Tilburg University
Who is (not) paying the carbon price? De Lemos Pinto Aydos, Elena
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2016
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De Lemos Pinto Aydos, E. (2016). Who is (not) paying the carbon price? The subsidisation of heavy polluters under emissions trading schemes.
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The Subsidisation of Heavy Polluters
Under Emissions Trading Schemes
Proefschrift ter verkrijging van de graad van doctor aan Tilburg
University op gezag van de rector magnificus, prof.dr. E.H.L.
Aarts, en The University of Sydney op gezag van de rector
magnificus, dr. M. Spence, in het openbaar te verdedigen ten
overstaan van een door het college voor promoties
aangewezen commissie in de Ruth First zaal van Tilburg
University op maandag 6 juni 2016 om 16.15 uur door Elena de
Promotores:
Professor P. Delimatsis
i In the absence of a comprehensive and legally binding international agreement on global emissions reduction, the free of cost allocation of permits has been a political condition of the acceptance of Emissions Trading Schemes (ETSs) in most jurisdictions. As a consequence, up to now, many heavy polluters participating in the ETSs are not paying the full price of carbon.
The extent to which pricing carbon affects specific sectors in practice remains unclear in most jurisdictions. In this thesis, I bring together and analyse the economics and legal literature in relation to free allocations. A detailed comparison of the free allocation mechanisms utilised in three ETS systems is then undertaken in order to make recommendations for scheme design rules that will be legally robust and will support the effectiveness of the ETSs, whilst limiting any negative impacts on international trade.
Based on a systematic analysis of the available economic data, I observe that carbon leakage rates have been historically overestimated. As a result, governments have been providing free permits to a number of sectors which are not significantly exposed to carbon leakage. Furthermore, the inconsistent eligibility criteria for the free allocation of permits can distort trade between competitors liable under independent schemes. However, such trade distortions may be mitigated by harmonising the free allocation methodologies.
The harmonisation process may take place under a linking agreement and should follow a best practice approach, avoiding the eligibility of an excessive number of sectors as carbon leakage exposed. I suggest in this thesis that cumulative criteria of high emission-intensity and high trade-exposure thresholds are recommended, along with the removal of any sole trade-exposure thresholds and sole emissions-intensity thresholds.
ii that the free allocation of permits is a subsidy according to the definition provided by Article 1.1(a)(1) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Subsidies generally represent an unnecessary cost to society and may compromise the fairness of the ETS.
iv This thesis would not have been written without the financial support of the Australian Government, Sydney Law School and Tilburg University.
I have been very fortunate to be supervised by an interdisciplinary team of experts in the areas of climate change, carbon markets and World Trade Organization (WTO) law. My supervisors from the University of Sydney, Professor Rosemary Lyster and Associate Professor Celeste Black, and my supervisor from Tilburg University, Professor Panagiotis Delimatsis, were a constant source of inspiration and support. I greatly appreciate their reading and re-reading of my work and their valuable feedback. The errors remain my own.
I have had the good fortune of working as a research assistant under the supervision of Celeste Black in 2011 and 2012. Another particularly fruitful period was spent at Tilburg University, The Netherlands, in 2014, under a cotutelle agreement between the University of Sydney and Tilburg University. This was followed by four months as a fellow scholar at Fundação Getulio Vargas, Rio de Janeiro, Brazil. I have benefited greatly from my discussions with numerous colleagues in each of these opportunities.
Michael Hanley, Suzanne Attar and Natasha Stamenkovikj proofread different sections of this thesis for publication in three book chapters. David Whittaker proofread the thesis in record time and with meticulous attention to detail.
v I would like to thank my many friends and family in Brazil, Australia, The Netherlands and beyond, who have spent so many years supporting my endeavours.
vi I hereby certify that this thesis is entirely my own work and that any material written by others has been acknowledged in the text.
The thesis has not been presented for a degree or for any other purposes at The University of Sydney, at Tilburg University or at any other university or institution.
vii
AAU Assigned amount unit
ACCU Australian Carbon Credit Unit
ACU Australian Carbon Unit
ADP Ad Hoc Working Group on the Durban Platform
for Enhanced Action
ALP Australian Labor Party
AR5 Fifth Assessment Report
AUS Australia
AUS CPM Australian Carbon Pricing Mechanism
AU$ Australian Dollar
AWG-KP Ad Hoc Working Group on Further
Commitments for Annex I Parties under the Kyoto Protocol
AWG-LCA Ad Hoc Working Group on Long-term
Cooperative Action
BAU Business-as-usual
BCA Border Carbon Adjustment
CDM Clean Development Mechanism
CFI Carbon Farming Initiative
CH4 Methane
CMP Meeting of the Parties
CPRS Carbon Pollution Reduction Scheme
COP Conference of the Parties
CO2 Carbon Dioxide
CO2-e Carbon Dioxide Equivalent
EC European Commission
viii
ERU Emission Reduction Units
ETS Emissions Trading Scheme
EU European Union
EUA European Union Allowance
EU ETS European Union Emissions Trading System
FAR First Assessment Report
FVA Framework for Various Approaches
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GHG Greenhouse Gas
HFC Hydrofluorocarbon
ICAO International Civil Aviation Organization
IPCC Intergovernmental Panel on Climate Change
JI Joint Implementation
LNG Liquefied Natural Gas
LULUCF Activities Related to Land Use, Land-use
Change and Forestry
NAMAs Nationally Appropriate Mitigation Actions
NAP National Allocation Plan
NAP2 National Allocation Plans for the Second
Trading Period
NER New Entrants’ Reserve
NF3 Nitrogen Trifluoride
NGER National Greenhouse and Energy Reporting
npr-PPM Non-product-related Process and Production
Methods
NZ New Zealand
NZ ETS New Zealand Emissions Trading Scheme
ix
PFC Perfluorocarbon
ppm Parts Per Million
PPM Process and Production Methods
QELROs Quantified Emission Limitation or Reduction
Objectives
REDD+ Reducing Emissions from Deforestation and
Forest Degradation
RMU Removal Units
RTAs Regional Trade Agreements
SCM Agreement Agreement on Subsidies and Countervailing Measures
SOT Senior Official Talks on Climate Change
SF6 Sulphur Hexafluoride
UNFCCC United Nations Convention on Climate Change
US United States
x
Abstract i
Acknowledgments iv
Declaration of Originality vi
List of Abbreviations vii
Chapter 1: Methodology 1
I Introduction 1
II Research Questions 3
III Hypotheses 4
IV Methodology 4
V The Structure of the Thesis 8
