The world trade organization and carbon market clubs

• Author: Rafael Leal-Arcas/Ellis Malle/Marion Kerestedjian/Gulce Budak
• Position: Jean Monnet Chaired Professor in EU International Economic Law and Professor of Law, Queen Mary University of London (Centre for Commercial Law Studies), United Kingdom/Independent researcher, PhD, LLM, LLB/Former research assistant, Queen Mary University of London/Ph.D. Candidate, University of Zurich, School of Law
• Pages: 895-976

THE WORLD TRADE ORGANIZATION AND CARBON

MARKET CLUBS

RAFAEL LEAL-ARCAS*, ELLIS MALLE†, MARION KERESTEDJIAN‡, AND

GULCE BUDAK§

ABSTRACT

This article explores emission units as a linkage in climate clubs in the hope

of making a remarkable difference in climate change mitigation. It analyzes

emission units trading in the context of regional trade agreements as a novel,

promising, and effective way to mitigate climate change. It then examines

Article XX of the General Agreement on Tariffs and Trade (GATT) as a poten-

tial and encouraging remedy for the development of climate clubs. Specif‌ically,

it explores the scope of application of Article XX and investigates to what extent

it can be applied to climate concerns. It then provides an analysis of climate-

club measures according to the jurisprudence of the World Trade Organization

on GATT Article XX.

This article concludes that, unless there is signif‌icant reform in the current

laws, policies, and actions regarding climate change, the global levels of green-

house gas emissions will continue to increase. As a response to this problem,

many countries have enacted regulatory measures and economic incentives to

mitigate climate change at the national level. One of them is emissions trading

schemes, in which carbon has been given a price and the environmental exter-

nality of the industry is internalized with this pricing mechanism. However,

these national-level carbon pricing mechanisms create the risks of carbon leak-

age, reduction of competitiveness of their industry, and free-riding in the coun-

tries that have no climate-change mitigation measures.

* Jean Monnet Chaired Professor in EU International Economic Law and Professor of Law,

Queen Mary University of London (Centre for Commercial Law Studies), United Kingdom.

Visiting Professor, New York University Abu Dhabi (UAE). Inaugural Lee Kong Chian

International Visiting Professor, Singapore Management University School of Law, Singapore.

Member, Madrid Bar. Ph.D., European University Institute; M.Res., European University

Institute; J.S.M., Stanford Law School; LL.M., Columbia Law School; M.Phil., London School of

Economics and Political Science; J.D., Granada University; B.A., Granada University. V

C 2021,

Rafael Leal-Arcas, Ellis Malle, Marion Kerestedjian, and Gulce Budak.

† Independent researcher, PhD, LLM, LLB.

‡ Former research assistant, Queen Mary University of London.

§ Ph.D. Candidate, University of Zurich, School of Law.

895

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 898

II. EMISSION UNITS AS A LINKAGE IN CLIMATE CLUBS . . . . . . . . . . . . 902

A. Climate Clubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902

1. The Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902

2. Emission Units as a Linking Instrument . . . . . . . . 903

B. Emission Units as a Good . . . . . . . . . . . . . . . . . . . . . . . . . 905

1. The Characterization of the Units . . . . . . . . . . . . . 905

2. Most-Favored Nation Principle . . . . . . . . . . . . . . . 906

a. Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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907

b. Advantage Accorded Immediately and

Unconditionally 907

c. Like Products 907

i. The Product Characteristics 907

ii. The End-Use . . . . . . . . . . . . . . . . . . . . . . . 909

iii. Consumer Preferences . . . . . . . . . . . . . . . . . 910

iv. Tariff Classif‌ication . . . . . . . . . . . . . . . . . . 910

v. Competitiveness and Substitutability 911

C. Emission Units as a Service 911

1. The Characterization of the Units 911

a. Environmental Services 911

b. Financial Services 912

2. Most-Favored Nation Principle . . . . . . . . . . . . . . . 913

a. Like Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 914

i. The Service Characteristics 914

ii. End-Use 917

iii. Consumer Preferences . . . . . . . . . . . . . . . . . 917

iv. Modes of Supply 917

v. Competitiveness and Substitutability 918

b. Advantages Immediately and Unconditionally

Provided and Treatment No Less Favorable 919

III. EMISSION UNITS TRADING AND REGIONAL TRADE AGREEMENTS 920

A. Emissions Trading Under International Law: An Overview . 920

B. The Relationship Between Emissions Trading Schemes and

International Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . 923

1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923

2. Linking Emissions Trading Schemes 928

3. Purpose of Linking Emissions Trading Schemes 930

C. A Club of Emissions Trading 933

1. The Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933

2. Are Emission Units Services or Goods? . . . . . . . . . 936

3. Emissions Trading Measures in Line with WTO

Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 937

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896 [Vol. 52

4. Border Carbon Adjustments (BCA) in Line with

WTO Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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940

D. WTO Rules Applicable to Environmental Policies and

Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948

1. Scope and Coverage of the Rules on

Environmental Issues 948

2. General Exceptions According to GATT Article XX 950

E. Regional Integration and Emissions Trading: The Case of

RTAs in the WTO Framework . . . . . . . . . . . . . . . . . . . . . . 952

1. WTO Legal Framework . . . . . . . . . . . . . . . . . . . . . 952

2. RTAs and Climate Clubs . . . . . . . . . . . . . . . . . . . . 956

IV. GATT ARTICLE XX AS A POTENTIAL REMEDY FOR THE

DEVELOPMENT OF CLIMATE CLUBS . . . . . . . . . . . . . . . . . . . . . . . 958

A. The Scope of GATT Article XX and its Application to Climate

Clubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958

1. Material Scope: A Larger Umbrella of Exceptions 958

a. A Trade Measure Infringing GATT’s Substantive

Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958

b. An Exhaustive List of Exceptions: Detailing Article

XX(b) and (g) . . . . . . . . . . . . . . . . . . . . . . . . . . 960

c. Stretching the Def‌inition of Article XX(b) and (g) to

Include Climate-Related Trade Restrictions . . . . . . 961

i. Integration of climate concerns in the def‌inition

of Article XX(b) and (g) . . . . . . . . . . . . . . . 961

ii. The Specif‌ic Treatment of Emissions Tradable

Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . 962

2. Geographical Scope: The Extraterritorial

Application of Article XX to a Club of Carbon

Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963

a. The Environmental Law Approach Backs Up

Climate-Clubs Initiatives 963

b. The Potential for a Cross-Border Approach to

Climate-Change Mitigation Under Article XX . . . . 966

B. Climate-Related Trade Measures Subject to the “Two-Tier

Test” of Article XX 967

1. Proving a Degree of Connection Between Trade

Measures and Climate Policy Objectives: Specif‌ic

Objectives Under Article XX(b) and (g). . . . . . . . 967

a. The Necessity Test of Article XX(b) . . . . . . . . . . . . 967

b. The “Relating to” Test Under Article XX(g) . . . . . 969

2. The “Chapeau” as Anti-Abuse Check 971

THE WORLD TRADE ORGANIZATION AND CARBON MARKET CLUBS

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