The Sky is Not the Limit: - Carbon Trade Watch

4. Kyoto in Context: Trade andInvestmentAs emissions trading emerges as aprinciple component of governmentclimate change policy, the rulesgoverning its use will have to cohabitwith rules governing trade andinvestment. Increasingly, these tradeand investment rules continue todevelop and expand in scope andpower affecting more and moreaspects of human activity. Any effortsto improve the rules of emissionstrading, or to curb its use, will beforced to contend with these forces ofliberalisation.As new international‘environmental markets’develop, in what way willthese markets be subjectto international rulesgoverning trade andinvestment? The KyotoProtocol, for example,includes three marketbasedmechanisms(CDM, JI, and EmissionsTrading), which intersectwith many existing rules in the WorldTrade Organisation (WTO). As such,speculation is rife over how therelationship between WTO rules andthe Kyoto Protocol will pan out.Free Trade in Greenhouse Gases?The WTO governs international tradingrelationships between countries byenforcing complex rules, which extendbeyond mere trade in goods to coverservices, intellectual property rights,trade-related aspects of investment,agriculture, government procurement,and more. The WTO also includes adispute settlement mechanism, whichenables it to enforce non-complianceof its rules with devastating tradesanctions and penalties. Variousministerial ‘rounds’ in the WTOcontinue to expand and refine theserules to cover ever more aspects ofglobal economic activity, with theultimate goal of securing global free“The Kyoto Protocol tothe UN FrameworkConvention on ClimateChange (FCCC) may bethe most importanteconomic agreementpenned in the 20thcentury.”— Aaron Cosbey, Royal Institute ofInternational Affairs (RIIA) 1trade, property protection, supranationalregulation of the economy,and dispute settlement for the globaleconomy.Since the rules for the Kyotomechanisms are still being developed,and the WTO’s Committee on Tradeand Environment (the principalcommittee responsible for evaluatingthe relationship between MultilateralEnvironmental Agreements (MEAs)such as the Kyoto Protocol, and theWTO), is still deliberating, muchremains speculation. Sinceinternational emissions trading,particularly with regard to the KyotoProtocol, will have alarge impact on globaleconomic activity, thereis already a broadconsensus among legalexperts and academicsthat there are somepoints of conflict, whichwill need to beaddressed. 2These include issuessuch as: subsidies forrenewable energy technologies,discrimination of products based onhow they are produced, labellingstandards, environmental and socialstandards included in CDM and JI, thenature of certain types of rules whichmay be imposed on emissionsmarkets to prevent fraud, ‘carbontaxes’ and cross-border adjustments.In all these areas and more, there areconcerns that WTO rules restrictcountries from fulfilling key parts of theKyoto Protocol. There has alreadybeen a glimpse of this, when in 1999,the US Clean Air Act provisionrestricting imports of low standardreformulated gasoline was struckdown by the WTO in a challenge. As aresult, the US EnvironmentalProtection Agency was forced torewrite the rules to be in compliancewith the WTO ruling. The measurewas aimed at meeting tougher airquality standards by preventing theuse of low-grade gasolines. 323