Chapter 2: Contextualising the Thesis Topic 8
Chapter 3: Theoretical Framework 11
Chapter 4: Introducing the Case Studies 12
Chapter 5: Carbon Leakage Data 13
Chapter 6: Comparing Levels of Free Allocation 14
Chapter 7: Free Allocation and the SCM Agreement 14
VI Conclusion 15
Chapter 2: Contextualising Climate Change and International
Cooperation 17
I Introduction 17
II Climate Change 19
A Effects of Climate Change 20
B Global Emissions Trends 23
III The Dilemmas of International Cooperation for Climate Change
Mitigation: A Historical Analysis 26
A The Kyoto Protocol 28
B Post-Kyoto Climate Negotiations 31
xi A Why should one commit to legally binding emission reductions, when one’s actions alone will not be sufficient to achieve meaningful global
emission reductions? 39
B Why should one commit to legally binding emission reductions, when
others will not? 41
V Multilateral Agreement versus Regional Cooperation: A Real
Paradox? 43
VI The Role of Linking Emissions Trading Schemes in the Post-2020
Climate Change Regime 47
A The Clean Development Mechanism 48
B Is There a Future for Linked Schemes? 50
VII Conclusion 52
Chapter 3: Theoretical Framework 54
I Introduction 54
II Pigou: Climate Change as an Externality 55
III Coase and the Legal Rights Approach 60
A From Theory to Practice: Emissions Trading Schemes 63 B Carbon Taxes, Emissions Trading Schemes and Hybrid Schemes 65 IV The Complexities and Challenges of Emissions Trading Schemes
69
A Border Carbon Adjustments 70
1 Administrative Challenges to the Implementation of Border Carbon
Adjustments 72
2 Legal Challenges of Border Carbon Adjustments 73
B Free of Cost Allocation 80
C Linking Independent Emissions Trading Schemes 82
V Conclusion 85
xii II A Roller Coaster: the European Union Emissions Trading System 89
A Coverage under the Emissions Trading System 90
B First Ride: Early Surplus Issues 91
C Second Ride: The Emissions Trading System in Crisis 93 D Third Ride: Reforms and Attempts to Save the Emissions Trading
System 97
E Reporting and surrendering obligations and consequences of
non-compliance 100
F Links to Other Schemes 102
III What Went Wrong? A Short-Lived Carbon Price in Australia 102
A ‘Labor’ and Birth of a Pricing Mechanism 103
B An Innovative Pricing System 105
C Emissions Cap 107
D Reporting and Surrendering Obligations and Consequences of Non-Compliance 108
E Governance 109
F Links to Other Schemes 110
G Death of the Carbon Price 113
H Carbon Tax or ETS – Did it Really Matter? 117
IV Small and Resilient: The New Zealand Emissions Trading Scheme 119
A Coverage 120
B Emissions Cap 123
C Reporting and Surrendering Obligations and Consequences of Non-compliance 124
D Linking with Other Schemes 125
V Conclusion 127
xiii
A The Fossil Fuel Price Channel 132
B The Competitiveness Leakage Channel 133
III The Trade Impacts of Free Allocation under Emissions Trading Schemes 138
A Two Misconceptions about the Free Allocation of Permits 139
B Competitiveness Concerns When Linking Emissions Trading Schemes 142
IV Storm in a Teacup: From Modelling to Policy in the European Union Emissions Trading System 144
V Carbon Leakage Assessment and Industry Assistance in Australia153 VI Carbon Leakage Assessment and Industry Assistance in New Zealand 159
VII Conclusion 163
Chapter 6: Free Allocation and Linking: The Case for Harmonisation166 I Introduction 166
II The European Union Emissions Trading System Phases I and II: Prototype for an International Emissions Trading Scheme 168
A National Allocation Plans in Phases I and II 170
1 Grandfathering 172
2 Historical Emissions versus Benchmarking 173
3 New Entrants’ Reserves and Closure Provisions 174
4 Overall Surplus 176
B Competitiveness Concerns in the First Phase of the EU ETS 178
III Lessons from a Hypothetical Linking Between the EU ETS and AUS CPM 183
A The European Union Emissions Trading System Third Trading Period 185
1 Use of Benchmarks 186
xiv B Industry Assistance in the Former AUS CPM: The Jobs and
Competitiveness Program 190
1 Review of the Jobs and Competitiveness Program 192
C Issues Arising from Different Assistance Levels 193
IV Conclusion 197
Chapter 7: The Free Allocation of Permits and the WTO Discipline of Subsidies 199
I Introduction 200
II The World Trade Organization Law on Subsidies and Countervailing Measures 201
A Is the Free Allocation of Permits a Subsidy? 204
III First Inquiry: Financial Contribution 205
A Revenue Forgone that is Otherwise Due 209
B Free Allocation of Emission Permits as a Forgoing of Revenue Otherwise Due 211
1 The Foregoing of Revenue under the European Union Emissions Trading System 212
2 The Forgoing of Revenue under the Australian Carbon Pricing Mechanism 213
3 The Forgoing of Revenue under the New Zealand Emissions Trading Scheme 215
C Provision of Goods 216
1 Are Intangible Assets ‘Goods’? 218
D Emission Permits Are Goods for the Purpose of the SCM Agreement 220
E Income support in the sense of Article XVI of General Agreement on Tariffs and Trade 222
IV Second Inquiry: Benefit Analysis 224
xv B Analysis of Benefit and Revenue Forgone that is Otherwise Due 231
V What Type of Subsidy? Third and Fourth Inquiries 233
A The Trade-Exposure Threshold and the Treatment of Prohibited Subsidies 235
B The Emissions-Intensity Threshold and Treatment of Actionable Subsidies 238
1 De jure specificity 239
2 Sole Energy-Intensity Threshold: A ‘De Facto’ Specific Subsidy 240
C Is the Specific Subsidy Causing Adverse Effects on the Interests of Other Members? 244
IV Conclusion 246
Chapter 8: Summary of the Main Findings 248
I Introduction 248
II Climate Policy Regimes and the Role of Linked ETSs in the New Framework for International Cooperation on Climate Change Mitigation 250
III Real-Life ETSs: Lessons from the Case Studies 252
IV The Central Questions of this Study 255
V Final Remarks 259
Bibliography 262
A Articles/Books/Reports 262
B Australian Legislative Materials 279
C Foreign Domestic Materials 280
C.1 Belgium 280
C.2 Brazil 281
C.3 New Zealand 281
C.4 United States 281
xvi
D.2 European Case Law 284
E Treaties 285
F United Nations Materials 286
G International Economic Materials 287
G.1 WTO Panel Reports 287
G.2 WTO Appellate Body Reports 288
G.3 Other International Economic Materials 289
1
CHAPTER 1: METHODOLOGY
‘There is no Plan B, because we do not have a Planet B’
Ban Ki-moon, UN Secretary General, September 2014
I Introduction
II Research Questions III Hypotheses
IV Methodology
V The Structure of the Thesis
Chapter 2: Contextualising the Thesis Topic Chapter 3: Theoretical Framework
Chapter 4: Introducing the Case Studies Chapter 5: Carbon Leakage Data
Chapter 6: Comparing Levels of Free Allocation Chapter 7: Free Allocation and the SCM Agreement VI Conclusion
I Introduction
This thesis analyses the methodology of the free allocation of permits in Emissions Trading Schemes (ETSs). What motivated this research in the first place was an insight from an earlier work1 on the implementation of carbon taxes in Brazil. During my previous study, I came into contact with literature suggesting that carbon taxes and ETSs, by unilaterally adding a carbon cost to domestic industries, could lead to carbon leakage and competitiveness distortions.
