Emissions trading and the GATS financial services provisions

Author:Felicity Jane Deane
Position:Queensland University of Technology, Brisbane, Queensland, Australia

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 (th... (see full summary)

1 Introduction

The General Agreement for Trade in Services (the GATS) regulates the international trade in all services1. 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 will encompass ETSs. In particular, the Australian carbon pricing mechanism (the CPM) is used as a case study to provide a practical analysis of how the GATS provisions may regulate ETSs.

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 competition2. The Australian commitments specific to the financial services sector within the GATS are based on the Understanding on Commitments in Financial Services (the Understanding)3. Although some limitations remain in insurance and banking services2, Australian representatives have committed to avoid discrimination within this sector4. With this in 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. Following this, this paper provides an overview of 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 determine whether any potential breaches of the WTO rules may be justified accordingly.

2 Emissions trading and the CPM

ETSs are set to become more common throughout the world, as a consequence of the global acceptance of the necessity to limit GHG emissions. As Garnaut (2011) recognised, “more than half of the 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 another six regional schemes before 2015, which will collectively represent the world's second largest ETS ( Combet, 2013 ). In addition to this, South Korea has plans to launch its nationwide emissions trading scheme in January 2015 ( White Paper, 2013 ).

The emissions trading scheme that is the subject of the analysis of this paper is the Australian CPM. The CPM is a hybrid emissions trading scheme ( Garnaut, 2008, p. 310 ). It displays a number of similarities to both the EU ETS and the NZ ETS. However, the design of the CPM also contains a number of unique features that have not previously been exhibited in other emissions trading legislation. The framework for the CPM in Australia creates a system to:

  • assess and impose liability on certain entities for GHG emissions;
  • require payment and surrender for such action; and
  • impose a charge in the event of a failure to comply with the above obligations5.
  • A fundamental feature of the CPM is the design of the GHG tradeable units: namely eligible emissions units. Eligible emissions units include carbon units, Australian carbon credit units (ACCUs) and eligible international emissions units6. The attributes of these units and their conditions for surrender have ramifications for the framework of the CPM, and the compliance of the CPM with the WTO rules. These attributes are examined subsequently within this paper.

    3 The scope of the GATS

    Article 1.1 of the GATS defines the scope of the agreement. This article states that “this agreement applies to measures by members affecting trade in services7”. There have been very few disputes exploring the provisions of the GATS. However, a test has been established to resolve when the agreement itself is applicable. In this regard, the Appellate Body in the Canada – Autos dispute suggested:

    […] at least two key legal issues must be examined to determine whether a measure is one “affecting trade in services”: first, where there is “trade in services” in the sense of Article I:2; and, second, whether the measure in issue “affects” such trade in services within the meaning of Article I:18.

    “Service” is not strictly defined within the GATS, although there exists a variety of commonly understood definitions. For example, a definition of “services” is provided by Morrison (1997) , who notes that:

    A service is essentially an act, even though the result of the service may be embodied in a person, thing or data. A good on the other hand, is clearly a thing even though it results from an act (its production).

    Article XXVIII(b) of the GATS clarifies that “supply of a service includes the production, distribution, marketing, sale and delivery of a service9”. Although services are not defined within the GATS it does describe the modes of service that fall within the agreement. These modes are described in Article I:2 of the agreement. They include the supply of services:

  • (a) from the territory of one member into the territory of any other member (Mode 1);
  • (b) in the territory of one member to the service consumer of any other member (Mode 2);
  • (c) by a service supplier of one member, through commercial presence in the territory of any other member (Mode 3); and
  • (d) by a service supplier of one member, through presence of natural persons of a member in the territory of any other member (Mode 4)10.
  • Panels have considered the meaning of “affect” within the context of the GATS. In this regard, it has been determined for a measure to “affect” a service or service supplier that measure must modify the conditions for competition for that service or supplier ( Martin, 2007, p. 461 ). This was confirmed by the Appellate Body in the EC – Bananas III dispute11. In its report the Appellate Body suggested that a wide meaning was intended for the term “affecting”:

    In our view, the use of the term “affecting” reflects the intent of the drafters to give a broad reach to the GATS. The ordinary meaning of the word “affecting” implies a measure that has “an effect on”, which indicates a broad scope of application. This interpretation is further reinforced by the conclusions of previous Panels that the term “affecting” in the context of Article III of the GATT is wider in scope than such terms as “regulating” or “governing”12.

    The reasoning in EC – Bananas III demonstrates that for a measure to have an effect on a service it is not necessary for the measure to govern or regulate the service itself ( Van Den Bossche, 2008, p. 339 ). It also appears that the object or intention of a measure need not be to affect the trade in services in order to be subject to the GATS ( Martin, 2007, p. 453 ). In this regard, Article XXVIII(c) of the GATS provides a non-exhaustive list of the measures that may have an effect on the supply of services. This list includes measures in respect of:

  • the purchase, payment or use of a service;
  • the access to and use of, in connection with the supply of a service, services which are required by those members to be offered to the public generally...
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