The World is on Fire: is Trade a Cure or a Curse?

Climate change is causing havoc across the world.?Whether living in Europe, California, Australia, Africa, or anywhere else in the world, there is an element that we are sure did not go unnoticed: summers are getting hotter and more intense.[1]?News about wildfires and droughts are commonplace in today’s newspapers and news channels,[2]?and the heatwave that some countries are experiencing is so intense that it threatens to melt the asphalt of the roads and put the railways, literally, on fire.[3]

Climate change is also affecting every country’s ability to produce and export.This is particularly true in agricultural areas, vulnerable to changing weather patterns and in need of green-tech solutions to be able adapt. Crop yields in regions close to the equator have fallen, while dry-land areas in Africa, Asia and South America face greater food insecurity. Countries need to adapt to the threats of climate change. In this context, countries have made the commitment to achieve “net-zero” by 2050, i.e., cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere, by oceans and forests for instance.[4]Access to new technologies, enabled by global trade systems, can contribute in achieving that objective and help build the countries’ economic resilience.[5]

Trade has an important role to play in the fight against climate change.?On the mind of policymakers, whilst solutions to climate change are urgently needed, these also must support the economic growth necessary to keep the countries’ economy growing. These are where trade comes into play. Traditionally, trade has not been strongly associated with environmental sustainability, although there is no clear consensus amongst the academic literature (see Box 1).[6],[7]

Knowing this, trade negotiators from across the world, and particularly developed countries, have been including environmentally related provisions as part of trade agreements.?The recent Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) is an example of a trade agreement including relatively high standards of environmental protection as part of a trade deal.[10]?The CPTPP addresses trade-related environmental issues such as the protection of the ozone layer, protection of the marine environment from ship pollution, wildlife protection from illegal trafficking, combatting over-fishing and illegal fishing, as well as on biodiversity, protection from alien species, and low-carbon economy. Unlike most trade agreements, it also enforces the commitments made on this area with trade sanctions and requires parties to commit to a high standard of public participation.[11]

International Economics Consulting Ltd. Actively participates in the policy space analysing the scope, content and impact of free trade agreements on a wide range of areas, such as labour, environment, and women’s economic empowerment. We work with leading international organisations, such as UNESCAP, the UK’s Department of International Trade, and Canada’s Expert Deployment Mechanism for Trade and Development to understand the commitments made by countries across the world on those areas, and how future trade agreements can improve the existing frameworks.

At the multilateral level, countries are negotiating an Agreement on Climate Change, Trade and Sustainability (ACCTS). Costa Rica, Fiji, Iceland, New Zealand and Norway are leading this initiative at the World Trade Organisation. Specifically, the ACCTS aims to:

• Remove tariffs on Environmental Goods (EGs) and make new commitments on Environmental Services (ESs);
• Establish concrete commitments to eliminate fossil fuel subsidies; and
• Develop voluntary guidelines for eco-labelling programs and mechanisms.[12]

However, negotiations are slow, plagued with challenges, and any agreement will take years to be negotiated and implemented. For example, just the task of measuring fuel subsidies represents a big challenge, because it is technically difficult and because countries do not delegate energy pricing to supra-national bodies, making the monitoring extremely difficult.

At the national level, countries and regions across the world have been adopting mechanisms to curve, or at least mitigate, carbon emissions.?The European Union (EU), Canada and the United Kingdom are considering the implementation of a border carbon adjustment mechanism, aiming to impose the carbon costs borne by the producers based in the aforementioned countries on imports from countries with less stringent climate policies.[13]?This would mean, for example, that African exports to the EU would become more expensive, as these contain the highest levels of carbon footprint in the world – Africa’s production is still very carbon intensive.[14]

The world needs quick and effective actions that have an impact on climate change.?Trade, properly managed, can be an instrumental tool in the countries’ fight against the degradation of the environment. Some of such actions could consist in the following:[15]

• Reviewing and eliminating tariffs on environmental goods, especially in low- and middle-income countries, which have the highest level of tariff protection. This would facilitate the importation of environmentally friendly goods, contributing to the nation’s environmental objectives.
• Tackling?non-tariff measures to trade in environmental goods and opportunities. Tariffs are just half of the picture in international trade. This would reduce trade costs for these products through mutual recognition, equivalence, or harmonisation.
• Improving access to environmental services through trade. Making environmental services accessible to all is essential to realising the gains from trade in environmental goods – services are embodied in trade in goods (think about the marketing, logistics and transport, R&D services needed to operate a company). As highlighted by Brenton & Chemutai (2021), “improving?access?[to these services]?will require efforts at both the regional level and at the WTO to agree on definitions of environmental services and identify the main trade-restricting barriers and mechanisms for monitoring the effective implementation of commitments.”?[16]

Businesses can also consider making changes:

• Commit and publish baseline conditions and targets in core areas for environmental sustainability purposes;
• Set out a strategy to achieve targeted reductions in GHG emission and increase environmental and social responsibility. To guide businesses, there are plenty of voluntary standards that set out how to achieve this;
• Map supply chains and screen the ESG aspects linked to using those supply chains;
• Engage in specific activities, such as coastal preservation, to recycling, education and civil society actions; and
• Establish a Business charter for ESG within sector associations, setting out principles and reporting.[17]

Paul Baker is the founder and chairman of International Economics Consulting Group. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on trade technologies for trade, and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s Trade Select Committee, and UNESCAP and UNCTAD panels and events regarding trade impact analysis.