The aim of carbon pricing is to mitigate greenhouse gas (GHG) emissions. It is intuitive, therefore, that impacts on the profits and, occasionally, on the actual viability of certain businesses are a necessary consequence of an effective environmental policy. However, even now,
1 Elena Aydos, 'Tributação Ambiental no Brasil: Fundamentos e Perspectivas' (2010)
2 many heavy polluters participating in ETSs are not paying the full price of carbon.
Concerns with the loss of competitiveness, vis-à-vis international competitors who are not liable under a carbon pricing mechanism, have been at the centre of the political discussions on climate policy in several countries.2 Carbon leakage, that is, the risk that the environmental goals of ETSs might not be achieved if energy-intensive industries move offshore and global GHG emissions, therefore, remain unchanged or increase, has also been a key concern.3
Nevertheless, the extent to which pricing carbon could affect specific sectors remains unclear in most jurisdictions.4 Free allocation, while being a methodology which is meant to mitigate trade distortions, can actually have the effect of distorting industry competitiveness. In other words, if the combined effects of the carbon price and free allocation are not the same for two firms operating in different jurisdictions, which are in competition in relation to the product they produce, then these firms will still face different price constraints. Different allocation rules could affect their profit margins, thereby distorting trade.
Economic data that assesses the sectors liable under ETSs is often discussed within the economics sphere, with little attention from legal scholars. 5 As a result, the legal implications of the World Trade Organisation’s (WTO) laws applicable to the free allocation method have been largely disregarded.
Therefore, I undertake a detailed and systematic analysis of the free allocation mechanisms utilised in three ETS systems, and conclude that the free allocation of permits may be deemed to be a subsidy according to the
2 See also Harro Van Asselt and Thomas Brewer, 'Addressing competitiveness and
leakage concerns in climate policy: An analysis of border adjustment measures in the US and the EU' (2010) 38 (15/09/09) Energy Policy 42
3 See Chapter 5.
4 European Environment Agency, 'Market-based instruments for environmental policy in
Europe' (European Environment Agency, 2005) 9. According to the European
Environment Agency ‘there is no evidence that existing economic instruments have a major adverse effect on competitiveness at the macro and sector level’.
5 Sanja Bogojevic, 'Ending the Honeymoon: Deconstructing Emissions Trading
3 definition in the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Finally, I make recommendations for future scheme design rules that will be both legally robust and will support the effectiveness of the ETSs whilst limiting any negative impacts on international trade.
II Research Questions
The principal areas of enquiry of this thesis are twofold. Firstly, on the premise that future ETSs may continue to adopt the free allocation of permits to assist domestic industry, I have formulated the following research questions:
(i) Is the inclusion of free allocation as an element of the ETS design justifiable, given the concerns about international competitiveness and carbon leakage?
(ii) Based on the case studies, are the independent domestic ETSs adopting distinct methods for the free of cost allocation of permits?
(iii) Where relevant discrepancies are observed, would these discrepancies affect the competitiveness of liable industries under the ETSs?
(iv) Could trade distortions be mitigated by the harmonisation of free allocation rules under linking agreements?
Secondly, focusing on the interactions between the free allocation of permits and the WTO rules relating to subsidies, more specifically the provisions in the Agreement on Subsidies and Countervailing Measures (SCM Agreement), I am proposing the following research questions:
(i) Is the free allocation of permits deemed to be a subsidy under the definition provided by Article 1.1(a)(1) of the SCM Agreement?
4
III Hypotheses
In relation to the first set of research questions, I expect to find the following results:
(i) The risk of carbon leakage is not as high as initially predicted by policymakers and independent research. However, some industry sectors may be vulnerable to a carbon price, in which case a legal framework for the free allocation of permits is likely to be justifiable;
(ii) There are significant discrepancies in the framework for free allocation under the independent ETSs;
(iii) The free allocation of permits, as an industry assistance measure, is problematic as it discriminates between liable entities under the different ETSs.
In relation to the second set of research questions, I expect to find the following results:
(i) The free allocation of permits, in certain circumstances, would be deemed to be a subsidy according to the definition in the SCM Agreement. As such, the design for free allocation must conform to the discipline of the SCM Agreement;
(ii) The free allocation of permits, in certain circumstances, may be deemed an actionable subsidy, but it is unlikely to be a prohibited subsidy.
IV Methodology
5 across a number of disciplines, such as international relations, ecology, sciences, social sciences, politics, philosophy, economics, law, just to name a few.
Within the general topic of climate change law and policy, the focus of this thesis has been narrowed down to the methodology of free allocation of permits in ETSs. In order to answer the research questions set out above, I have adopted an interdisciplinary research methodology, which combines different bodies of knowledge and sources of data.6
The term interdisciplinary research is used in this thesis to define ‘research across the boundaries of several closely related disciplines like sociology, anthropology and psychology, which involves extensive “borrowing” of concepts and methods’. 7 This methodology can be undertaken by individuals, as well as teams of researchers.
I argue that two closely related disciplines are best suited to analyse the research questions, that is, law and economics. Legal scholars’ have generally assumed that free allocation is necessary and justifiable in order to prevent carbon leakage, which has influenced their legal analysis of this measure.8 These views are arguably derived from the lack of a detailed understanding of the functioning of ETSs, the free allocation methodology, and the economic aspects of distributing permits free of cost.
