Bridges Trade BioRes Review • Volume 5 • Number 4 • November 2011

A response to Response Measures: Solving conflicts between trade and climate change policy

Discuss this articleShare your views with other visitors, and read what they have to say

Response measures to climate change undertaken in one country can have an impact on the prospects for social and economic development of other countries. They are therefore addressed in the context of climate change negotiations, with a view to minimising the adverse effects.

Response measures relate to international trade in two ways. First, climate change policy measures can have an impact on trade flows. This is the case, for instance, when it comes to regulating emissions related to international transport. Second, trade measures can be used as a tool for climate change mitigation. An example of this could be border tax adjustments. The reason why it is important not to unnecessarily restrict trade is that it can be an important engine for growth and can play a crucial role in countries’ social and economic development. Carefully designed trade strategies can moreover contribute significantly to both mitigation and adaptation to climate change. This can be done, for example, by encouraging the dissemination of climate friendly technologies through trade liberalisation or, conversely, by restricting the trade in emissions intensive goods.

Indeed, the principles and commitments of the UNFCCC, its Kyoto Protocol, and the Cancun AWG-LCA decision all maintain 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.” Consequently, it is imperative for Parties to carefully evaluate, understand and cooperatively work to avoid potential yet unintended consequences of response measures, including on international trade.

The reality of a broad array of existing domestic measures with the potential to impact third countries clearly demonstrates the need for a process for assessment, discussion, and analysis. Such a process could be valuable in helping countries establish a better overview and understanding of climate-related measures which have an impact on trade, as well as to share experiences and lessons that could inform the design of new measures so the adverse effects can be minimised.

In Cancun one year ago, Parties agreed to establish a two part forum on the impact of the implementation of response measures. This forum – which was launched in June 2011 at the UNFCCC’s mid-year meeting in Bonn and will continue in Durban – is tasked with developing a work programme to address these impacts. The purpose of this article is to suggest that some of the interlinkages between climate change and trade, as referred to above, be discussed under the heading of response measures and, more specifically, in a possible permanent forum on response measures

Where to address trade and climate change issues?

Despite an array of important and influential trade issues that are closely linked to climate change, no unique, designated process currently exists within the multilateral systems for countries to access information, evaluate, or discuss the issues at stake. Avoiding the discussion will not, however, resolve the increasing challenges facing policymakers.

Instead, in the absence of such a process, there is a risk that trade-related concerns continue to prevent Parties from taking effective action to address climate change. Likewise, action taken without a clear understanding and scrutiny of trade concerns may lead to a sub-optimal balance between the efficiency of policies to address climate change and their potential to allowing for fair and open international trade to contribute to growth and development. It is therefore crucial that discussions advance on how to best address the trade and climate nexus.

The two fora that are the most immediately concerned are the World Trade Organization (WTO) and the UNFCCC. Both should ideally house some level of discussion on trade and climate change, while carefully respecting each other’s role and mandate.

A clearer determination of which is the most appropriate and effective forum for addressing varying issues is critical. Clarifying what may be addressed under the UNFCCC and what should be addressed elsewhere would help avoid conflicts, confusion, and establish more effective solutions.

Which issues to address?

The following measures to address climate change – by no means an exhaustive list of issues that can impact on trade or are actual trade-measures – would merit consideration by the response measures forum:

Emissions Trading Schemes and the practice of allocating emission allowances free of charge

The practice of allocating emission permits free of charge is a tool commonly used in existing and proposed emission trading schemes. It serves several purposes. Initially distributing allowances free of charge rather than making polluters pay for them is a way to smoothly phase in the carbon cost. In the long run, the main rationale is to decrease the risks for carbon leakage (i.e., that emission reductions achieved in the regulating country result in increased emissions elsewhere). Sharing the same rationale for implementation – at least in the long run, the allocation of permits free of charge and border carbon adjustments are considered as options dealing with the same concerns, separately or supplementing each other.

When inadequately designed, this allocation of allowances free of charge can negatively impact trade of third parties, including developing country parties, resulting in risks for economic and social development impairment.

Border carbon measures

Border carbon measures – or “adjustments” – refer to the levying of a carbon charge on imported products and/or services. These measures are aimed at charging for emissions related to imports in a similar fashion to what is imposed on domestic industry producing a like good. These would most commonly be imposed through either an emission trading scheme or a carbon tax. The rationale behind such adjustments is to address carbon leakage and related competitiveness concerns. Such adjustments can significantly affect exports of countries targeted by the measures, thereby altering important sources of income and employment. Developing countries that are not prepared to take on comparable emission reductions are particularly concerned that their exports will be targeted and that their economic development will be compromised. Although no such border measures are in place, the inclusion of international aviation into the EU Emissions Trading Scheme from 2012 could be seen a carbon border measure.

National promotion of low‐carbon technologies and measures

The shift to a low‐carbon economy will require massive investments from both the public and private sectors to make up for the high initial costs required to develop green energy sources. As a consequence, government subsidies and other incentives are considered a necessary tool – and response measure – to motivate firms to invest in and produce clean energy products and services. Government response measures in the form of subsidies and other incentives to support clean energy, may however disadvantage foreign manufacturers and thereby distort competition. Indeed, “non‐tariff” barriers – such as energy efficiency requirements, product labelling, feed‐in tariffs, export credits, and manufacturing subsidies – are even more significant as an explanatory variable for impacting exports or imports of renewable energy equipment and components than import tariffs.

