This chapter addresses some of the key issues facing the international community as it seeks further to develop and apply rules of international law for the protection of the environment. A decade or so ago a paper on this topic would probably have begun with a discussion as to whether the subject of international environmental law even existed: there were no treatises or journals specifically on the subject, only a very limited number of law school courses were being taught, and most treatises on general international law made no mention of the environment (with little risk of being criticized for incompleteness).

Today the situation is very different, as the environment comes to occupy a more central position in the international legal order. Within the past couple of years the International Court of Justice has confirmed the “obligations of States to respect and protect the natural environment” and expressed the opinion that their “general obligation…to ensure that activities within their jurisdiction or control respect the environment of other States or of areas beyond national control is now part of the corpus of international law relating to the environment.” This latter obligation, it is now clear, is applicable at all times and to all activities.

These are expressions of a general obligation. They will have to be further elaborated in the context of particular objectives and cases. In this regard, account will have to be taken of the international community's expressed commitment, at the 1992 UN Conference on Environment and Development (“UNCED”), to treat environment and development in an integrated manner and to cooperate “in the further development of international law in the field of sustainable development.”

This essay examines the issues of equity and efficiency in the use of global environmental resources, with the atmosphere as a case in point. It shows a somewhat unexpected connection between the two issues in the context of international greenhouse gas emissions trading markets. Contrary to common wisdom, achieving a more even distribution of property rights to environmental assets is more than a matter of equity. Property rights also influence market efficiency. I show that a precondition for market efficiency is that more property rights in the global commons should be given to those regions that own fewer private goods. This connection leads to recommendations to implement the greenhouse gas emissions trading regimes authorized by the Kyoto Protocol to the United Nations Framework Convention on Climate Change (FCCC). In order to ensure an efficient trading market, developing countries should be allocated proportionately more emissions rights than industrial countries. In addition, there is a need to create an International Bank for Environmental Settlements (IBES) as a self-financing institution that can obtain market value from environmental resources while preserving them. Emissions trading, the global reinsurance of environmental risks, and securitization of the earth's biodiversity resources are financial instruments that merge the interests of the private financial markets with international sustainable development policy. These instruments and institutions should help to redefine economic progress in a way that is compatible with a harmonious use of the world's resources and with equity among rich and poor nations.

Introduction

Professor Revesz discusses three prominent rationales for vesting responsibility for environmental regulation at the federal level: the asserted danger of a “race-to-the-bottom,” the problem of interstate externalities, and the public choice claim that state environmental regulation will be too lax. These three arguments are also relevant in the European context and may play a crucial role in the interpretation of the subsidiarity principle, as formulated in Article 3 B(2) of the EC Treaty. Following this principle, the Community shall take action “only if and in so far as [italics added] the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.” By stressing the need to take the effects of the proposed action into account the EC Treaty itself rejects a pure legal formalistic approach and invites economic analysis. An assessment of the subsidiarity principle that is consistent with economic principles must take into account the implications for social welfare of a diffusion of powers between different levels of government. In a firstbest world environmental standards are decentralized: they are adapted to varying preferences of the population and they take regional diversity (i.e. differing costs and benefits across geographic regions) into account. However, in such a first-best world there are no externalities across jurisdictions. Each state bears the full costs of its own environmental regulation.

Professor Roessler's paper purports to “explore the systemic, legal, and institutional consequences of linking trade and non-trade issues in the framework of the WTO, taking the proposed linkages between environment and trade as an example.” The first section of this comment on Prof. Roessler's paper addresses briefly the four conclusions reached by Roessler. The second section draws attention to additional “interface problems,” notably advantages and problems of environmental taxes. The third section elaborates on the second conclusion of Roessler, i.e. that the WTO's border adjustment rules should not be changed, by analyzing in more detail the interrelationships between environmental taxes and border tax adjustment in the worldwide context of GATT and WTO law. The final section compares the worldwide GATT/WTO rules on border tax adjustment and tax discrimination with the corresponding rules and experiences in the regional context of EC law, and draws some tentative conclusions.

