Taking stock of evolutions in the trade and climate relationship

1 December 2015

What are the links between trade and climate change? How has the relationship between these two policy areas changed over the years?

Parties to the UN Framework Convention on Climate Change (UNFCCC) have kicked off their annual negotiations, this time in Paris, France. Countries have agreed to hammer out a new climate regime by the time the meeting closes, geared to take over upon expiry of the current Kyoto Protocol at the end of the decade, and capable of keeping the planet below a two degree Celsius rise from pre-industrial levels. Momentum building up to the talks from the international community, business, and civil society has been strong. However, while this might augur well for a positive result, delegates from nearly 200 nations still have a lot of work to undertake in the next fortnight to deliver a “Paris agreement.” In particular, negotiators must navigate a complex draft text with various options for each part of deal, which will cover areas such as mitigation, adaptation and loss and damage, finance, technology development and transfer, among others.

In contrast to the Kyoto Protocol, which only mandates emissions-cuts from a pre-defined list of developed countries, UNFCCC parties agreed in 2011 in Durban, South Africa that the new deal would be universally applicable. At last year’s meeting in Lima, Peru, parties confirmed this shift, calling on all countries to outline at least a mitigation component in their “intended nationally determined contribution” (INDC). Governments had earlier said that these self-defined INDCs should form the basis of the agreement. These developments have necessarily sparked new dynamics, tensions, and questions within the UNFCCC negotiating corridors, as well as reflection on how to translate the principles of the 1992 Convention into new climate governance arrangements. Many others in the international community, too, are waiting to see what Paris might deliver and whether it will be enough to tackle the climate challenge at hand. A recent UNFCCC review of the aggregate contribution made by the INDCs to date – which mostly target cuts for the 2020-2030 period – finds that global emissions would remain between 11-22 percent higher in 2030 compared to 2010 levels.

The remainder of this article looks at key ways the UN climate talks have evolved since the world’s last effort to secure a global climate pact in 2009 in Copenhagen, Denmark, with an emphasis on the trade-relevant parts. It also provides some insights on the intersections between the multilateral trade and climate regimes and where trade policy might be used to help the world shift towards a low-carbon future.

What has changed since 2009?

Conversations among stakeholders have noticeably evolved since the UNFCCC gathering in the Danish capital. For several years following that meeting, a lot of effort was dedicated to getting the multilateral climate process up to speed again, which meant that negotiators were to some extent distracted from the main task of  getting down to solving the problem posed by high-carbon growth models.  There was a real loss of faith in the UN process that ultimately needed some time to fix.

The current phase of the talks now seems actually more focused on delivering mitigation action and with more of a sense of urgency. The shift from the former parallel tracks known as the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP) set up in 2005 and the“Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA)” established in 2008 to one consolidated Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP) in 2011 with a clear mandate to develop an agreement with legal force under the Convention applicable to all parties by this December has made the multilateral negotiations somewhat clearer and more targeted.

Another evolution in the last six years has been around carbon pricing. Prior to Copenhagen many experts had called for a “global price on carbon” as the best response to climate change by capturing the external costs wrought by emissions that are not necessarily directly factored into the production and consumption costs. After 2009 the concept of a global carbon price went somewhat out of fashion as it was simply out of reach. In parallel the climate community increasingly started to talk about and design other possible mitigation policy options. Interestingly the carbon pricing concept is now back in vogue, although this time it is being seen in a broader context of a range of necessary policies and no longer as the only solution. There has also been a move away from an idea of a universal carbon price, in favour of a reality in which we will see differentiated prices between countries and regions, and in this sense the idea clearly has matured. A report from the World Bank, for example, finds that existing carbon prices in various schemes range from less than US$1 per tonne of carbon dioxide equivalent (CO2e) emitted under Mexico or Poland’s carbon tax through to US$130 per tonne of CO2e for Sweden’s carbon tax.

