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Christian de Perthuis and Raphael Trotignon

The European emissions trading scheme (EU ETS) is the centrepiece of Europe’s climate policy. The system has been undermined variously by the weakness of its regulation, an undesirable overlap with other public policies and the far-reaching economic and financial crisis that caused the market price of allowances to plunge. This chapter attempts to identify the conditions for making the coming years of the EU ETS a success. It draws historical lessons from the eight years the scheme has been in operation, and then presents the various interventions by the public authorities currently under discussion in order to revive the market. Finally, the chapter proposes to draw lessons from monetary policy by outlining what might be the mandate of an Independent Carbon Market Authority, with responsibility for the dynamic management of the supply of allowances, and whose main mission would be to ensure the optimal linkage between the different temporal horizons of the climate strategy.

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Claudia Kettner

The idea of emissions trading reflects the fact that the costs of reducing emissions differ between regulated entities. Differences in marginal abatement costs will hence spur permit trading, leading to their equalization across market participants and aggregate cost efficiency in equilibrium. In view of the broad range of activities covered by the EU ETS, one can expect significant differences in emission reduction costs and hence strong incentives for trade. This chapter presents empirical evidence on trading in the EU ETS: EUA trade is analysed and discussed and the use of international credits for compliance under the EU ETS is addressed on country and sector level. In addition, trading flows on installation and company level are assessed. The empirical analysis of the EU ETS shows that the assumptions of the theory of emissions trading are not matched by the real-world setting. Allowance imports and exports showed only a very limited correlation with allowance surpluses and allowance deficits. This phenomenon cannot only be observed at country and sector level, where differences between installations and intra-firm transfers could have been a possible explanation for these discrepancies, but first analyses of trading in the EU ETS show that several companies have bought additional allowances on the market in Phase 1 despite being endowed with surplus allocation and the absence of banking between Phases 1 and 2. While the EU ETS is far from being a perfect market, empirical evidence shows an increase in trading activity since 2005 as agents became accustomed to the new market. A higher stringency of the cap in the EU ETS and the possibility of banking allowances might help stabilise carbon prices and hence mitigate inefficiencies.

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Erich Vranes

Climate change is an example of a worldwide tragedy of the commons. The option of introducing carbon taxes has increasingly been discussed as a possible remedy, namely as an economic solution that may be both efficient and effective. However, carbon taxes tend to encounter strong opposition by domestic industries for competitiveness concerns. Therefore, and for reasons of effectiveness and equity, carbon taxes arguably need to be accompanied by border measures that apply to imported products. One type of border measure that is usually discussed in connection with carbon taxes is the instrument of border tax adjustments (BTAs). While BTAs are a classic instrument of trade policy, so far it has rarely been used in relation to environmental taxes. This contribution, therefore, concentrates on the question of the WTO consistency of carbon taxes and related-BTA schemes. Due to the lack of international cooperation, the legality of such unilateral climate measures will arguably remain topical for many years.

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Angelos Dimopoulos

This chapter examines how investor-State dispute settlement (ISDS) influences the balance between investment protection and climate change¬. It looks first at the jurisdiction of investment tribunals and remedies available under ISDS, in order to explain when and what kind of claims investors can raise, and who can participate in arbitral proceedings. Second, this chapter critically reviews applicable law in investment arbitration, and the role of environmental law rules and principles therein. It is argued that ISDS limited jurisdiction to determine only whether there has been a violation of investment law provisions does not pose a systemic “threat” to climate change protection, since tribunals cannot make authoritative findings on the existence of environmental harm. On the contrary, investment tribunals tend increasingly to pay due consideration to national or international law rules on climate change and show deference to host states when the latter provide evidence supporting the legality of climate change-related measures. Besides, investment tribunals can indirectly address potential environmental harm caused by investors by excluding them from the scope of investment protection, or take their conduct into account in the merits or in the calculation of damages. Finally, although ISDS has been heavily criticized for not allowing third parties to participate in proceedings, a growing number of arbitration rules and investment treaties enable the submission of amici curiae, that presents a first positive step towards strengthening inclusiveness and legitimacy of ISDS.

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Michaël Alder, Aik Hoe Lim and Ruosi Zhang

Considerable attention has been devoted to how trade in environmental goods can help in the efforts to mitigate climate change and the role that the General Agreement on Tariffs and Trade (GATT) might play in this regard. There has, in contrast, been much less consideration of the impact of services trade and the adequacy of the General Agreement on Trade in Services (GATS) as a framework for supporting environmental sustainability. We argue that market opening for trade-in-services does not stand in the way of sound environmental policies. To the contrary, liberalizing trade in services can positively impact the environment, by providing greater access to environmental services, such as waste management services, to name just one. Moreover, liberalization of trade in environmental services may enable and encourage service suppliers and consumers alike to opt for eco-friendly, “green” (and “greener”) services. Hence, trade in services and environmental sustainability should be considered as complementing one another. With an appropriate legal and policy framework, such an approach can create a win-win situation; namely, higher potential for international trade in services on the one hand, and better global environmental policies, on the other hand.

