Bridges Trade BioRes Review • Volume 3 • Number 3 • December 2009

Climate change, agriculture and international trade: Potential conflicts and opportunities

by Jane Earley

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Examining the nexus between climate change, agriculture and international trade is not easy, but a necessary task. Understanding these linkages is a high priority for those who will be called on to shape policies and response measures to massive changes in the global economy and the global environment.

Two factors complicate the analysis. First, while the state of the science is indisputable in some areas, much remains to be done. Shaping trade policies, as well as climate mitigation and adaptation measures, will call for a good deal more analytical precision than has ever previously been employed. This is an area where models build on other models, both in the international trade and in the international climate context.

Second, the role of trade measures in the context of international negotiations on climate change stabilization is unclear. While some refer to trade measures as a useful incentive to promote adherence to climate goals, others see them as a potential threat to mutually agreed climate solutions.

Climate change impacts on agricultural production

Climate change is estimated to affect agricultural ecosystems in many ways, but perhaps most notable is that it will affect different regions of the globe differently. Tropical regions - and thus developing countries - will generally be more severely affected than temperate regions, primarily because growing temperature ranges and changes in precipitation regimes will add to water use demand. Also, while moderate warming actually benefits crops in the short term in mid and high latitudes, even slight warming would decrease yields in seasonally dry and low-latitude regions.

Densely populated developing countries in tropical and drought-stressed regions could experience increased food insecurity. While total potential world food production is projected to increase with increases in local average temperatures of 1 to 3C (but to decrease at higher temperatures), world food security is very vulnerable to extreme weather events and socioeconomic factors.

Food security and the role of trade

In this context, trade in agricultural products may be vital to food security even in low and moderate climate change scenarios. The principal impact of climate change on trade in agricultural products will likely be higher trade flows of mid-to-high latitude products to the low latitudes, where production and therefore export potential will be reduced.

Volatility will continue to be part of agricultural trade patterns. Climate change is projected to increase wide variations in the net global food supply, as droughts and extreme weather events become more common. This will both increase prices, at least on local levels, and volatility of supplies. Resource and food scarcity may become more common.

It should be noted that the Intergovernmental Panel on Climate Change’s (IPCC’s) dire predictions about agricultural productivity in low latitude countries are not backed by detailed and country specific studies, nor do they sufficiently factor in potential adaptation measures. However, the implications for food security are very sobering. All four dimensions of food security (food production, trade, stability of food supplies, access to food and food utilization) would be affected. Climate change would add to the burden of developing countries already faced with serious food insecurity problems and it would exacerbate them.

Many of the issues at the forefront of the Doha Round trade negotiations will assume new relevance considering climate change. Dealing with food security is not new to the trading system, and safeguard mechanisms exist to deal with an influx of imports and collapsing prices for domestic producers. Whether new special safeguard mechanisms are needed has been the subject of much debate in the Doha Round, but climate change underscores their relevance. It also underscores the need to help developing countries deal with food and energy price increases.

Also relevant to volatile food supplies and food and energy prices are differential export tariffs and export prohibitions. The former are disciplined by WTO Agreements, but some countries feel that the latter need to be limited to cases where countries act to prevent or relieve critical shortages, and applied on a temporary and non-discriminatory basis.

Given current projections, an open trading regime for food and agriculture will be vital for global food security in that it can allow for increased productivity in some regions to offset - via trade - climate-induced constraints in other regions. However, it would be unwise to believe that trade alone is a sufficient adaptation to climate change.

Mitigation strategies examined: biofuels, biotech and nitrogen fertilizer

Climate change mitigation measures that will affect food production and agricultural trade, as well as food security, involve emissions reductions from many sources. The following section reviews mitigation measures related to biofuel production and subsidies, biotechnology and intellectual property protection, and how reducing emissions from fertilizer production could negatively affect global productivity and food security.

