13.3.3.7 Compliance

Using game theory, Hovi and Areklett (2004) argue that a compliance system has to meet several criteria: (1) consequences of non-compliance have to be more than proportionate; (2) punishment needs to take place when behaviour is suboptimal; (3) an effective enforcement system must be able to curb collective as well as individual incentives to cheat. The compliance system agreed under Kyoto is viewed as only partially fulfilling these criteria. For example, Nentjes and Klaassen (2004) note that the obligation to fully restore any excess emissions in subsequent periods does not exclude the option of postponing restoration forever. If such an outcome occurs, the trading mechanisms under the Protocol may be substantially weakened. However, it is pointed out that introducing adversarial elements (such as sanctions) into the system are highly undesirable in view of the fact that the Kyoto Protocol currently covers only one third of the total GHG emissions of the world (Murase, 2005).

There are two schools of thought regarding the appropriate response to non-compliance contemplated under the Kyoto Protocol (see Murase, 2002b). One view advocates ‘soft’ compliance-management, which favours primarily facilitative and promotional approaches by rendering assistance to non-compliant States; those holding this view often refer to ‘the non-compliance procedure’ used under the Montreal Protocol. The other view takes a ‘hard’ enforcement approach in order to coerce compliance by imposing penalties or sanctions on non-complying parties. Financial penalties and economic or trade sanctions have been proposed along these lines. However, it has been suggested that such measures could be in conflict with WTO/GATT rules on trade liberalization (Mitchell, 2005).

A more nuanced view is provided by Wettestad (2005), who concludes that there are eight lessons to be learnt from other regimes. These include the need for an institutional warm-up period, wise institutional engineering, moderate expectations from the verification process, increased transparency, efforts to maintain close cooperation between the Facilitative and Enforcement Branch of the Compliance Committee, the search for opportunities to engage civil society in the process and a focus on assistance and compliance facilitation using the enforcement mechanism as an important but ‘hidden’ stick.

In his review of the Kyoto Protocol’s compliance mechanism, Barrett (2003) argues that failure to comply over two compliance periods can essentially be equivalent to indefinitely postponing action: A country that is found in non-compliance in the first period has to make up the difference plus 30% in the next period. If it fails to achieve the latter target as well, it will have to make up the difference in the period thereafter – a process that can continue indefinitely. Perhaps the most important point in his proposal is that if countries feel that they cannot easily meet their commitments, they will negotiate for higher allowances in the period thereafter – or even withdraw from the agreement entirely. He also notes that the Protocol does not have any procedures to deal with countries that decide not to cooperate with the rules.

There is a significant body of research that compares various dispute settlement procedures. A number of these assessments examine environmental agreements (see, for example, Werksman, 2005), while others more specifically focus on possible conflicts between climate agreements and trade agreements (see, for example, Murase, 2002b). With respect to the latter, Murase notes the need for a coordinating authority to be established between a multilateral environmental agreement (MEA) and the WTO. Given that MEAs and the WTO are independent treaties on equal footing, neither can automatically be given the right to make a decision in the case of a conflict. As a result, a number of authors (e.g. Esty, 2001; Murase, 2002b) have called for the establishment of a new institution, such as a World Environment Organization (WEO), that would embody its own dispute settlement mechanism. This institution would function as a counterpart of WTO by attaining an equal footing between the two regimes.