Sustainable Development through Carbon Markets Integration

1. Innovative Sustainability Instruments for the Green Economy- Strengthening Carbon Markets by Integrating the Environmental and Social Impacts of Trade & Investment Prof Markus Gehring, Dr. jur (Ham) LL.M. (Yale) MA (Cantab), Professeur agrégé, Chaire Jean Monnet en droit du développement durable, Université d’ Ottawa (droit civil); Tutor in Sustainable Development Law, Cambridge Law Faculty & Fellow, Robinson College Cambridge ICTSD Symposium on the Role of Trade and Markets in Addressing Climate Change and Sustainable Development at the COP16 - 11:00 – 13:00 / Thursday, 09 Dec 2010 - Hotel Azul Sensatori, Cancun, Mexico Thanks to the EU Jean Monnet Programme, Sustainable Prosperity and the University of Ottawa – Civil Law Section Faculty of Law

2. Overview - Keynote • Carbon markets as a sustainable development challenge • Trade and investment interfaces with carbon markets • The contribution of impact assessment instruments • Strengthening of carbon markets through integration of environmental and social impacts of trade and investment

3. CISDL Programming: • Dialogue: Conferences (Sustainable Justice 2002: Implementing International Sustainable Development Law, Montreal); Legal Experts Panels (WSSD, UN CBD, WTO, UNCCD); Academic Workshops (McGill, Yale, Oxford), etc. • Curriculum: Legal Seminars & Courses (McGill, Oxford, UVic, Capetown, UdM, Cambridge, Chile, etc.); Judicial Education (UNEP, IDLO, NJI). • Research: Six Research Programmes, led by nine Lead Counsel, with over 80 Legal Research and Associate Fellows and a Student Research Group. • Publications:Sustainable Development Law: Principles, Practices & Prospects (Oxford University Press, 2004); Sustainable Justice (Martinus Nijhoff, 2004); Sustainable Developments in World Trade Law (Kluwer Law International, 2005); World Trade Law in Practice (Globe, 2006); etc. The Centre for International Sustainable Development Law (CISDL) www.cisdl.org 3

4. How to generate (and re-direct) economic resources to build a low-carbon economy? Stimulate international trade: - Build comparative advantages of diverse renewable energies - Increase trade in low-carbon technologies for all sectors - Redirect subsidies and other non-tariff barriers to trade in climate-friendly goods/services Stimulate private investments: - Private and intra-company carbon markets to collect & reduce carbon - Equity investments in low-carbon projects - Increased private research, development & testing of low-carbon technology - Private commercialization of clean technologies Carbon markets as a sustainable development challenge 4

5. Carbon markets as a sustainable development challenge Domestic measures for climate financing Emission trading Carbon taxes Clean subsidies Renewable energy support / feed-in Energy efficiency support / labels Carbon budgets Bioenergy projects Other carbon pricing instruments 5

6. Carbon markets as a sustainable development challenge Applicable Trade Law Emission trading Carbon taxes Clean subsidies Renewable energy support / feed-in Energy efficiency support / labels Carbon budgets Bioenergy requirements Other carbon pricing • Market access, discrimination, services • GATT, border tax adjustment • SCM Agreement • SCM Agreement • SCM Agreement / TBT • Services Agreement / GATS • Difficult classification/ TBT • Services Agreement / GATS 6

7. Carbon markets as a sustainable development challenge Emission trading * Emission trading (TPRM EU) Mitigation subsidies * Forestry subsidies (SCM ARG) Renewable energy support / feed-in Energy efficiency support / labels * Energy efficiency standards (TBT CDN) Carbon budgets * Accounting rules Bioenergy projects * Biofuels standards (TBT CRI) Land use planning * Sustainable land use rules (AG ARM) Carbon pricing/ taxes * Packaging tax (TPRM Maldives & Guyana) * Preferential tax for use of waste material (SCM PRC) Notified WTO Measures (WTO Environmental Database) 7

8. How to create and maintain a carbon market (or other flexible mechanisms) so that they do not conflict with trade & investment law, and instead support carbon markets? Opportunity for trade law & trade measures to take down barriers, including tariffs, subsidies, other non-tariff rules, for low-carbon goods and services Need for stability to attract capital-intensive renewable energy & stimulate clean technology investments Trade & investment law can be a powerful tool for sustainable development: - Current global rules governing climate / energy investment: UNCITRAL, ICSID and the 2700+ BITS - Current global rules governing climate / energy trade: WTO, 350+ FTAs and Energy Charter-type initiatives Trade and Investment Challenges to Carbon Markets 8

