The Climate Change Regime Mix of Direct and Indirect Trade Restrictions

The climate change regime, i.e., the 1992 Framework Convention on Climate Change and its 1997 Kyoto Protocol, can collide with WTO law in a number of aspects. First of all and similar to the aforementioned agreements, the Kyoto Protocol confines the trade in particular products; but unlike other MEAs which affect existing goods, the Kyoto Protocol, in its Article 17, introduces the very products it regulates. These emissions or "Parts of Assigned Amounts" (PAAs) shall only be traded within certain limits ("caps") and between designated industrialized countries listed in Annex B of the protocol.

However, what can be traded is subject to WTO agreements, regardless of the difficult characterization of PAAs as either goods or services, hence either

* The Working Group considered the exceptions under Article XX GATT and the corresponding rules of the 1969 Vienna Convention on the Law of Treaties (VCLT) as sufficient in order to avoid conflicts.

falling under the GATT or the GATS.* A legal challenge of the global climate regime might only be a question of time: "In the absence of express rules limiting PAA-related issues to the UNFCCC, difficulties may arise because there is no legal barrier preventing a country from bringing the case before the WTO dispute settlement" [26,37].

With the Kyoto Protocol entering into force in February 2005, the compatibility issue of PAA-trading has not only become more virulent, but will also turn out more complex, since the parties have to decide on concrete procedures under Article 18 which asks "to approve appropriate and effective procedures and mechanisms to determine and to address cases of non-compliance". As a matter of fact, the first Meeting of Parties in December 2005 has already taken a major step in this direction, by adopting the Marrakesh Accords, including "the most elaborate compliance regime of any existing multilateral environmental agreement" [38]. If upcoming meetings decide to include trade-related sanctions into this compliance regime, the Kyoto Protocol might yet in another way collide with GATT or GATS.

Another type of provision, which could at least indirectly lead to a conflict with WTO law, involves the so-called PAMs under Article 2 of the Kyoto Protocol. Parties ought to apply these "policies and measures" in order to meet their quantified emission limitation and reduction commitments. Among these PAMs are "fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors" (Article 2[v])—in other words: steps "which are likely to affect the competitiveness of national industries" [26,39]. In particular, border cost adjustments have recently entered debates about appropriate measures [40]. These tools aim at balancing competitive disadvantages of domestic goods which face higher licensing costs under the Kyoto Protocol. However, in light of more trade-consistent alternatives, cost adjustments might

* Werksman (Will International Investment Rules Obstruct Climate Protection Policies? 2001: 155f.) denies this interpretation of emissions allowances as either goods or services. This notwithstanding, he agrees that Kyoto Protocol regulations can promote behavior which is at odds with GATT or GATS rules: "design choices regarding the incidence of regulation and allocation of allowances will probably affect the competitive relationship between products and services that are governed by WTO disciplines." In particular, Werksman predicts legal conflicts not so much for the primary market, i.e., trade in allowances by end-users, but rather for the secondary market, i.e., trade in derivative financial instruments based upon allowances: "If the ETS [Emissions Trading Scheme] rules allow financial-service providers to buy, own, and hold allowances, the EC and its Member States may be under a GATS obligation to extend MFN and national treatment to foreign services and service suppliers" (ibid.: 171). Depending on the design of the ETS, especially on the point of a carbon-based fuel cycle, at which allowances are required, the trading scheme could run counter to WTO provisions. This holds especially true for upstream allocations requested from energy producers, since, whenever exporting their energy to another ETS country, such allocations would be equal to import licenses to be held by these producers.

not stand tests of necessity and appropriateness under Article XX GATT, once being challenged and brought before the DSB.*

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