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Who’ll Stop the Rain? Allocating Emissions Allowances for Free: Environmental Policy, Economics, and WTO Subsidy Law

Published online by Cambridge University Press:  13 September 2012

Luca Rubini
Affiliation:
Institute of European Law, Birmingham Law School, United Kingdom. Email: l.rubini@bham.ac.uk.
Ingrid Jegou
Affiliation:
Global Platform on Climate Change, Trade and Sustainable Energy, International Centre for Trade and Sustainable Development (ICTSD), Geneva, Switzerland. Email: ijegou@ictsd.ch.

Abstract

This article investigates the environmental and economic impact of the free allocation of emissions allowances in Emissions Trading Schemes (ETSs) as well as its compatibility with trade law. Free allocation can facilitate the industry’s gradual adjustment to an ETS and hence boost its acceptability. At the same time, however, the article shows that the economic and environmental benefits of free allocation are debatable. Moreover, the practice of free allocation possibly contravenes WTO law. The conclusion that free allowances may constitute an objectionable subsidy under WTO subsidy disciplines raises questions of law reform. Should the ETS be reformed to fit conventional trade imperatives, or should trade law be rethought so as to be responsive to contemporary environmental protection strategies? The article argues that, considering the questionable benefits of free allocation, any adjustment to trade law should be narrow and temporary.

Type
Articles
Copyright
Copyright © Cambridge University Press 2012

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References

1 European Commission, Climate Action, ‘Emissions Trading System (EU ETS)’, available at: http://ec.europa.eu/clima/policies/ets/index_en.htm.

2 Ministry of the Environment (Norway), ‘Norwegian National Allocation Plan for the Emissions Trading System in 2008–2010’, available at: http://www.regjeringen.no/en/dep/md/documents-and-publications/reports-and-plans/Plans/2008/norwegian-national-allocation-plan-for-t.html?id=505229.

3 Federal Office for the Environment (Switzerland), ‘Emissions Trading in Switzerland’, available at: http://www.bafu.admin.ch/emissionshandel/05538/05540/index.html?lang=en.

4 Climate Change Information (New Zealand), ‘The New Zealand Emissions Trading Scheme’, available at: http://www.climatechange.govt.nz/emissions-trading-scheme.

5 Tokyo Metropolitan Government, Bureau of the Environment, ‘Tokyo Cap-and-Trade Program: Japan’s First Mandatory Emissions Trading Scheme, Mar. 2010, available at: http://www.kankyo.metro.tokyo.jp/en/attachement/Tokyo-cap_and_trade_program-march_2010_TMG.pdf.

7 For an overview of some of these schemes, see I. Jegou & L. Rubini, ‘The Allocation of Emission Allowances Free of Charge: Legal and Economic Considerations’, International Centre for Trade and Sustainable Development (ICTSD), Issue Paper 18/2011, Programme on Competitiveness and Sustainable Development, Geneva (Switzerland), Aug. 2011, available at: http://ictsd.org/downloads/2011/11/the-allocation-of-emission-allowances-free-of-charge.pdf.

8 As of today, there is limited empirical evidence of carbon leakage: for a summary of empirical findings, see P. Wooders & A. Cosbey, ‘Climate-Linked Tariffs and Subsidies: Economic Aspects (Competitiveness and Leakage)’, Background Paper prepared for the conference ‘Thinking Ahead on International Trade’, Graduate Institute, Geneva (Switzerland), 2010, at p. 6, available at: http://www.wto.org/english/res_e/reser_e/climate_jun10_e/background_paper5_e.pdf.

9 This difference has been estimated to be in the region of billions of dollars per year in the EU or the United States (US): see P. Wooders, A. Cosbey & J. Stephenson, ‘Border Carbon Adjustment and Free Allowances: Responding to Competitiveness and Leakage’, Organisation for Economic Co-operation and Development, Round Table on Sustainable Development, Paris, 23 July 2009, p. 6, available at: http://www.oecd.org/dataoecd/49/17/43975050.pdf.

10 A survey of stakeholders carried out in the EU in 2005 indicated that many participants indeed incorporated the value of allowances in making long-term decisions, particularly in the electric utility sector: European Commission, Directorate General for Environment, ‘Review of EU Emissions Trading Scheme: Survey Highlights’, Nov. 2005, pp. 5–7.