9. Introduction – Trade Impact Assessments Why should we assess impacts? Many sustainable development challenges can be addressed through trade and investment but many of the same challenges are also created through international trade and foreign investment. The relationship between trade and investment rules and sustainable development is thus not black and white but rather differing shades of gray. The zero option often not part of an assessment (but mitigation and enhancement measures). Impact assessment as a tool for sustainable development through process Increasing information and participation Identifying mitigation and flanking measures, keeping options open. Well tested instrument, successful in many areas, though more difficult the more abstract the policy choice.

10. Trade Impact Assessments and Carbon Markets Canada’s Environmental Assessments – 1999 & 2001 Cabinet Directives EAs focus on environment, limited to Canadian impacts, carried out by government with public comment period. “Generally, while possible changes to the climate are explored, it is only to say that significant increases are not expected given the magnitude of expected trade increase.” Final Environment Assessment of the Canada-Colombia and Canada-Peru Free Trade Agreement (FTA) Negotiations:“Climate change due to increased GHG emissions is an important transboundary environmental issue. The FTAs with both Colombia and Peru are not expected to significantly expand Canada’s overall trade volumes, or those of our partners relative to overall trade and production levels. Therefore the impact of these trade agreements on Canada’s GHG emissions is expected to be negligible. Although Colombia and Peru are not major GHG emitters (combined share about 0.3% of global emissions), all countries are vulnerable to the impacts of climate change, requiring increased investments in adaptation measures. Any increase in trade with Canada is expected to contribute to economic development, and therefore help those countries to better cope with the changes in global climate already occurring. Canada believes that economic prosperity cannot be sustained without a healthy environment, just as progress on environmental protection cannot be achieved without a healthy economy. Canada has committed to take aggressive actions at home to reduce its GHG emissions by 20% by 2020, relative to its 2006 emissions levels, and is implementing a robust climate change plan that provides the right balance between environmental protection and economic prosperity.”

11. Trade Impact Assessments and Carbon Markets Canada’s Environmental Assessments – 1999 & 2001 Cabinet Directives, cont Canada-Panama FTA “In principle, increased exports of other products of interest not listed above (such as machinery, construction equipment, and iron and steel products), could also have environmental impacts in Canada, such air pollution, hazardous wastes, and greenhouse gas emissions resulting from production increases. However, as noted above, exports to Panama of all other products not listed in the above categories accounted for only 0.01% of Canada’s global exports of these products, illustrating that even if considerable export growth ensued as a result of an FTA, they would still constitute a very small share of total Canadian exports and production and would be manageable under current environmental management practices. As such the significance of any environmental impact resulting from export expansion in these sectors is expected to be minimal.”

12. Impact Assessments and Carbon Markets Click View then Header and Footer to change this footer US Environmental Reviews - Executive Order 13.141 (1999) & Trade Act (2002) ERs focus on environment only, review impacts on the U.S., also foreign impacts that may affect the U.S., carried out by government working groups with public input U.S. – Australia FTA Final Review: Very broad commitment with no concrete numbers on possible effects or mitigation procedures. “They reiterate commitments to continued cooperation on environmental issues such as climate change, botanic gardens, endangered and migratory species, Antarctica, meteorological and oceanographic research and management, and whale and ozone protection.” U.S. – Peru FTA Final Review, U.S. – Thailand FTA interim review, U.S. – Columbia FTA, U.S. – Chile FTA final Review:Focus on existing treaties that touch on climate change U.S. – Korea Interim Review:Notes Korea’s current emissions levels U.S. – Panama FTA Final Review:Addresses local emissions laws and treaties to which Panama is party U.S. – Singapore FTA Final Review:Addresses local emissions laws and treaties to which Singapore is Party

