Give climate and trade negotiators a new joint mission: Low-carbon trade agreements

Richard Samans 22 September 2019

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It has been four years since the Paris Accord was agreed, and the world’s climate change strategy needs a new infusion of energy (pardon the pun).  The plans submitted by countries to the UN – the nationally determined contributions (NDCs) – do not sum1 to anywhere near the level of ambition required to achieve the Accord’s 2˚C target, let alone the 1.5˚C goal the IPCC has recommended is most appropriate (IPCC 2018).  

At the same time, the global trading system is under increasing strain and is also in need of an infusion of fresh momentum.  Merchandise trade among G20 economies is now contracting (OECD 2019), partly due to rising tensions, tariffs, and the increased costs and uncertainty these generate.

The climate and trade diplomatic communities travel in different circles.  But they need each other more than they know, and it is time to bring them together.

The best way to help the Paris Accord succeed is to build upon it rather than rest on its laurels. And the best way to defuse rising public scepticism about the benefits of economic integration is to focus trade negotiations more directly on top societal priorities, of which climate change is certainly one.  

The time has come to construct the international economic architecture necessary to accelerate the propagation of low-carbon energy innovations that entrepreneurs are increasingly bringing to market on competitive terms.  Solely relying on the national political processes set in motion by the Paris Accord simply won’t achieve the necessary diffusion of these technologies within the timeframe dictated by the physics of our atmosphere. 

The world needs international cooperation to deliver more than the bottom-up, ‘let a thousand flowers bloom’ framework of voluntary national climate plans established in Paris.

This next – economic – phase of climate change cooperation should have a different cast and geometry than the one that produced the Kyoto and Paris accords.  With regard to cast, foreign and environment ministries were the main protagonists in the creation of the UN Framework Convention on Climate Change Kyoto Protocol in 1997 and Paris Accord in 2015, with crucial input from the scientific community through the assessments organised through the Intergovernmental Panel on Climate Change (IPCC).  This time around, the economic ministries (finance, trade, energy, transport, infrastructure, development and technology) will need to be engaged, with active input from, as well as co-design and partnership by, the business and financial communities.  

As for geometry, while the climate diplomacy of the past two decades has been at the multilateral level in the UN, this new economic phase will require a more purpose-built and variable configuration.  Since the speed and volume of greenhouse gas emissions reductions is what matters most, a universal, multilateral approach will be unnecessary and even counterproductive. Global emissions are concentrated in a limited number of geographies and industrial sectors, so there will be no need to take the extraordinary amount of time ordinarily required to reach unanimous agreement within the international community.  

A group of like-minded major economies could use their combined market power to speed the diffusion of carbon-efficient utility, industrial and consumer goods and services, aligning their economic incentives and standards in ways that create greater economies of scale and lower transaction costs for these producers. By collectively shifting the relative prices of the high- and low-carbon goods and services within their markets, a plurilateral coalition of countries having big markets and climate ambitions as well as supportive business communities could do much to accelerate a shift of production and consumption patterns, directly at first within their own sizable collective share of the world economy and then indirectly in other markets as these increased economies of scale serve to drive down production costs of low-carbon goods and services and make them more price-competitive globally. 

The most effective way to widen the price differential between low- and high-carbon alternatives would be to impose a broad carbon tax or implement a national cap-and-trade scheme. But these policies have been slow to spread, and when adopted – often at considerable political cost – they have yielded meagre results (Bloomberg 2016).  As such, while in theory ‘putting a price on carbon’ might appear to be a magic bullet, in the real world it has proven to be anything but.

There are multiple other ways to shift the relative prices of high- and low-carbon goods in an economy beyond a broad tax or cap-and-trade scheme, whether via tariff, procurement, financing, corporate governance, subsidy, technical standards, investor disclosure, targeted tax or emission trading rules and policies.  Some of these instruments have the potential to influence prices fairly directly, others more indirectly through a shift in purchasing behaviour that generates expanded economies of scale for low-carbon technology producers.  Examples of the former include creating a tariff differential in international trade, differential tax treatment of energy intensive equipment, differential regulatory weighting, and disclosure rules for carbon-intensive assets of financial institutions and reductions in fossil fuel subsidies.  Examples of the latter include performance-based energy efficiency standards for public procurement, definition and labelling of efficiency standards for industrial and consumer equipment, transportation fleet performance standards, and so on.   

The landscape of actors relevant to this broad economic agenda is highly fragmented across many different ministries, international organisations and industries. Each has no shortage of challenges and priorities within its traditional business, which is why the machinery of international economic cooperation has remained so quiet in the fight against climate change all these years.   Only presidents and prime ministers can galvanise the necessary intra- as well as inter-governmental action.  And only they can compel the engagement of the key business leaders in their societies needed to co-design and support such a strategy. 