11 Data suggest that in the aggregate they have not done so: R.N. Cooper, ‘Europe’s Emissions Trading System’, The Harvard Project on International Climate Agreements, Discussion Paper, Aug. 2010, p. 9, available at http://belfercenter.ksg.harvard.edu/files/CooperETSfinal.pdf.

12 Grandfathering refers to the allocation based on past levels of emissions.

13 Absolute targets for emissions reductions, expressed in terms of emissions.

14 Intensity targets expressed in terms of emissions per unit of output.

15 See Wooders, Cosbey & Stephenson, n. 9 above, at p. 50.

16 Smale, R., Hartley, M., Hepburn, C., Ward, J. & Grubb, M., ‘The Impact of CO2 Emissions Trading on Firm Profits and Market Prices’ (2006) 6 Climate Policy, pp. 2946.CrossRefGoogle Scholar

17 Organisation for Economic Co-operation and Development (OECD), The Economics of Climate Change Mitigation: Policies and Options for Global Action Beyond 2012 (OECD, 2009), at p. 88.Google Scholar

18 Wooders, Cosbey & Stephenson, n. 9 above, at p. 51.

19 OECD, Environmentally Harmful Subsidies: Challenges for Reform (OECD, 2005), at p. 7.Google Scholar

20 Ibid, p. 16.

21 M. Åhman, D. Burtraw, J. Kruger & L. Zetterberg, ‘The Ten Year Rule: Allocation of Emission Allowances in the EU ETS’, Resources for the Future, Discussion Paper 05-30, June 2005, p. 5, available at: http://www.rff.org/rff/documents/rff-dp-05-30.pdf.

22 See M. Grubb & K. Neuhoff, ‘Allocation and Competitiveness in the EU Emissions Trading Scheme: Policy Overview’, Cambridge Working Papers in Economics, No. 0645, June 2006, available at: http://www.eprg.group.cam.ac.uk/wp-content/uploads/2008/11/eprg0622.pdf; and J. Stephenson & S. Upton, ‘Competitiveness, Leakage and Border Adjustment: Climate Policy Distractions?’, OECD, Round Table on Sustainable Development, 22–23 July 2009, available at: http://www.oecd.org/dataoecd/23/20/43441650.pdf.

23 Benchmarking methodology is designed to avoid the negative effects associated with grandfathering. The principle behind benchmarking is to assess each entity’s emissions efficiency against a sector average using a mathematical formula. Allowances are then distributed based on a benchmark of the most efficient installations, to create incentives to reduce emissions.

24 A synthesis of much of the empirical evidence on windfall profits from the EU ETS concludes that total rents have been substantial, even when the carbon price has been modest. All technologies and all participants included in the EU ETS have benefited from ETS-related rents. See Egenhofer, C., Alessi, M., Georgiev, A. & Fujiwara, N., ‘The EU Emissions Trading System and Climate Policy Towards 2050: Real Incentives to Reduce Emissions and Drive Innovation?’, CEPS Special Report, 2011, pp. 14–6Google Scholar, available at: http://www.ceps.eu/ceps/download/4097.

For a helpful discussion of windfalls in the power sector and in the cement industry, see J. Sijm, K. Neuhoff & Y. Chen, ‘CO2 Cost Pass Through and Windfall Profits in the Power Sector’, CWPE 0639 and EPRG 0617, May 2006, available at: http://www.eprg.group.cam.ac.uk/wp-content/uploads/2008/11/eprg0617.pdf; Gulli, F. (ed.), Markets for Carbon and Power Pricing in Europe: Theoretical Issues and Empirical Analyses (Edward Elgar, 2009)Google Scholar; N. Walker, ‘Concrete Evidence? An Empirical Approach to Quantify the Impact of EU Emissions Trading on Cement Industry Competitiveness’, University College Dublin, Planning and Environmental Policy Research Series, Working Paper 2006/10, available at: http://www.ucd.ie/gpep/publications/archivedworkingpapers/2006/06-10.pdf.

