Securing climate benefits in the Environmental Goods Agreement
Shifting to a cleaner energy mix is essential to limit the far-ranging consequences of climate change caused by ballooning greenhouse gas emissions. Trade policy can play an important role in this transition but a number of challenges will need to be addressed in a future Environmental Goods Agreement.
As is now well-known, a group of 14 WTO members in July launched plurilateral negotiations aimed at achieving maximum “global free trade” in a wide range of environmental goods. In a joint statement participants said that the global challenges of environmental protection and climate change required urgent action. The removal of tariffs and non-tariff barriers (NTBs) to trade may reduce the costs of environmental goods in the domestic markets of importing countries and holds the potential to play a role in climate mitigation policies such as tackling greenhouse gas emissions by scaling up renewable energy (RE) use.
The “Environmental Goods Agreement” (EGA) will become operational once a critical mass of WTO members join, in other words, countries covering a large portion of world trade in the goods selected for liberalisation. The benefits of tariff elimination will then be extended to all other WTO members on a most favoured nation (MFN) basis. Determining the exact critical mass threshold will be a key part of the talks. WTO members involved in the Information Technology Agreement (ITA), which was also negotiated on an open plurilateral basis, agreed to a 90 percent threshold. In theory EGA participants could adopt any threshold considered large enough to reduce concerns about free riding – where non- participants benefit from the tariff reduction and elimination without having to reduce or remove their own tariffs – as a prerequisite to the agreement’s entry into force.
Selecting the goods
Determining which goods get included is of course where the rubber hits the road in such negotiations. Current EGA participants have said that they will build on the APEC List of Environmental Goods endorsed by leaders from the 21 Asia-Pacific Economic Cooperation (APEC) economies at a meeting held in Vladivostok, Russia in 2012. The aim is to reduce MFN-applied tariffs on a negotiated list of environmental goods to five percent or less by next year. Applied tariffs are the customs duties levied at the border. In contrast, some EGA members have indicated they would like to reduce bound tariffs, namely the maximum duty ceiling levels WTO members could potentially set. It is expected that bound tariffs for all goods covered by the EGA will be reduced to zero.
The APEC list classifies environmental goods under 54 6-digit level Harmonised System (HS) subheadings. The HS is a nomenclature, developed by the World Customs Organization, to classify internationally-traded products in a uniform way. Only few HS subheadings exclusively or predominantly include environmental goods. The APEC list uses the term “ex-out” to indicate that just one part of a particular HS subheading may be considered as an environmental good, in accordance with additional product specifications and remarks provided by APEC economies.
Tariffs are then applied at the level of tariff lines (TL) in national – or regional in the case of the EU – tariff schedules, whereas global trade data is only available at the level of entire HS subheadings. Some national tariff schedules may include certain codes for single-use environmental goods that are part of the subheadings of the APEC list, for example, solar cells. One challenge is that most environmental goods are dual-use products that also have non-environmental applications. Examples include items such as gas turbines and AC generators. Meanwhile, other environmental goods may fall under national tariff lines that also include unrelated products, which in some instances are highly traded. Where a specific TL for an environmental product is available in a WTO member’s tariff schedule, implementing a tariff cut is straightforward. Where TLs are more broadly defined than the environmental good targeted for tariff liberalisation – as will often be the case – a WTO member could eliminate tariffs for the full TL or create a new TL that captures the environmental good more narrowly.
Trade liberalisation driven by an agreement in environmental goods may go beyond just environmental goods, because as explained, it may be difficult to specifically target the latter. In general, this is a welcome development, because trade liberalisation has wider potential economic benefits. Nevertheless certain WTO members joining an Environmental Goods Agreement may want to use existing national tariff lines or create new ex-outs in their own tariff schedules, where possible, in a manner that allows them to keep their right under WTO rules to apply tariffs to unrelated products. Using ex- outs may help in achieving tariff reductions that better target environmental objectives and could make negotiations easier. Creating new ex-outs may also involve costs, however, and in certain cases additional work for customs officials. There may be a need for technical work among EGA participants wishing to create tariff lines that specifically capture environmental goods or a product’s environmental end-use. It will also be interesting to see how APEC economies, where necessary, implement changes in their national tariff schedules to execute the APEC tariff-reduction commitment. At their latest annual meet held in November in Beijing, China, APEC leaders called on officials to submit implementation plans by next year’s APEC trade ministers gathering, in line with earlier commitments.
