Emissions trading schemes (ETS) are generally considered to be an effective market-based approach toward reducing greenhouse gas emissions that amplify climate change. As with any public policy, a scheme’s effectiveness depends, in part, on participation. Where a government implements an ETS, but strategically limits participation, the effectiveness of the scheme declines, with the potential for regulatory failure. Strategic limitations on participation in ETSs can also have economically distorting effects, by resulting in the transfer of investment and resources from ETS-participating sectors to excluded industries and undermining the regulatory objectives of the ETS. Currently, there are no international agreements in force that mandate the structure of such schemes for particular levels of participation. This means governments can design and implement ETSs as they see fit. Where, however, participation in an ETS is subject to sectoral exclusions, this might give rise to concerns under the World Trade Organization’s (WTO) Agreement on Subsidies and Countervailing Measures (SCM Agreement). This Article argues that clean air is a good that is consumed by the emission of greenhouse gases. When a government implements an ETS but does not require participation of sectors that fall within the scheme’s set parameters based on the level of emissions, the government provides clean air for less than what the emitter would otherwise be required to pay under the ETS, potentially a countervailable subsidy within the meaning of the SCM Agreement.

Continue reading Countervailing Climate Change: Emissions Trading and the SCM Agreement