25 See Stephenson & Upton, n. 22 above, at p. 14.

26 Grubb, M.The European Emissions Trading Scheme: An Overview of Operation and Lessons’ (2007) 8(4) CESifo Forum, p. 22Google Scholar, available at: http://www.cesifo-group.de/portal/pls/portal/docs/1/1193136.PDF. In addition, giving free allowances in proportion to the carbon intensity of new plants can bias the incentives towards more carbon-intensive investments, something that would not be beneficial to the aim of reducing emissions. Benchmarking new entrant reserves on the basis of capacity could avoid the worst of distortions.

27 See Åhman, Burtraw, Kruger & Zetterberg, n. 21 above, at p. 12.

28 The described problem is in any case likely to be reduced in Phase III of the EU ETS when there will be increased harmonization in the allocation of emission allowances, mainly following the abandonment of the National Allocation Plans (NAPs) since the allocation will be decided at the EU level. On the progressive increased harmonization of the EU ETS, see A. Denny Ellerman, ‘The EU Emission Trading Scheme: A Prototype Global System?’, The Harvard Project on International Climate Agreements, Discussion Paper, Aug. 2008, available at http://belfercenter.ksg.harvard.edu/publication/18488/eu_emission_trading_scheme.html.

29 Stephenson & Upton, n. 22 above, at p. 14.

30 See Wooders, Cosbey & Stephenson, n. 9 above, at p. 27.

31 See Stephenson & Upton, n. 22 above, at p. 15.

32 For example, in the EU ETS, there is a lack of harmonization with respect to the allocation of allowances to new entrants. Research shows that the annual free allocations to a new natural gas combined-cycle plant would vary from zero allowances in Sweden to as much as allowances worth €11 million in Germany, at a carbon price of €10 per ton. See M. Åhman & K. Holmgren, ‘New Entrant Allocation in the Nordic Energy Sectors: Incentives and Options in the EU ETS’, IVL Swedish Environment Research Institute, Jan. 2007, p. 8, available at: http://www.ivl.se/webdav/files/B-rapporter/B1710.pdf.

33 The said precision refers to the fact that there are very identifiable requirements, not to the conceptual or practical clarity of those requirements. On the various issues raised by the definition of a subsidy in both the WTO and EU, see Rubini, L., The Definition of Subsidy and State Aid: WTO Law and EC Law in Comparative Perspective (Oxford University Press, 2009).CrossRefGoogle Scholar

34 Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto (Japan), 10 Dec. 1997, in force 16 Feb. 2005, available at: http://unfccc.int/kyoto_protocol/items/2830.php.

35 Stiglitz, J., ‘A New Agenda for Global Warming’ (2006) 3(7) The Economists’ Voice, available at: http://works.bepress.com/joseph_stiglitz/1.Google Scholar

36 Marrakesh (Morocco), 15 Apr. 1994, in force 1 Jan. 1995, available at: http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm.

37 Which should be broadly interpreted to cover any ‘public body’, such as a regulatory authority. See Appellate Body Report, United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China (US – AD/CVD), WT/DS379/AB/R, adopted on 25 Mar. 2011 paras. 282–322.

38 Arts. 1.2 and 2 SCM.

39 Arts. 5 and 6 SCM identify three types of adverse effect: injury, serious prejudice and nullification, and impairment of benefits.

40 Art. 15 SCM. Unless subject to countervailing duty investigation, ‘specificity’ and a negative impact are assumed for export subsidies.

41 Item (iv), which covers those cases where the government provides a financial contribution indirectly, mainly through a private body, is not relevant here, since the government normally allocates allowances itself.

42 See Henschke, L., ‘Going it Alone on Climate Change: A New Challenge to WTO Subsidies Disciplines – Are Subsidies in Support of Emissions Reductions Schemes Permissible under the WTO’ (2012) 11(1) World Trade Review, pp. 2752, at 30–9.Google Scholar

43 US – Tax Treatment for ‘Foreign Sales Corporations’, DS108.

44 See Rubini, n. 33 above, at pp. 263–74. For a recent discussion on the ‘otherwise due’ test, see Appellate Body Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (US – Aircraft), WT/DS353/AB/R, adopted on 23 Mar. 2012, paras. 816 et seq.