When it comes to competitiveness concerns, often raised in relation to carbon pricing, these would not be fully addressed by differentiated carbon pricing. However, there is research indicating that even a low price is capable of inducing behavioural change, and would thus to some extent help alleged competitiveness distortions. And after all, a low carbon price is likely to be preferred over no carbon price, also for competitiveness reasons. The private sector too is now more involved in this latest resurgence of interest in carbon pricing with many companies either integrating carbon costs into their business model, using shadow carbon prices, or joining calls for a greater uptake of such policies.

Overall, compared to a few years ago, it seems as if there is a greater economy-wide mobilisation towards working on solving the climate challenge.  Many, of course, still question whether the multilateral system is really going to deliver an effective agreement. There is a recognition too now that action through the UN alone is not enough. This has manifested in the interesting launch of the “Lima-Paris Action Agenda” designed to account for climate contributions made by non-state entities, many of whom are key economic actors, and therefore helping to build a bridge between commercial and climate concerns. Whereas this is clearly a positive development, questions remain with respect to accounting, and accountability. How to ensure that the same pledge will not be counted more than once, indicating a stronger mitigation effort than what is actually planned? And how to hold actors, in particular non-state players, accountable to their pledges? Answers given by the UNFCCC so far are not convincing.

Whither climate and global economic, trade governance?

A growing body of literature is attempting to understand the economic impacts and consequences of climate change. A new report from the OECD, for example, finds that a temperature rise of four degrees Celsius above pre-industrial levels could hurt GDP between 2-10 percent by the end of the century relative to a no-damage baseline scenario. Despite this important connection the links between trade – a key driver of the global economy – and the UN climate regime to date have been fairly limited. Article 3 of Convention does refer to the need to cooperate to promote a supportive and open international economic system that would lead to the sustainable economic growth and development of all parties. The same paragraph also stipulates that measures taken to tackle climate change, including “unilateral efforts” at the domestic level, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade. However, although this article is often referred to in a general sense, few specific conceptual discussions have been had on its full implications from a systemic perspective.

There are nonetheless a few pockets within the talks where more specific trade topics might be usefully fitted into the climate action agenda. Negotiations have been ongoing over the years under the UNFCCC’s subsidiary bodies – charged with implementing and providing scientific and technological advice for the current climate regime – on addressing the impact of the implementation of “response measures” or the actions parties take to tackle climate change.

Article 4.8 of the Convention specifies that parties should give full consideration to necessary actions required to meet the needs of developing countries arising from the adverse effects of climate change and/or the impact of the implementation of response measures. Article 2.3 of the Kyoto Protocol, meanwhile, specifies that when meeting emissions reduction targets parties should strive to minimise any adverse effects, including on international trade, as well as social, environmental, and economic impacts on other parties and particularly developing nations.

Talks on response measures within the UNFCCC have proved tricky. A mandate for a two-year forum designed to discuss various issues expired in 2013 and parties have since been in the process of trying to figure out how to address response measures moving forward. Although the topic could see some progress in Paris, the concept remains quite controversial, for various historic reasons such as the perception that this is a platform to compensate economies highly dependent on fossil-fuel exports from losing out too much.

In an ideal world some sort of new response measures platform could be used for reviewing climate policies and their impact on various key areas of economic activity, particularly in context of a climate architecture with universal action on the one hand, driven by self-determined domestic policies on the other hand. Since the response measures forum so far has been unable to address these issues in a holistic manner, much due to its inherently thorny nature, perhaps such an exercise might be usefully transposed into a review of the INDCs that many parties have now signalled could be an important part of the Paris deal.

Another trade and climate link that has gained attention over the years is around carbon markets. By putting a price on carbon, and with increasing use by jurisdictions around the world, these can help to reduce competitiveness concerns stemming from different levels of mitigation ambition. Talks on establishing global norms for market-based and non-market based mechanisms – which would in theory cover international emissions trading – have nevertheless proved slow in the UNFCCC’s subsidiary bodies.

