Market Convergence Through the Back Door : Inadvertent Integration of the World's Carbon Markets Under NAFTA

Canada has promised to set up a greenhouse gas trading program to facilitate its greenhouse gas emissions reductions and has expressed an interest in tying its program to the European Union Emission Trading Scheme. At the same time, the United States Congress is contemplating legislation that would set up the country's own, domestically-scaled GHG trading program and attempt to insulate it from the rest of the world's carbon markets. While carbon credits are unlikely to trigger international trade obligations under the WTO, NAFTA's provisions have broader coverage, and may require national treatment of allowances between Canada and the U.S. This paper examines whether an inadvertent integration of the U.S. market with the EU ETS is possible under the NAFTA provisions, and explores whether restrictions which attempt to insulate are permissible within the exceptions provided for by the agreement itself. This paper concludes that, in order to protect carbon markets and provide investors and industry with a predictable regulatory structure, NAFTA member states should expressly address how carbon credits will be treated under the agreement