Climate and Trade - Why Climate Change Calls for Fundamental Reforms in World Trade Policies

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Responsible: Jürgen Maier
Author: Tilman Santarius
Layout: Monika Brinkmöller
Printing: Druckerei Conrad GmbH
Translation: Emma Grylls

Publishers:

• German NGO Forum Environment & Development/Forum Umwelt & Entwicklung
  Koblenzer Str. 65 | 53173 Bonn
  Marienstr. 19 - 20 | 10117 Berlin
  E-Mail: info@forumue.de
  Internet: http://www.forumue.de/
• Heirich-Böll-Foundation/Heinrich-Böll-Stiftung e.V.
  Schumannstraße 8
  10117 Berlin
  E-Mail: info@boell.de
  Internet: www.boell.de

Content

Introduction

1 Globalisation and Global Warming

• Technology effects vs. scale effects - which are winning?
• Carbon leakage: displacement of emissions to Southern countries
• Relocation of production due to climate policy measures?
• Territorial reporting. a problem of method
• Shared responsibility for export-related emissions

2 Trade Policies against Climate Offenders

• A border adjustment for climate protection...
• ...or for the protection of US industry?
• A wavering course in the EU
• Is a border adjustment compatible with WTO law?
• The future: a trade ban on goods produced with fossil fuels

3 Trade Policies for Technology Transfer

• Liberalisation of trade in environmental goods...
• ...versus cooperative technology transfer
• How both North and South can benefit
• Climate protection innovations are global pulic goods
• Investment governance for a vital climate protection industry

Summary of main findings

References

Introduction

“Save the Earth now – [if compliant with WTO rules]” – this was how environmentalists summed up the conflict between trade and environmental concerns with a T-shirt slogan at the World Summit on Sustainable Development in Johannesburg in 2002. For over a decade, following the founding of the World Trade Organisation (WTO) in 1995, free trade rules seemed to hang like a sword of Damocles over environment and development conferences. New regulations for climate protection or poverty alleviation stood little chance in the face of the liberalisation and deregulation agenda. Worse than this, trade rules had a ‘chilling effect’ on other concerns: any proposal of serious intervention into the free play of the market – to save the planet or promote world justice – was nipped in the bud before it could even be discussed.

But the tide has turned. Free trade, the credo of the so-called Washington Consensus, has lost its legitimacy even in the eyes of those who championed it for years. In times of economic and financial crisis, anyone still driven by self-interest to advocate liberalisation, deregulation and privatisation – instead of thinking about political restraints for the market – risks no longer being taken seriously.

Moreover, the WTO is going through a fundamental crisis and has lost much of its political significance. But the fall of one thing is the rise of another: in the meantime, international climate negotiations have become one of the most important forums in international politics. The agenda is no longer confined to the prevention of climate change; negotiators in climate talks are also discussing the regulatory framework of tomorrow’s economy. Production structures and trade flows will change as a result of regulations for international emissions trading; recommendations for the extensive funding of greenhouse gas prevention and adjustment schemes, as well as global technology cooperation, will determine the future face of the economy.

The chilling effect seems passé. Environment ministers need no longer fear their colleagues from the trade and economic departments. Now trade ministers meet on the margins of climate conferences and discuss how they can contribute to mitigating climate change. Instead of the chilling effect, we are seeing the ‘teasing effect’: climate topics have become a starting point for economic and trade policy issues and a means of drawing attention to them. And demands for a Green New Deal, to mitigate both the recession and the looming climate catastrophe, resound from China’s state-run economy to the bastions of liberal economic policy in the USA and Britain. The question is no longer: “What will climate policy cost free trade?”, but rather, from all sides: “How can climate policy and trade policy pursue common goals?”

Up to now, negotiators at climate conferences have avoided trade policy topics like the plague. There were concerns that broaching such issues would mean contesting the authority of other government departments over their policy areas, that it would overload the agenda of climate negotiations, that it might ultimately create more conflicts than solutions. In fact, doubts were raised as to whether trade policy and climate policy could ever be reconciled. All the talk of synergy effects and ‘win win’ can’t hide the fact that the two policy areas follow very different logics, reflect conflicting values and involve different sets of actors.

