The global trading system and climate change: avoiding collision and enhancing co-operation

As trade makes its way to the COP28 agenda, a looming question comes to mind – can industrial decarbonisation, at the scale required to reduce greenhouse gas emissions by 43 percent by 2030, be achieved without the help of the global trade policy regime? 

The answer is an emphatic no. Roughly 30 percent of global carbon emissions are embodied in internationally-traded goods and services. This suggests that future policies that drive a stronger decoupling of carbon emissions from trade have considerable latitude. More than 75 percent of these trade-related emissions are unsurprisingly linked to the energy and transport sectors. As per research cited by the WTO, pollution-intensive industries currently reap the benefits of much lower tariff and non-tariff barriers than clean industries  – thus offering substantial opportunity for course-correction. Therefore, one outcome of COP28 ought to be a clear mandate to the WTO to further liberalise tariff and non-tariff barriers in environmentally/climate-friendly goods and services (EGS), in accordance with Target 9.4 of the Sustainable Development Goals, which calls for “greater adoption of clean and environmentally sound technologies and industrial processes, with all countries taking action in accordance with their respective capabilities.”

Scope of trade liberalisation in EGS and clean technology deployment and diffusion 

The global energy transition can hardly take place without leveraging trade for the global passage and redistribution of critical minerals such as lithium, cobalt and nickel, graphite, copper and rare earths, where currently there is high geographic concentration. The World Bank expects a 450 percent increase in the global demand for graphite, cobalt and lithium and per other reports, total material demand could increase six to seven times under the net-zero scenario. 

As per the UNCTAD, international trade in electric vehicles has grown by 25%, non-plastic packaging by 20% and wind turbines by 10 percent in 2022; and overall trade in environmentally-friendly goods has surged by 4 percent (a record high of $1.9 trillion) in 2022. There remains considerable scope for liberalisation of complementary environmental services as well, such as construction, installation and operation of renewable energy equipment, services relating to waste water treatment, pollution-monitoring equipment and others such as natural disaster insurance.

The global trading system is also a critical conduit for the innovation and diffusion of technical know-how embodied in EGS. There is scope, for instance, for the diffusion of advanced wind technologies embedded in high-quality wind turbines, into countries beyond the selective few that currently have expertise. The international renewable energy market is already open and competitive and global value chains are already credited for the expansion of the global solar photovoltaic market, bringing about lowered costs for consumers and stimulating the diffusion of solar PV technology. 

Trade can reduce the cost not just of climate mitigation but adaptation as well, and make cheaper and cleaner substitutes available more easily across borders. For instance, trade liberalisation can enhance access to more affordable climate adaptation for agriculture systems across the globe, such as through making available improved stress-tolerant varieties of plants, cleaner irrigation technology and related services and early warning weather systems.

Resolving the tensions between trade and climate change 

A much-debated principle of fairness and distributive justice enshrined in the Paris Agreement and its predecessors is that of “common but differentiated responsibilities and respective capabilities (CBDRRC).” The CBDRRC has brought about varied interpretations of what “burden-sharing” for climate action between developed and developing countries should look like. The principle justifies differentiated climate action by different countries commensurate with their respective historical responsibilities, capabilities and national circumstances. This is arguably at odds with the WTO principle of “most-favoured nation,” where all countries are treated equally, a principle that would have to underpin trade-related climate measures. 

This clash is manifested in the controversial EU Carbon Border Adjustment Mechanism (CBAM) that entered into effect in October 2023. The EU CBAM violates the CBDRRC as it seeks to equalize carbon prices between the EU and all other importing countries, as a way to prevent carbon leakage and protect domestic competitiveness. However, the CBAM is expected to have a disproportionate impact on developing countries, which have valid fears of green protectionism, thus intensifying the risk of future trade disputes. Such fears could partly be allayed if revenues from CBAM are channelled into climate funds accessible to developing countries for their uptake of renewable energy. A carve-out from the CBAM for the poorest nations would also have been fair. 

Perhaps the time is ripe for the WTO rules-based regime to clarify the legality of border adjustment measures, while simultaneously clarifying whether trade-related climate measures are justified based on “how products are manufactured or processed and how natural resources extracted or harvested” (definition of PPMs). The matter remains politically sensitive, given the extra-territorial implications of measures based on non-product related PPMs. Furthermore, there are practical issues involved in the smooth implementation of a CBAM. How should embedded emissions of products manufactured in other countries be calculated? Would the use of a ‘country of origin-specific emissions factor’ violate WTO rules? Is the CBAM going to contribute effectively to the EU’s carbon neutrality targets and help with global climate mitigation? Does a uniform Pigouvian global carbon tax remain the ideal, albeit politically unrealistic, first-best option? What happens to equity if, push comes to shove, the global community wants to pursue a global carbon tax? Some experts have come up with ideas for a differentiated and progressive carbon pricing mechanism, with a reference price pegged to the Human Development Index, to ensure better co-operation between developed and developing countries. These novel ideas are worth looking into for a global and just solution for collective action.

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