MJIEL Vol 9 Issue 2 2012 - Article 1

Legal Nature of the Traded Units under the Emissions
Trading Systems and Its Implication to the Relationship
between Emissions Trading and the WTO

Wen-chen Shih 

ABSTRACT: With regard to the relationship between emissions trading and the WTO, most existing literature focuses on the emissions trading system under the Kyoto Protocol without analysing existing or forthcoming domestic or regional emissions trading systems. Furthermore, these analysis also does not differentiate between different types of emissions trading systems, in particular the possible different legal nature of various types of the ‘units’ that are being traded under different types of emissions trading system. Is this an over-simplified approach in terms of analysing the relationship between emissions trading and the WTO? This is the main research question of this article. By focusing on two different types of emissions trading system – cap & trade versus baseline & credit – this article attempts to provide detailed analysis on the legal nature of different types of ‘units’ – allowances versus credits – that is being traded under these two systems in order to re-examine the relationship between emissions trading and the WTO. The article concludes as follows. First, there are certain differences between allowances and credits in terms of their legal nature under domestic law. Second, depending on the types of markets under the emissions trading system, differences in the legal nature of these traded units have different implications. Both of these ‘traded units’ share one similar legal characteristic that render the inapplicability of the WTO disciplines in both the sovereignty market which consists of sovereign governments, and primary market which consists of private parties whose main purpose of trade is to meet regulatory requirements: these traded units, similar to permit under public law, represent regulatory sovereignty of governments and are, thus, neither ‘goods’ nor ‘services’ in the context of the WTO. However, as these traded units have market value and are freely transferable in the secondary market, they might be regarded as ‘negotiable instruments’ or ‘financial assets’ under the definition of financial services of the GATS.

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