Bridges Trade BioRes Review • Volume 3 • Number 1 • June 2009

Trading the environment: The importance of trade in climate change negotiations

by Solveig Crompton

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

As climate change has in recent years come to the fore of the international agenda, increasing attention is being paid to the linkages between trade and climate change. A noteworthy example of this was the inclusion of a meeting of trade ministers on the sidelines of the thirteenth UN Framework Convention on Climate Change (UNFCCC) Conference of the Parties in Bali, Indonesia in December 2007. However, in terms of the agreement that Parties to the Convention are currently negotiating -which is due to be concluded by the end of 2009 - it is less obvious where the trade issues specifically lie.

Both the Convention and the Kyoto Protocol seek to minimise the adverse effects on trade caused by the measures Parties put into place in their efforts to address climate change. Article 3 of the Convention includes the provision that “Parties should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties.” Furthermore, in the same sub-paragraph, Parties agreed that “[m]easures 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.”[1] Article 2.3 of the Protocol requires that Annex I Parties, or industrialised countries, “strive to implement policies and measures under this Article in such a way as to minimise adverse effects, including…effects on international trade, and social, environmental and economic impacts on other Parties, especially developing country Parties.”

Parties to both the Framework Convention and the Kyoto Protocol clearly recognised that in order to achieve sustainable development, a mutually supportive relationship between the multilateral trade and climate change regimes is necessary. On the road to Copenhagen, Parties have reaffirmed this recognition, but face even greater challenges in this respect.

The general position of the developing countries has been that discussions around trade issues belong in the World Trade Organization (WTO), and should not be addressed within the scope of the climate change discussions. Unlike their compatriots in the WTO however, Parties negotiating climate change have only a few formal meetings during the year in which they aim to resolve the entire negotiating mandate of climate change.

Possibilities within the WTO to address climate change concerns

Negotiations on the Doha Development Agenda are now in their eighth year, and trade negotiators are still grappling with resolving a few particularly difficult issues, especially in the Agriculture and Non-Agricultural Market Access (NAMA) negotiations.

Within the context of the so-called “Paragraph 31[2]” negotiations on trade and environment, the issue of climate change has been explicitly raised only in reference to environmental goods and services (EGS). The exception followed an informal proposal made by the EC and US to fast-track specific goods and services that help to address climate change concerns. Progress in the EGS negotiations is dependent on the resolution of issues in the Agriculture and NAMA negotiations, in particular the latter, as the level of tariff cuts agreed within NAMA will serve as the baseline for determining the tariff cuts for environmental goods.

Developing countries are not convinced that goods that assist in addressing climate change should be prioritised above other environmental goods. Furthermore, the WTO negotiations do not sufficiently address issues around technology transfer, and developing country Members argue that sustainable development will not be achieved if they become mere importers of cleaner technology products and equipment from industrialised countries.

WTO negotiators will need to approach these negotiations in a more integrated manner for the liberalisation of goods and services to benefit climate change in the manner envisaged by the UNFCCC: supportive of the sustainable development of Parties, particularly developing country Members.

While the outcome of the negotiations on Paragraph 31(i), which seeks to address “the relationship between existing WTO rules and specific trade obligations set out in multilateral environmental agreements (MEAs),”[3] may have implications for climate change, this is not given, as it could be argued that neither the UNFCCC nor the Kyoto Protocol contains “specific trade obligations,” and as such these agreements would fall beyond the scope of the mandate.[4]

In the absence of an outcome on these Paragraph 31(i) negotiations, the question of the relationship between the UNFCCC, the Kyoto Protocol and WTO rules remains open. For example under a proposal made by the European Union[5] in 2006, there could be implications for the relationship between trade measures implemented by Parties in fulfilment of their climate change commitments under the Convention and/or Protocol and the WTO compatibility of those measures. WTO Members remain divided on whether the scope of the negotiations precludes consideration of the relationship of the WTO Dispute Settlement Understanding (DSU) and specific trade obligations under MEAs.