The economic data demonstrates that impacts on industry competitiveness and carbon leakage exposure is very limited.9 However, these studies assume that free allocation is a method that complies with WTO law, as opposed to Border Carbon Adjustments (BCAs). I suggest that
6 Gabriele Bammer, Disciplining Interdisciplinarity: Integration and Implementation
Sciences for Researching Complex Real-World Problems (ANU E Press, 2013);
Desmond McNeill, 'On Interdisciplinary Research: with particular reference to the field of environment and development' (1999) 53(4) Higher Education Quarterly 312.
7 Bammer, above n 6.
8 James Windon, 'The Allocation of Free Emissions Units and The WTO Subsidies
Agreement' (2009) 41 Georgetown Journal of International Law 189; Felicity Deane,
Emissions Trading and WTO Law : A Global Analysis (Edward Elgar Publishing, 2015);
Lauren Henschke, 'Going it Alone on Climate Change. A New Challenge to WTO Subsidies Disciplines: Are Subsidies in Support of Emissions Reductions Schemes Permissible Under the WTO' (2012) 11(1) World Trade Review 27; Felicity Deane, 'Subsidies of the Australian Clean Energy Package' (2013) 12(2) The Journal of Law and Financial
Management .
6 this assumption is incorrect.
The interdisciplinary methodology adopted in this thesis aims to close the gap between the economic data and the legal analysis of these measures, which led to the interpretations and conclusions described above. Economic data is integrated in the research through a review of the economics literature in Chapter 5. The main objective in doing so is to synthesise disciplinary knowledge in relation to carbon leakage rates.10
Two legal methodologies complement the findings in Chapter 5. Firstly, I adopt a comparative law methodology. Kamba suggests that ‘comparative law serves to emphasise the interdependence between law and other social phenomena’,11 which is also the case with interdisciplinary research. The comparative law research is undertaken across Chapters 4, 5 and 6, where three case studies are analysed: the legal framework of the European Union Emissions Trading System (EU ETS); the Australian Carbon Pricing Mechanism (AUS CPM); and the New Zealand Emissions Trading Scheme (NZ ETS).
Hutchinson, lists a number of goals of comparative law research, including:
Identifying solutions to specific or novel legal problems already encountered in other jurisdictions; looking at not only the solutions to the legal problems, but ‘how the functionally equivalent need was perceived and addressed’; ... promoting international unification in regard to transnational legal issues ... [and] encouraging countries to cooperate in addressing social issues and problems at an international level 12 The choice of jurisdictions and areas for comparison were dictated by the purposes of this research.13 In the particular case of this research, the comparative analysis between the primary legislative instruments covering
10 Intergovernmental Panel on Climate Change, 'Climate Change 2007: Mitigation of
Climate Change ' (2007). The IPCC defines carbon leakage as ‘the increase in CO2
emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries’. For further details on carbon leakage see Chapter 5.
11 W J Kamba, 'Comparative Law: A Theoretical Framework' (1974) 23(03) International
and Comparative Law Quarterly 485, 493.
7 the EU ETS, AUS CPM and NZ ETS allows one to: better understand the real world experiences of ETSs; compare the regulatory responses to the issue of carbon leakage across jurisdictions; and, understand the outcomes of the distinct free allocation methods and how they fit particular characteristics of the respective jurisdictions.14 Furthermore, a key aim of employing the comparative law methodology is to address the issue of whether the discrepancies in the free allocation method can encourage jurisdictions to cooperate in the future by linking their domestic ETSs and harmonising the free allocation rules through the linking agreement.
Hence, the choice of jurisdictions was based on the existing and projected interactions between the three independent ETSs at the commencement of the research. A direct linking of the AUS CPM and the EU ETS was announced and scheduled to commence in 2015.15 The intercontinental linking was never implemented due to the repeal of the AUS CPM in 2014.16 The decision to include the AUS CPM in the case studies remains valid, despite its repeal in July 2014. The successful negotiation of a direct linking with the EU ETS, the phased approach to pricing, and the likelihood of Australia re-implementing an ETS in the future are factors that confirm the relevance and suitability of the case study.
A tentative direct linking between the AUS CPM and the NZ ETS was discussed between the two jurisdictions. However, the negotiations for linking the schemes were not as successful as between the EU ETS and the AUS CPM, due to fundamental discrepancies between the schemes, such as the methodology for cap setting, as explained below. The initial openness to a global carbon market was a key feature of the NZ ETS, although it has ceased to be the case with New Zealand’s decision not to participate in the second trading period of the Kyoto Protocol. Consequently, the indirect link between the EU ETS and the NZ ETS, which was in place from the commencement of the NZ ETS, may cease to exist,
14 Hutchinson, above n 12.
15 For further details on direct links between ETSs, see Chapter 2. For an overview of
these schemes, see Chapter 4.
8 as further explained below.17 However, the comparison still remains relevant and the conclusions from this analysis could be transferable to the other intended linkages between independent ETSs.
Furthermore, the geographical and economic differences, as well as the range of sizes and structures of these three schemes, contributes to broadening the applicability and geographic scope of the research. The time period for the research begins with the introduction of the analysed ETSs in each of the case studies and concludes on 15 December 2015.
Finally, a doctrinal analysis of the interpretation of the SCM Agreement by the WTO Dispute Settlement Body (DSB), and how it applies to the free allocation of permits in the case studies, is undertaken in Chapter 7. This analysis is substantiated by a comprehensive understanding of the three ETSs and the economic data on carbon leakage.
V The Structure of the Thesis
Chapters 2 and 3 contextualise the topic and set the theoretical framework upon which the thesis will be constructed. Chapter 4 introduces the case studies. Chapters 5, 6 and 7 analyse the data and answer the research questions. Chapter 8 presents a summary of the key findings. Chapters are presented according to the formal guidelines adopted by the University of Sydney and the Sydney Law School.