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Roy Andrew Partain

This chapter addresses a novel and unique danger to the functioning of international trade laws, that of ‘green paradoxes’. As such, it provides an introduction to the literature on green paradox models, provides a structural list of areas of nexus between those models and international trade laws, and suggests areas of future research. As first argued by Hans-Werner Sinn, certain regulatory elements of international climate change conventions have the potential to provide economic incentives that could, under certain conditions, lead to increases in GHG emissions and thus worsen the likelihood of adverse anthropogenic climate change. Thus the moniker of ‘green paradoxes’ i.e. ‘green policy’ environmental laws could worsen climate change conditions. The consideration of green paradox models for environmental law researchers is compounded by the additional requirements of international trade laws and conventions. In an international market, global trade and global emissions are increasingly interconnected. This chapter introduces the background and central concepts of green paradox models to a broader audience of international trade law specialists. It provides a framework of causes and potential mitigation strategies with which international trade law strategies could be coordinated with international environmental laws to allow for future green policy coordination.

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James Munro

This chapter assesses the intersection between climate change and two of the most significant preferential trade agreements (PTAs) ever to be contemplated—the Trans-Pacific Partnership Agreement (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP). These agreements would, upon entry into force, cover close to one-third and one-quarter of world trade flows respectively. This chapter begins by addressing the competing rationales for covering or omitting climate change in PTAs such as the TPP and TTIP. It then reviews the varied and evolving approaches of the EU, US, and other key negotiating parties to referencing and addressing climate change in their past PTAs. At one end of the spectrum, some are silent on climate change and environmental matters altogether. At the other end, some include binding obligations to implement international climate treaties. This chapter then proceeds to evaluate how general, non-specific environmental obligations in PTAs, such as the TPP and TTIP apply to domestic climate law, such as through binding existing levels of domestic climate ambition. It then surveys the prospect for liberalization of market access for environmental goods and services under the TPP and TTIP, and how this could assist climate mitigation and adaptation objectives. The chapter concludes by analysing the emergence of climate change in a series of recent trade and investment disputes, and the extent to which similar climate-related disputes could arise within the TPP and TTIP.

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Ludivine Tamiotti and Daniel Ramos

Global concerns over the effects of GHG emissions on the climate has led to important developments in climate change policies. As a result, several different policy paths at national and regional levels might be adopted to address the issue, including through the use of trade-related mechanisms. Such paths might give rise to concerns regarding their effectiveness and potential consequences for different economies. The concluding chapter joins the debate around the issues addressed throughout the book by presenting the institutional role the WTO can play to promote the mutual supportiveness between international trade and climate change. Three principal institutional roles are outlined: as a binding legal system that regulates its members' trade interactions and which includes a dispute settlement resolution mechanism; as a framework through which WTO members are engaged in a peer-review of each other's trade policies; and as a negotiating forum in which members exchange views, opinions and ultimately negotiate ways to further their trade relations. The concluding chapter discusses such institutional roles and explores how the WTO offers a framework for its members to address the trade issues that may arise when adopting measures aimed at climate change mitigation.

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Anastasios Gourgourinis

This chapter deals with climate change and trade, from the perspective of the normative interaction between common but differentiated responsibilities (CBDR) and the World Trade Organization (WTO) regime. In this vein, the chapter first examines the content and legal status of CBDR in international law, reaffirming the obvious, i.e. that CBDR does not enjoy independent legal status under international law. Then, the discourse turns to examine whether it is somehow 'inherent' in WTO law, still cautioning against overstating the relevant impact of either the reference to the objective of sustainable development in the Marrakesh Agreement’s Preamble, or that of the WTO rules on special and differential treatment (S & D) for developing countries. Given the fact that CBDR lacks independent legal status in international law, the chapter addresses the question whether CBDR, as reflected or operationalized via provisions of multilateral environmental agreements (MEAs), such as those of the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol, may still be resorted to in WTO dispute settlement for climate change measures. Distinguishing between using MEA provisions reflecting/operationalizing CBDR in a WTO dispute settlement, either as applicable law, or as an interpretative tool, the chapter concludes that CBDR's pertinence in WTO disputes is rather overstated, insofar as the interaction between CBDR and WTO law should be neither framed as a tale of two 'interconnected worlds', nor a tale of two 'crossing swords'.

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Thomas Cottier and Tetyana Payosova

Climate Change mitigation and adaptation is not limited to specialized instruments of international law based upon the United Nations Framework Convention on Climate Change (UNFCCC). It will increasingly bear upon international trade regulation within the World Trade Organization (WTO) and in preferential trade and investment agreements. The chapter develops the linkages between climate change and trade, taking recourse to the principle of common concern; which provides the proper foundation to address collective action problems in the field. Different from public goods or the principle of common heritage of humankind, common concern of humankind offers the foundations, but also the limitations, of unilateral action addressing climate change mitigation. The chapter discusses the status and use of production and process methods (PPMs) which increasingly move at the heart of international trade regulation and the analysis of like products. Methods of clean production of goods and services are key to addressing climate change and can be properly framed within the emerging principle of the common concern of humankind.