Index

Environmental Services

Mahesh Sugathan and Johannes Bernabe

“Arguably, greater and cost-effective access to environmental services in developing countries would potentially help them progress towards implementing the Johannesburg Plan of Implementation and achievement of key MDGs…”

Paragraph 31 (iii) of the Doha Ministerial Declaration which calls for the “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services” has raised more questions and speculation on possibilities than any other item in the Doha negotiating agenda on trade and environment. During the negotiation process, the issue has taken on dimensions that might not have been anticipated at the time the issue was originally singled out for liberalization and there continue to be uncertainties about how to proceed. Negotiations related to environmental goods are primarily taking place in the Committee on Trade and Environment (CTE) and the Negotiating Group on Market Access (NGMA), and issues related to environmental services are being negotiated within the Special Sessions of the Council for Trade in Services.

Before focusing on the specifics of the environmental services discussions, it might be useful to start with a two-fold conceptualization of environmental goods and services (EGS), as a category. The first is the conventional view that focuses on treating a specific environmental problem through the end-use of a particular good or service. This characterizes the traditional classification of EGS and includes goods such as wastewater treatment equipment or solid waste disposal services. The second conceptualization is broader and includes environmentally preferable products (EPPs) and services. The environmental benefits may arise from the more environmentally benign production method, during the course of it use—e.g., through lesser pollution and energy-consumption— or during the disposal stage of the product. In many, if not most, cases these will have nonenvironmental counterparts and this raises the question of like products and services. There may also be an overlap between these two categories and some EPPs may be used to prevent or treat environmental problems as well. (See related discussion on Environmental Goods.)

Both these conceptualizations of EGS are important in the context of trade, environment and development. Trade liberalization in EGS both narrowly and broadly defined could enable a freer flow of goods and services relevant to environmental protection. However whether this will translate into greater access to these goods and services in developing countries remains to be seen. It is here that the role of suitable flanking policies and their mainstreaming into WTO rules may be important.

Arguably, greater and cost-effective access to environmental services in developing countries would potentially: (a) help developing countries progress towards implementing the Johannesburg Plan of Implementation and achievement of key Millennium Development Goals (MDGs) particularly through the provision of critical services such as clean water and sanitation aided by appropriate goods and technology; (b) provide a means of employment and economic activity particularly in the case of trade in environmental services via Mode 3 (commercial presence); (c) enable developing country firms to economize on resource and energy use; and (d) increase access to new technologies and knowledge.

Interests and Fault Lines

The mandate for negotiating liberalization of trade in environmental services arose out of the built-in agenda stipulated under Article XIX of the General Agreement on Trade in Services (GATS), which provides for successive rounds of progressive liberalization across all services sectors, with the first round beginning in January 2000. In this context, negotiating proposals of WTO Members with a keen interest in this sector, such as the European Union (EU), Canada, Switzerland, Australia, Colombia and Cuba, were submitted to the Council for Trade in Services Special Session (CTS-SS), with a view to presenting these countries’ vision of how environmental services should be liberalized.

Subsequently, requests were put forward by Members in the framework of the bilateral request and offer process whereby one Member can ask another Member to open up certain sectors to which the Member will respond with a specific offer.

Moreover, under the plurilateral request process initiated at the 2005 Hong Kong Ministerial meeting as a complement to the bilateral process, a group of countries—led by the EU and including Australia, Canada, Japan, Korea, Norway, Switzerland, Chinese Taipei and the United States—circulated a collective request in February 2006 for a number of large developing countries to open the environmental services markets.

While some Members’ offers have included liberalization of trade in environmental services, it is fair to say that the breadth of countries as well as the depth of these offers fall quite short of the expected levels. This situation is of particular concern for some Members—most especially, the EC—who view liberalization of environmental services as a fundamental element of any successful outcome. Although a fair number (48) of WTO Members made commitments in environmental services during the Uruguay Round, proponents of liberalization in this sector had hoped that this situation would improve under the Doha Round of services negotiations, through an increase in the number of Members undertaking commitments as well as in an improvement in the breadth and scope of commitments. This has not materialized. Moreover, there is a continuing lack of substantive engagement by developing countries in the discussions and negotiations, especially by those who regard this issue as one where they have primarily a defensive interest. These may in large part be attributed to the factors discussed below.

Classification

The main stumbling block in substantive discussions relates to classification issues. Traditionally, the basis for most Members’ commitments in environmental services has been the WTO Services Sectoral Classification list (W/120), which in turn cross-refers to the UN Provisional Central Product Classification (UN CPC). Some Members however argue that the W/120 classification is no longer consistent with commercial reality of the way industry operates.

Hence, even before the launch of the Doha Round of services negotiations, the Europeans made a submission proposing to update the classification system used for environmental services. They argued that W/120 did not reflect changes in the environmental industry, which was developing beyond traditional end-of-pipe/pollution control/remediation/ clean-up towards integrated pollution prevention and control, cleaner technology and resources and risk management. They proposed an alternative classification which referred to (i) “core” environmental services, or those which can undisputedly be classified as “purely” environmental and where the services are classified according to the environmental media (i.e., air, water, solid and hazardous waste, noise etc.); and (ii) environmental related sub-sectors which could be the subject of “cluster” negotiations together with the services in the “core” environmental activities. These sub-sectors pertained to services which have an environmental end-use or contribute to the production of an environmentally- friendly good or service, such as design, engineering, research and development, and consulting services.