Chapter 2: Contextualising the Thesis Topic
Chapter 2 contextualises the use of ETSs and the free allocation of permits within the broader field of emerging climate policy regimes and international efforts to adopt a universal agreement to mitigate global climate change. The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) on the physical science basis of climate change concluded,
17 For further details on the functioning of the indirect links between the ETSs, see
9 with an unprecedented level of certainty, that the atmosphere and oceans are warming at increasing rates.18 Each of the past three decades has been warmer than all the previous decades in the instrumental records, and the first decade of the 2000s has been the warmest.19
A growing body of scientific evidence demonstrates that the cumulative concentrations of human-induced greenhouse gas (GHG) emissions are the primary cause of the changes to the climatic system described above, which is evidenced by the present concentrations of carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) being the highest recorded in ice cores in the last 800,000 years.20 Approximately half of the anthropogenic GHG emissions are generated by energy use and production, with land-use changes such as deforestation and industrial activities also playing an important role.21
Climate change represents a crisis of global magnitude and requires concerted global action. Garnaut argues that ‘the search for effective climate change policy is partly a search for effective cooperation amongst countries of a kind and dimension that has never previously been known’.22
A near-universal assembly of countries under the auspices of the UNFCCC23 recognised that the increasing concentrations of GHGs in the atmosphere from anthropogenic sources are causing climate change and that its adverse effects are a common concern for humankind. Parties agreed for the first time in 2009 that the increase in the global temperature should be kept below 2oC above pre-industrial temperatures. This goal may be achieved if the carbon-dioxide equivalent (CO2-e) concentrations in the atmosphere peak and then decline thereafter to below 450 parts per million
18 Intergovernmental Panel on Climate Change, 'Climate Change 2013: The Physical
Science Basis - Technical Summary' (2013) <www.ipcc.ch>.
19 Ibid.
20 Intergovernmental Panel on Climate Change, 'Climate Change 2013: The Physical
Science Basis - Summary for Policymakers' (2013) <http://www.ipcc.ch/>.
21 IEA and OECD, 'Coal medium term market report: market trends and projections to
2018' (IEA, 2013) 15.
22 Ross Garnaut, 'Garnaut Climate Change Review Update: Progress Towards Effective
Global Action on Climate Change' (Commonwealth of Australia, 2011) 5.
23 United Nations Framework Convention on Climate Change, opened for signature 9 May
10 (ppm) CO2-e. A second best option would be the stabilisation of the greenhouse gases at 550 ppm CO2-e, which is likely to lead to a global temperature increase of 3o C above pre-industrial levels, a scenario that presents higher risks of dangerous climate change.24
Paradoxically, nations have failed, for over a decade, to achieve a comprehensive agreement with legally binding emissions reduction targets. The chapter analyses, from a historical perspective, the decade-long impasse in the negotiations for a multilateral comprehensive agreement for climate change mitigation under the auspices of the UNFCCC, with a focus on the strict division between the developed and developing countries which was formalised by the Kyoto Protocol, and the assumption by a number of governments that adhering to a legally binding agreement was irrational.
Following an increase in bilateral and regional collaboration between the biggest polluters, negotiations at the Twenty First Conference of the Parties (COP21) under the United Nations Framework Convention on Climate Change (UNFCCC), also known as the 2015 United Nations Climate Change Conference, took place in Paris at the end of November 2015. A new, universal agreement was reached at COP21. The new agreement aims for universal participation, that is, all Parties must make national commitments to reduce their GHG emissions. However, participation will not be uniform. This model for international cooperation is more fragmented and reflects national circumstances, with leadership taken by the Parties with the greatest responsibility and highest capacity to mitigate their emissions.
I argue the new paradigm of international cooperation combines the multilateral framework that has been pursued under the UNFCCC with bilateral and multilateral approaches, such as linking the independent ETSs, carbon taxes and offset markets in order to achieve a global carbon price that can increase ambition and the adherence to mitigation action.25 The
24 Ross Garnaut, 'Garnaut Climate Change Review Update: The Science of Climate
Change' (Commonwealth of Australia, 2011) 43.
11 chapter then focuses on the role of linking the ETSs within this proposed framework.
However, there are a number of limitations to the analysis presented in Chapter 2. These include that it does not cover international relations and the various political perspectives, the possible interactions between international regimes such as the UNFCCC and the WTO and/or forms of private and public–private governance. These matters remain outside the scope of the thesis.
Chapter 3: Theoretical Framework
Chapter 3 sets the theoretical framework upon which the thesis is developed. From an economics perspective, climate change is a market failure of unparalleled magnitude. Therefore, I analyse two key market instruments to deal with this market failure, that is, carbon taxes and ETSs.
Carbon pricing, implemented by the introduction of ETSs, is a cost-effective instrument to achieve emissions reductions. ETSs are largely based on Coase’s theory, which, in its application to climate change, proposes that the use of carbon taxes may not be the most efficient policy to achieve carbon reduction where manufacturers are willing to pay for the pollution costs, and where the carbon costs become excessive this can lead to the closure of otherwise viable businesses.
The general structure and practical applications of ETSs is explained, as well as the alternatives to link the independent ETSs. While there is uncertainty regarding the carbon price under an ETS, governments can connect the measure to a mandatory emission cap or reduction targets, allowing for predictability in relation to the environmental outcomes. However, the ETSs are a complex regulatory mechanism and their success will greatly depend on the design of the scheme.
12 implementing ETSs, that is, border carbon adjustments (BCAs) and the free of cost allocation of permits. I explain the general concept of BCAs, highlighting the key administrative and WTO law challenges to its implementation. The treatment of international aviation under the EU ETS is an example of a BCA.
I argue that, based on a misreading of the Coase Theorem, the literature has projected that the trading of emissions permits in an ETS would have the same efficiency, whether the emissions permits are initially auctioned or given away free of cost to participants. In these circumstances, the free allocation of permits is the prevailing instrument in the case studies and also the focus of this thesis. As a consequence, the liable entities under these schemes have not yet started to pay the full carbon price.
Chapter 4: Introducing the Case Studies
Chapter 4 introduces the case studies, providing the reader with a basic understanding of the key elements of each ETS, such as the coverages, emissions caps, governance regimes and links with other schemes. This is necessary for the analysis that follows in Chapters 5, 6 and 7. It also reflects on the main achievements and challenges particular to each scheme.
For example, the EU ETS has experienced significant problems with surplus emissions permits, and recent reforms are attempting to provide a much needed stability to the scheme to enable it to reach its goal of promoting cost efficient emissions reduction.
Australia has attracted the undesirable distinction of being the only jurisdiction to discard a mandatory carbon price and to move away from its key climate change policy. Despite its short life, the AUS CPM remains a relevant case to be studied due to the innovative framework adopted to prevent issues such as price volatility during the first years of the scheme, building on the lessons learned from the EU ETS.
13 the scheme (carbon tax or emissions trading scheme), and its impacts on the international competitiveness of the domestic energy-intensive trade-exposed (EITE) industries.
Finally, the NZ ETS is the most distinctive of the three schemes, due greatly to the singularity of New Zealand’s economy. The scheme has been resilient and stable, despite significant changes in the country’s approach towards international climate change negotiations, which is discussed in Chapter 2.