The forum could discuss and search for a balance between the need for countries to reap the benefits of support for their shift to a low‐carbon economy and the longer‐term ambition of a global level playing field that provides the incentives for innovation, cost reduction and quality assurance.

Carbon foot‐printing and labelling schemes

The numbers of carbon standards and labelling initiatives is rapidly growing. Both government‐mandated standards and voluntary private sector initiatives raise a number of challenges and opportunities with regard to trade, development and climate policy, which merit further elaboration and discussion.
Regulation of international transport

Aviation and maritime shipping are important and rapidly growing contributors to global greenhouse gas (GHG) emissions; this share is projected to increase rapidly. Due to the international nature of aviation and shipping, a global solution would be the most efficient and effective option for addressing the related GHG-emissions. However, negotiations thus far have been futile, due to political disagreements over how to address the UNFCCC principle of common but differentiated responsibility (CBDR).

Against this background, the EU has decided to include aviation in its Emissions Trading System (EU ETS) beginning in January 2012. The regulation of aviation in the EU ETS is non-discriminatory, meaning that all aircraft operators – regardless of their nationality – need to surrender emissions allowances for intra-EU flights, as well as flights to and from the EU. Regulating emissions from aviation is a response measure to climate change that may have an impact on trade and thus on prospects of development for third countries. Concerns for negative impacts are the greatest among remote countries relying heavily on tourism, or on trade in goods that are air freighted.

Recommendations

So what to do next? A forum within the UNFCCC could address a breadth of topics, of which trade could be one. It could include three pillars of action, or more: transparency, research and analysis, and dialogue. A work programme to set up such a forum could include exploring the following:

Transparency measures

Transparency on responses to climate change would benefit both countries undertaking the measures and those who may be impacted by them. Increased insights into positive impacts from response measures could contribute to a positive outcome for the future negotiations as it would build good-will, in addition to the actual benefits in terms of sustainable development. Drawing lessons on positive outcomes would also allow their optimisation in future policy measures. A good scrutiny of the possible impact on third countries may furthermore foster efforts by countries implementing the measures through a careful design attempt to minimise any adverse impacts. And lastly, countries who may be affected can formulate better informed policies to shield their economies from adverse effects.

Such transparency could be achieved either through a process of notification and review, where Parties undertaking mitigation efforts would be required to notify measures, which would then be subject to a review process where other Parties would be provided an opportunity to ask for information and clarification as well as comment on the measures. Such a solution could build on existing channels of information, for instance the National Communications. Another option could be a regular review of response measures by a specifically assigned body, possibly supplemented by information and commentary by the implementing country. All Parties would then be invited to discuss and react to the review. Such an option could be inspired by the trade policy reviews (TPR) in the WTO.

Countries on the receiving end could also report on experiences of impacts to their social and economic development from response measures, as well as possibly on their own measures to address impacts.

Putting in place a mechanism for multilateral transparency and discussion would ensure that countries do not have to rely on their own resources to monitor the measures undertaken by every other Party. This would be particularly valuable to the most vulnerable economies.

Expertise, research and information.

Research and analysis exists for some response measures and their potential impact on social and economic development. The forum could include a process for compiling, structuring, and making this available in a database or clearinghouse. This would also allow the identification of research gaps. The database could be supplemented by the establishment of a small group of specialists from inter- governmental, non-governmental organisations and academia to help to provide advice, research, and analysis on topics raised at the forum.

Dialogue

The forum could include an ongoing, permanent forum for dialogue. In particular, this would allow for parties as well as relevant organisations to consider issues and particular circumstances that arise as countries and regions implement new measures for mitigation. Such a forum could serve as a space to air concerns, present up-to-date information, and develop solutions. Experiences could be shared and lead to the development of “best practices.”

What to leave to the WTO

Part of the controversy surrounding the topic of trade within UNFCCC discussions is due to the uncertainty of where and how to address trade-related issues and also due to the fact that there are other multilateral processes and agreements with mandates over trade issues. It is therefore important to clarify what trade-related issues and processes the UNFCCC does not have a mandate to cover and that should consequently not be addressed by a forum. These include:

Rule-making on trade
Implementation of trade measures
Addressing and resolving violations of trade rules
Trade liberalisation and trade reform

Indeed, the WTO and other trade agreements have a crucial role to play in this respect. The trade institutions are increasingly facing issues related to climate change, particularly through trade disputes. Also through discussion on how trade can serve as a positive driver for mitigation and adaptation action, an area of constructive inter-linkaging that deserves attention to advance.

Ultimately, the systems, although different, are interrelated and need to be coordinated. It is, thus, crucial to clarify the distinct responsibilities and ensure that the necessary process and forum exist to avoid negative consequences and safeguard countries’ sustainable development.

This article is based on an ICTSD submission to the UNFCCC. The full submission can be found on ICTSD’s website.