Greenhouse Gas Emissions Trading and the WTO

• DOI: http://doi.org/10.1111/1467-9388.00209
• Date: 01 November 1999
• Published date: 01 November 1999

Volume 8 Issue 3 1999 Greenhouse Gas Emission Trading and the WTO

Greenhouse Gas Emissions

Trading and the WTO

Jacob Werksman

Overview

This article explores selected aspects of the potential

relationship between an international emissions trading

system (ETS) that may be developed as a means of

implementing the Kyoto Protocol to the United Nations

Framework Convention on Climate Change (UNFCC),

1

and the rules and procedures of the World Trade Organi-

zation (WTO).

2

The primary objective of this article is to

provide an assessment of the scope of the WTO’s juris-

diction over various aspects of the design of an ETS. It

thus offers an approach to exploring this relationship,

rather than an exhaustive analysis of what conf‌licts

might arise and how they may be resolved.

Precise conclusions about this relationship are diff‌icult

to reach because the rules governing the operation of

the Kyoto Protocol have not yet been agreed inter-

nationally, and states have not yet narrowed the options

available to them in the design of an ETS. Furthermore,

substantial portions of the WTO regime have been in

force for less than f‌ive years and the precise contours

of these obligations have yet to be clarif‌ied through state

practice and jurisprudence. Finally, it must be acknowl-

edged that in seeking to implement the Kyoto Protocol

through the use of international market mechanisms, the

Parties are undertaking an unprecedented experiment in

international co-operation and regulation.

Introduction

When in force, the Kyoto Protocol will require its indus-

trialized Parties (known as ‘Annex I Parties’) collectively

to reduce their overall emissions of greenhouse gases

by at least 5% below 1990 levels in the commitment per-

iod 2008–2012. Each Annex I Party will be bound by a

specif‌ic commitment set out in Annex B to the Protocol.

These commitments cap emissions to between 8% below

to 10% above each Annex I Party’s 1990 levels, with each

Annex I Party limited to emitting its respective ‘assigned

amount’. Negotiators designing the Kyoto Protocol

recognized that the costs of reducing greenhouse gas

emissions would vary among Annex I Parties. Emissions

could be reduced most cost-effectively if governments

and regulated entities were allowed to acquire or invest

Blackwell Publishers Ltd. 1999, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

251

in emission reduction opportunities in whichever coun-

tries they are cheapest to achieve. Emissions trading, in

effect, allows those Annex I Parties with parts of

assigned amount (PAAs) that are excess to their require-

ments to sell these to Annex I Parties that need

additional PAAs to remain within their Annex B caps.

The essential objective of the WTO is to liberalize mar-

kets in the trade in goods and services. It does this

through the imposition of both relative and absolute

standards of treatment of goods and services in the

international and domestic market place. The WTO’s

relative standards prohibit WTO Members from the dis-

criminatory treatment of ‘like’ goods, services and ser-

vice suppliers on the basis of country of origin. The

WTO’s ‘absolute’ standards prohibit or discourage Mem-

bers from putting in place certain types of measures that

directly or indirectly interfere with the trade in products

and services.

This article analyses international emissions trading

under the Kyoto Protocol on two, parallel levels. At one

level sovereign exchanges of PAAs will take place

between Parties. At a second level exchanges of emis-

sions allowances may take place between private enti-

ties. The analysis concludes that WTO rules do not cover

the transactions in PAAs at the sovereign level. Thus

WTO rules would not constrain the choice of any Party

to the Protocol as to which other Party to the Protocol

it wishes to trade PAAs with. For example, if the Kyoto

Protocol rules allow it, a Party may choose not to engage

in the exchange of PAAs with countries that have joined

the Kyoto Protocol but that are in non-compliance with

their commitments.

This article assumes that international ‘emissions trad-

ing’ involving private entities will most likely involve the

transfer of government-issued permits or ‘allowances’.

Such ETSs will require the development of rules on the:

앫Transfer and mutual recognition of allowances (what

standards and conditions will govern the validity of

allowances within the jurisdiction of each participat-

ing country);

앫Incidence of regulation (which entities will be

required to hold allowances); and