Chapter 5: Carbon Leakage Data
Despite the general acceptance of the economic justifications for implementing ETSs as a cost-effective instrument to achieve emission reductions, concerns over competitiveness distortions to the domestic industry due to a carbon price, and the risk of carbon leakage are still real challenges to the adoption of ETSs worldwide. Chapter 5 reviews the economics literature and empirical research on carbon leakage in the EU ETS, AUS CPM and NZ ETS.
Chapter 5 focuses on carbon leakage and free allocation as an industry assistance measure. It develops the theory of carbon leakage and the parameters for economics research.
14
Chapter 6: Comparing Levels of Free Allocation
Chapter 6 examines aspects of the design of the free-allocation methods that might lead to competitiveness distortions. It reviews the data from the first and second trading periods of the EU ETS, when the different Member States had their own separate National Allocation Plans (NAPs).
In the EU ETS context, the different allocation rules generated concerns over the competitiveness of industries subject to the different NAPs. By analogy, key design elements in the legal framework of the EU ETS and the AUS CPM would be problematic from a trade perspective. For example, the uneven benchmarks and output-based allocation versus the historical emissions data, which could result in a significant variation of the allocation levels, with the potential to impact trade and distort competition between liable installations under the independent ETSs.
Chapter 7: Free Allocation and the SCM Agreement
The literature has extensively analysed the legal implications of the free allocation system from the perspective of the WTO laws on subsidies.26 However, as explained above, the absence of an interdisciplinary approach resulted in a lack of detailed understanding of the functioning of the ETSs, the free allocation methodology and the economic aspects of distributing permits free of cost. Chapter 7 closes the gap between the doctrinal analysis of the SCM Agreement, the legal frameworks of these schemes in practice and the economic research data.
Chapter 7 concludes that the free allocation of permits is a subsidy in accordance with the definition in the SCM Agreement and analyses whether it could be a prohibited or actionable subsidy, according to the different thresholds for allocation and the levels of assistance set by each scheme.
15 In relation to the EU ETS sole emissions-intensity threshold, it seems to have been included in the Directive in order to perpetuate a targeted subsidisation of a small number of enterprises from the cement sector, which were already being favoured by the decentralised NAPs during the first and second trading periods. As such, it is an actionable subsidy and may be challenged if it causes adverse effects on other WTO Members. I recommend the removal of the sole emissions-intensity factor from the EU ETS quantitative assessment. The recent proposal for a directive to amend the EU ETS27 is partially in line with this recommendation.
VI Conclusion
The thesis analyses the free allocation of permits methodologies in the ETSs from an interdisciplinary perspective. My hypotheses are that the free allocation of permits discriminates between the liable entities under the ETSs, and that it may have undesirable trade impacts. Trade distortions may be dealt with through linking agreements, whereby two or more linking countries adopt harmonised allocation rules. Furthermore, where linking is not a realistic alternative, the free allocation of permits may be deemed to be a subsidy subject to the discipline of the SCM Agreement. In this case, affected countries may bring a dispute to the WTO DSB.
The dual focuses of the thesis determined the choice of an interdisciplinary research methodology, one which bridged the economic data and the legal interpretations of the SCM Agreement, based on the framework of the ETSs in the case studies. The following chapters demonstrate that the EU ETS, the AUS CPM and the NZ ETS have all subsidised emissions-intensive industries. However, the consequences of this regulatory model have, in general, escaped the scrutiny of legal scholars. Despite being formally liable entities under these schemes, heavy polluters are not yet paying their fair share of the carbon price.
27 Proposal 2015/148 (COD) for a Directive of the European Parliament and of the Council
16 It should be noted that, between the commencement of my doctoral candidature in 2011 and the completion of this thesis in 2016, a number of significant changes in relation to climate change regulations have taken place in the jurisdictions where the case studies were originated. In the first year of research, the Clean Energy Bills were introduced in Australia, featuring a market instrument known as the Carbon Pricing Mechanism (AUS CPM) as its key instrument for achieving GHG emissions reductions.
The Australian Clean Energy package was approved and a linkage between the AUS CPM and the EU ETS was announced. The AUS CPM functioned for two years and, unfortunately, I concluded my thesis one year after the repeal of the Carbon Pricing Mechanism was enacted.
Both the EU ETS and the NZ ETS have also been subject to several amendments.28 A recent proposal for amending the EU ETS Directive, released in July 2015, is of particular interest to the topic of this research. In terms of the international negotiations on climate change mitigation, I have concluded my final draft with renewed hope due to the successful meeting of the Twenty First Conference of the Parties (COP21) under the United Nations Framework Convention on Climate Change (UNFCCC) in Paris.
‘If not us, then who? If not now, then when? If not here, then where?’
Philippines Climate Commissioner, Naderev Saño, COP18
I Introduction II Climate Change
A Effects of Climate Change B Global Emissions Trends
III The Dilemmas of International Cooperation for Climate Change Mitigation: A Historical Analysis
A The Kyoto Protocol
B Post-Kyoto Climate Negotiations
C The Doha Amendment to the Kyoto Protocol D The Paris Agreement
IV Countries’ Historical Key Concerns
A Why should one commit to legally binding emissions reductions when one’s actions alone will not be sufficient to achieve meaningful global emissions reductions?
B Why should one commit to legally binding emissions reductions, when others will not?
V Multilateral Agreement versus Regional Cooperation: A Real Paradox?
VI The Role of Linking Emissions Trading Schemes in the Post-2020 Climate Change Regime
A The Clean Development Mechanism B Is There a Future for Linked Schemes? VII Conclusion
I Introduction
This chapter focuses on contextualising the use of Emissions Trading Schemes (ETSs)1 and the free allocation of permits within the broader fields of the emerging climate policy regimes and international efforts to adopt a universal
18 agreement to mitigate global climate change. In Part II, a review of the current state of scientific knowledge on anthropogenic climate change is provided.
Part III analyses the decade-long impasse in the negotiations for a multilateral, comprehensive agreement on climate change mitigation under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC).2 The potential for the adoption of legally binding commitments by all the major emitters under the first commitment period of the Kyoto Protocol was undermined by two important factors. 3
Firstly, strict divisions between the developed and developing countries were formalised by the Kyoto Protocol. The developing countries justified this position on the basis of historical emissions and the principle of common but differentiated responsibilities.4 However, the rigid division impacted on the viability of an effective second commitment period of the Kyoto Protocol, and resulted in the impasse at Copenhagen. Secondly, there are common concerns which led governments from the key polluter countries to the conclusion that adhering to a legally binding agreement was irrational.5 Part IV develops two historical concerns of the countries engaging in the international cooperation process.
