COMPLIANCE MATTERS

Recent developments relating to compliance with multilateral treaties in the
area of disarmament and international security.

The newsletter of the Markland Group

Issue No. 19, April 2003

This newsletter was originally published as part of the Canadian Council on International Law Bulletin, Vol. 29, No. 1, Winter/Spring 2003.

In this Issue:

I. Compliance Procedures and Mechanism under the Kyoto Protocol. By Neil Craik.

II. Compliance Problems under Europe's Stability and Growth Pact. By Marla Frketich

I. Compliance Procedures and Mechanism under the Kyoto Protocol

Editor’s Note: Although the matter of compliance machinery for treaties is of interest to The Markland Group primarily in relation to disarmament treaties, we like to keep abreast of developments in this area in relation to other treaties – including those dealing with the environment, human security, and trade issues. With this in mind, we asked Neil Craik to report on the progress being made by the parties of the Kyoto Protocol to agree on a compliance mechanism.

By Neil Craik*

The 1992 United Nations Framework Convention on Climate Change (UNFCCC), which came into force on March 21, 1994, imposes no precise obligations on its signatories. Instead, the parties to the Convention (numbering 187) commit themselves to a principle – that of taking action to stabilize greenhouse gas concentrations in order to combat global climate change conditions. The Kyoto Protocol, on the other hand, provides substantive, time-linked commitments – aimed at achieving the goals set forth in the UNFCCC. Negotiated under the UNFCCC and opened for signature on March 1, 1998, the Protocol will enter into force when 55 states have ratified it, representing at least 55 percent of the total 1990 greenhouse gas emissions of those states identified in Annex 1 to the Protocol. As of this writing, 15 November, 2002, 97 states have ratified it, representing 37.4 percent of the 1990 greenhouse gas emissions of Annex 1 states.

The Protocol's commitments are targeted only on the developed states and states with economies in transition. Twenty-six such states are listed in Annex 1 in the Protocol. They are required to reduce their emissions of greenhouse gases in accordance with assigned levels (a percentage reduction from a 1990 baseline). Canada, for instance, has been assigned a level of six percent below its 1990 level – to be achieved by 2012. In order to assist Annex 1 states towards achieving their assigned emission reduction commitments, the Protocol offers them the use of three "flexibility mechanisms". These include emissions trading, joint implementation to facilitate emission reduction projects between Annex 1 states and a Clean Development Mechanism to facilitate emission reduction projects between Annex 1 states and developing countries. Due to a concern that Annex 1 parties could, through excessive reliance on the flexibility mechanisms, avoid taking mitigation measures at home, they are required to demonstrate that their use of the flexibility mechanisms is “supplemental to domestic action”.

“[The Compliance Decision adopted at Marrakesh] utilizes both soft enforcement… measures and more coercive measures, such as… penalties.”

Although the Protocol is silent on machinery to deal with non-compliance, Article 18 requires that the Protocol’s governing body, which is known by the name "Conference of the Parties serving as the meeting of the Parties – COP/MOP", to approve “appropriate and effective procedures and mechanisms to determine and to address non-compliance”. After considerable negotiation at several Conferences of the Parties, (which are referred to as COPs and which act as the plenary decision-making body under the UNFCCC), the Parties, at COP7 held in Marrakesh in November 2001, adopted Decision 24/CP.7: “Procedures and mechanism relating to compliance under the Kyoto Protocol” (the “Compliance Decision”). The approach taken under the Compliance Decision is a hybrid one. It utilizes both soft enforcement measures, such as persuasion and capacity building, and more coercive measures, such as exclusion from the flexibility mechanisms and penalties, to induce compliance.

Under the Compliance Decision, the primary institutional mechanism intended to implement the compliance procedures is the Compliance Committee, which is in turn made up of a Facilitative Branch and an Enforcement Branch. The Committee is made up of twenty members, with ten assigned to each branch. The composition of the Branches is determined with reference to geographical criteria and development status. The members of the Compliance Committee, who are elected by the COP/MOP, are required to possess relevant expertise and serve in their individual, as opposed to representative, capacities.

The Facilitative Branch has a broad mandate to provide advice and facilitation to the Parties respecting implementation of the Protocol. Specific responsibilities of the Facilitative Branch relate to compliance with the commitment of Annex 1 states to minimize the adverse effects of climate change and of response measures on developing countries and with the requirement that the flexibility mechanisms under Article 6 (joint implementation), Article 12 (Clean Development Mechanism) and Article 17 (emissions trading) be supplemental to domestic action. The consequences that the Facilitative Branch can apply are limited to providing advice to Parties and facilitating technical and financial assistance. The Facilitative Branch cannot make a finding of non-compliance. Given the open-ended nature of these commitments, it is not surprising that only non-coercive measures are available.

The Enforcement Branch has a mandate to determine questions of compliance by Annex 1 states with their greenhouse gas emissions reduction commitments. In addition, it will review questions of compliance relating to the manner in which states calculate their emission levels, compliance with their reporting commitments and compliance the eligibility requirements for the flexibility mechanisms. The "consequences" (penalties) that the Enforcement Branch may apply are tied to the nature of the non-complying behaviour. So for example, failure to comply with the reporting requirements results in a requirement for the non-complying party to develop a plan setting out remedial action and to report on its implementation. A determination that a Party no longer meets the eligibility requirements for the flexibility mechanisms results in a suspension of eligibility from participating in the mechanism in question, (the Compliance Decision also includes provisions respecting reinstatement). Finally, a determination by the Enforcement Branch of non-compliance with assigned emission levels commitments results in that Party having to make up the shortfall plus a 30% penalty in the next commitment period, as well as suspension from eligibility for selling emissions under the emissions trading mechanism.

