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Rules governing the global environment and the international economy are currently decided in separate arenas.

Yet, environmental agreements can have strong economic implications, particularly with the growing use of market mechanisms. Economic liberalization rules, meanwhile, may limit the effectiveness of environmental agreements.

The authors assess the potential interaction between one important market-based environmental mechanism — the Clean Development Mechanism (CDM) -- and the framework of international investment law.

The Kyoto Protocol’s CDM will stimulate and govern the flow of investment finance from industrialized to developing countries for projects that reduce greenhouse gas emissions. For investments to generate internationally marketable emission credits, investors will have to comply with the rules of the CDM.

At the same time, the wider body of international law relating to investment flows across national boundaries will also govern CDM investments.

The authors argue that there is potential for CDM rules to conflict with international investment law. Yet, investment law, appropriately constructed, can also support the effective functioning of the CDM.

In either case, close attention must be paid to these areas of overlap.

• CDM rules should be designed to fit the Kyoto Protocol Parties’ shared objectives in a manner that takes into account existing international legal frameworks.

• Current and future investment agreements must allow for legitimate circumstances in which countries might depart from the tenets of investment agreements by deciding to take actions pursuant to multilateral environmental agreements, such as the Kyoto Protocol.