Biofuels: Ambitious biofuel mandates in both the European Union and the United States were created in part to act as a climate change mitigation tool by substituting biofuels for fossil fuels in transport fuels. In time, cellulosic feedstocks and other processes and crops are projected to substitute current biofuel feedstocks, but existing capacity using present agricultural feedstocks (rapeseed, maize, canola, sugarcane, soy, palm oil) will likely be in production for the next 20 years.

The significance of biofuels in mitigating climate change is currently the subject of much research involving complex life cycle analyses and questions surrounding indirect land-use change caused by biofuel development and other factors increasing global demand for arable land. Biofuels have also been blamed for hiking up food prices and contributing to food insecurity. In addition, the extent to which biofuel production distorts agricultural production and trade systems has yet to be definitively assessed.

Most governments have more recently become more cautious in their approach to biofuels. Overall, development has been scaled back due to the global economic recession and a growing portfolio of other renewable energy supplies.

Biotech: Three aspects of agricultural biotechnology are relevant to tradeoffs between climate change mitigation and agricultural trade: the potential of biotechnology to intensify production of food and biofuel on existing agricultural land (and thus reduce pressure to develop additional land for agriculture); the restrictions on trade that apply to the technology; and the implications for food security of the technology transfer required by the climate change agreement.

Many kinds of new technologies will be important to mitigating and adapting to climate change, agricultural biotechnology among them. New traits include pest and drought resistance and carbon sequestration, and varieties to produce increased yields and survive on marginal lands.

However, biotechnology dissemination has been controversial and limited by demands for extensive product labeling and tracing, and by environmental concerns requiring an extensive and complex international system of approvals and controls under the Biosafety Protocol to the UN Convention on Biodiversity. Whether governments can be encouraged to find ways to monitor and enable biotechnology without detracting from their mitigation potential is an important question for climate change mitigation.

To what extent biotechnology developers will be called on to transfer these technologies is an issue yet to be discussed. Protection of intellectual property did not become an international trade obligation until the completion of the Uruguay Round Agreement. In the climate change context, transfer of technology is critical to implementation of widespread and effective mitigation and adaptation, and it is an obligation under the Convention.

Nitrogen fertilizer: Reducing emissions related to the production and use of nitrogen fertilizer will inevitably increase its cost. This will have important implications for agricultural producers in developed and developing countries alike, and for existing patterns of trade in fertilizer. The dilemma is that although use of, and emissions from nitrogen fertilizer may decrease, so might crop yields. This would come at a critical juncture when increasing crop yields is vital to global food security for increased populations.

It is not, however, simply a food production vs. climate change mitigation dilemma. Since land-use change is such an important contributor to climate change, the question may also be whether intensifying agricultural production with the use of fertilizers and thus averting land-use change is a more effective mitigation tool than reducing emissions from fertilizer production, which may lead, in turn, to stagnant yields and pressure on forests and grasslands.

The right balance will have to be struck: intensification of agricultural productivity is a key component for meeting food security needs and climate change mitigation. Fertilizers should not be priced out of reach for agricultural producers, yet their use must become more sophisticated. Good fertilizer practices, including adjusting fertilizer rates to crop demand and synchronizing application to crop uptake, can reduce fertilizer use without negatively affecting yield. In the long-term, agricultural production is expected to rise in response to high prices and technology enhancements, but there will be limited ability to expand planted area, and inputs - particularly tied to energy costs - will increase in price.

Climate change mitigation and trade rules

A number of climate change mitigation policies are potentially affected by trade rules. Among these, some may also have implications for agriculture trade, food security and development.

Border taxes to deal with competitiveness and leakage: National mitigation measures that make the production of carbon-intensive products more expensive in the domestic market and therefore less competitive relative to imports may cause such production to move to other countries without mitigation measures. In order to counter such “leakage,” countries may seek to impose measures on imports. More specifically, countries implementing a carbon tax may opt to impose border tax adjustments, and those implementing a cap and trade system may impose corresponding allowance adjustments at the border. Without international agreement on climate policy, the potential for border tax adjustment to become the focus of WTO litigation is relatively high.