13. Trade Impact Assessments and Carbon Markets Click View then Header and Footer to change this footer EU’s Sustainability Impact Assessments - Working Method Adopted by DG Trade (2004) SIAs focus on sustainable development (economic, social and environmental dimensions), review both impacts in partner country and in the EU, consist mainly of expert partner studies EU-ANDEAN Community Association Agreement Final Report:After stressing the susceptibility of the Andean environment to climate change (p. 46), concerns are voiced about the effect of possible increased transportation on climate change (p. 108). These studies were conducted based on public consultations where one of the key points was “Environmental circumstances in the Andean region that should be considered by the study, with a focus on biodiversity and climate change impacts” (p. 139) EU- Central America Association Agreement Final Report:Concerns raised about the negative effect of liberalisation on the environment, especially concerning deforestation. (pages 81 and 84). Policy recommendations in this regard remain broad “Commitment to signing and enforcing multilateral and international environmental agreement (MEAs) in order to combat climate change (p. 95). EU-Libya FTA Final Report: Several mentions of CO2 emissions during the informational phase, but more importantly policy recommendations are made in order to mitigate possible expected increases (ex. p.76 – energy section of table). Opportunities are also highlighted wherein emissions can be diminished (p.52)

14. Impact Assessments and Carbon Markets Click View then Header and Footer to change this footer EU’s Sustainability Impact Assessments - EU-China PCA Final Report:Describes the seriousness of the potential effects of climate change on China: “Complicating the problems inherent in China’s current and expected water shortages are the consequences of ongoing global climate change as a result of sustained CO2 emissions. Studies have indicated that as temperatures rise across China and the world, current regions of arable land will shift in unpredictable ways, creating both winners and losers in agriculture. Modelling suggests that climate change without CO2 fertilization could reduce yields of rice, maize and wheat in China by up to 37% in the next 20 to 80 years” (p.142) * Most importantly, SIA Policy Recommendations highlight climate change: “The trade liberalisation measures in the PCA are expected to have mixed impacts on climate change, with greater use of energy efficient and low carbon technologies accompanied by greater economic growth and increased energy demand. The major role that EGS can play in reducing greenhouse gas emissions will be only partly facilitated by the liberalisation measures under negotiation. Their contribution may, however, be enhanced by joint measures within the PCA for EU-China cooperative action on climate change, with particular emphasis on the development and application of appropriate EGS. Any such cooperative action should address greenhouse gas emissions in both the EU and China, and take full advantage of their respective strengths in the development and provision of EGS.”

15. Impact Assessments and Carbon Markets Click View then Header and Footer to change this footer EU’s Sustainability Impact Assessments - EU-China PCA Final Report: “Such measures may for example include: • Cooperative development of energy efficiency policies in the EU and China which maximise the use of each other’s strengths in the provision of EGS. • Joint funding in collaboration with EU and Chinese industry of R&D technology projects for carbon capture and storage and other innovative low carbon or energy saving initiatives. technology transfer which provides stronger enforcement of intellectual property rights along with preferential access to specified EGS related to climate change, based for example on the WTO provisions for access to medicines. • Cooperation in the development of EGS standards and technical regulation, with particular emphasis on EGS related to climate change. • Consider developing a joint approach to including China in the EU’s Emissions Trading Scheme, with special provisions for each party’s emissions in the production of goods supplied to the other. • Develop joint approaches to international agreements and action under the United Nations Framework Convention on Climate Change.” (P. 102)

16. Practical Challenges and Opportunities for Innovation in Trade Impact Assessment Click View then Header and Footer to change this footer • Several different methodologies: Difficult to compare or make use of results, opportunities for convergence. • Data limitations: Limits of quantitative modeling, lack of comprehensive environmental data, opportunities for cooperation. • Consultation Outcomes: Meaningful participation is difficult to achieve, opportunities for greater engagement. • Timing: How and when should negotiators be informed, opportunities to maximise the impact of an impact assessment. • Assessing non tariff-related provisions: Less useful modeling / scenarios experience, opportunities to learn from IP / Services methods. • Follow- up: Currently no ex-post assessment, opportunities to review. • Developing country ownership: Currently no ‘smart’ model of assessment for developing country use, opportunities to cooperate.

17. Strengthening of carbon markets through integration of environmental and social impacts Preliminary Conclusions • In many debates, the limitations of trade and investment law for carbon markets are emphasized, despite offering plenty of opportunity for synergies. • Impact assessment has the potential to identify these synergies. • However, just as climate change is seldom assessed in project impact assessment at the local level, it is still a complete novelty in assessments of trade and investment treaty impacts. • Further strengthening of the impact assessment approach can potentially highlight important synergies that trade and investment have to offer for carbon markets and other flexible mechanisms. • In summary: Trade Impact Assessment (SIA, ER, EA) is an innovative, tailored, and as yet under-utilized instrument for addressing climate change in trade and investment law. Potential exists, but remains to be developed.

