Bridges Trade BioRes ReviewVolume 2Number 1 • March 2008

Climate change and trade at Bali and beyond

Like it or not, the climate change meeting in Bali, Indonesia in December 2007 propelled the trade and climate interface onto a higher level of political interest. For the first time, trade ministers were present at a UN Framework Convention on Climate Change (UNFCCC) Conference of the Parties, even if only at the sidelines. The talks covered a range of issues and perspectives, including suggested ‘win-win’ solutions for the trade and climate regimes, such as the liberalisation of environmental goods and services.

There was also pointed debate centred on fears that energy-intensive industries in countries taking on significant commitments in the realm of climate change would face competitiveness losses in their trade with countries taking on lower levels of commitment. These concerns have significant implications for the future of the climate regime, and they are now openly acknowledged – although countries, and different constituencies within countries, certainly disagree on the extent to which competitiveness concerns are warranted and how to address them.

The constraints of time

Following the adoption of the Bali Action Plan, a period of intensive negotiations to put in place a new and comprehensive climate regime after 2012 has begun. With UNFCCC COP-15 in Copenhagen at the end of 2009 representing a key deadline, time is of the essence.

In terms of the Doha round of trade negotiations, time has run out – over and over again. Launched in 2001, the round has been dogged by missed deadlines and slow progress. The current deadline for agreement on modalities in key areas such as agriculture and non-agricultural market access is coming up within the next few months, with some key members insinuating that unless there is progress soon, the round may be quietly left behind. On the other hand, the successful conclusion of the round could deliver climate benefits in the area of environmental goods and services.

A number of parallel national and regional developments are closely intertwined with the fate of the UNFCCC negotiations. Among these, the EU climate and energy package launched on 23 January outlined the Union’s commitments in terms of reductions in greenhouse gases, increases in the use of renewable energy and support for new technologies such as carbon capture and storage. The draft legislation also spelled out the future of the European Emissions Trading Scheme (ETS).

Border measures creep in

During the drafting process of the new EU climate and energy package, competitiveness fears and concerns related to ‘leakage’ of carbon emissions to less efficient industries in other countries and regions were taken onboard. Although provisions – such as instituting border tax adjustments or requiring exporters to the EU to buy emissions allowances under the ETS – were not included for the time being, the door was left open for countries to do so in the future.

Meanwhile, there are two draft climate change bills in the US Congress, and both of these also contain measures to deal with competitiveness and leakage concerns. Although it will take time for any new US climate change legislation to come into affect, competitiveness effects are very much part of the debate and considered in the drafting process.

Now that potential trade-related border measures are squarely on the table (and out of the closet) some key developing country concerns should be kept in mind.

The proliferation of non-tariff barriers?

The overall uneasiness that countries are feeling with regard to the Doha round is coupled with a widely prevailing sentiment that even as, and if, tariffs were to be lowered, new types of barriers are arising. Developing countries in particular are suspicious with regard to non-tariff barriers, such as new standards and product requirements for their exports, especially those set by the private sector. Given the control of private entities in the upper end of supply chains, private sector standards – even though not mandatory in the sense of technical regulations – often condition what and how goods are produced by suppliers and determine which products make it to the market place.

There are ongoing discussions within the WTO Committee on Non-agricultural Market Access and the Committee on Sanitary and Phytosanitary Measures on non-tariff barriers. Developing countries have presented many concrete examples of how their exports and opportunities for trade-led growth have been hit by non-tariff barriers, which often are considered to lack transparency and to constitute a moving target.

Environmental standards and requirements in particular are seen as potential hidden protectionist tools. Schemes such as border tax adjustments or obligatory participation in emissions trading schemes in export markets could be considered as very representative of the market barriers of the future.

Carrots or sticks?

The rhetoric around border tax adjustments that makes its way to Geneva is confused, and one of mixed messages. While the trade chiefs and trade experts sing one song denouncing the use of restrictive trade tools in the name of climate protection, some heads of state and parliamentarians are vocally supporting them. Meanwhile, draft legislation containing border measures are emerging on both sides of the Atlantic.

The perception among developing country trade negotiators regarding border tax adjustments is clearly negative. They are considered to be pushed by special interest or vocal environmental groups. In addition, the legality of climate-related border tax adjustments is widely disputed and has not yet been tested through the WTO dispute settlement mechanism.

Many trade negotiators and policy-makers believe that in order to get a solid commitment to climate efforts, carrots such as technology transfer and assistance would be much preferred; efforts to show that developing country voices are being heard and respected. Building in principles of common but differentiated responsibilities or earmarking part of the proceeds from potential border measures or a broader emissions trading scheme for adaptation and assistance to the most vulnerable countries might help. The latter option is in fact considered in the proposed Lieberman-Warner bill in the US, which would allocate a certain portion of the revenues from emissions allowances to support adaptation efforts in developing countries. A potential solution could build on incentive measures combined with border measures of some form. However, keeping sticks in one hand does not build trust.

Double standards

Further lowering the morale is a wide perception that trade partners promoting border tax adjustments in the name of climate are looking no further than to their own interest. In other realms of trade, obstacles remain: Europe will keep anti-dumping duties on Chinese energy-efficient light bulbs in place until 2009. Brazil has had a negative response from its developed-country trade partners with regard to its suggestion to include ethanol among environmental goods slated for tariff cuts.

In addition, if border measures were put into place, would these in any way reflect the per capita and historic emissions of different countries?

Beyond China…

Another aspect of any potential border measures to take into account would be how they might affect countries beyond China, and beyond other large and emerging developing countries such as Brazil, India, South African and Mexico.

For example, Europe has recently agreed preliminary Economic Partnership Agreements with most African, Caribbean and Pacific (ACP) countries, guaranteeing them tariff and quota-free market access. While these countries currently do not have much in the way of export industries in the energy-intensive sectors affected by potential border tax adjustments, their situation should be considered more carefully. A perception of Europe giving with one hand and taking back with the other would leave a bad aftertaste – and perhaps trigger a heightened fear of non-tariff barriers. Some ACP countries already feel uneasy with regard to Europe’s climate measures, as they have been at the centre of the food miles debate.

Climate change will affect all countries, and efforts to mitigate and adapt are needed on all fronts. However, when it comes to using trade measures, great care needs to be taken in order to take onboard the need to leave developing countries the option to harness opportunities for trade-led growth.