45 Bhagwati, J. & Mavroidis, P.C., ‘Is Action Against US Exports for Failure to Sign Kyoto Protocol WTO-Legal?’ (2007) 6(2) World Trade Review, pp. 299310Google Scholar, at 302–3.

46 New York, NY (US), 9 May 1992, in force 21 Mar. 1994, available at: http://unfccc.int.

47 This approach is followed in EU state aid law. See the Opinion of Advocate General Jacobs in Case C-126/01, Ministre de l'Économie, des Finances et de l’Industrie v. GEMO SA [2003] ECR I-13769, paras. 66–71. On the PPP generally, see Schwartz, P., ‘Polluter Pays Principle’, in Malgosia, F. and Ong, D. (eds.), Research Handbook on International Environmental Law (Edward Elgar, 2010), pp. 243–61.Google Scholar

48 The EU ETS should be fully based on auctioning by 2027.

49 The example provided is ‘fiscal incentives such as tax credits’.

50 The recent finding of the Appellate Body in US – Aircraft, n. 44 above, para. 615, which interpreted item (i) so that ‘the inclusion of specific examples […] provides an indication of the types of transactions intended to be covered by the more general reference’, seems to support the limitation of item (ii) to fiscal measures.

51 The two options are not mutually exclusive; depending on the perspective, an emissions allowance could constitute a good and a service: see Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas (EC Bananas), WT/DS16/AB/R, para. 221.

52 See Vranes, E., ‘Climate Change and the WTO: EU Emission Trading and the WTO Disciplines on Trade in Goods, Services and Investment Protection’ (2009) 43(4) Journal of World Trade, pp. 707–35.Google Scholar

53 Which may engage the WTO's General Agreement on Trade in Services (GATS), Marrakesh (Morocco), 15 Apr. 1994, in force 1 Jan. 1995, available at: http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm.

54 R. Howse, ‘Climate Change Mitigation Subsidies and the WTO Legal Framework: A Policy Analysis’, International Institute for Sustainable Development, May 2010, pp. 12–13, available at: http://www.iisd.org/pdf/2009/bali_2_copenhagen_subsidies_legal.pdf.

55 Appellate Body Report, United States – Final Countervailing Duty Determinations with respect to Certain Softwood Lumber from Canada (US – Softwood Lumber IV), WT/DS257/AB/R, adopted on 17 Feb. 2004.

56 Ibid., paras. 57–76. If the benefit analysis of the Appellate Body (see paras. 82–122) is controversial because contra legem this is not the case for the financial contribution analysis outlined in the text.

57 General Agreement on Tariffs and Trade (GATT 1994), Marrakesh (Morocco), 15 Apr. 1994, in force 1 Jan. 1995, available at: http://www.wto.org/english/docs_e/legal_e/06-gatt_e.htm.

58 The only official interpretation by the WTO can be found in the very recent Panel Report, China – Countervailing and Antidumping Duties on Grain Oriented Flat-Rolled Electrical Steel from the United States (China – GOES), decision of 15 June 2012, paras. 783–8.

59 Staiger, R.W. & Sykes, A.O.“Currency Manipulation” and World Trade’ (2010) 9(4) World Trade Review, pp. 583627Google Scholar, at 610 fn. 52. On the history of this language and arguing for a broad interpretation, see J. Lambert & S. Rueffer, Export Taxes under WTO Agreements, Legal Memo to the Mexican delegation, 10 June 2010, available at: http://www.graduateinstitute.ch.

60 Bigdeli, S.Z., ‘Incentive Schemes to Promote Renewables and the WTO Law of Subsidies’, in Cottier, T., Nartova, O. & Bigdeli, S.Z., International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press, 2009), pp. 155–92CrossRefGoogle Scholar, at 170; Howse, n. 54 above, at p. 14; Rubini, n. 33 above, at pp. 123–5. The recent Canada – Certain Measures Affecting the Renewable Energy Sector (DS 412) and Canada – Measures Relating to the Feed-In Tariff Program (DS 426) disputes, where the local content requirement of a Canadian feed-in-tariff system is challenged, may provide the opportunity to explore the notion of ‘income or price support’.

