Emissions trading and the GATS financial services provisions. A case study of the Australian carbon pricing mechanism

• Date: 11 March 2014
• DOI: https://doi.org/10.1108/JITLP-06-2013-0017
• Published date: 11 March 2014
• Pages: 44-66
• Author: Felicity Jane Deane
• Subject Matter: Strategy,International business,International business law

Emissions trading and the GATS

f‌inancial services provisions

A case study of the Australian

carbon pricing mechanism

Felicity Jane Deane

Queensland University of Technology, Brisbane, Queensland, Australia

Abstract

Purpose – The purpose of this paper is to determine whether greenhouse gas (GHG) tradeable

instruments will be classif‌ied as f‌inancial products within the scope of the World Trade Organization

(WTO) law and to explore the implications of this f‌inding.

Design/methodology/approach – This purpose is achieved through examination of the units of

the Australian carbon pricing mechanism (the CPM), namely eligible emissions units. These units are

analysed through the lens of the def‌inition of f‌inancial products provided in the General Agreement

for Trade in Services (the GATS).

Findings – This paper f‌inds that eligible emissions units will be classif‌ied as f‌inancial instruments,

and therefore the provisions that govern their trade will be regulated by the GATS. Considering this,

this paper explores the limitations that are introduced by the Australian legislation on the trade of

eligible emissions units.

Research limitations/implications – This paper islimited in its analysis to the Australian CPM.

In order to draw conclusions on the issues raised by this analysis, it is necessary to consider the WTO

requirements against an operating emissions trading scheme. The Australian CPM presents a

contemporary model of an appropriate scheme.

Originality/value – The f‌indings in this pap er are crucial in a GHG- constrained societ y. This is

because emissions trading schemes (ETSs) are becoming popular measures for pricing GHG

emissions, and for t his reason the units that are tra ded and surrenderedfo remissions l iabilities must

be classif‌ied appropriately on a global scale. Failing to do this could result in differential treatment

that may be contrary t o the intentions of impor tant global agreeme nts, such as the WTO-cov ered

agreements.

Keywords WTO,Services, Emissionstrading, Financialservices, Australia,Carbon pricing mechanism,

GATS, Eligibleemissions units

Paper type Research paper

1. Introduction

The General Agreement for Trade in Services (the GATS) regulates the international

trade in all services[1]. Within this agreement there are specif‌ic provisions for the

international trade in f‌inancial services. The purpose of this paper is to consider

the regulation of the f‌inancial services sector by the GATS and determine whether this

regulation willencompass ETSs. In particular,the Australian carbon pricingmechanism

(the CPM) is used as a case study to provide a practical analysis of how the GATS

provisions may regulate ETSs.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1477-0024.htm

Thank you to Shol Blustein and Professor Douglas Fisher for reviewing this article for the author

prior to submission.

Received 26 June 2013

Revised 17 September 2013

Accepted 27 November 2013

Journal of International Trade Law

and Policy

Vol. 13 No. 1, 2014

pp. 44-66

qEmerald Group Publishing Limited

1477-0024

DOI 10.1108/JITLP-06-2013-0017

JITLP

13,1

44

In order to achieve this objective it is necessary to examine the meaning of f‌inancial

instruments within the GATS and determine whether emissions units may be

classif‌ied accordingly. It suggested that emissions units display qualities that enable

their inclusion within the category of f‌inancial products. For this reason the contention

within this article is that the GATS provisions that are applicable to f‌inancial services

will extend to ETSs.

There have been signif‌icant reforms to Australia’s f‌inancial sector since the GATS

was introduced. These reforms have been motivated by eff‌iciency gains and increased

competition[2]. The Australian commitments specif‌ic to the f‌inancial services sector

within the GATS arebased on the Understanding on Commitmentsin Financial Services

(the Understanding)[3]. Although some limitations remain in insurance and banking

services[2], Australian representatives have committed to avoid discrimination within

this sector[4]. With thisin mind, this paper examines whether the Australian legislators

have honoured these commitments when they drafted the CPM framework.

This paper is presented in four substantive parts, which ref‌lects the methodology

employed in this research. The f‌irst part considers ETSs generally and contrasts the

tradable units introduced by the schemes with a specif‌ic focus on the Australian CPM.

Followingthis, this paper provides an overviewof the GATS. Specif‌ically,the structure of

the GATS is important to understand before undertaking analysis using its provisions.

The third and most substantial part of this research examines the f‌inancial services

provisions of the GATS, and considers how ETSs, in particular the Australian CPM,

may be regulated by these provisions. Finally, the GATS exceptions are considered to

determinewhether any potential breachesof the WTO rules may be justif‌iedaccordingly.

2. Emissions trading and the CPM

ETSs are set to become more common throughout the world, as a consequence of the

global acceptanceof the necessity to limit GHG emissions.As Garnaut (2011) recognised,

“more than half ofthe population of the developed world [already] lives in countries with

ETSs”. Certainly, ETSs represent one of the most popular instruments for pricing GHG

emissions. This popularity may be related to the knowledge that these frameworks

enable nation states to include the GHG units and GHG credits created by the

international climate change regime f‌lexible mechanisms in their domestic strategies to

reduce GHG emissions. For this reason, it is important to consider the broader

implications of these new markets and their impacts on global economic circumstances.

By imposing a cost on entities that emit GHGs, ETSs operate by encouraging

regulated parties to reduce their GHG emissions when the cost of doing so is less than

the cost the scheme imposes (Lyster, 2007, p. 452). To facilitate this outcome, ETSs

harness market forces by enabling the price of GHG emissions, represented by a

prescribed unit, to be traded on an open market (Lefevere, 2005, p. 104). While this

approach is designed to encourage least-cost abatement of emissions, it may result in

barriers to trade. These units and the markets associated with their trade have not yet

been suff‌iciently considered in the context of international trade.

The European Union (EU) introduced the f‌irst regional GHG emissions trading

scheme in 2005. Since then national schemes have been introduced in New Zealand and

Australia. More recently governments in Asian nations are turning to ETSs to address

their escalating GHG emissions inventories. China introduced its f‌irst regional trading

scheme in Shenzhen in June 2013 (Combet, 2013). Chinese authorities will implement

Emissions

trading

45