Professor Roessler's four main conclusions

CONSISTENCY OF WTO LAW WITH EFFICIENT ENVIRONMENTAL POLICIES

Roessler's first conclusion is that there is in principle no conflict between WTO law and the efficient pursuit of a domestic environmental policy objective so that there does not seem to be a need for exempting domestic environmental policies from WTO obligations. This view is widely shared today in environmental economics and among governments. As most environmental pollution arises at the level of production, distribution, consumption, or disposal of goods and services, efficient environmental policies should intervene directly at the source of the pollution, i.e. at the production, distribution, consumption, or waste disposal level rather than at the trade level where trade policy interventions risk causing welfarereducing “by-product distortions.”

In the United States, vesting control over environmental regulation at the federal level is most commonly justified both in the legal academic literature and the legislative arena by reference to three distinct arguments. First, advocates of federal control argue that in its absence interstate competition would result in a “race to the bottom.” Second, they maintain that federal regulation is necessary to prevent interstate externalities. Third, proponents of centralization raise the public choice claim that environmental interests will be systematically underrepresented at the state level relative to business interests.

This essay, which builds upon my prior works in the area, has three major purposes. First, it casts serious doubt on the validity of some of the arguments made in favor of centralizing environmental regulation. Second, it shows that, to a large extent, there has been a misallocation of responsibility over environmental regulation: the federal government has taken too aggressive a role with respect to matters best handled at the state level, but has been too constrained in its exercise of authority with respect to issues over which it enjoys a distinct comparative advantage. Third, it attempts to extract from the experience in the United States, lessons that might be of interest to the European Union and to the international trading regime.

The first section develops the arguments for a presumption for decentralization, which calls for vesting responsibility over environmental protection at the state rather than federal level, as a result of differences in preferences over environmental protection, as well as differences in the benefits and costs of such protection.

Introduction

This chapter addresses the first three of the four issues analyzed by Professor Roessler: exempting domestic environmental policies from WTO obligations, permitting WTO Members to offset differences in environmental regulations, and reforming the WTO to allow the use of sanctions to coerce WTO Members into raising their environmental standards. On the fourth issue discussed by Professor Roessler – that the WTO should open its decisionmaking to scrutiny by environmental organizations – I have nothing to add to what he and others have already said.

Exempting domestic environmental policies from WTO obligations

Should domestic environmental policy be generally exempt from having to comply with the multilateral trading rules? The argument in favor of this proposal seems to be that the exemption would increase the demand for environmental policies by politicians, and that this would be good for the environment, even if it were not good for trade. In fact, the exemption would potentially be disastrous for trade, as it amounts to a giant loophole in the trading regime. And there can be no presumption that the environment would be any better protected, either. The point is that, under this regime, environmental policy would serve the cause of protectionism. Environmental policy would be devised not only or perhaps even mainly to protect the environment but to protect domestic industry (at the expense, perhaps, of foreign industry). There can be no presumption that policies which protect markets would necessarily protect the environment.

Up to here, Professor Roessler and I are in agreement.

Introduction

Trade issues are rarely discussed in isolation from other policy issues. The conference that led to the adoption of the Havana Charter for an International Trade Organization was the United Nations Conference on Trade and Employment. The Charter assigned to the stillborn Organization the task of resolving the most pressing economic problems of the late 1940s. It was to work towards full employment and the removal of balance of payments disequilibria of its Members, take action against inflationary or deflationary pressures, and promote fair labor standards. Its Members would have been committed to cooperating in the fields of economic development and reconstruction. And the Organization was to be the forum for negotiating agreements on technology transfer, foreign investment, double taxation, and restrictive business practices, as well as commodity agreements.

The central theme of international economic diplomacy in the 1960s and 1970s was the economic development of the third world, and the GATT's legal regime was gradually adapted between 1965 and 1980 to serve as an instrument of development policy: the principle of non-reciprocity in trade negotiations between developed and developing countries was recognized; developed countries were permitted to accord tariff preferences to developing countries; and developing countries were accorded the right to exchange preferences among themselves in the name of collective autonomy.

The voluntary nature of the preferences accorded to the developing countries induced some developed countries to link the granting of preferences to other policy issues.

Introduction

Professor Revesz has shown that the problem that federalism poses for environmental regulation arises from the fact that pollution produces interjurisdictional externalities and not from jurisdictional competition. Without externalities, Revesz has shown that competition among jurisdictions is generally welfare enhancing and attempts of the central government to impose more stringent environmental standards will only induce the jurisdictions to react by competing on some other margin. When interjurisdictional externalities exist, however, states will typically have an incentive to push the costs of industrial activity off onto their neighbors by making suboptimal locational and abatement decisions, and this may justify federal regulations.