The current draft text for the new post-2020 regime contains a few proposals on this front but overall a number of experts agree that the spread of carbon markets will likely occur regardless of the UNFCCC process. The Paris deal could provide a useful “hook” with agreement on certain standards to establish comparability, avoid double counting, and have some sort of standard for international transfers to make sure a tonne is a tonne no matter where it is abated, but without having to resolve the whole design issue around a global carbon market.

“International bunker fuels,” the emissions from fuel used for international aviation and maritime transport, are another area of intersection between trade and climate change. While the Kyoto Protocol addresses this issue in Article 2.2 suggesting that developed countries shall pursue limitation or reduction of emissions of greenhouse gas emissions from aviation and marine bunker fuels, working through International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO) respectively, the issue has not really been taken up as much in the climate talks.

Yet this is an area in the trade-climate intersection where efforts need to be scaled up. In fact this is the most direct impact on climate change from trade, and if trade is to be sustainable, emissions from aviation and shipping, both projected to grow, need to be curbed through international cooperation. A step-by-step approach may be envisaged, such as addressing emissions from shipping in distinct geographic regions, thereby both boosting abatement efforts while also paving the way for multilateral solutions. [Ref 1]

A new regime, a new relationship?

Clearly the emerging dynamics of the new climate regime might be a game changer for some of the ways governments cooperate internationally around climate change. With a planned universal regime, the world is looking at a much broader climate mitigation effort than seen before, alongside a bottom-up approach whereby countries will use very different instruments and means to achieve their mitigation pledges. This could have implications for trade in terms of how these different policies and measures influence relative prices, demand and supply, and therefore for trade flows. For the trade policymaking community, the significance of Paris will take some time to digest, but it is likely that the range of new climate policies may test the limits of existing trade rules not the least as some countries start scaling up the use of subsidies and other support schemes to clean energy. Some of these support programmes remain in the “grey zone” with regard to international trade rules and careful policy design is needed for optimal outcomes for both climate and trade. It should not be excluded that trade rules may need to be revisited, or at least clarified, to ensure that they are fully supportive of effective global climate action.

Another issue in this context is that of embedded carbon. The volumes of carbon embedded in goods and services that are being traded globally are increasing and today account for almost as much as one quarter of global emissions. This fact will need to be acknowledged and addressed if we are to be successful in curbing emissions. A first step would be to develop better accounting practices, which should be used in parallel with the current system which is based on territorial emissions, to inform policymaking. Second, there is a need to develop policy instruments for abatement purposes. Much can be done by domestic, consumption-related policies such as regulatory standards, labelling, and information campaigns, rather than direct trade policies. Even the former, however, would indirectly affect trade flows. Again, there may be a role for the trade community in recognising embedded carbon in trade and revisiting the concept of “like” products, thereby being able to treat imports differently depending on the level of embedded carbon.

The relationship between the trade and climate communities has also evolved in time. A few years ago the link was rather expert driven and debated at an academic level. Today there is a more proactive approach to trade and climate change policymaking among decision makers. For example, the WTO’s Committee on Trade and Environment (CTE) has discussed the potential trade impacts of carbon footprinting, while regional trade agreements are including cooperative language around “low carbon development” and specific chapters on energy trade.

In June 2013, moreover, US President Barack Obama made an explicit link between trade in clean energy goods and climate efforts through his executive “Climate Action Plan.” As part of a list of international efforts to address climate change, Obama signalled the US would work with trading partners in the WTO towards global free trade in environmental goods, including for clean energy technologies. A group of 17 WTO members are now in the process of negotiating a tariff liberalising “Environmental Goods Agreement (EGA)” and have explicitly indicated that this could be a contribution to the environmental protection agenda including efforts under the UNFCCC to combat climate change and transition to a green economy.

