This article explores the relationship between the newly emerging market for tradable greenhouse gas emissions allowances established by the 1997 Kyoto Protocol on Climate Change and the rule-based frameworks of the World Trade Organization (WTO). The paper finds that the greenhouse gas emissions reduction responsibilities and emissions trading rights established by the Kyoto Protocol do not conflict in any way with the responsibilities and rights of the nations under the WTO Agreements governing trade in goods, services, and the provision of subsidies. Rather, the emissions trading structure of the Kyoto Protocol deploys a rule-based system of "free trade" in emissions allowances to benefit the environment in a manner that is fully compatible with the WTO system.
The article cautions, however, that if governments implement their Kyoto Protocol obligations by placing quantitative restrictions on trade in allowances, or arbitrarily or unjustifiably discriminating against certain nations engaged in emissions trading, such measures might raise WTO issues at the same time that they would diminish the environmental effectiveness of the protocol.
The article recommends that in designing rules for the Kyoto Protocol's multilateral emissions trading system and structuring national implementation of Protocol obligations, governments can maximize environmental and economic benefits if they refrain from raising non-tariff barriers to trade in emission allowances, and avoid imposing quantitative restrictions on, or arbitrarily discriminating against, such trade.
The article concludes that by following these recommendations, governments enhance the potential for the Kyoto Protocol to achieve real, significant, and cost-effective reductions in emissions of global warming gasses, while reducing the likelihood that their implementation of greenhouse gas emissions reduction measures would raise any inconsistency with their responsibilities under the multilateral trading system.
A. Responsibilities and Rights of Nations Under The Kyoto Protocol on Climate Change
Experience with market-based approaches to environmental protection at local, regional, and national levels has demonstrated that such programs, if properly designed, can achieve improved environmental results faster, and at less cost, than "command-and-control" approaches, technology mandates, operational performance standards, or taxes.(1) International experience with these instruments includes their use in fisheries management and in a limited number of international emissions allowance transactions. The 1997 Kyoto Protocol on Climate Change(2) has the potential to create the first truly global demonstration of the power of environmental markets to deliver improved environmental results by providing incentives for countries, companies, and communities to reduce emissions of the greenhouse gases that contribute to global climate change. Because it offers this potential, in a market-based "trading" framework that has the potential to integrate smoothly into the existing international framework of trade in goods and services, the Protocol is attracting attention and interest at local, national, regional, and global levels. This article examines the relationship between the emissions trading systems established by the Kyoto Protocol and the trade rules established by the World Trade Organization (WTO).(3)
Beginning in 1990, the Intergovernmental Panel on Climate Change (IPCC) issued a series of reports indicating that carbon dioxide, methane, and other greenhouse gases (GHGs), which are being emitted into the atmosphere in ever greater amounts due to human activities, have the potential to cause serious climate disruption.(4) In Earth's atmosphere, GHGs trap heat that would otherwise radiate into space. Unchecked, anthropogenic emission of GHGs is expected to contribute to an accelerated warming of the planet, with potentially dangerous interference in the world's climate system. …