61 It should be noted that this rests on an interpretation of ‘income support’ which may be warranted after the Panel, China – GOES decision (n. 58 above) which, interpreting the sister concept of ‘price support’, found that this would involve the government ‘setting and maintaining’ a fixed level, rather than ‘a random change [in price] merely being a side-effect of any form of government measure’: ibid., at para. 7.86. As noted in section 3.2 above, a free transfer of allowances necessarily increases the financial wealth of the recipient firm.

62 Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft (Canada – Aircraft), WT/DS70/AB/R, adopted on 4 Aug. 2000, para. 157.

63 We leave aside here the more general questions of whether the subsidy is conferring a benefit or is rather compensating for a disadvantage. For an analysis of these questions, see Sykes, A.O., ‘The Questionable Case for Subsidies Regulation: A Comparative Perspective’ (2010) 2(2) Journal of Legal Analysis, pp. 473523CrossRefGoogle Scholar. See also Jegou & Rubini, n. 7 above, at pp. 33–4.

64 Rubini, n. 33 above, at p. 263.

65 This marketplace does not seem an absolute benchmark, however. The Appellate Body itself (Canada Aircraft, n. 62 above, para. 157) underlined that the marketplace is justan appropriate basis for comparison’ [emphasis added], thus opening the door to alternative yardsticks.

66 An interesting issue is whether these normal market conditions should refer to an emissions trading scenario with full auctioning or, more radically, to a situation with no market-based systems, without an ETS in place. It appears ‘natural’ to consider existing conditions as normal conditions, thus, conditions available under the ETS at issue or similar schemes (in the jurisdiction), including the allocation mode of allowances.

67 Another possible dimension of benefit (albeit an indirect one that may go beyond the current legal framework of analysis) may come from the economic finding that free allocation may undermine the incentives to reduce emissions. In such a case, the advantage derives from the fact that the firms receiving free allowances are not only relieved from the costs of the emissions but also from the costs of the activities and investments necessary to be more efficient in their reduction.

68 The scenario is different if there is a clear point in time which signals the passage from a free-of-charge scenario to a fully auctioning scenario. Old and new production units would thus belong to different regime periods of the ETS with different prevailing benchmarks.

69 See Jegou & Rubini, n. 7 above, at pp. 33–4, warning against the dangers of charging the benefit analysis with too many considerations which potentially extend to every possible positive or negative occurrence affecting the position of the recipient firm.

70 See also Henschke, n. 42 above, at pp. 39–43. The possibility of considering any disadvantage or cost in the context of the benefit analysis, or indeed its calculation under Art. 14 SCM would, in our view, require a complete redefinition of the law.

71 For a comprehensive exposition of the specificity test, see Appellate Body Report, US – AD/CVD, n. 37 above, paras. 363–78. As mentioned, if a subsidy is found to be a prohibited subsidy, it is automatically deemed to be specific and thus not subject to the specificity test.

72 See Rubini, n. 33 above, Chapter 13, at pp. 359–77.

73 Appellate Body, US – AD/CVD, n. 37 above, para. 371.

74 Panel Report, United States – Subsidies to Upland Cotton (US – Cotton), WT/DS/267/R, adopted on 21 Mar. 2005, para. 7.1142.

75 Ibid. On the interpretation of ‘sufficiently broadly available’ (as different from ‘universally available’) and interpreting selective as ‘sufficiently limited’, see Panel Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (US – Aircraft), WT/DS353/R, adopted on 23 Mar. 2012, paras. 7.762 and 7.1237. See also the rather open-ended approach to specificity in Panel Report, United States – Final Countervailing Duty Determinations with respect to Certain Softwood Lumber from Canada (US – Softwood Lumber IV), WT/DS257/R, paras. 7.115–7.122.