18. Many thanks / Danke / merci / gracias mwg24@cam.ac.uk Markus.Gehring@Uottawa.ca MGehring@cisdl.org

19. Impact Assesment of Investment Chapters of FTAs Click View then Header and Footer to change this footer Canada’s Environmental Assessments – 1999 & 2001 Cabinet Directives focus only on Canadian impacts and only on the environment Canada-CA4 FTA (El Salvador, Guatemala, Honduras and NicaraguaEA 2003“The inclusion of substantive investment rules in the FTA would provide more certainty and predictability as well as better protection for Canadian investors. No significant increase in investment flows from the CA-4 countries into Canada can be expected to result from these negotiations... Therefore, no environmental impact would result from the investment provisions of the FTA. It is not expected that the very low level of CA-4 FDI in Canada will increase significantly as a result of the FTA… Effects on the environment… would be, at the most, marginal and no assessment of the significance of the potential environmental impacts is considered necessary.”). Canada – Andean FTA EA 2008: “Investment from the Andean Community represents only a very small proportion of total foreign investment in Canada. … even a significant economic change in investment from the Andean Community would be small in scale compared to the overall level of investment in Canada, and any environmental impact is expected to be minor, if not negligible… potential environmental impacts will be mitigated by laws which bind foreign investors to the same environmental regulations that govern domestic investors.”

20. Impact Assessment of Investment Chapters of FTAs Click View then Header and Footer to change this footer US’ Environmental Reviews - Executive Order 13.141 (1999) & Trade Act (2002) impacts on the U.S. & where foreign impacts may affect the U.S., still only environment Interim Environmental Review: U.S.-Andean FTA:“The U.S.- Andean FTA may have positive environmental consequences in Colombia, Ecuador and Peru by reinforcing efforts to effectively enforce environmental laws, accelerating economic growth and development through trade and investment and disseminating environmentally beneficial technologies.” [Recent laws establish] “…that the Andean countries will strive to ensure that they will not, as an encouragement for trade or investment, weaken or reduce the protections provided for in their environmental laws.” “FTA could intensify the negative environmental effects of foreign investment on the region’s biodiversity… The Camisea Natural Gas Project, recently completed in the Peruvian Amazon with export facilities adjacent to a national marine reserve, was singled out for particular attention.” Interim Environmental Review U.S. - Panama FTA, USTR June 2004:“Given the long shared history of the Canal, U.S. investment in Panama is already quite high. The U.S. - Panama FTA may further increase investment, trade and production in the region, which may be associated with further pressure on the environment. On the other hand, proposed commitments in the U.S. - Panama FTA, such as those to effectively enforce environmental laws, may have a positive effect, especially when coupled with capacity-building and environmental cooperation activities.”

21. Impact Assessment of Investment Chapters of FTAs Click View then Header and Footer to change this footer EU’s Sustainability Impact Assessments - Working Method Adopted by DG Trade (2004) SIA of EU-India TSIA 2008 “Investments are a main determinant of economic growth. If the FTA can ensure (partial) focus of investments in the direction of sectors that promote sustainable development, trade patterns will also become ‘greener’. A free trade agreement may – through its output and employment effects – have asymmetric impacts on sectors and thus on sustainable development...” “Investment conditions affect most sectors in the EU and Indian economies, are of crucial importance for economic development, have large impacts socially and environmentally and incorporate essential elements of FDI and technological change, especially in the long run...”. SIA of EU and China Economic Partnership and Cooperation Agreement 2008“China’s productivity will also rise across the board in land, skilled labour, and capital, signifying the gains… from both a liberalised, competitive market [and] increased investment. Natural resource productivity rises…this may .. be a positive development, with natural resource imports replacing once polluting extraction industries run in country. … unskilled employment will also rise, a welcome development ...” “The focus of the PCA will be to reach a sustainable trade agreement, including a commitment aimed at ensuring that environmental or social standards are not reduced in order to artificially attract investment or enhance trade. In addition, the possible impacts on third country partners, particularly least developed countries, will be taken into account. The broad scope of the PCA provides a unique opportunity to integrate trade policy goals with wider cooperation objectives, such as in the areas of sustainability, energy efficiency, social issues and the preservation of biodiversity and natural resources.”