One WTO forum that does offer an opportunity to create and harness synergies with the climate change discussions is that of the Working Group on Trade and Technology Transfer (WGTTT). The Bali Action Plan identified technology transfer as one of the four pillars of work. The WGTTT could offer a useful forum to contribute to the work of the climate change discussions by providing inputs on the relationship between trade and technology transfer.

At this point, the negotiations in the WTO are for all intents and purposes on an entirely separate and unrelated track from that of the climate change negotiations. The broad position of developing countries, who insist that the Paragraph 31(i) negotiations should not legitimise environmental barriers to trade, will ensure that the balance between the trade and environment regimes is largely maintained.

Trade issues within the climate change negotiations

There is no explicit reference to any trade issues under the mandate of the Ad Hoc Working Group on Further Commitments for Annex I Countries of the Kyoto Protocol (AWG-KP), or of the Ad Hoc Working Group on Long-Term Cooperative Action under the Convention (AWG-LCA). However, there has been an implicit acknowledgement that the balance achieved in the Convention and Protocol (as noted above) needs to be maintained. The work programmes of both working groups reflect this symbiosis, allowing for consideration of trade implications of response measures undertaken when addressing climate change.

The AWG-KP, at its sixth session in August 2008, included an agenda item on “Information on Potential Environmental, Economic and Social Consequences including Spillover Effects, of Tools, Policies, Measures and Methodologies available to Annex I Parties.” A workshop was held on this issue at the March/April 2009 session of the working group. It was however evident that there remain challenges around building a common understanding among Parties as to the kind of ‘unintended consequences’ which should be addressed and how best to address those consequences.

Under the AWG-LCA, the agenda item on economic and social consequences of response measures has already elicited inputs with respect to trade. At the June meeting of the AWG-LCA, Parties are considering a draft negotiating text[6]. On this question, it appears that Parties are seeking to maintain the existing understanding that climate change measures should not lead to trade restrictions or discrimination.

Trade in climate change negotiations should not be underestimated

Trade is merely one of many elements of the broader climate change discussions. There is certainly little scope to broaden discussions within the WTO until trade delegates have completed their current work programme under the Doha Development Agenda. Thus, opportunity exists within climate change discussions to ensure that the mutually supportive relationship between trade and climate change measures is maintained.

It may be helpful to consider the issue from a slightly different angle, however. The overarching objective of the climate change negotiations is to agree on the required action needed to stabilise concentrations of greenhouse gases in the atmosphere at a level that would prevent anthropogenic interference with the climate system.[7] Developing countries must simultaneously ensure that the developmental and poverty eradication objectives of their countries are in no way compromised through these actions.

Key principles of the UNFCCC include that action to address climate change be taken “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”[8] In light of the dire situation of climate change, developing countries are strongly arguing that the historical responsibility for climate change lies firmly with the developed countries. As such, developing countries feel that the onus is on industrialised nations to take the lead in the response to climate change.

Industrialised countries are, however, consistently trying to ‘share’ their responsibility with developing countries. One of the ways they are doing this is through the use of trade measures. A key concept in much of the literature on trade and climate change is that of ‘carbon leakage’ - the result of production shifting from countries with more stringent climate change regimes to those with lower standards, and the associated increase in CO2 emissions. This has been a long-standing concern of industrialised countries, particularly those in the European Union, and it must be emphasised that it is likely to be an even greater concern in the context of the global recession in terms of the implications this has for the competitiveness of domestic industries and employment.

A number of developed countries are in the process of exploring the use of a ‘border tax adjustment’ (BTA) as a means of addressing such carbon leakage. Effectively, this means that through the BTA, imported goods would be subject to an additional duty upon entry into the country to compensate for the lower carbon price of inputs in the exporting country. There has been some debate over the practicality of implementing such a measure, and even over whether such a measure would be WTO compliant.[9] Furthermore, the looming threat of industrialised countries applying such a measure has annoyed many developing countries who criticise the measure as protectionism veiled behind environmental objectives.