Institutionally, however, the two regimes continue to remain relatively distinct. This may not be a bad thing given the different memberships and mandates between the UN and the WTO. But it is important that the UN system takes the lead for helping governments to address market failures and to internalise environmental costs, so that trade is able to contribute to sustainable growth and development, rather than to exacerbate distortions. In addition, the UN system could draw on some of the good lessons – and there have been some – from the trade system. The WTO’s Trade Policy Review Mechanism (TPRM) provides one multilateral model for the type of oversight that could be applied to the INDCs. In addition, the trade world has seen a diversification in recent years of alternative avenues for cooperation through regional and “plurilateral” agreements – involving sub-set groups of interested WTO members – which could potentially inspire actors in the climate arena. Conversely, the WTO could draw on expertise around climate technologies in the UNFCCC’s Technology Mechanism, which might eventually need to see governments explore ways to have a better connection between the trade and climate communities in this area specifically. 

Harnessing trade for a low carbon future

Overall, if deployed correctly, trade can be used as a tool to support climate action and the right alignment of policies remains much more important than the potential tensions or friction. International trade could in particular help to scale up the deployment of environmentally-friendly goods and technologies by lowering tariffs, non-tariff barriers to trade, and smoothing the delivery of environmental services between different countries. This includes products related to clean energy, energy efficiency for mitigation purposes, and possibly even those relevant to adaptation. On this front, the WTO members participating in the EGA have held a series of talks since launching in July 2014 with the aim of identifying precisely which products will be eligible for tariff cuts. Several climate-relevant items, particularly those relevant to clean energy, are reportedly in the mix.  

Moreover, while EGA participants have indicated that the deal will initially focus on removing tariffs on products, a number of experts agree that this moderate first step would be significant as a framework for continued effort. In the long term, it would be necessary for the EGA to move beyond tariffs to take on areas such as non-tariff barriers (NTBs) and environmental services trade, as well as broadening its membership to more developing countries. As an “open plurilateral,” the tariff cuts in the EGA will be applied to the full WTO membership on a “most-favoured nation” basis, which means that there are benefits already for those that haven’t joined. As a full member, however, developing countries would be able to play a role in any eventual review of the EGA list of goods and they could benefit in economic terms from gains from trade such as a better integration in global value chains, economies of scale, and specialisation. In addition, the global climate benefits of the deal would be larger if more countries joined, as this would further drive down the costs and enhance the access to and uptake of climate friendly technologies such as clean energy.

A potential systemic implication of the EGA is that it could help reduce the fear of trade rules as a threat to climate action and instead help stakeholders see it as something useful that can be part of the solutions the world sorely needs. Furthermore, within the context of a newly adopted 2030 Agenda for Sustainable Development that calls for more integrated and coherent policymaking, a successful EGA would be a demonstration that trade negotiators can balance both environmental and commercial concerns.

Trade can also play an important role in adaptation and economic diversification given that climate change will affect the productive capacities of countries. The issue of embedded carbon also needs to be given further consideration. In an ideal world, in the not too far distant future, countries with abundant access to clean energy could step up the production of energy intensive goods and export to other countries. This would be a way of using trade to produce goods in the most energy efficient and low carbon manner. Given that an increasing number of developing nations are plugging into clean energy – and in some cases leapfrogging the high-emitting energy infrastructure found in developed countries – such an approach could be turned to a comparative advantage as part of a sustainable growth model. While much work still needs to be done in this area, Paris will demand significant attention from the global community as a whole, and much more efforts ahead on ensuring its successful implementation within the context of an interconnected and increasingly fragile world.

Ingrid Jegou, Senior Programme Manager of the Global Platform on Climate Change, Trade and Sustainable Energy at the International Centre for Trade and Sustainable Development (ICTSD)

[Ref 1]  See for example Thomas L. Brewer’s recent proposal for a club-type partnership to tackle black carbon (soot) pollution from maritime shipping in the Arctic region. Brewer, Thomas L, (2015). Arctic Black Carbon from Shipping: A Club Approach to Climate and-Trade Governance. Issue Paper No. 4, Global Economic Policy and Institutions Series. ICTSD, Geneva, Switzerland.

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