In Part V, I argue that the quest for meaningful global emission reductions – which intuitively denotes a multilateral process – can and, indeed, should, coexist with regional initiatives. A new paradigm of international cooperation is now being shaped, based on universal – but not uniform – participation, reflecting national circumstances. Complementing the multilateral platform, there is a proliferation of regional approaches to climate change mitigation and adaptation.
2 United Nations Framework Convention on Climate Change, opened for signature 9 May 1992,
1771 UNTS 107 (entered into force 21 March 1994) (‘UNFCCC’).
3 The analysis in this chapter is not exhaustive. There are several factors and hidden interests,
both within the domestic context of each Party as well as from an international political economy perspective, which have contributed to the incapacity of the Parties to reach a centralised multilateral agreement under the UNFCCC. Nevertheless, the framework developed herein is central to contextualising the thesis topics and understanding the role that linked Emissions Trading Schemes will play in the new paradigm for international cooperation that is likely to be developed from 2015 onwards.
4 On the principle of common but differentiated responsibilities, see Christopher D. Stone,
'Common but Differentiated Responsibilities in International Law' (2004) 98(2) The American
Journal of International Law 276.
5 Scott Barret, 'Self-enforcing international environmental agreements' (1994) 46 Oxford
Economic Papers 878; Robert Stavins, 'The problem of the commons: Still unsettled after 100
19 It is therefore the right moment to reflect on the decade-long impasse of international negotiations under the auspices of the UNFCCC, in order to understand the challenges and opportunities that have materialized in this process.
The new paradigm of international cooperation combines the multilateral framework under the auspices of the UNFCCC with the bilateral and multilateral approaches, such as linking independent ETSs, carbon taxes and offset markets, in order to achieve a global carbon price that can increase ambition and an adherence to mitigation action.6 In Part VI, I focus specifically on the role of linking the ETSs within this proposed framework.7
II Climate Change
The Fifth Assessment Report (AR5) of the United Nations Intergovernmental Panel on Climate Change (IPCC)8 on the physical scientific basis of climate change concluded, with unprecedented levels of certainty, that the atmosphere and oceans are warming at increasing rates.9 Each of the past three decades has been warmer than all the previous decades in the instrumental records, and the first decade of the 21st century has been the warmest yet.10
Based on meteorological data independently collected by different centres around the globe, the IPCC concluded that it is virtually certain that maximum
6 See also Joëlle de Sépibus, Wolfgang Sterk and Andreas Tuerk, 'Top-down, Bottom-up or
In-between: How Can a UNFCCC Framework for Market-Based Approaches Ensure Environmental Integrity and Market Coherence?' (2012); Stavins, above n 5; Rafael Leal-Arcas, Climate Change
and International Trade (Edward Elgar, 2013).
7 See Chapter 3 for further details on these instruments.
8 Intergovernmental Panel on Climate Change <http://www.ipcc.ch/>. The IPCC is a scientific
body established in 1988 under the auspices of the United Nations (UN) with the aim of providing ‘a clear scientific view on the current state of knowledge in climate change and its potential environmental and socio-economic impacts.’ While the IPCC reviews and assesses scientific, technical and socio-economic information produced worldwide, it does not conduct any direct research and/or monitor climate related data or parameters. The IPCC work is conducted by three Working Groups (WGI, WGII and WGIII), coordinated and administrated by a Technical Support Unit (TSU). The WGI assesses the physical scientific aspects of the climate system and climate change. The WGII assesses the vulnerability of socio-economic and natural systems to climate change, consequences of climate change and adaptation options. The WG III assesses mitigation options, including emissions reductions and removals, adopting a solution-oriented approach. Between 1988 and 2015 the IPCC released five Assessment Reports (AR) of the state of knowledge on climate change.
9 Intergovernmental Panel on Climate Change, 'Climate Change 2013: The Physical Science
Basis - Technical Summary' (2013) <www.ipcc.ch>.
20 and minimum temperatures over land have increased on a global scale since 1950.11 It is also virtually certain that the upper ocean (0−700m) warmed from 1971 to 2010. 12
A growing body of scientific evidence demonstrates that the cumulative concentrations of human-induced greenhouse gas (GHG)13 emissions are the primary cause of climate change.14 In 2011, the atmospheric concentrations of carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) exceeded the pre-industrial levels by approximately 40 per cent, 150 per cent, and 20 per cent, respectively.
The present concentrations of CO2, CH4 and N2O are the highest ever recorded in ice cores in the last 800,000 years.15 More than half of anthropogenic GHG emissions are generated by energy use and production, with land-use changes, such as deforestation and industrial activities, also playing an important role.16
A Effects of Climate Change
The already observed consequences of global warming include a change in the intensity and frequency of extreme weather and climate events,17 a lessening of
11 Ibid. Also see Intergovernmental Panel on Climate Change, 'Climate Change 2013: The
Physical Science Basis - Summary for Policymakers' (2013) <http://www.ipcc.ch/>. Note that ‘virtually certain’ indicates a 99 to 100 per cent assessed likelihood of the outcome or result.
12 Intergovernmental Panel on Climate Change, above n 11.
13 There are seven main Greenhouse gases (GHGs) in the atmosphere: Carbon dioxide (CO2),
Methane (CH4), Nitrous oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs),
Sulphur hexafluoride (SF6) and Nitrogen trifluoride (NF3). The first three GHGs occur naturally in
the atmosphere, while the others are synthetic. Natural (non-anthropogenic) GHGs are essential to life in this planet. They absorb solar radiation and keep the earth warm enough to support life. However, human activities such as energy production, land clearing and agriculture have increased the volume and variety of GHGs present in the atmosphere, with severe impacts to the climate system.
14 Intergovernmental Panel on Climate Change, above n 11, 12.
15 Ibid 7. CO2 concentrations have increased from 280 parts per million (ppm) in pre-industrial
times to over 400 ppm in 2013.
16 Intergovernmental Panel on Climate Change, above n 9; International Energy Agency, 'Key
Trends in CO2 Emissions' (2015); Rosemary Lyster and Adrian Bradbrook, Energy Law and the
Environment (Cambridge University Press, 2006) 51.