Imagine if the leaders of France, Germany, China, Japan, South Korea, Canada, and the UK – all of whose governments and underlying polities are firmly committed to strong climate progress – were to announce a new kind of international economic alliance aimed at scaling market incentives for low-carbon adoption by aligning multiple aspects of their economic enabling environments.  In creating such a low-carbon trade and investment alliance, these leaders could add fresh momentum to humanity’s race against time, propelling faster adoption of low-carbon technology in a group of the world’s most important economies and driving down the relative price differential of these products worldwide in the process.    

Reflecting its emphasis on speed and impact, this new type of trade agreement could take a flexible approach to the terms of membership, requiring each member country to commit to implementing at least half of the policies on its agenda within a certain number of years while encouraging all to adopt as many as possible over time. The policy menu could include:

  • Zero tariffs for a defined set of low-carbon goods and services (Hufbauer et al. 2016), similar to what 18 economies – including the US, the EU, and China – are negotiating as part of a potential WTO Environmental Goods Agreement
  • Common energy efficiency standards for government procurement of energy intensive goods and services
  • Mutual recognition of technical standards for related goods and services
  • Minimum, time-bound targets for the reduction of fossil fuel subsidies (OECD 2018)
  • A trade dispute peace clause and consistent rules on the use of clean energy subsidies
  • Implementation of the Task Force on Climate-Related Financial Disclosures framework in corporate governance and disclosure rules
  • Coordination of efforts  within the boards of multilateral development banks to have them make more effective use of their balance sheets to mobilise private finance for climate mitigation and adaptation in developing countries (Blended Finance Taskforce 2018)
  • Alignment of policies in carbon-intensive sectors such as maritime, aviation, cement, steel and oil and gas (Energy Transitions Commission 2018)
  • Coordination of basic and applied clean energy research2 to avoid wasteful duplication and speed the rate of technical progress on key challenges
  • Mutual recognition of the rough equivalency of domestic carbon pricing schemes for purposes of border tax adjustment
  • Linkage of emission trading systems (Haita 2013).

Such a low-carbon trade agreement (LCTA) would help to scale demand for low-carbon goods and services by embedding and aligning price advantages for them through linked trade, procurement, tax, and investment rules.  A virtuous circle of policy leadership, technological innovation, and market forces would ensue, and the risk of border adjustment tax disputes relating to differences among national carbon tax and cap-and-trade regimes might recede as member countries used the alliance as a mechanism to recognise the equivalency of each other’s carbon pricing policies or eventually to negotiate a common scheme at a national level or within key industrial sectors.  

The agreement need not be restricted to national governments.  City and provincial governments could be invited and encouraged to accede to those elements of the policy menu within their authority, particularly with respect to procurement rules and energy efficiency product regulations.  

Expanding the geometry of global climate action in this manner would accelerate the implementation of the UN Paris Agreement by speeding the underlying economic transformation upon which realisation of the political commitments made by nation states in their NDCs depends.  

The best way to reinvigorate both climate and trade diplomacy is to think and act outside the box of the Paris Accord and conventional free trade agreements (FTAs). In particular, economic policies and institutions need to be brought more fully into the game by heads of government and given a mission to craft LCTAs rather than just FTAs.  Only leaders, many of whom will convene in New York this week for the UN General Assembly, have the capacity to create the conditions in the world economy in which clean energy technologies propagate at the pace needed to stabilise the planet’s greenhouse gas emissions at the level they promised to posterity four short years ago. 

References

Blended Finance Task Force (2018), Better Finance, Better World.

Bloomberg (2016), “Tough to Keep the World From Warming When Carbon Is This Cheap”, 8 July.

Energy Transitions Commission (2018), Mission Possible:  Reaching Net-Zero Carbon Emissions from Harder-to-Abate Sectors by Mid-Century. http://www.energy-transitions.org/sites/default/files/ETC_MissionPossibl...

Haita, C (2013), Linking Emission Trading Schemes: Pros and Cons, ICCG.

Hufbauer, G C, R Melendez-Ortiz and R Samans (2016), The Law and Economics of a Sustainable Energy Trade Agreement, Cambridge University Press.

Intergovernmental Panel on Climate Change (IPCC) (2018), “Summary for Policymakers of Special Report on Global Warming of 1.5 C Approved by Governments,” United Nations, 8 October.

OECD (2018), OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018.

OECD (2019), “G20 international merchandise trade continues to fall in the second quarter of 2019,” news release, 29 August.

Samans, R, R Melendez-Ortiz, H V Singh and S Doherty (2016), Strengthening the Global Trade and Investment System in the 21st Century: Synthesis Report, E15 Initiative, World Economic Forum and International Centre for Trade and Sustainable Development.

Endnotes

[1] See https://climateactiontracker.org/global/temperatures/

[2] See http://mission-innovation.net

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Topics:  Environment International trade

Tags:  climate change, paris agreement, low-carbon trade agreements, trade diplomacy

Managing Director and Member of the Managing Board, World Economic Forum

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