This approach has, however, elicited reservations from a number of WTO Members, who are particularly concerned with the risk of making unintended, crosscutting commitments in a broader set of services activities than had been originally envisaged. For instance, under the European proposal, architectural services, integrated engineering services, consulting services for tourism, transport, fishing, sustainable land use etc.— insofar as they may have an environmental component when performed in conjunction with certain activities—would be the basis for a more “holistic” approach towards liberalizing environmental services. Other countries fear that the inclusion of such “environmentrelated sub-sectors” would necessarily include all activities, whether or not they have an environmental component. In the course of negotiations, the EC has refined their proposal on the “cluster” approach, and clarified that it intended the cluster of activities to be used primarily as an aide memoire or a checklist of activities which Members can refer to when they engage in bilateral request-and-offer negotiations on the environmental sector, or when they negotiate other sectors where these related services may fall under.

Among developing countries, Colombia has proposed that the following additional activities be included in the list of environmental services: (i) the implementation and auditing of environmental management systems, (ii) the evaluation and mitigation of environmental impact, and (iii) advice in the design and implementation of clean technologies. In this respect, Colombia implicitly acknowledged that the W/120 classification scheme needs updating and needs to incorporate new services not envisaged in W/120. Such a revised model would then be used for the negotiation of environmental services, with the caveat that the services to be negotiated must be specific to the sector and should not duplicate activities listed elsewhere in W/120.

However, none of the proposed alternative classification schemes appear to have yet gained acceptance among the general membership of the WTO. Deliberations at the WTO Committee on Specific Commitments, which provides the main forum for technical discussions on classification and scheduling issues on services trade, remain at a standstill. Given this and that Members are free to make use of their own classifications, it is likely that Members will continue to decide unilaterally their own classification and scheduling approach and will use W/120 by default; though perhaps with a few commitments on additional environmental services culled by cross-reference to other specific activities contained in the UN CPC that are not presently detailed in W/120.

Environmental Infrastructure Services and the Issue of Water

It has been argued that foreign commercial presence through Mode 3 could help ease the constraint on domestic resources in developing country provision of safe water as well as treatment of polluted water. Some see the GATS as a suitable instrument to offer binding and predictable market access for foreign investment in this sector. Others including many developing countries question the value of this, particularly as it raises issues of affordability to poorer sections of the population as well as fears about private ownership and control of water.

These fears were brought into focus when the European Union proposed that “water for human use and wastewater” should be included under “environmental services” in its alternative classification. The proposal marked a shift away from the W/120 classification which does not address water at all and mentions only sewage treatment and tank emptying.

General obligations under the GATS such as the most favoured nation (MFN) or national treatment do not apply to “services supplied under government authority” that are not supplied on a “commercial basis” or in “competition with other service suppliers.” In the case of water supply, for instance, only if the sector already has private actors or if the sole state entity in charge supplies water on the basis of commercial considerations, would a WTO Member be required not to discriminate between water supply service providers from different Member states or grant them the same treatment as domestic entities. Assuming that private participation and commercial considerations do exist in the delivery of environmental infrastructure services, Members may wish to preserve regulatory “policy space” and incorporate adequate safeguards in their GATS commitments so as to facilitate other models for delivery of water and the use of policy instruments, such as subsidies or tax incentives.

In response to widespread concerns raised by civil society groups and some developing countries, the EU subsequently retracted its proposal and the plurilateral request explicitly excludes any request for water for human use (i.e., the collection, purification and distribution of natural water).

Domestic Regulations

Detailed knowledge of domestic regulatory and administrative regimes will be relevant for trade negotiations in environmental services as in other services. This is because domestic regulations touch upon provision of services through Mode 3 (commercial presence) and Mode 4 (movement of natural persons) through foreign investment, health, environment, immigration and intellectual property rights laws and regulations.

WTO Members should therefore assess ongoing negotiations in the WTO Working Party on Domestic Regulation in light of their regulatory requirements. It is argued that various kinds of contractual arrangements, such as build-operate-transfer (BOT), are actually a combination of government procurement and market access concessions. Any future disciplines on government procurement and subsidies could have implications for market access commitments already made.

Environmental Services of Export Interest to Developing Countries

The prevalent proposals on the classification of environmental services reflect sectors where developed countries enjoy a comparative advantage, as many of these sectors are capital and technology-intensive. However, many developing countries are interested in market access for environmental services that they could possibly export, particularly in Mode 4. Cuba for instance—where service segments such as environmental studies, assessments and consultancy services are particularly well developed—has exported such services to Brazil, the Dominican Republic, Haiti, Mexico, Nicaragua, Spain and Venezuela. Assessing the opportunities in this sector will however imply as assessment of the impact of foreign immigration regulations that are a part of domestic regulation, as well as other requirements such as quality assurance and educational requirements. Provision of consultancy services through Mode 1 (cross-border supply) could also hold out opportunities for developing countries for export of environmental services.

Trends and Future Directions

As in the case of environmental goods, the outlook for trade liberalization in environmental services remains cautious and uncertain. Very few commitments have been made by developing countries in environmental services. Their reluctance, according to several delegates, is largely attributable to prevalent uncertainty particularly on regulatory autonomy in key services such as water supply. This is despite the increasing need for environmental services in all developing countries, and particularly in rapidly growing countries such as China. Moreover the rapidly expanding environmental service industry in developing countries such as those based on consultancy and Mode 4 need to be reflected in the market access commitments of developed countries.

The key challenge is to get Member countries, especially developing countries, excited about the issue and for them to take a more proactive, as opposed to defensive, stance on environmental services. This will require significant investments of analysis and research on the part of developing countries themselves.

Finally, it is important to stress the need to adopt a coordinated strategy between environmental goods and services as they are frequently inter-linked. At present Members have not agreed to adopt a single strategy within the context of the WTO negotiations but are likely to tailor individual strategies to respond to specific country interests in both goods and services negotiations. Some have suggested that Paragraph 51 that calls upon the CTE and Committee on Trade and Development (CTD) to identify and debate the environmental and developmental aspects of the Doha negotiations should play a more useful role in this regard.