The fundamental objective of world trade policy is to limit failures in state intervention and policy measures. The aim of trade policymakers, in reducing duties and abolishing non-tariff trade barriers, has been to reduce state interventions so that the hampering of market mechanisms is kept to a minimum. Climate policymakers, on the other hand, seek a response to what they see as the greatest market failure in history: human made climate change. They take it as read that climate change cannot be solved by the ‘invisible hand’ of the market, and that further externalisation will only compound climate damage. Their aim is therefore to change the general framework of the market through interventions and to regulate the behaviour of market actors. More state or more market? This question fundamentally divides trade and climate policymakers.

Not only when it comes to ecology issues, but also in relation to social justice do climate policy and trade policy take entirely different approaches. Trade policy aims for resources to be allocated as efficiently as possible. Resources are understood to be scarce (since their production entails costs) but in principle infinitely available. The optimal distribution of scarce resources is left to the free market. In contrast, climate policy’s first principle is that the atmosphere’s capacity is finite. And since the atmosphere is a limited ‘resource’, the distribution of this resource through emission allowances has taken on great importance in climate negotiations. Policymakers have agreed that this can’t take place via the market, but instead according to the fundamental principles defined by the United Nations Framework Convention on Climate Change (UNFCCC): countries should pursue climate protection “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities” (Article 3.1, UNFCCC). For the sake of fairness, the UNFCCC rejected the idea of allocating emission allowances in the most efficient way possible.

These fundamentally different approaches and understandings of the problems can lead to tangible policy conflicts. Trade policymakers, for instance, aim to increase world trade, ultimately to stimulate economic growth. Yet, as chapter 1 of this study illustrates using empirical data, globalisation is in fact fuelling global warming. For climate policy this means a limit on emissions-intensive economic activities and the volume of commercial traffic, as long as transport remains fossil fuel-based. Climate policy needs to put an end to ecologically unsound trade flows and encourage the specialisation of energy-intensive production in places where it can take place in the most climate-friendly way. These changes would result in a form of – at least partial – deglobulisation.

Obviously, this will mean sensitive interventions in the trade policy domain. In view of the conflicting values and aims outlined earlier, the question of how this could take shape politically remains an open one. Can trade policy really become a driver for climate protection? Given the many conflicts of interest, the economically powerful lobby groups and the dependence of entire countries on their exports, this may seem impossible. Negotiators will therefore need to be vigilant about the possible obstacles and conflicts. But at the same time it is vital to work out where there are areas of compatibility and mutual support. Only by paying keener attention to conflict and consensus can we create the right conditions for a joint debate.

However climate and trade policy may relate to each other in the future, there is no getting around the closing argument of this study: global warming can only be kept under the dangerous threshold of 2 ºC if trade flows and world trade policy regulations are fundamentally reformed. Climate policy will need to deal with world trade issues – if not within the next international climate contract, supposedly agreed upon in Copenhagen in December 2009, then soon afterwards. This study is intended as a contribution to that process.

Chapter 1 will discuss the connection between world trade and greenhouse gas emissions. Nearly a quarter of all CO2 emissions worldwide arise from the production of internationally traded goods. Carbon leakage is occurring through international trade, insidiously but on a large scale, as industrial countries displace greenhouse gas emissions to emerging economies and developing countries. So long as reduction goals do not apply for all developing countries, the result is an increase in total global emissions. This can only be successfully controlled if export-related emissions are made transparent through systematic reporting and taken into account in the future allocation of reduction obligations.

Chapter 2 deals with the question of how trade in climate-damaging goods can be curbed. It goes on to outline the debate over border adjustment measures, concluding that at present it seems unnecessary either in the EU or in the USA to prevent emissions-intensive industries from relocating overseas by imposing a border levy. Instead it is worth asking whether trade sanctions could be an important building block in ensuring the implementation of the climate regime. In order for this to work, trade would not have to be deregulated but fundamentally (re)regulated. In the long term, a trade ban should be considered for goods produced with fossil fuels.

Finally, Chapter 3 focuses on how to best facilitate the diffusion of climate-friendly products and technologies and introduce them onto the market. This is a central question in the current climate negotiations. Trade policy promotes the liberalisation of trade with environmental goods and services, as well as foreign direct investment, yet this can run counter to the goals of climate protection and energy security. Technology transfer should be expanding the production capacity of climate-friendly industries in all countries of the global South, rather than primarily serving as a ‘green export promotion programme’ for industrial countries and some emerging economies. Alongside improved technology transfer, an intelligent regulation of foreign investment and intellectual property will be suggested.