How much trade?
In the period 2011-13, trade in the subheadings of the APEC list amounted to around US$400 billion per year measured either by exports or imports, excluding intra-EU trade. This represents approximately three percent of total world trade and four percent of world trade in manufactured products. A more detailed look at the APEC list reveals, however, that trade in environmental goods accounts for only a small portion of all trade in many subheadings. One study argues that 46 of the 54 HS subheadings on the APEC list reflect goods that are not used primarily for environmental purposes. On the other hand, the APEC list includes only part of today’s internationally-traded environmental goods. In addition, multiple-use products with certain environmental applications may be traded under HS subheadings not usually included in analyses of trade in environmental goods.
Based on COMTRADE data it is estimated that the 14 WTO original EGA participants accounted for 86 percent – 78 percent of imports and 93 percent of exports – of global trade in the 54 APEC subheadings in 2012. This figure includes re-imports and re- exports, as well as intra-EU trade, the exclusion of which would round the numbers down somewhat. Mainly due to developments in photovoltaic (PV) trade – such as the fall in solar PV prices, policy uncertainty in several countries, and the effect of antidumping and countervailing duty actions – the group’s trade in the subheadings declined in value terms compared with 2012, whereas trade by non-EGA participants increased. If a key issue in the EGA talks proves to be concerns around free riding, participants could eventually give more weight to their more than 90 percent share in global exports.
Non-EGA participants with the largest value of total trade in the 54 subheadings of the APEC list for the period 2011-13 are, in descending order, Mexico, Malaysia, India, Russia, Thailand, Brazil, Turkey, South Africa, Indonesia, Saudi Arabia, the Philippines, Israel, and Vietnam. Turkey and Israel have now applied to join the EGA.
Identifying climate potential
Whereas the APEC list will be taken as a starting point, EGA participants are committed to exploring a broad range of additional products. The September round focused on what goods might be included in the EGA on two fronts, namely, air pollution control and solid and hazardous waste management. During a third discussion round, scheduled for the first week of December, participants are considering products related to wastewater management and water treatment, environmental remediation and clean-up, and noise and vibration abatement. Goods related to cleaner and renewable energy, as well as energy efficiency are slated to be reviewed early in the new year, while a later discussion round is due to tackle environmental monitoring, analysis and assessment, as well as environmentally-preferable products, and those related to resource efficiency.
One of the most significant developments in the energy sector in recent years has been the decline in the cost of renewable energy technologies for electricity supply. The recent New Climate Economy report confirms that renewable energy, particularly wind and solar power, is increasingly cost-competitive and in many places able to keep up with fossil fuels without the help of subsidies. The elimination or reduction of tariff and non-tariff barriers to trade in renewable energy equipment and components could further facilitate the use of renewable energy in the overall energy mix while trade liberalisation may also provide opportunities for exports and economic development.
The APEC list provides a reasonably good coverage of certain RE supply products particularly in the solar PV and wind-power sectors. The list also includes products that may contribute to enhancing access to clean energy, for example small hydro, ocean, geothermal and biomass gas turbine generating sets. On the other hand, some RE sectors are not included. For example, equipment used in hydropower applications does not make the cut for the APEC list. While the list does include both RE equipment and parts – which may be useful for a value-chain approach to reducing costs – certain segments of value chains are missing. For example a range of downstream components used in solar PV systems, such as solar inverters, are also not included perhaps because the relevant HS subheading includes products that are principally applied for other uses.
Drawing on earlier submissions made in the WTO and those identified in work carried out by the International Centre for Trade and Sustainable Development (ICTSD), the publisher of BioRes, additional products and components relevant for RE and access to clean energy could also be considered. These include, for example, Fresnel mirrors and reflector modules used in concentrated solar power (CSP) applications, heat pumps, as well as parts and components used in RE supply technologies. Some of these products are multiple-use with relatively large values of trade, such as switchboard and control panels, gearboxes, and ball bearings used in RE installations. Some other recent ICTSD studies have also highlighted products that contribute to improved access to clean energy, in particular, off-grid solar appliances. Opportunities for including such products in the EGA could also be explored although lack of data may be a problem. For example, off-grid markets and trade flows for solar home-systems, mini-grids, solar pumps, solar cooking stoves, and solar lighting appliances are difficult to trace. Certain products that may be required in off-grid solar applications such as batteries, charge controllers, and energy converters have been included in earlier submissions to the WTO, but not in the APEC list, and they could be part of possible additions for the EGA.