The Compliance Committee's consideration of a question of non-compliance (referred to as “questions of implementation” in the Compliance Decision) may be initiated by: 1) an expert review team; 2) a Party in respect of itself, (presumably to access the facilitation of assistance); or 3) a Party in respect of another Party, where the question is supported by sufficient evidence. The mandate of the expert review team is to provide technical assessments of the implementation of the Parties’ commitments. The terms of service and details of the composition and training of expert review teams are the subject of ongoing discussion between the Parties. Once a question of implementation is raised, it is allocated to the appropriate branch for an initial determination as to whether there is sufficient basis to proceed. The Compliance Decision also contains detailed procedural requirements, such as notice, access to the evidence, rights of participation, as well as a right of appeal of an Enforcement Branch decision to the COP/MOP where the Party believes it has been denied due process. The COP/MOP may only overrule an Enforcement Branch decision with three-quarters majority.

A significant outstanding issue relating to the Compliance Decision is its legal status. Here the parties remain split as to whether the Compliance Decision is, or should be, a legally binding document. Article 18 of the Protocol requires that compliance procedures or mechanism entailing binding consequences be adopted by means of an amendment to the Protocol, a process requiring instruments of acceptance. The Compliance Decision notes that the question of the legal status of the compliance procedures will have to be addressed by the COP/MOP upon the Protocol coming into force.

II. Compliance Problems under Europe's Stability and Growth Pact

Editor’s Note: Treaty provisions dealing with penalties for non-compliance rarely specify that they can be imposed "automatically" - that is by decision by the secretariat of a treaty administering organization. In almost every case, the imposition of penalties requires a decision by some or all of the treaty parties. The problems with such an arrangement are well illustrated by the difficulties recently encountered with the efforts to impose penalties under Europe's Stability and Growth Pact. Recent moves to penalize Germany and Portugal have met with resistance. We asked Marla Frketich to update us on this matter.

By Marla Frketich*

The Stability and Growth Pact was created in the mid-1990s to monitor and constrain the spending of EU governments participating in the single currency, the euro. It contains several key requirements: firstly, that euro-zone members restrict their annual deficit to a legally binding 3% of gross domestic product; secondly, that governments balance their budgets by 2004 and continue to do so over the medium term; and thirdly, that their respective debts eventually be brought to under 60% of GDP [1].

“Portugal and Germany became the first to exceed the [Pact’s] 3% ceiling.”

A country exceeding deficit triggers is subject to the process and penalties of the Excessive Deficit Procedure, Article 104 of the Treaty Establishing the European Community. Proceedings under the EDP are initiated with a report from the European Commission to the Council of Ministers outlining the details of the alleged deficit. A second report contains recommendations to return the offender to compliance. If, after a period of time, the Council is not satisfied that the recommendations have been adopted, it may decide, through a weighted, two-thirds majority vote of remaining euro-zone members, to punish the offender. Access to EU funds may be limited, a fine may be levied, or a deposit of between 0.2 to 0.5% of GDP convertible to a fine may be requested.

Challenges to compliance began soon after the agreement came into force in 1999. In 2001, Portugal became the first to exceed the 3% ceiling, admitting a deficit of 4.1%.[2] In February of this year, political tensions were signaled when the Council of Ministers, comprised of national finance ministers, vetoed a decision by the Commission issue a formal warning to Berlin and Lisbon. Despite this, the Commission initiated proceedings under the EDP against each, reporting an excess deficit in Portugal in July and a German deficit of 3.8% on November 19. [3] Portugal and Germany face fines of up to 1.04 billion and 61.5 billion euros respectively, in addition to loss of European Central Bank development funds. [4]

On November 27, the Commission announced would loosen its interpretation of the provisions of the pact, effectively allowing governments more opportunities to return to compliance without evoking the penalties of the EDP. This compromise saved the effort and embarrassment of trying to reach consensus on amendment, made more challenging due to the painful and unpopular spending cuts many smaller members endured to bring themselves into compliance.

The Commission communiqué points out that the Excess Deficit Procedure, complete with its punishing fines, is still the law, but warns that “if we base our [insistence on] compliance [by members] on the threat of sanctions we will not go very far and we will prove too rigid.”[5] It is therefore increasingly unlikely that Germany and Portugal will be fined, or that the EDP will be used again. In moderating its interpretation of the agreement, the Commission is apparently relying for compliance upon the carrot of economic growth and stability, for which the pact is named.

The pact has been widely criticized for being overly strict in its provisions and unenforceable in its penalties. Lower than expected growth, persistently high unemployment, and expensive natural disasters (such as the recent floods in Central Europe), have intensified the argument that the pact deprives governments of the use of fiscal levers in times of economic hardship. The length and complexity of the EDP undermines its enforcement by providing too many outs in the event of disagreement or a lack of political will to impose sanctions. Since the ‘fall’ of Germany, the primary architect of the pact, political will may be further affected, as members are reluctant to penalize others, lest they suffer a similar fate themselves.×

* Neil Craik (neil.craik@utoronto.ca) is a doctoral (SJD) candidate at the Faculty of Law, University of Toronto

* Marla Frketich is currently completing her MA in International Affairs at the Norman Paterson School of International Affairs, Carleton University, Ottawa.

[1] Further information about the Stability and Growth Pact can be found at the website of the EU Economic and Monetary Affairs: www.europa.eu.int/scadplus/leg/en/s01000.htm

[2] “Too much red ink for the euro-zone,” The Economist, 4 July, 2002.

[4] Figures calculated at .05% of 2001 GDP as given in the Commission’s Autumn 2002 Economic Forecasts, Germany pg. 48, Portugal pg. 75.

[5] “Communication on reinforcing the coordination of budgetary policies.” European Union, Speech/02/592, Brussels, 27 November, 2002.