Export diversification and climate change: Overcoming the emerging constraints

4 June 2012

Despite the outcomes from COP17there remains a considerable degree of ambiguity in relation to the relationships between trade and climate change regimes. Countries in sub-Saharan Africa (SSA), particularly least developed countries (LDCs) and small vulnerable economies (SVEs) need to be prepared to defend their offensive and defensive trade interests related to the new challenges posed by climate change. This approach is necessary so as to ensure that the actions being taken to mitigate climate change by developed countries facilitate rather than hinder existing export diversification strategies. This article introduces several emerging physical and regulatory challenges to traditional export diversification strategies, and discusses some of the potential development-friendly approaches to dealing with these.

Adapting and designing export diversification strategies

Although some ingredients from successful export diversification strategies in the past, late industrialisers in SSA now face a different trade environment. On top of the traditional challenges to export diversification there is climate change. Not only will countries in SSA need to adapt to the physical effects of climate change - such as changes in precipitation patterns, increases in global temperatures and the likelihood of extreme events - but also regulatory changes related to the mitigation of further temperature increases.

Strategies to mitigate climate change taken by developed countries have led to an increasing focus on the processes and methods by which goods are produced. This suggests that the impacts of climate change will not only be physical, but also regulatory, and that the severity of each on exporters will be product and country specific. The compound effect of all of these changes may mean that for some countries in SSA the routes used in the past to diversify exports may no longer be viable. As a consequence, new strategies need to be designed for increasing the resilience of existing productive structures, moving into new products and services related to global climate change mitigation efforts, and making full use of rights provided by the international trade regime.

Addressing the new physical and regulatory constraints

Even if the most ambitious measures to address climate change are adopted, global temperatures are projected to increase by at least 2 degrees Celsius by the end of this century if not sooner. The effects of climate change, including policies designed to mitigate it, will be country, product and value chain specific. However, agricultural producers are inevitably the most vulnerable to the physical effects of climate change. A number of countries in SSA are likely to experience declines of at least 20 per cent in farm outputs should climate change continue unmitigated. This would jeopardize the prospect for enhanced agricultural export earnings and increase the volatility of commodity prices unless efforts to mitigate these effects are adopted.

Increasing the resilience of existing productive structures

UNCTAD (2010) suggests the establish­ment of a counter-cyclical financing facility for low-income commodity dependent countries to better deal with external shocks, involving physical and virtual reserves. Mechanisms could be designed ex ante rather than ex post, and take into account new indicators of vulnerability related to climate change, for example, the relationships between productive outputs and variability in temperature or rainfall. Other ways in which to make existing productive structures more resilient include enhancing insurance facilities. For example, in the case of the Global Index Insurance Facility (GIIF) being implemented by the IFC, payments are triggered on the basis of rainfall and variation of temperature.

While technical assistance programmes should implicitly prepare countries to meet any challenges associated with the trading environment, some changes may be so large and uncertain that trade support must allow for them explicitly. The Aid for Trade initiative, like climate change mitigation and adaptation finance, is about the delivery of global public goods. However, any new purpose for Aid for Trade needs however new resources in order to avoid diverting from existing needs; there are governance issues that need to be resolved so as to ensure that this is the case.

Addressing new regulatory constraints

The WTO does not have specific provisions to deal with climate change, despite there being some obvious potential clashes between the trade and climate regimes. The EUs Emissions Trading Scheme (ETS) Directive will require importers to participate in emissions trading schemes, and to purchase emissions allowances according to the carbon content of products being supplied to these markets; this is even if importing countries are under no obligation to reduce their emissions under the Kyoto protocol. If importers fail to purchase these allowances, border tax adjustments (BTAs) will be levied so as to level the playing field between domestically produced and imported products.

