Using the multi-layered nature of international emissions trading and of international-domestic legal systems to escape a multi-state compliance dilemma

Georgetown International Environmental Law Review, Winter 2001 by Frischmann, Brett

I. INTRODUCTION

While the science, economics, and politics of global warming have not yet converged on consensus, States and private actors are actively engaged in designing, and in some cases taking, precautionary measures to address the threat of human-induced climate change. Most efforts focus on reducing the emissions of various greenhouse gases, particularly carbon dioxide (CO^sub 2^) that many believe have caused and will continue to cause the earth's climate to change. International emissions trading is one particular mechanism for achieving emissions reductions that has received considerable attention by numerous governments.

Ensuring compliance is an inherent dilemma that threatens the integrity of any international emissions trading system because States face significant political and economic incentives to shirk their responsibilities. As Robert Stavins noted:

There is little doubt ... that in the international domain satisfactory solutions to monitoring and enforcement problems will be preconditions for successfully implementing any policy instrument, be it market-based or otherwise [in the global warming context]. From this perspective, the central challenge is to understand how a credible and effective system of monitoring and enforcement can be established (at reasonable cost) in the absence of a centralized authority.1

This article addresses this challenge by focusing on the monitoring and enforcement aspects of obligations undertaken by States that participate in an international emissions trading system. However, for analytical purposes,2 the article abstracts from the Framework Convention on Climate Change 3 and the Kyoto Protocol,4 and envisions the following series of events leading to an international emissions trading system:

1) A number of States sign an international agreement that commits each State to make reductions in its aggregate national greenhouse gas emissions according to a detailed schedule.

2) Each State implements its international obligations through national programs, which may consist of various combinations of regulatory programs, from command-and-control to carbon taxes to emissions trading systems.5

3) A subset of the States that signed the first "national commitment" agreement also sign a "founding agreement" that establishes an international emissions trading system by harmonizing the domestic emissions trading systems created under step 2 [hereinafter "founding agreement" or "international emissions trading agreement"].6

Thus, two legal regimes arise from the agreements-an overarching climate change regime and a subsidiary international emissions trading regime. The international legal obligations at issue in this article derive both from the overarching regime under which States make commitments to reduce national aggregate emissions and from the founding agreement for an international emissions trading system. However, the article focuses exclusively on the coordination problems that must be dealt with in negotiating the founding agreement for an international emissions trading system (step 3). Specifically, three interdependent components establish the contours of an international emissions trading monitoring and enforcement regime:7 (1) the monitoring institution, (2) the liability rule applicable to permits, and (3) the reprisal mechanism. States must work out the details of these components ex ante and incorporate them into the founding agreement for the international emissions trading system.

Parts II and III explain the basic elements of an international emissions trading system, although it should be stressed at the outset that many variants in design, outside the enforcement context, are not discussed. Part II focuses on a unilateral emissions trading system and the design elements that are derived from previous domestic experience with emissions trading. It is important to remember that a domestic government has monopoly control on the exercise of enforcement power for a domestically created emissions trading system. Ultimately, and in theory, this monopoly allows the government unilateral control over the quantity of domestic emissions through its regulatory authority.

Part III highlights the additional complications associated with harmonizing domestic emissions trading systems at the international level.8 An international emissions trading system operates more like a cartel than a monopoly. Participating States seek to restrict the quantity and raise the price of greenhouse gas emissions through a cooperative regulatory effort. Yet, States face the same strategic incentives as members of a cartel that lead to cheating and possibly to the system's collapse. This section analyzes two types of State-level cheating: (1) Protectionist cheating to convey competitive advantages to domestic industry, and (2) Cheating to facilitate a wealth transfer from non-cheating States that import permits. The integrity of an international emissions trading system will be undermined unless adequate "terms of coordination" can be agreed upon by States. Parts IV and V consider two such coordination mechanisms: creation of a monitoring institution and submission to a strict enforcement regime.9 Part III also introduces the international emissions trading system and the attendant enforcement problem through a hypothetical. It illustrates that an international emissions trading system depends on domestic enforcement of emissions limitations and that States must make a crucial choice between relying on State-to-State mechanisms and citizen-State mechanisms for resolving disputes over underenforcement.