Photo for representation: iStock
Photo for representation: iStock

Trade & climate priorities are converging: Does this help or hurt a fair global green transition?

If climate considerations are to permeate trade agreements & vice versa, upholding principles of common but differentiated responsibilities, special & differential treatment is crucial

The world is in a race to build a low-carbon economy. In mid-2022, the world’s largest historical emitter of greenhouse gas (GHG) emissions, the United States passed a domestic bill — the Inflation Reduction Act (IRA) — that would see the government invest about $370 billion across a decade in renewable energy, energy efficiency and electric vehicles (EV).

Separately, in December 2022, the European Union agreed on a preliminary deal for an EU Carbon Border Adjustment Mechanism (CBAM) on imported goods such as iron and steel, cement, aluminium, fertilisers, electricity and hydrogen. In the EU’s words, this would “incentivise our trading partners to decarbonise their manufacturing industry”.

On the face of it, these measures seem like proactive climate-friendly legislation by big polluters. However, the IRA’s bottomless green subsidies and the CBAM’s green tariff wall have sparked fears of trade protectionism, as governments on the pretext of climate action try to reshore green industries and dominate the global supply chain of goods and technologies essential to avert a climate catastrophe.

An overarching consideration that includes but is not limited to CBAM or IRA as policy tools, is whether trade is a domain through which countries must enforce greater climate ambition. For example, last month, US Climate Envoy John Podesta announced a new Climate and Trade Task Force to address “carbon leakage, carbon dumping, and embodied carbon in general”. The US signals intent to work with trade partners to develop standard methods to measure emissions, lower costs of clean technologies and help developing countries secure capital needed to decarbonise industry.

A history of distrust

Historically, developed countries have sought to merge trade and environment considerations, arguing that “the multilateral trading system and the environmental regime are mutually supportive”.

Critics have argued that this approach seeks legal grounds to impose trade restrictions on developing countries on the grounds of environmental concerns. Thus, even if the restrictions do not significantly address environmental problems – or carbon emissions – developing countries would find it difficult to legally challenge them and their exports will also suffer.

Developing countries distrust the developed countries’ endeavour to link environment and trade – their fear being that trade / environment linkages are sought for purely protectionist reasons. To that extent, the 1992 UN Convention on Climate Change specified that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”

In 1998, in the context of a US ban on the import of shrimp that was caught in a way that harmed endangered turtles, Anil Agarwal of Delhi-based think tank, Centre for Science and Environment, argued against the use of trade sanctions on environmental grounds. “Only economically powerful nations can impose effective trade sanctions against less economically powerful nations. This tool for bringing environmentally errant nations to task cannot be used by less economically powerful nations against the global economic powers, howsoever bad their environmental track record might be,” he stated.

Agarwal raised the issue of the climate problem where the US is the biggest perpetrator, asking “can the nations likely to be most affected by global warming – the Maldives and Bangladesh – impose trade sanctions on the US and expect it to be effective?”

Moreover, the criteria on which some of the new policy tools are hinged, such as differing emission intensities of production among countries, cannot be delinked from the climate justice question. Take the case of a CBAM that imposes a border adjustment tax on exporting countries on the basis of a higher emission intensity and the absence of a domestic carbon pricing mechanism, compared to the EU. Higher emissions intensity in many developing countries is linked to a number of historical variables including the offshoring of carbon intensive manufacturing from developed countries, and a belated effort at improving developmental outcomes through the use of cheap energy, which in many cases is coal. The latter is occurring decades after the Global North industrialised through unhindered fossil fuel dependence and now has the means to gradually decarbonise. The unilateral imposition of a carbon tax on traded goods neglects this history.

Yet, in an increasingly climate-risked world, the lines between trade rules and greenhouse gas (GHG) governance rules are getting blurred, especially considering that GHG emissions produced locally have a global warming impact and do not restrain themselves within territorial borders.

It’s not just about carbon, it’s also economic might

Green is the colour of tomorrow’s world economy, as clean technologies produced by low-carbon industrial processes will dominate, and fossil fuels and carbon intensive production increasingly become stranded assets. Therefore, for the world powers, carbon is not the only consideration, it is economic relevance as well. The US’ statement on its Climate and Trade Taskforce comes with caveats – the provisions will be extended to “like-minded” countries, a continuation of the strategy of ‘friendshoring’ to counter China’s dominance of manufacturing as well as the new green supply chains.

China dominates clean energy manufacturing capacity globally

The US has been fairly explicit in its China containment strategy, for, among other things, green goods. Last week it announced a hike in tariffs on Chinese imports of EVs, batteries and solar cells. Duties on EVs have been hiked to 100 per cent. The IRA itself prevents subsidies going to batteries manufactured in a ‘foreign entity of concern’, thereby shutting out Chinese firms or EVs containing battery metals processed in China.

Where does Global South stand?

In this economic (and thereby trade) war between the G2 – the US and China – and the EU’s role as a frontrunner in climate policy and marketplace for goods, developing countries must determine their role. During climate negotiations at the 28th Conference of Parties to the United Nations Framework Convention on Climate Change in Dubai in 2023, developing country Parties and blocs such as the African Group, China, Iran, Brazil, Egypt and BASIC raised concerns about unilateral trade measures negatively impacting their economies, as well as hindering their ability to eradicate poverty and fulfil their commitments to the Paris Agreement. This confirms the gradual intertwining of the trade and climate agenda, as climate-related policy tools start showing the potential to impact global trade balances and competitiveness, and the subsequent financial health of countries with export-driven economies.

How developing countries respond to this will vary across the policy landscape, as different instruments warrant different approaches. It’s a question we will keep exploring. But one thing is clear: If climate considerations are to permeate trade agreements, and vice versa, upholding the principles of common but differentiated responsibilities as well as special and differential treatment is crucial. Without this, developing countries may increasingly find their exports curbed on climate grounds, and simultaneously become buyers of green technologies produced in the Global North.

As Agarwal wrote: “There can be no doubt that there is today a need for a system of global environmental governance, but this system must be built on rules, regulations, tools and modalities that are fair, just and equally accessible to all.”

Down To Earth