The selection of additional products for the EGA will likely face similar challenges as those detailed in the APEC list. Some criteria may therefore be developed to guide the possible inclusion of additional products in the EGA, which should be driven primarily by environmental considerations. Possible impacts of tariff elimination and practical factors, such as the ease of implementing tariff cuts taking into account HS classifications and existing national tariff schedules, including the costs and benefits of creating new TLs, might also be considered.
Moving forward there is also a need to explore ways to arrive at a more accurate picture of trade in more narrowly-defined environmental goods. Analysis of available information on trade in national tariff lines of key trading partners may give some insights around how to interpret trade flows estimated at the level of certain HS subheadings that include unrelated products. Additional indicators and business surveys of markets for environmental goods and services could be useful for that purpose.
While a tariff-cutting EGA is certainly a welcome step forward, the impact on tariff levels in environmental goods is likely to be relatively small, given that MFN-applied tariffs in most EGA participant countries are already low. For the APEC list, the overall simple average MFN-applied tariff is only 1.67 percent. This very low average can mostly be explained by the large number of duty-free items and more than half of all imports are fully duty-free on an MFN basis. Considering only those dutiable items, the simple average MFN-applied tariff at 4.3 percent is more significant, although still modest. However, even where tariffs are low their elimination may make certain RE technologies more cost-competitive, including by reducing the impacts of cumulative tariffs facing products that cross borders several times in the context of global value chains.
Bound tariffs among the largest participants are also already low. For example, the simple and trade-weighted averages of bound tariffs are only around 1.5 percent in both the EU and the US, although this figure sits at 5.2 percent for China. Tariffs for nine subheadings of the APEC list, including subheading HS 854140 that provides for trade in solar cells, panels, and modules are already fully covered by the ITA. Since all the EGA participants are ITA signatories, they have already bound their tariffs at zero percent in these subheadings. For further tariff liberalisation to occur in these areas a non-ITA country would need to join the EGA. Addressing NTBs at some stage could facilitate renewable energy deployment. The EGA could also play a role in helping to prevent trade friction.
Boosting low-carbon deployment
To date the EGA participants dominate the global renewable energy market. Total renewable energy investment weighed in at US$214.4 billion in 2013, according to a joint report, with China, the EU, US, Japan, Canada, and Australia together accounting for 80 percent of this amount. International trade in renewable energy goods has played an important role in spreading the benefits of technology cost reductions around the world, including falling prices for solar panels and wind turbines. Such cost reductions, in combination with domestic clean energy policies, are an important driver of RE investment in developing countries. For the period 2011-13 imports of solar PV equipment in non- EGA developing countries increased significantly in value terms, and even more in volume terms, for example in South Africa, the Philippines, and Chile. A large portion of emerging import demand for RE equipment in developing countries is currently met by China.
Furthermore, the reduction and eventual elimination of import tariffs for intermediate products may lower the costs of renewable installations in importing countries, while at the same time also allowing certain developing countries to participate in global value chains. Some national tariff schedules, such as those of the US and China, include specific codes for wind-energy components. US import statistics show that certain non-EGA developing countries are key suppliers of specific components. In 2012, Vietnam was the largest foreign supplier of AC generators for wind-powered generating sets to the US market, whereas Mexico accounted for around 70 percent of US imports of parts for such generators. Brazil was the largest foreign supplier of wind-turbine blades and hubs, accounting together with India, for more than half the value of US imports.
Next year will mark a watershed moment in international climate governance as governments seek to pin down a global emissions-cutting deal that could send a major signal to energy markets. In this context, opportunities lie ahead to achieve climate, sustainable development, and trade benefits from the reduction or elimination of tariffs and NTBs to environmental goods and services, including through a future EGA. Also in the climate context, EGA negotiators will have to dive down into the details to make sure trade liberalisation negotiated in the eventual deal can make a significant contribution to the deployment of cleaner and renewable energy technologies, thereby facilitating emissions reductions around the world.
Rene Vossenaar, Independent Consultant, former Head of the Trade, Environment, and Development Branch, UN Conference on Trade and Development
[Ref 1] R. Reinvang (2014), The APEC list of environmental goods: An analysis of content and precision level, ISBN 978-82-8126-149-5, Vista Analysis AS Report number 2014/08.