conditions exist arbitrarily or unjustifiably, nor can they be construed as a covert trade
barrier.

Application of measures based on processes and production methods (PPM) could present a
particularly challenging issue when determining how trade measures would interact with
environmental policy. These PPM-based measurements may focus on the manufacturing process
rather than the fundamental characteristics of the product. PPM concerns are crucial for the
compatibility study because the majority of environmental measures don't directly target any
specific product but instead considers how greenhouse gases is emitted during production.18
The Shrimp-Turtle dispute19 may have opened the way to the legitimacy of trade measures based
on PPMs, according to the WTO Dispute Settlement Panel and the Appellate Body.

The idea of PPMs has not been well received in earlier cases. However, in that instance, the
United States' prohibition on the importation of specific shrimp and shrimp-related items from
India, Malaysia, Pakistan, and Thailand was challenged by these countries. The measure in
question concerned the method of catching shrimp, specifically whether shrimp trawlers
employed "turtle excluder devices," which allowed shrimp to flow to the back of the net while
diverting endangered sea turtles and other unintentionally caught large objects out of the net.
The WTO panel and the Appellate Body concentrated on how the United States applied its
measure and concluded that it complied with the requirements of Article XX exceptions, including
the requirements of the Article XX chapeau, which forbids environmental measures from being
applied in a "disguised restriction on international trade" or in a "arbitrary or unjustifiable"
manner.20 They pointed out that sea turtles were protected under the widely ratified Convention
on International Trade in Endangered Species, to which all of the parties to the WTO dispute were
also parties, and they also noted the appropriateness of specific measures in specific
circumstances to protect the environment.

As a result, even though a climate change policy (including PPM-based measures) might not be
fully GATT-consistent, depending on the circumstances, it may be justified if it complies with the

17
ibid
18
ibid
19
US Shrimp (Vietnam) Re unreported 22 April 2015 (WTO)
20
The World Bank (n15)
requirements of Article XX exceptions and does not apply arbitrarily or unjustifiably or act as a
covert barrier to the free flow of international trade.21

Recommendations

The need to develop an environmental regulation for oil and gas trade in the WTO is necessary
to achieve a global, sustainable and clean environment. The current regulations as seen above is
highly fragmented and largely incoherent. There is an urgent need to address environmental
issues and pollution that has ravaged and still ravaging the world.22 This should be addressed by
a future Framework Agreement to standardize environmental protection expectations amongst
WTO member states in Oil and Gas Trade, especially by putting the following into consideration:

1. A coherent and comprehensive binding rules on oil and gas trade amongst members states
which clearly classifies clean and fossil energy sources (like oil and gas) while also recognizing
their distinction. In view of the close interactions between the energy sector and environmental
issues, formulating effective rules to address energy under the WTO system will infuse coherence
and efficiency into the environment and trade regimes.23

2. Generally, environmental measures can be employed by the WTO for all its members with
respect oil and gas trade. Environmental measures can be grouped as regulatory measures, fiscal
measures, market-based instruments, or voluntary agreements24

Since The Prohibition on Quantitative Restrictions (Article XI) allows member states to impose
quotas, including bans, on imports of products from other member states, in specified
circumstances. It is most desirable for the WTO to have in place the environmental framework
reflecting uniformity in these punitive measures.25 These measures should be considered jointly
by all member states and not left to the sole discretion of individual member states. Doing this
will strengthen the fight against world pollution resulting from oil and gas trade.

Another measure that can be considered is Carbon pricing. Using a price, typically in the form of
a penalty for the carbon dioxide (CO2) emitted. Carbon pricing is a measure that captures the
external costs of greenhouse gas (GHG) emissions—the costs of the consequences that the public
experience, such as damage to crops, health care costs from heat waves and droughts, and loss
of property from flooding and sea level rise. Carbon pricing aids in shifting the responsibility for

21
ibid
22
Thomas Cottier(n2)
23
ibid
24
The World Bank (n15) 19,20
25
Ibid, 37
the harm caused by GHG emissions back to those who are accountable and who could have
prevented it. A carbon price sends an economic signal to emitters and gives them the option of
improving their activities and reducing their emissions or continuing to emit and being charged
for their emissions, as opposed to mandating who, where, and how to cut emissions. Thus, the
ultimate environmental aim is accomplished in the most adaptable and economically beneficial
manner for society.26

Furthermore, equalizing carbon prices will also help avoid the perception and reality that climate
measures might be used as an excuse for protectionist discrimination.27

Countries in charge of oil and gas multinationals that operate in developing countries and fail to
maintain proper environmental standards in those other regions could be sanctioned using any
of the punitive measures above by other member states until the pollution is abated.28

While developing countries may not be expected to stop pollution in oil and gas production
processes immediately, they can still be a part of the agreement and given a time frame, as well
as technological partnership, and support to develop their domestic policy and measures to
conform with the developed framework to end the prevalence of pollution in their nations.
However, developed nations should be signatories and immediately be accountable for
pollutions in their territories.