References:

[1]?See, for example, Kirby, P. (2022). Heatwave: Ferocious European heat heads north. BBC News, July 19. Available from:?https://www.bbc.com/news/world-europe-62216159

[2]?In 2022, so far, there have been 1,900 blazes in Europe, in comparison to the historical average of 520. See Tidey, A. (2022). Fighting Europe’s fires: Inside the EU’s emergency response centre. Euronews, July 25. Available from:?https://www.euronews.com/my-europe/2022/07/25/fighting-europes-fires-inside-the-eus-emergency-response-centre

[3]?News18 (2022). UK Heatwave Melts Train Signals, Leaves Track on Fire as Europe Sizzles Alarming. News18, July 21. Available from:?https://www.news18.com/news/buzz/uk-heatwave-melts-train-signals-leaves-track-on-fire-as-europe-sizzles-alarmingly-5594983.html

[4]?See UN – Climate Change. For a livable climate: Net-zero commitments must be backed by credible action. United Nations. Available from:?https://www.un.org/en/climatechange/net-zero-coalition

[5]?Pangestu, M. E. (2022). Rethinking trade’s relationship to the fight against climate change. World Economic Forum, February 4. Available from:?https://www.weforum.org/agenda/2022/02/rethinking-trades-relationship-to-the-fight-against-climate-change/

[6]?Martinez-Zarzoso, I. (2018). Assessing the Effectiveness of Environmental Provisions in Regional Trade Agreements: An Empirical Analysis. OECD Trade and Environment Working Papers 2018/02, Organisation for Economic Cooperation and Development, Paris.

[7]. However, the results of the different econometric analysis are inconclusive. As highlighted by the WTO (2013), “[broadly], the studies suggest that total pollution may increase or decrease depending on whether the technique effect overrides the scale effect. The type of pollutant is among the factors that influence the net result.” See WTO (2013). World Trade Report 2013: Factors shaping the future of world trade. World Trade Organisation, Geneva

[8]?WTO-UNEP (2009). Trade and Climate Change. WTO-UNEP Report. Geneva; Martinez-Zarzoso, I. (2018),?ibid; and Grossman, G.M. & A.B. Krueger, (1991). Environmental impacts of the North American Free Trade Agreement, NBER working paper 3914.

[9]?Jakob, M.?et?al?(2022). How Trade Policy Can Support the Climate Agenda: Ensure Open Markets for Clean Technologies and Products. Science, Vol. 376, Issue 6600.

[10]?Although some critics have highlighted that the CPTPP is ““weak and unlikely to address the problems of illegal wildlife trade, overfishing, and other environmental concerns described”. See Wold, C. (2016). Empty Promises and Missed Opportunities: An Assessment of the Environmental Chapter of the Trans-Pacific Partnership. Lewis & Clark Law School, January 4.

[11]?Deng, H. & Huang, J. (2018). What Should China Learn from the CPTPP Environmental Provisions. Asian J. WTO & International Health Law & Policy, Vol. 13, pp. 551-550.

[12]?For a deeper analysis of the ACCTS and its implications, please see: De Melo, J. (2020). Negotiations for an Agreement on Climate Change, Trade and Sustainability (ACCTS): An Opportunity for Collective Action. International Economics Consulting Ltd., April 10. Available from:?https://www.tradeeconomics.com/wp-content/uploads/2020/04/JDM-ACCTS-2.pdf

[13]?See Jakob et al (2022),?ibid.

[14]?Melo, J. & Solleder, J-M. (2022). The Landscape of COE Emissions Across Africa: A Comparative Perspective. Discussion Paper DP17450, Centre for Economic Policy Research.

[15]?Brenton, P. & Chemutai, V. (2021). The Trade and Climate Change Nexus: The Urgency and Opportunities for Developing Countries. The World Bank Group, Washington D.C.

[16]?Ibid.

[17]?Baker, P. (2021). COP26, Climate Change and the Impacts on International Trade. CEO Insights, International Economics Consulting Ltd., November 11. Available from:?https://www.tradeeconomics.com/cop26-climate-change-and-the-impacts-on-international-trade/