What role does trade policy have in addressing climate change?

The 26th UN Climate Change Conference of the Parties (COP26) in Glasgow has given fresh impetus to discussion around the role of international trade in reaching climate goals.

This Insight looks at what the UK Government’s trade priorities are and how green trade can be achieved, including addressing “carbon leakage”.

The UK’s role in trade and the environment

The Board of Trade, (the Government’s advisory body for trade), stressed in its July Green Trade report that the UK is well placed to bring trade and environmental agendas together, and to be a leader in decarbonisation and free trade.

The Board lauded ‘green trade’ – the trade in goods and services that are good for the environment – as a major opportunity for the UK economy. This could include  the export of innovative green technologies and the creation of green jobs.

The Board urged the UK to take a leading role and “reframe the narrative on trade and the environment and build consensus“ in international forums, such as the G7, G20 and the Twelfth World Trade Organization Ministerial Conference (MC12), and through the Trade and Environmental Sustainability Structured Discussions (TESSD) at the World Trade Organization (WTO).

Appearing before the International Trade Committee on 14 October, Anne-Marie Trevelyan, the Secretary of State for International Trade, said the Government’s independent trade policy will support green trade. Recognising the private sector’s role in meeting climate commitments, the Government is updating export policies to support businesses and promote investment.

The Government’s Net Zero Strategy: Build Back Greener (paragraphs 33-38), published in October 2021, shows how the UK is focusing on trade commitments at the multilateral level. For example, the UK Government has secured agreement with G7 Environment Ministers to end fossil fuel subsidies by 2025 and no longer provides support to fossil fuel energy sectors overseas.

The UK will seek to improve market access for green goods and services, the Strategy says. As part of the UK Global Tariff, it has unilaterally removed tariffs on various goods that benefit the environment or conserve energy and natural resources.

Trade policy can both promote and hinder climate goals

International trade promotes economic efficiency and helps disseminate green technologies and expertise. But making the economy greener requires investment and may increase costs. This places domestic businesses at a competitive disadvantage.

The green transition must include greening global trade rules, otherwise climate issues could shift between countries. High domestic standards could be undermined by cheaper imports produced to lower standards abroad. High standards might also push investors and jobs to less demanding countries. It’s suggested that because of this phenomenon, referred to as “carbon leakage”, countries are reluctant to take on stronger climate commitments.

At the same time, both scholars and governments are concerned that free trade and investment leads to the depletion of natural resources and an increase in trade in carbon-intensive goods like fossil fuels and timber.

What can be done?

Green trade can be promoted through various channels. Countries can agree rules at multilateral forums, like the WTO, and promote international environmental cooperation and multilateral climate agreements. They can also seek green bilateral and multilateral trade agreements, as well as take unilateral steps.

Free trade agreements can remove tariff, non-tariff and regulatory barriers to trade in environmental goods and services. These include goods used to generate clean energy, like solar panels and wind turbines, control pollution and manage waste. Services include research and development and ones that improve energy efficiency.

Countries can agree to limit subsidies for environmentally harmful fossil fuels and make it easier to subsidise renewable energy.

Some countries, such as Canada are considering taxes or other measures at their borders to prevent “carbon leakage” – these are known as “carbon border adjustment mechanisms”.

Trade experts have called on governments to clarify whether climate-focused trade initiatives are compliant with WTO rules, and when they unnecessarily discriminate against foreign producers.

Putting a price on carbon at borders

An influential proposal to address “carbon leakage” is the EU Carbon Border Adjustment Mechanism (CBAM). In July 2021, the EU Commission presented a unilateral mechanism where EU importers of certain energy intensive goods – cement, iron and steel, fertilisers and electricity – would have to buy carbon certificates.

The cost of the certificates would cover the difference in carbon price in countries with lower climate standards and the price that would have been paid, had the goods been produced under the EU’s carbon pricing rules (the Emissions Trading System). While not on the COP26 Agenda, the EU Commission President raised the issue in Glasgow.

The UK Government is considering border adjustment mechanisms as one option. The recent Treasury Net Zero Review is critical of CBAMs, however. It highlights the complexity of border measures, problems caused by inconsistencies in measuring carbon emissions, unclear effects on consumers and businesses. The review also questions whether CBAMs are WTO-compliant (in paragraph 251).

In the Government’s eyes, the ideal approach would be to reduce the risk of carbon leakage at the source, that is, by reaching an international agreement to reduce emissions.

Are UK priorities ambitious enough?

Various major free trade agreements, including the CPTPP and CETA, have been criticised for their lack of ambition and their non-binding “best endeavours” approach to climate commitments. They lack defined outcomes or formal reporting obligations. The UK independent trade policy offers an opportunity to be more concrete.

Critics, like the Green Alliance think tank, have said the UK seems to have failed “to leverage climate ambition as quid pro quo” for a deal with Australia. They call for more strategic thinking on the climate and urge the UK to go beyond references to international climate goals.

There are press-reported allegations that departmental policy may prioritise economic growth over environmental protections, but the Government has rejected this.

Scholars have put forward concrete policy proposals for greening trade. For example, Emily Lydgate and Chloe Anthony of the University of Sussex argue that the climate target must be a central objective of UK trade strategy.

The National Food Strategy independent review recommends introducing core minimum standards for trade deals, including on environmental protection and carbon emissions.

Trade experts George Riddell and Sam Lowe published a detailed proposal for a UK green trade strategy in October 2021. It includes joining the negotiations of New Zealand, Norway, Switzerland and three other countries on the Agreement on Climate Change, Trade and Sustainability (ACCTS). This first of its sorts agreement seeks to remove mutual barriers to environmental goods and services trade, eliminate fossil fuel subsidies, and support voluntary eco-labelling programmes.

Further reading

COP26 and international trade, International Trade Committee enquiry.

Aligning Trade Rules to Meet Climate and Environment Goals, The All-Party Parliamentary Group for Trade & Export Promotion inquiry.

About the author: Ilze Jozepa is a researcher at the House of Commons Library, specialising in trade.

Photo by CHUTTERSNAP on Unsplash