The Paris Agreement Banner
Trade’s Intersections

The Paris Agreement’s Article 6 and the WTO: Points of Convergence

April 27, 2020

limate change is one of the defining challenges of our time. That is, it is becoming ever clearer that relative global success or failure in addressing this challenge will fundamentally dictate the nature of humanity’s future. As such, it behooves us to think of the ways in which all areas of policy might contribute to efforts to address climate change. In the area of trade law and policy, this boils down to two types of actions: amending trade law or policy that unduly impedes climate action, and formulating new trade laws or policies that proactively support climate change objectives such as mitigation or adaptation. This essay will explore the first type of option: the links between World Trade Organization (WTO) law and article 6 of the Paris Agreement.

The Paris Agreement,1 adopted at the twenty-first Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change in 2001, is the pre-eminent global agreement on international action to address climate change. Among other things, the agreement sets a target of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”2

Article 6 of the Paris Agreement establishes three forms of voluntary cooperation between countries in pursuit of their nationally determined contributions to fighting climate change, with the aim of allowing higher ambition in their mitigation and adaptation options, and by which countries might promote sustainable development and ensure environmental integrity.

Two of these forms of cooperation are market-based. Article 6.2 allows for parties to use internationally transferred mitigation outcomes (ITMOs) to meet their mitigation commitments. Any exchanges occurring under this provision would take place under bilateral governance (that is, under the terms of an agreement between the country of sale and the country of purchase), but in accordance with guidance to avoid double counting — which was agreed upon by the parties to the Paris Agreement. Activities under article 6.4 exchanges, by contrast, would probably look more like what took place under the Kyoto Protocol’s Clean Development Mechanism (CDM), taking place within a system of rules and institutions established by the parties.

While ITMOs are compliance instruments created under article 6.2, article 6.4 units will also be treated as ITMOs under Paris Agreement rules, once issued. The only question is whether they will be ITMOs from the moment they are issued or after the second transfer — a debate that is not relevant in the context of this essay. Ultimately, both articles 6.2 and 6.4 would involve trade in carbon permits that could be used to comply with emission-reduction commitments in the country of purchase. The final details are meant to be worked out at COP26 in 2021. Given that article 6.2 and 6.4 transactions involve trade of carbon credits that facilitate achieving the objectives of the Paris Agreement, there would seem to be a natural connection between article 6 and the WTO. In fact, however, WTO rules are generally held3 not to cover such trade.

Any exchanges occurring under this provision would take place under bilateral governance.

Legal scholarship4 from the time of the Kyoto Protocol noted that its internationally traded emissions allowances lacked the basic characteristics of products — they were created by government fiat to denote compliance with international obligations and lacked physical presence — and they more closely resembled financial instruments or currency than they did goods. According to this reasoning, while the services involved in trading emissions allowances (brokerage, for example) may be covered under WTO law on trade in services, the actual trade in emissions allowances was not covered under WTO law. Such an interpretation may also be in line with the findings of the (unadopted) 1985 General Agreement on Tariffs and Trade (GATT) Panel Report entitled Canada–Measures Affecting the Sale of Gold Coins. This report distinguished between products, which were understood to be covered by GATT law, and legal tender, which was not. That said, the WTO agreements never defined “products,” and a definitive interpretation of the WTO agreements on this matter can only be rendered by the members and the bodies created by them, including the Dispute Settlement Body.

If we are assessing the ways in which WTO law might be linked to the Paris Agreement, one possibility would be a formal understanding that the carbon permits generated under articles 6.2 and 6.4 are considered goods for the purposes of the GATT.

Along similar lines, the WTO’s fourth Ministerial Conference in 2001 produced the Declaration on the TRIPS Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights) and Public Health. The declaration asserted that WTO law needed to be part of the wider national and international action to address critical problems such as HIV/AIDS, tuberculosis and malaria, and reiterated the members’ common interpretation of certain provisions of the TRIPS Agreement. In that context, it was clear that such an interpretation would help the international effort to combat disease by making medicine more affordable. The question is whether a declaration to the effect that ITMOs are goods — and thus covered under WTO law — could result in a similar contribution to internationally agreed upon goals.

The most obvious consequence of covering ITMOs as goods would be that their trade would be covered by the GATT provisions on non-discrimination. Most importantly, per the GATT provisions on most-favoured-nation (MFN) treatment (article I), members could not provide less favourable treatment to imports of carbon credits from any WTO member as compared to imports of “like goods” from any other WTO member. This applies to import duties, charges, internal taxes, all rules and formalities associated with import and, significantly, “all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”

It is possible that some parties may feel the need to supplement the final rules with guidelines of their own that discriminate among carbon credits.

This would be a significant obligation because, while it is not yet clear exactly how the rules of article 6.4 transactions will play out, it is possible that some parties may feel the need to supplement the final rules with guidelines of their own that discriminate among carbon credits.

