Greenhouse Gas Emissions Trading and the WTO

AuthorJacob Werksman
Date01 November 1999
Published date01 November 1999
Volume 8 Issue 3 1999 Greenhouse Gas Emission Trading and the WTO
Greenhouse Gas Emissions
Trading and the WTO
Jacob Werksman
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),
and the rules and procedures of the World Trade Organi-
zation (WTO).
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.
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.
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:
Transfer and mutual recognition of allowances (what
standards and conditions will govern the validity of
allowances within the jurisdiction of each participat-
ing country);
Incidence of regulation (which entities will be
required to hold allowances); and

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