76 Footnote 2 SCM.

77 Art. 2.1(c) SCM.

78 Appellate Body, US – Aircraft, n. 44 above, para. 796.

79 The concept of injury applies also in the countervailing duty context.

80 See, e.g., Panel Report, European Communities – Measures Affecting Trade in Large Civil Aircraft (EC Aircraft), WT/DS316/R; Panel, US – Aircraft, n. 75 above; Appellate Body Report, United States – Subsidies to Upland Cotton (US – Cotton), WT/DS 267/AB/R; United States – Subsidies to Upland Cotton (Art. 21.5 DSU) (US – Cotton 21.5), WT/DS267/AB/RW; European Communities – Measures Affecting Trade in Large Civil Aircraft (EC Aircraft), WT/DS316/AB/R, adopted on 1 June 2011; and US Aircraft, n. 44 above. On the various adverse effects tests, see Rubini, n. 33 above, Chapter 14, at pp. 381–418.

81 See Appellate Body, EC – Aircraft, ibid., and Appellate Body, US – Aircraft, n. 44 above.

82 This follows the definition of trade intensity adopted in Directive 2003/87/EC Establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community and Amending Council Directive 96/61/EC [2003] OJ L275/32, Art. 10a(16): ‘A sector or subsector is also deemed to be exposed to a significant risk of carbon leakage if … (b) the intensity of trade with third countries, defined as the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size from the Community (annual turnover plus total imports from third countries), is above 30%.’

83 Appellate Body, EC – Aircraft, n. 80 above, para. 1036 et seq.

84 See Panel, US – Aircraft, n. 75 above, para. 7.1542, which rejected the EC argument that a subsidy contingent on sales, whether domestic or export sales, does amount to an export subsidy.

85 Arts. 8 and 9 SCM.

86 See n. 57 above.

87 J. Pauwelyn, ‘US Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade’, Nicholas Institute Working Paper NI-WP 2007/02, Duke University, defined the chapeau as ‘the most important provision in the entire GATT agreement’, available at: http://nicholasinstitute.duke.edu/climate/policydesign/u.s.-federal-climate-policy-and-competitiveness-concerns-the-limits-and-options-of-international-trade-law.

88 Van den Bossche, P., The Law and Policy of the World Trade Organization: Text, Cases and Materials (Cambridge University Press, 2008), at p. 616.Google Scholar

89 Ibid, at p. 618.

90 See Rubini, L., ‘Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform’ (2012) 15(2) Journal of International Economic Law, pp. 525–79, at 558–67.Google Scholar

91 Appellate Body, United States – Standards for Reformulated and Conventional Gasoline (US Gasoline), WT/DS2/AB/R, adopted on 20 May 1996, p. 20.

92 Although partly overlapping, the focus of the two exceptions differs slightly.

93 Appellate Body, US Gasoline, n. 91 above, at pp. 16–7.

94 Eeckhout, P., ‘The Scales of Trade: Reflections on the Growth and Functions of the WTO Adjudicative Branch’ (2010) 13(1) Journal of International Economic Law, pp. 326.Google Scholar

95 This process does not necessarily require a precise cost–benefit analysis, but what is, in substance, a proportionality assessment. An informative taxonomy of ‘trade-off’ adjudicative ‘devices’ can be found in Trachtmann, J.P., The Economic Structure of International Law (Harvard University Press, 2008), at pp. 222–3.CrossRefGoogle Scholar

96 Competitiveness claims, based on the disadvantage or cost ensuing from participation in the ETS, do not seem to be directly relevant under Art. XX GATT. Similarly, political considerations do not easily find space in the assessment.

97 It should be noted that measures addressing carbon leakage cannot be held to be extraterritorial and thus raise issues of availability of the Art. XX defence. It is in the nature of GHG emissions that, although produced locally, their effects are felt everywhere.

98 Appellate Body Report, Brazil – Measures Affecting the Imports of Retreated Tyres (BrazilRetreated Tyres), W/DS332/AB/R, adopted on 17 Dec. 2007, para. 151.

99 See Panel Report, Measures Affecting the Imports of Retreated Tyres (BrazilRetreated Tyres), W/DS332/R, adopted on 17 Dec. 2007, para. 7.46, in which it is noted that a party invoking an environmental justification under Art. XX(b) GATT ‘has to establish the existence not just of risks to “the environment” generally, but specifically of risks to animal or plant life or health’.