BTAs are likely to violate WTO non-discrimination rules because they discriminate between products based on where and how they are produced, which means the remedy in some cases could be to take such actions to the WTO's dispute settlement mechanism. Alternatively, levying a carbon exports tax could be a tool developing countries use in order to counter or pre-empt border adjustment measures imposed by developed countries; this would result in revenue being retained rather than being transferred. Such an approach would level the playing field between products subject to no carbon regulation and those that are.  A similar strategy could also be adopted in response to the inclusion of the aviation industry within the EU's ETS from 2012.

Other strategies may need to be pursued in order to ensure access to the EU's ETS and carbon market. For example, in the absence of an ambitious international post-2012 climate agreement, access to the EU's ETS may be limited to CERs obtained from LDCs only as of 2013. This could provide a unique market access opportunity for LDCs in SSA, particularly since the EU's ETS is likely to include the forestry sector from 2020 onwards.

The carbon market for reduced emissions from deforestation and forest degradation (REDD) essentially represents a new market for existing products; this is because CERs can be obtained through improving the management of forestry reserves and enhancing carbon sequestration processes. The inclusion of terrestrial carbon within the EUs ETS could provide new market opportunities for agricultural producers in SSA. However, an appropriate regulatory framework needs to be developed which supports such trade. Trade in CERs is payment for a service, which means that different rules apply from those that regulate trade in goods. SSA has had limited access to the CDM to date because of technical and financial barriers.

Adhering to new carbon standards results in costs of compliance and/or changes in how production is undertaken, and so does harmonising them across different products and markets. If all inputs are priced to reflect both their scarcity and any external diseconomies, then shifting production to the most efficient producers will help mitigate climate change as well as improve development prospects, but this will not happen if developing countries cannot demonstrate their lower carbon costs. There could be a role for trade facilitation measures such as Aid for Trade in assisting SSA countries in designing carbon standards, meeting them and demonstrating compliance. The UNFCCC has already developed guidelines on how to measure the carbon content of land which suggests that further links could be made between the trade and climate change regimes.

New and possibly higher value markets for existing products related to climate change mitigation efforts could include biofuels. The price advantages of biofuels production relative to importing fossil fuel are increasing rapidly (Wiggins et al., 2011). New markets for existing prod­ucts, such as sugar cane, could include developed countries such as the EU which has mandatory renewable energy targets - so long as sustainability criteria can be met and verified - but also other regional and domestic mar­kets. This could provide some soft commodity exporters such as Malawi with new opportunities for their sugar exports.

Linking certified low carbon biofuels production, as well as low carbon agricultural production in general, by LICs to carbon offset markets in the EU or UK market could be one way in which to incentivise increased invest­ment in these export-orientated sectors, raising productivity and potentially generating positive spillover effects for other agricultural producers and exporters. This is because adherence to quality standards related to the carbon content of products may help producers to upgrade agricultural production and marketing systems in general.

Conclusion

Policy makers need to address the regulatory gaps and potential clashes between the trade and climate change regimes, but they also need to develop the potential synergies that exist between the regimes. The importance of doing this for most countries in SSA is amplified because of their inherent structural characteristics: limited scale economies in the domestic market because of small economic as well as geographic size enhances the role of trade as a contributor to growth; this means that ensuring the post-2012 climate change regime facilitates rather than hinders the process of export diversification and structural change takes on an added urgency.

Author: Jodie Keane is a Research Officer with the Trade Program, Overseas Development Institute, London.

See also: "How could and should Aid for Trade and climate change finance work together to address the challenges faced by the agricultutal sector in poor countries", J Keane, S Page, K Alpha and J Kennan, 2009 ICTSD  http://ictsd.org/climate-change/agriculture-and-biofuels/.

"Production, Policy and Trade Opportunities for Biofuels in Eastern Africa, Research report for Bioenergy in Africa: Opportunities and risks of jatropha and related crops", Wiggins, S., Keane, J., Kennan, J., Leturque, H., and Stevens, C., 2011. Project briefing available at: http://www.odi.org.uk/resources/docs/7316.pdf

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