The use of such a measure can be seen as a ‘stick’ incentive - as opposed to a ‘carrot’ - to persuade developing countries to do more when it comes to climate change. In such economically sensitive times, such a threat may be achieving its desired effect.[10] In addition, as industrialised countries have been trying to use sectoral approaches as a back-door means of extracting additional concessions from developing countries, trade measures, such as BTAs may amount to the same thing.

Climate change is a key priority for all countries, but even for developed countries, it is not the only priority. The role that the global recession will play in the negotiating positions of parties should not be underestimated. Trade measures in this context become a key weapon in the hands of climate change negotiators. Developing countries, which face considerable capacity challenges at the best of times, cannot afford to underestimate the ‘lethal’ nature of trade in the climate change context. Trade measures may very well become the means by which developed countries ultimately circumvent their historical responsibility for climate change, by ‘exporting’ the costs onto developing countries, through the use of trade measures such as BTAs.

Conclusion

The risks posed by trade measures within climate change should not be underestimated. This risk is even greater within the current context of the need to respond adequately both to climate change and the global economic crisis. Trade measures can be seen as the interface between these two challenges. Now more than ever, developing countries must adopt an approach that fully integrates the economic and environmental sectors. While trade negotiators may have their hands full trying to conclude the Doha Development Agenda, they can ill afford not to pay attention to the trade issues under discussion on the road to Copenhagen.

Solveig Crompton is a Policy Analyst at the Department of Environmental Affairs and Tourism, South Africa. She is writing in her personal capacity and nothing in the article should be construed as the position of the Government of South Africa.

[1] This provision is in direct line with the Preamble of Article XX of GATT 1994 which states that exemptions to WTO rules are permitted, as long as “such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”.

[2] The trade and environment mandate is contained within Paragraph 31 of the Doha Ministerial Declaration, WTO document: WT/MIN(01)/DEC/1

[3] Paragraph 31(i), Doha Ministerial Declaration, WTO Document: WT/MIN(01)/DEC/1

[4] It should however be noted that there remains no agreement among WTO Members as to what constitutes a ‘specific trade obligation’ or even, which agreements should be seen as ‘multilateral environmental agreements’.

[5] Proposal by the European Union to the Committee on Trade and Environment in Special Session, WTO Document: WT/TE/W/68, dated 29 June 2006.

[6] This draft negotiating text (UNFCCC document FCCC/AWGLCA/2009/8, dated 19 May 2009) has been prepared by the Chair of the AWG-LCA under his own responsibility, taking into account previous discussions and inputs from Parties. I

[7] United Nations Framework Convention on Climate Change, Article 2.

[8] Article 3.1 of the United Framework Convention on Climate Change

[9] See inter alia: European Parliament (2007) What Contribution can Trade Policy Make Towards Combating Climate Change, www.europarl.europa.eu/activities/expert/eStudies.do?languageEN accessed 8 Oct. 08; Assunção, Lucas, (2000), Trade Rules and Climate Change Policy: Some issues of Synergy and Conflict, www.ictsd.org/dlogue/2000-11-20/20-11-00-Assuncao.pdf accessed 8. Oct.08.; and Ismer, R. and Neuhoff, K. (2007) Border Tax Adjustments: a Feasible Way to Support Stringent Emission Trading, European Journal of Law and Economics , 24: 137-164 for varying aspects of these debates.

[10] This was in particular evident at the recent Climate Change summit held in South Africa, where the then Minister of Environment said in his statement: “Today we know that if we continue to grow without a carbon constraint we face the threat of border tax adjustments or trade sanctions from key trading partners and the destruction of thousands of jobs in high emitting trade exposed sectors” (accessed 12 March 2009) http://www.deat.gov.za//NewsMedia/Speeches/2009Mar3_1/03032009Speech.doc