100 The current interpretation of the necessity test is a ‘weighing and balancing exercise’ where a considerable degree of deference is given to Members, particularly with respect to the level of protection decided: see Appellate Body, Brazil – Retreated Tyres, n. 98 above, para. 178.

101 Ibid.

102 This may happen in systems with intensity-based or output-based caps alike. See Part 2 above.

103 See Appellate Body Report, United States – Import Prohibition of Shrimp and Certain Shrimp Products (US – Shrimp), WT/DS58/AB/R, adopted on 6 Nov. 1998, para. 141 for the ‘relating to’ language.

104 Importantly, the Appellate Body in US – Gasoline (n. 91 above, at p. 18) concluded that clean air can be protected under this exception.

105 Appellate Body, Brazil Retreated Tyres, n. 98 above, para. 225.

106 Appellate Body Report, Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines (Thai – Cigarettes), W/DS371/AB/R, adopted on 15 July 2011, para. 177, which (in the context of item (d) of Art. XX GATT) noted that what has to be necessary is the ‘differential treatment’ of the measure.

107 Appellate Body, US Gasoline, n. 91 above, at pp. 22–3.

108 Appellate Body, US Shrimp, n. 103 above, para. 165.

109 Appellate Body Report, United States – Import Prohibition of Shrimp and Certain Shrimp Products (Article 21.5 DSU) (US – Shrimp 21.5), WT/DS58/AB/RW, adopted on 21 Nov. 2001, para. 144.

110 See, e.g., Appellate Body, US Shrimp, n. 103 above, paras. 180–1.

111 Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries (EC Tariff Preferences), WT/DS246/R, adopted on 20 Apr. 2004, paras. 7.228–7.229.

112 See Appellate Body, US Gasoline, n. 91 above, at p. 29; and Appellate Body, US Shrimp 21.5, n. 109 above, paras. 132–4.

113 N. 46 above.

114 It has been noted that this introduces in the chapeau of Art. XX GATT ‘an “embryonic” and “soft” requirement on Members to recognize the equivalence of foreign measures comparable in effectiveness’: see Van den Bossche, n. 88 above, at p. 645; Marceau, G. & Trachtmann, J.P.A Map of the WTO Law of Domestic Regulations of Goods’, in Bermann, G.A. & Mavroidis, P.C. (eds.), Trade and Human Health and Safety (Cambridge University Press: 2006), pp. 976, at 42.Google Scholar

115 Art. 25 of Directive 2003/87/EC, n. 82 above.

116 R. Howse & A.L. Eliason, ‘Domestic and International Strategies to Address Climate Change: An Overview of the WTO Legal Issues’, in Cottier, Nartova & Bigdeli, n. 60 above, at pp. 48–94, at 58.

117 Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries (EC –Tariff Preferences), WT/DS246/AB/R, adopted on 20 Apr. 2004.

118 Bhagwati & Mavroidis, n. 45 above, at pp. 306–7.

119 This seems indeed the rationale of the newly introduced Art. 25.1a of Directive 2003/87/EC, n. 82 above, which allows for agreements on the recognition of allowances of ‘compatible mandatory greenhouse gas emissions trading systems with absolute emissions caps established in any other country or in sub-federal or regional entities’. What remains to be seen is whether this amendment eliminates possible claims of bias. One factor that could lead to controversy is the limitation of the linking to ETSs with absolute caps only.

120 For some suggestions, see Hufbauer, G.C., Charnovitz, S. & Kim, J., Global Warming and the World Trading System (Peterson Institute of International Economics, 2009)Google Scholar; Aerni, P. et al. ., ‘Climate Change, Human Rights and International Economic Law: Exploring the Linkages between Human Rights, Trade and Investment’ (2010) 53 German Yearbook of International Law, pp. 139–88.Google Scholar

121 See Opponents of EU Aviation Carbon Law Agree on Possible Countermeasures’ (2012) 16(7) Bridges Weekly Trade News Digest, pp. 12Google Scholar; Hertogen, A., ‘Sovereignty as Decisional Independence over Domestic Affairs: The Dispute on Aviation in the EU Emissions Trading System’ (2012) 1(2) Transnational Environmental Law,Google Scholar pp. 281–301.

122 Henschke, n. 42 above, at p. 51.