How trade policies can support global efforts to curb climate change

Climate change will have a big impact on the global economy as nations seek to adapt to a warmer world and adopt policies to keep global warming below two degrees. In the wake of the US withdrawal from the Paris Agreement, it is important that policies around trade and investment support national efforts to adapt to global warming while trying to curb it. Four issues stand out:

1. Border tax adjustments

Border tax adjustments, or BTAs, refer to import taxes on goods from countries where companies do not have to pay for their emissions.

This is highly controversial and problematic for practical reasons and difficult to reconcile with World Trade Organisation (WTO) compliance requirements. The arguments in favour rest on punishing free riders and protecting the competitiveness of national firms subject to climate change costs in their home country. Such taxes are also held up as a way of avoiding “carbon leakage” caused by production shifting to countries with more lax climate change policies.

The latter two arguments are similar to those that have been applied in the past to environmental protection regulations. The problem with them is that there is very poor empirical evidence for either competitiveness risk or for carbon leakage. They also rest on the assumption that combating climate change is always a net cost. This is being increasingly challenged.

The argument against BTAs centres on the potential of unilateral measures being used to coerce developing countries. The sensitivity of such measures is shown by the fact that, until very late in the negotiations of the Paris Agreement, developing countries insisted on including the following clause.

“Developed country parties shall not resort to any form of unilateral measures against goods and services from developing country parties on any grounds related to climate change.”

2. Trade liberalisation in climate-friendly goods and services

Eliminating trade barriers on solar panels and other green technologies could help countries to shift away from fossil fuels. This is fully within the scope of the WTO and indeed the mandate of the current Doha trade round. There are several work streams within the WTO covering this area, though progress is slow.

3.International carbon trading and offsets

The Kyoto Protocol includes several mechanisms (Clean Development Mechanism, Joint Implementation and Emissions Trading) that can be used by countries that have tabled a 2020 target (European countries and Australia).

International market mechanisms beyond 2020 have not yet been created under the Paris Agreement but its Article 6 foresees them. Such mechanisms are being developed bottom-up by groups of countries, which can make much faster progress than is possible within the United Nations Framework Convention on Climate Change (UNFCCC).

However, any new mechanisms are likely to be linked in some way to the UNFCCC. There is no coverage of carbon trading under the WTO at present and there appears to be no appetite for bringing it within WTO disciplines.

4. Compatibility of climate measures and trade rules

One fear is that WTO rules will have a chilling effect on climate change measures such as subsidies, technical regulations or bans on certain products. However, Article 3.5 of the UNFCCC (which applies to the Paris Agreement as it does to the earlier Kyoto Protocol) is clear.

It uses WTO language to state that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade”. The UNFCCC, like the WTO, acknowledges the legitimate purpose of climate measures, including that they may involve restrictions on trade.

There is ample and growing WTO jurisprudence on measures taken for environmental purposes which confirms their legitimacy in WTO law. The jurisprudence is not static; it evolves with international thinking as expressed in treaties and less formal agreements.

Helpfully the WTO Treaty (1994) included an objective relating to protection and preservation of the environment that went further than the earlier General Agreement on Tariffs and Trade (GATT). This provision has already been used in interpretation by the highest WTO jurisdiction, the Appellate Body.

Conclusions

I expect that some carbon markets will develop amongst carbon clubs. Trading rules will be determined by those countries involved and will rest on the environmental integrity of the units traded.

Border tax adjustments (BTAs) are problematic. Some commentators have predicted a climate change trade war, arguing that countries are vulnerable if their climate measures are seen as inadequate.

This is now an improbable scenario. Any attempt to impose BTAs against countries which have signed up to the Paris Agreement would face enormous practical difficulties. It would also risk undoing the international consensus.

Transparency, peer review and naming and shaming of countries with inadequate pledges (Nationally Determined Contribution or NDCs), or countries that fail to implement an adequate one, may prove more effective than any of these unilateral measures. Evidence from the climate change negotiations is that countries do care about their reputation.

A further resource to encourage countries to act would be carbon clubs, where countries wanting to accelerate their transition to a low-carbon economy would link their climate measures through a common carbon price via their emissions trading schemes.

The threat of BTAs - clearly foreseen by major American companies after the Trump Administration’s decision to leave the Paris Agreement - may be a useful political lever to gain cooperation. But there are other ways of achieving similar ends.

One example is to require all goods, domestic or imported, to meet sustainability standards. This is potentially allowable under the WTO Technical Barriers to Trade agreement (TBT) as a type of processing and production method. But even if not, the existence of the Paris Agreement – a universal agreement with clear objectives and requirements on all parties to act on climate change – would be a useful reference in any dispute settlement proceedings.