Secondly, Revesz shows that existing administrative and court practices under the Clean Air Act in the United States are inappropriate in inducing jurisdictions to internalize the costs of their polluting decisions. Indeed, he shows that, if anything, federal regulations have probably induced regulatory pathologies that have made interjurisdictional opportunism even worse than it had been. The result is that the pattern of environmental regulations is almost certainly quite perverse from a social welfare perspective. The pattern of court and agency decisions has increased the incentives for states and their industrial denizens to locate polluting plants at downwind borders and build excessively tall smokestacks, making inappropriate capital investment decisions and the like.

Thirdly, Revesz argues that the lessons of US environmental regulatory policies are a valuable source of cautionary tales for the European Community and for the international community more generally.

Introduction

Providing a definition is a good way to start talking about sustainability. There is no simple, operational, and generally agreed definition that we can lift from the literature, so let me suggest one. Sustainability is doing things that we can safely continue indefinitely: doing things that can be continued over long periods without unacceptable consequences, or without unacceptable risks of unacceptable consequences. This seems to capture much of what is implicit in general discussion, although it is perhaps more focused than the legal principles traced by Sands. Most people think of current fisheries policies as unsustainable: clearly they are so according to this definition. Energy policies, involving the emission of greenhouse gases, imply an unacceptable risk of climate change, and are unsustainable both in common parlance and by this definition. So are important aspects of agricultural policies, those that result in loss of soil fertility, or in massive run-offs of nutrients into rivers, lakes, and ground waters.

Given a working definition, a natural next step from an economic perspective is to ask: Do existing institutions lead us to make sustainable choices? This question is clearly rhetorical: the examples cited above show that the answer is “no.” Two more sets of questions follow immediately from this: Why not? And: What can we do about this?

I think we can group the answers to “Why not?” under three general headings.

Introduction

The failings of state socialism in the former Soviet Union, Eastern Europe, and many developing countries have stimulated renewed appreciation of the economic and political virtues of competitive markets in harnessing the efforts of managers to the demands of consumers, promoting efficiency in resource allocation, stimulating innovation, and avoiding undue concentration of political economic power. Many nations have taken steps during the past twenty years to dismantle central planning, privatize state-owned enterprises, and reduce or transform government control of economic activity.

Yet, during the same two decades governments have adopted and continually expanded far-reaching centrally planned command-and-control regulatory programs in order to limit air and water pollution, deal with toxic wastes, and solve other environmental problems. Seemingly oblivious to the inherent and well-documented failures of central planning, these programs aim to produce environmental quality by issuing detailed orders to thousands of individual facilities, prescribing their conduct in labyrinthine detail. This chapter seeks to help resolve this paradox by analyzing the advantages of economic incentive systems (EIS) for environmental protection including environmental taxes and tradable pollution quotas, identifying the types of environmental problems for which they are best suited, diagnosing structural factors that impede wider use of such instruments, and proposing regulatory reform strategies to promote such use.

The traditional instrument of choice for all types of economic and social regulation has been command and control.

The grammar of rights

For a long time the grammar of permanent sovereignty was a grammar of rights: the right to dispose freely of natural resources, the right to expropriate, the right to compensation for damages to natural resources caused by third States or enterprises, to mention just a few. The invocation of such rights often led to serious controversy between States, especially between Western and developing countries. Various attempts were made to formulate, in general terms, the relevant rules of international law in treaty law, for example in the 1948 Havana Charter, the 1965 ICSID Convention, the 1966 Human Rights Covenants, the 1967 OECD Draft Convention on the Protection of Foreign Property and the 1982 Law of the Sea Convention. In addition, efforts were made, in the context of both intergovernmental and professional bodies, to formulate ‘codes of conduct’, ‘declarations’ or ‘guidelines’.

Claims to and exercise of ‘sovereign’ rights have often been the subject of diplomatic protest and international litigation, occasionally before the International Court of Justice (such as the Anglo-Iranian Oil Company case) but more often before international arbitration tribunals. Examples of the latter include the Libyan oil nationalization tribunals, ICSID tribunals and the Iran–US Claims Tribunal. Finally, it goes without saying that heated debates and duels between lawyers occurred and these have given rise to an abundant literature describing historic controversies in which the battle lines in this field have been drawn.