Using the Multi-Layered Nature of International Emissions Trading and of International-Domestic Legal Systems to Escape a Multi-State Prisoners' Dilemma

This article designs an enforcement regime that maintains the integrity of the international emissions trading system in the face of significant political and economic incentives for States to shirk responsibilities. State noncompliance with international obligations to enforce domestic emissions limitations presents a significant risk for an international emissions trading system because the systematic utility and economic value of an emissions permit is ultimately dependent upon domestic enforcement. Emissions rights are products of regulation. In essence, they define the legal relationship between a domestically regulated entity and the host State. International trading of emission rights allows private transactions between foreign nationals to realign the legal relationship between the parties and their host States. The legal and economic value of such transactions is derived from the perceived risk of enforcement and the predicted value of relieving such risk. This article focuses on the monitoring and enforcement of obligations undertaken by States that participate in an international emissions trading system. It abstracts from the Framework Convention on Climate Change and the Kyoto Protocol and envisions the following series of events leading to international emissions trading system: 1) A number of States sign an international agreement that commits each State to making reductions in its aggregate, national greenhouse gas emissions according to a detailed schedule. 2) Each State implements its international obligations through national programs, which may comprise various combinations of regulatory programs, from command-and-control to carbon taxes to emissions trading systems. 3) A subset of the States that signed the first "national commitment" agreement also sign a "founding agreement" that establishes an international emissions trading system by harmonizing the domestic emissions trading systems created under step 2. Thus, two legal regimes arise from the agreements, an overarching climate change regime and a subsidiary international emissions trading regime. Of course, an international emissions trading system could evolve in many other ways. This article does not attempt to explain the global warming problem, the existing climate change regime, or the various regulatory options for domestic implementation; these issues are discussed extensively elsewhere in the literature. Instead, the article focuses exclusively on the coordination problems that must be dealt with in negotiating the founding agreement for an international emissions trading system (step 3). Three interdependent components establish the contours an international emissions trading monitoring and enforcement regime, namely, (1) the monitoring institution, (2) the liability rule applicable to permits, and (3) the reprisal mechanism. States must work out the details of these components ex ante and incorporate them into the founding agreement for the international emissions trading system. Finally, the article proposes a novel form of strict enforcement involving buyer-liability coupled with a citizen-State arbitration mechanism (similar to the investor-State mechanism in NAFTA chapter 11). The proposed mechanism provides an end-around the political, decentralized nature of international law.