2. PPM measures should be taken into consideration in the light of the recent WTO panel decision
on the "Shrimp-Turtle," case, provided that they are not implemented in a discriminatory
manner. These PPM-based measurements should focus on the manufacturing process rather
than the fundamental characteristics of the product. PPM measures can be incorporated into the
WTO's environmental framework to deter nations where oil spills and gas flaring occur during
crude oil production and exploration in order to address procedural flaws and hold members
states accountable for pollutions brought on by negligence.

Conclusion

The economic and trade consequences of countries adopting environmental policies is drawing
more attention to the interaction between trade and the environment. The WTO acknowledges

26
The World Bank, Carbon Pricing Dashboard- https://carbonpricingdashboard.worldbank.org/what-carbon-
pricing
27
The World Bank (n15)37,41
28
Poisoned Air, Undercover in BP’s Dirtiest Oil Field, BBC News (https://youtu.be/TJvLXcPBGwI)
the significance of attempting to "defend and conserve the environment" in its Preamble to the
Marrakesh Agreement, which formed the WTO in 1995.

The core of current legal innovations in energy law is the interaction between trade and
environmental protection and adaptation. The World Trade Forum Conference in 2007 focused
on this issue, and the many perspectives were thoroughly discussed..29

Over the past 20 years, there has been substantial discussion about how international trade
affects environmental results. This prompted theoretical research, which identified a number of
issues connecting openness to trade and environmental quality, as well as empirical research,
which sought to unravel some of the indicated relationships using national and international
data. Pollution, however, has received a lot of attention in recent times. Trade trends have an
impact on energy use and the environment. This is because a degraded environment brought on
by the pollution of fossil fuels can have a significant negative influence on and impede trade.30

The intersection of trade and political economy concerns and their effects on the environment
and natural resources have been the subject of several more recent studies. The significance of
creating connections between trade requirements outlined in various bilateral and multilateral
trade agreements and national environmental policies is becoming increasingly widely
acknowledged in the area of trade law.31

With the environmental provision of the General Agreement on Tariffs and Trade (GATT) which
permits the adoption of product-related measures in specific circumstances if they "relate to the
conservation of exhaustible natural resources" or "are necessary to protect human, animal, or
plant life or health." I think that this, along with the recent favourable ruling by the AB in the US
Shrimp case, are encouraging developments and the foundations for the establishment of a
thorough environmental protection framework for oil and gas trade in the WTO.32

29
Thomas Cottier (n2)
30
The World Bank (n15)7
31
ibid
32
ibid
BIBLIOGRAPHY

Adelman M A, ‘World oil production & prices 1947-2000’ (2002) 42(2) The Quarterly Review of
Economics and Finance 170.

Cottier Thomas, Nartova Olga and Bigdeli S Z, International Trade Regulations and the Mitigation
of Climate Change: World Trade Forum (Frontmatter Cambridge University Press, available at:
https://www.wto.org/english/res_e/publications_e/wtr10_7may10_e.pdf)

Cosbey Aaron, Marvrodis P C, Heavy Fuel: Trade and Environment in the GATT/WTO Case Law
Review of European, Comparative and International Environmental Law, Vol. 23, No. 3, pp. 288-
301, 2014. available at: https://doi-org.ezproxy.tees.ac.uk/10.1111/reel.12089 Citations: 36)

Energy Charter Secretariat, Putting a Price on Energy: International Pricing Mechanisms for Oil
and Gas (2007) p. 67.

European Environment Agency: Energy and Climate Change ( Published 29/08/2017) <
https://www.eea.europa.eu/signals/signals-2017/articles/energy-and-climate-change>
assessed on 2/1/2023

Nartova O, ‘Trade in Energy Services Under WTO Law: The Impact of Competition Policies’, PhD
thesis, University of Bern (2009);

Poisoned Air, Undercover in BP’s Dirtiest Oil Field, BBC News (https://youtu.be/TJvLXcPBGwI)

The World Bank: International trade and Climate change: Economic, Legal and Institutional
Persppective. Environment and Develpment- Pg 73-75

The World Bank: International trade and Climate change: Economic, Legal and Institutional
Persppective. Environment and Development 37

The World Bank- Carbon Pricing Dashboard-

https://carbonpricingdashboard.worldbank.org/what-carbon-pricing

WTO, Energy Services, Background Note by the Secretariat, S/C/W/52 (9 September 1998), para.
36