Border tax adjustments in the agricultural context could focus on the most carbon-intensive or greenhouse gas-emitting parts of the sector, with implications for agricultural chemical and fertilizer production, or livestock.

Standards and labeling schemes: Standards and certification systems are important tools in climate change mitigation and adaptation, but their use, particularly by governments, is somewhat vulnerable to interpretation of WTO rules.

The status of standards as international or national, public or private, and voluntary or mandatory, will influence their uptake and use. Standards and labels have assumed new significance in the WTO context as a source of non-tariff barriers. This is particularly relevant to the food and agriculture context, where private sector standards systems used by large retailers now dominate in some sectors of the global produce market.

The challenge of creating viable standards for use in a global climate change context should reinforce the utility of existing WTO disciplines requiring that they be transparently developed and applied.

Standards and certification systems have added value in agriculture and forestry because they can unite a number of disparate producers in long global value chains in adherence to generally acknowledged best practices. If they are suitably tailored, they can also provide a basis for award of offsets, or tax rebates and other benefits from reduced emissions. However, they can discriminate against producers in developing countries and small producers without abilities to generate data necessary to provide a basis for certification, and they can be expensive to join and costly to maintain.

Environmental payments: Environmental payments have significant potential to address climate change mitigation. The negotiations on (Reduced Emissions from Deforestation in Developing Countries) REDD are based on the proposition that payment for avoided deforestation can sequester significant amounts of forest carbon and avoid the release of existing carbon stocks. Agriculture has been discussed somewhat differently in the international climate change negotiations, but will clearly be a significant source of soil carbon sequestration in some national climate mitigation schemes.

Payments for forest and soil carbon sequestration, if granted by governments, could be viewed as subsidies in the WTO context. If so, they could be subject to trade disciplines. The situation could be different for a voluntary market for carbon offsets. In this case, the carbon offsets - likely viewed as financial instruments - could be covered by the General Agreement on Trade in Services (GATS).

Assessing tradeoffs: resolving conflicts and creating opportunities

In principle, there are no conflicts between trade and environmental protection, including climate protection. Yet there is considerable apprehension that climate change-related measures can distort trade, and alternatively, that trade rules could stand in the way of greater progress on climate change.

In the short term, opportunities for conflict exist in terms of the political choices countries have made and are preparing to make to stabilize emissions through regulatory regimes, taxation and other instruments.

In the longer term, trade rules that do not allow internalization of the cost of carbon would negatively affect climate change mitigation. Both the future climate and the future trade negotiations provide ample operating space for eliminating confusion and streamlining coherence in this regard.

Using the trade agenda to assist in climate change mitigation and adaptation

The objectives of the current trade negotiations in the realm of agriculture - reducing and eventually eliminating tariffs, phasing out export subsidies and trade-distorting domestic support - would also serve the climate change agenda well. Yet, many issues would need to be resolved in order for the negotiations to yield climate-friendly results.

Considering the predictions that developing countries will experience particularly severe effects from climate change, it could be argued that lower tariffs in these countries would be consistent with climate change adaptation. As North-South trade in agricultural products is likely to become important for food security, this should be enabled without high costs in the form of agricultural tariffs. Issues surrounding developing country tariffs and import safeguards are highly controversial, however.

Besides the agriculture negotiations, an expansion of the mandate of the Environmental Goods and Services negotiations to include all biofuels would advance more efficient and resource-friendly biofuel production. Yet, these negotiations are fraught with disagreement.

In the future, climate change mitigation policies will include measures designed to internalize the environmental costs of resources. The question may arise whether tariff structures should be tailored towards internalizing the cost of carbon and greenhouse gas emissions so that countries assess higher tariffs on carbon-intensive goods than on goods with lesser carbon footprints.

Also central to existing trade policies are domestic subsidies (for both production and export performance) in agriculture, biofuels and forest products. WTO members have committed to reduce them, yet climate change will undoubtedly exacerbate the need to provide domestic support for agriculture and biofuels.

Jane Earley is Senior Partner, Earley & White Consulting Group, LLC