17Intergovernmental Panel on Climate Change, above n 11, 5. See also The World Bank, 'Turn
Down the Heat: Why a 4oC Warmer World Must Be Avoided' (2012)
<http://climatechange.worldbank.org/sites/default/files/Turn_Down_the_heat_Why_a_4_degree _centrigrade_warmer_world_must_be_avoided.pdf> xiv. The World Bank report demonstrated that the Russian heat wave of 2010:
21 the snow and ice from glaciers all around the world,18 an increasing rate of sea level rise since the mid-19th century,19 and increasing ocean acidification endangering marine species and entire ecosystems.20
The continued release of GHGs at ‘business as usual’ levels will lead to further warming.21 In other words, the current levels of the mitigation efforts are not sufficient to prevent an increase in the long-term temperature of 2.8°C to 4.5°C, with a large part of the increase happening during the current century.22 The World Bank estimates about 4°C warming within this century and a 6°C warming in the long term, under a ‘business as usual’ scenario.23 The IPCC’s worst case scenario estimates that global temperature could rise by up to 5.4°C by 2100.24
Physical changes by the end of the 21st century will include more frequent hot and fewer cold temperature extremes over most land areas, with occasional cold winter extremes; changes in the water cycle, with increasing contrasts between the wet and dry regions and between the wet and dry seasons; continuous warming of the global ocean, with heat penetrating from the surface
areas at more than 1 million hectares, and economic losses at about US$15 billion (1 percent gross domestic product (GDP)) and the 2012 drought in the United States, which impacted about 80 percent of agricultural land, making it the most severe drought since the 1950s.
18 Intergovernmental Panel on Climate Change, above n 11, 3.
19 Ibid 6. The rate of sea level rise is now larger than observed during the previous two millennia. 20 Intergovernmental Panel on Climate Change, above n 9, 57. The WGI reports that ‘it is virtually
certain that the increased storage of carbon by the ocean will increase acidification in the future,
continuing the observed trends of the past decades. Ocean acidification in the surface ocean will follow atmospheric CO2 and it will also increase in the deep ocean as CO2 continues to penetrate
the abyss’. See also Australian Government, Impacts of Ocean Acidification on the Reef Great Barrier Reef Marine Park Authority <http://www.gbrmpa.gov.au/outlook-for-the-reef/climate-change/how-climate-change-can-affect-the-reef/ocean-acidification>. Ocean acidification threatens marine life and ecosystems, such as the Great Barrier Reef ecosystem in Queensland, Australia.
21 The IPCC assessment selected four different Representative Concentration Pathways (RCP)
scenarios from the published literature on which to base its projections. Under such different scenarios, the warming of the global surface temperature may range between least 1.5°C – 4°C above pre-industrial levels by the end of the 21st Century. Intergovernmental Panel on Climate
Change, above n 9, 60. Also see Intergovernmental Panel on Climate Change, 'Climate Change 2014: Synthesis Report. Summary for Policymakers.' (2015) 8. The IPCC concludes that ‘Continued emission of greenhouse gases will cause further warming and long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems. Limiting climate change would require substantial and sustained reductions in greenhouse gas emissions which, together with adaptation, can limit climate change risks’.
22 International Energy Agency, 'Redrawing the Energy-Climate Map: World Energy Outlook
Special Report' (IEA, OECD, 2013) 12.
23 The World Bank, above n 17, 5.
22 to the deep ocean and affecting ocean circulation and acidification; continuous reduction of the Global glacier volume, notably the Arctic sea ice cover and the Northern Hemisphere spring snow cover; and a continuous rise of the sea level, probably exceeding the rise levels observed during 1971–2010.25
The effects of climate change are experienced differently around the globe, and are not proportionate to the volume of the emissions from each individual country. It is known that both sides of the Equator are likely to be affected. While absolute warming will be largest in the Northern Hemisphere, sea-level rises are likely to be 15 to 20 per cent larger in the tropics than the global mean, affecting a number of small islands with a very limited economic capacity to adapt.26 Furthermore, increasing aridity and drought are likely to affect developing countries in tropical and subtropical areas.27
The increased frequency of climate extremes will affect North America, where large increases in wintertime precipitation and tropical cyclones are expected. Europe and the Mediterranean will experience enhanced extremes of storm-related precipitation.28
Asia will be severely impacted. The WGI 2013 report estimated enhanced summer precipitation in Central and North Asia, with related floods, enhanced winter warming in North Asia, and increased rainfall extremes of landfall cyclones and/or typhoons in West, East, South and Southeast Asia. The Pacific Islands will also have more extreme precipitation associated with tropical cyclones.29
Australia will be adversely affected by an increase in summer precipitation in the North, with consequent floods, and reduced precipitation in Northeastern Australia, with an increase in aridity, droughts and bushfires. New Zealand and Southern Australia will experience increased warming and reduced precipitation, with consequences including an increasing aridity, drought and bushfires.30
These physical changes will have significant social and economic consequences in different areas around the globe.31 The economic impacts
25 Ibid; Intergovernmental Panel on Climate Change, above n 11. 26 The World Bank, above n 17, xiii.
27 Ibid.
28 Intergovernmental Panel on Climate Change, above n 9, 76. 29 Ibid.
30 Ibid.
31 Intergovernmental Panel on Climate Change, 'Climate Change 2014: Impacts, Adaptation and
23 which can be expected from climate change are estimated to range from 1 to 3 per cent of global GDP per year by mid-century, assuming a 4oC warming.32
It is important to understand that most models are not successful in including the non-market impacts of climate change, for example to human health, and fail to consider amplifying feedbacks as a result of global warming. Indeed, the range of socio-economic implications from climate change includes food security problems, such as global marine species redistribution and a marine biodiversity reduction, an exacerbation of health problems, the increased displacement of people, and even international security risks.33 All these issues are likely to disproportionately impact the developing and least developed countries and particularly small islands. These elements will increase the average costs to global GDP by around 20 per cent, however, modelling the costs of climate change is very challenging.
B Global Emissions Trends
Concentrations of GHG in the atmosphere are cumulative and the effects to the climatic system are only experienced decades and centuries after the emissions were created. Even in the event of a complete cessation of emissions in the near future, global warming would still remain constant for centuries, representing a ‘substantial multi-century climate change commitment created by past, present and future emissions of CO2.’34
Therefore, a large percentage of climate change is already irreversible and will continue throughout the late 21st century and beyond, including the increase in surface temperatures and the heat transfer from the ocean surface to lower depths.35
Historically, the developed countries have been responsible for the vast
32 Stavins, above n 5, 97.
33 The United States Department of Defense, 'Climate Change Adaptation Roadmap' (2014). The
Department of Defence concluded that climate change poses immediate risks to US national security. The Department has adopted a Climate Change Adaptation Roadmap which has three main goals: 1. to identify and assess the effects of climate change on the Department; 2. To integrate climate change considerations across the Department and manage associated risks; 3. collaborate with internal and external stakeholders on climate change challenges.
34 Intergovernmental Panel on Climate Change, above n 11; Intergovernmental Panel on Climate
Change, above n 9, 61.
