Climate change: the leverage of trade policy

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A trade policy initiative should operate on a clear distinction between climate change mitigation and adaptation. It should be composed of unilateral measures and multilateral trade policy initiatives in support of the UN-led process of setting specific targets and providing for a Green Climate Fund.
Professor Thomas Cottier
Professor Thomas Cottier, from the World Trade Institute at the University of Bern, discusses the potential for using trade policy to enforce climate change mitigation measures

There is little controversy that climate change induced by the emission of greenhouse gases (GHGs) comes at a great cost. Preventative action is clearly preferable to forcing future generations to remedy the situation, given the implications of increased climatic instability affecting regions, continents and humankind in unprecedented ways. Yet, all the efforts so far within the United Nations Framework Convention on Climate Change (UNFCCC), being critical in raising awareness and developing policy tools, show extremely slow progress in addressing mitigation and adaptation. While there is a political commitment among industrialised and emerging economies to ensuring that temperatures do not increase by more than 2C, all efforts to agree on more specific reduction targets and on funding of mitigation have failed. Emerging economies continue to insist on differentiated and thus historical responsibility of industrialised countries.

Following the financial and debt crisis, these countries are afraid of distortions of competition and the loss of jobs. The United States continues to abstain from Kyoto II while Canada, Japan, Russia and New Zealand have not renewed their pledges. The European Union (EU), Australia, Belarus, Croatia, Iceland, Liechtenstein, Norway, Monaco and Switzerland remain committed, with a pledge to reduce emissions by 18 per cent by 2020 from the levels recorded in 1990. However, they account for a mere 15 per cent of all GHG emissions. As emissions have increased by 56 per cent since 1990, it is likely that even the political goal of limiting warming to a maximum of 2C cannot be achieved. While historical responsibility of industrialised countries is a valid argument in relation to climate change adaptation and funding, it cannot be applied to mitigation for the simple reason that effective reduction cannot be achieved without a full commitment from emerging economies, in particular the BRICS countries (Brazil, Russia, India, China and South Africa).

The time has come to call upon trade policy. Climate change negotiations within the United Nations suffer from classical collective action problems and the tragedy of the commons (Hardin). Most governments pursue policies of free-riding in light of fierce competition and developmental goals. They leave it to others to produce the global public good of climatic stabilisation while seeking to benefit from such efforts or while limiting themselves to domestic measures. The UN process therefore needs appropriate flanking policies by those committed to reducing GHG emissions. There is a need for creating incentives and for building leverage to encourage industrialised and emerging economies to commit to proper multilateral policies.

Today, countries committed to Kyoto II until 2020 need to develop appropriate tools in trade policy and regulation for the coming years. The EU is legitimately bound to take the lead, given its market size and renewed commitments to abatement. A trade policy initiative should operate on a clear distinction between climate change mitigation and adaptation. It should be composed of unilateral measures and multilateral trade policy initiatives in support of the UN-led process of setting specific targets and providing for a Green Climate Fund.

Trade policy and regulation can create appropriate incentives to shift to clean production of exported and imported goods. Tariff structures for the biggest polluters – such as the steel, aluminum, and cement industries – should take into account process and production methods (PPMs) in defining costs of importation. Polluting products will be taxed at a higher rate upon importation than similar products that are cleanly produced. Economic models show that small differences in tariffs would have a substantial impact. Results suggest that a unit increase in simple average applied tariffs on carbon-intensive imports from a sample of non-committed exporters would reduce such imports by an average 28.4 per cent in Australia, 49.7 per cent in Canada, 40.7 per cent in the EU, 58.9 per cent in Japan and 50.8 per cent in the USA.1 In case of excess of demand, tariff revenues could be used to fund the Green Climate Fund and structural adjustment in exporting countries, taking into account the carbon footprint of consumers. Such policies can be lawfully designed under the law of the World Trade Organization (WTO).Applied rates, deconsolidation and product differentiation based upon PPMs can be legally justified in light of massive climatic challenges, if properly designed.

A second avenue that is more frequently discussed is the introduction of border adjustment measures (BAMs). These include border taxes commensurate with the level of domestic taxes and charges imposed upon production, in particular off-setting the cost of carbon-trading. Border measures can equally address technical requirements, forcing exporting countries to comply with process and production standards that are mandatory for domestic production. Finally, it is conceivable to combine the effort with domestic measures, in the manner of the Swedish model of taxing polluting production domestically and using the proceeds to support the restructuring of domestic industries.

These measures both respond to political concerns about losing competitiveness in countries pursuing stringent climate policies and to the need for enhancing incentives to shift to clean production standards in exporting countries responsive to climate change mitigation. Trade measures offer appropriate incentives for restructuring and boost competiveness. But foremost, they offer leverage for convincing governments to commit to GHG emission reductions within the multilateral system of the UNFCCC. Unilateral measures could and should be designed in a manner that they would not be applied to partner countries which took full commitments under an effective UNFCC and under subsequent legal instruments, nor would they be applied to least developed countries. Such a commitment could also entail a mutual pledge to refrain from recourse to anti-dumping and countervailing duties against exported solar panels and other components relating to clean energy production.

A proper disposition and mix of unilateral policy measures by the European Union and like-minded countries thus will create the groundwork for overcoming current collective action problems. It will build incentive for abstaining countries to aspire to reduction goals. More importantly, it will provide the foundation for multilateral negotiations both within the United Nations and within the WTO. The post-Doha agenda of the WTO will be able to take up negotiations linking unilateral PPM policies in the field of tariffs, taxes and technical regulation to transfer of technology with a view to accelerating reform of polluting production methods around the world. These negotiations will take place essentially among the 10 to 12 parties (including the EU) responsible for more than 90 per cent of all GHG emissions. These countries offer a critical mass and results will eventually be granted to all members of the WTO on the basis of most-favoured nation treatment.

Negotiations on mitigation will also stimulate work on climate change adaptation in the WTO, which is of much greater importance to developing countries than mitigation. It will allow linking tariff and tax revenues to the Green Climate Fund, supporting structural adjustment and adaptation measures around the world. Policy concerns relating to food security will inform future negotiations on agriculture, taking into account the volatility and uncertainty of stable food production in the different regions. Access to supplies from different regions of the world needs to be secured and appropriate disciplines on export restrictions will be developed. Negotiations on energy will focus on energy security, in particular enhancing transit rights beyond current disciplines. The shift to renewable energies will imply longer distances of transportation of electricity for which a proper multilateral framework is required.

All this is possible if the EU takes the lead. It is in Europes interest. The lessons learnt from expanding the carbon emissions trading system to aviation should be reflected upon. Although the world protested, the measure increased the potential for multilateral negotiations in the International Civil Aviation Organization (ICAO) and other international fora. The same applies to setting binding emissions standards and effective climate change adaptation in coming decades. We owe this effort to future generations.

1 The Potential of Tariff Policy for Climate Change Mitigation: Legal and Economic Analysis



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