For example, some parties might refuse to grant their nationals compliance credits for ITMOs purchased from countries with low climate ambition, on the basis that such ITMOs are simply “hot air.” If carry-over credits are allowed from the Kyoto Protocol mechanisms into the Paris Agreement (a contentious issue), those that were opposed to the idea might similarly discriminate against them — despite the Paris Agreement rules. It is also worth noting that in the context of the CDM, the European Union defined what it saw as “acceptable” certified emissions reductions from the CDM, for example, by freezing out credit for reductions of HFC-23 (a type of greenhouse gas) that it saw as flooding the market. Some parties to the Paris Agreement are already expressing concern about such practices, as reflected in the draft text for operationalizing article 6, where they have introduced provisions that would prohibit such unilateral discriminatory measures.

The WTO’s MFN obligations might not allow this sort of discrimination if trade in these goods were covered. However, it would depend on whether carbon credits from “undesirable” sources were considered like carbon credits from approved sources. If both sources followed the Paris Agreement rules, this would be a strong argument for likeness, in particular as the Appellate Body (AB) has, in the past, been careful to situate trade law within the broader context of international law. But this specific line of argument falls outside existing WTO case law, although it closely parallels old arguments over whether members could discriminate on the basis of how goods are produced. These arguments were, more or less, put to bed by the AB ruling5 in the case of United States–Import Prohibition of Certain Shrimp and Shrimp Products, which allowed for such discrimination, in principle, in accordance with the WTO’s General Exceptions (article XX), but set a number of requirements on the practice to ensure it served environmental — rather than protectionist — objectives. In other words, even if MFN disciplines applied, discrimination might be allowed if the measure in question were properly articulated and implemented in accordance with article XX.

One issue to consider is that article 6.2 credits might not be so clearly like each other as article 6.4 credits. While the latter will be subject to common “rules, modalities and procedures” adopted by the parties, the former will be subject only to “guidance” with respect to accounting and the avoidance of double counting. Governments are likely to have significantly different national rules for how article 6.2 credits can be created and certified.

It’s time to come back to the question posed above: would coverage for article 6.4 carbon credits as goods under the GATT help advance the Paris Agreement objectives? Some would argue that eliminating policy space for discrimination actually works against these objectives. The stated aim of the examples described above is, after all, increased climate ambition, so national policy space for discrimination is, at least by this argument, a good thing. Others would counter that discrimination based on purely environmental grounds is likely to be found acceptable under the GATT’s article XX, and that the protection of trade law coverage would be a useful shield against discrimination that is arbitrary, unjustifiable or amounts to disguised protection. From an economic perspective, by this argument, discrimination leads to unreasonable market segmentation that will be detrimental to market liquidity and the achievement of the Paris Agreement goals.

Ultimately, it is worth asking whether the benefits of such protection are worth the risks. On the benefits side, are there, in fact, legitimate threats to the functioning of the article 6.4 carbon markets from “unfair” discrimination? On the costs side, how much are we willing to risk false positives — having the rules trip up measures that were, in fact, meant to advance climate objectives?

It is also worth reflecting on the negotiating dynamics that such coverage might entail. If WTO legal coverage were proposed for ITMOs before the article 6 negotiations had finished, would that add another challenge to completion? Parties that might have been planning discriminatory measures might instead become more insistent in the negotiations on their definition of quality credits. If WTO coverage were proposed after the article 6 negotiations had finished, those same parties might reject the idea, arguing that it materially changed the rights and obligations to which they had thought they were signing on when concluding article 6.

In considering the possibility of a Paris Agreement-WTO linkage on article 6, this brief piece raises more questions than it can answer. Our intent is to at least ask the right questions and stimulate thought on a set of issues that has not yet been well explored.

1 United Nations Framework Convention on Climate Change, Adoption of the Paris Agreement, 12 December 2015, Dec CP.21, 21st Sess, UN Doc FCCC/CP/2015/L.9.

2  Ibid, art 2(1)(a).

3  Cinnamon Piñon Carlarne, “The Kyoto Protocol & the WTO: Reconciling Tensions between Free Trade & Environmental Objectives” (2006) 17 Colo J Intl Envtl L & Pol’y 1.

4 Annie Petsonk, “The Kyoto Protocol and the WTO: Integrating Greenhouse Gas Emissions Allowance Trading into the Global Marketplace” (1999) 10:1 Duke Envtl L & Pol’y F 185.

5 Steve Charnovitz, “The Law of Environmental ‘PPMs’ in the WTO: Debunking the Myth of Illegality” (2002) 27 Yale J Intl L 59.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Authors

Aaron Cosbey is a development economist with more than 25 years of experience in the areas of trade, investment and sustainable development. His work cuts across a number of program areas at the International Institute for Sustainable Development, with emphasis on climate change and energy, trade and investment law and policy, subsidies and green industrial policy.

Andrei Marcu is currently a senior fellow at the International Centre for Trade and Sustainable Development and director of the European Roundtable on Climate Change and Sustainable Transition.


Dispute Settlement

Inclusive Trade

Trade’s Intersections

Digital Trade

Development and Trade

Negotiating Strategies