Climate value must be built into all decisions on trade

Climate value must be built into all decisions on trade

By Steve Valk

As the world strives to meet the challenge of reducing greenhouse gas emissions enough to keep the increase in temperature from exceeding the 1.5°C threshold, international trade has the potential to be the driver of best-case outcomes for people and for the planet. Decisions currently being made between trading partners could make climate action an everyday reality or make it impossible to limit global heating to 1.5ºC..

Thankfully, the role of trade in abating the impact of climate change is now apparent at the highest levels of international negotiations. A statement released following the recent G7 Trade Ministers meeting in Italy had this to say:

“We believe trade and environmental policies should be mutually supportive and contribute to sustainable development and to addressing the triple planetary crisis of climate change, biodiversity loss and pollution, whilst promoting a free and fair multilateral rules-based trading system.”

At the heart of these discussions is the realization that trade affects the state of our climate, and the state of our climate affects trade, the global economy and much more — food security, health, political stability, migration. The inescapable conclusion is that climate value must be embedded in every decision we make regarding trade.

Let’s pull back, then, to look at the bigger picture of the nexus between climate and trade and work our way toward the tools we can employ to make trade more climate-resilient.

Climate disruption can thwart humanity’s highest aspirations

In 2015, the United Nations adopted a blueprint for peace and prosperity known as the 2030 Agenda for Sustainable Development. The Agenda lists 17 Sustainable Development Goals (SDGs) all nations agree to achieve at home and in collaboration, by 2030. Climate change is slowing progress on every goal. I won’t go into all 17 objectives, but let’s examine a few key goals and how climate instability impedes achieving them.

Goal 1: End poverty in all its forms everywhere. Even without the existence of climate change, ending poverty worldwide is a daunting task. Factor in the impact of extreme weather disasters getting worse because of climate change, and this task becomes herculean. First, the heat. Most of the world’s poor work in manual labor outdoors, but record shattering, life-threatening heat waves — getting hotter and more prolonged because of climate change — make it unsafe to work outdoors for long periods of time. Then, there are floods. The poor live in the most modest of dwellings that are often wiped out by excessive rainfall caused by a number of climate-related factors — warmer air that holds and releases more water and changing weather patterns that cause storms to stall over a given area.

Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture. One in three people worldwide suffer from moderate to severe food insecurity. As the World Food Program states, “Climate shocks like droughts and floods kill crops and livestock, degrade soils, damage infrastructure and drive up food prices.” Food production is affected by climate change, and it also contributes to climate change by releasing heat-trapping gases into the atmosphere. Slowing and reversing this destructive cycle, as the World Bank’s William R. Sutton points out, will require the world to adopt climate-smart agricultural practices. 

Goal 3. Ensure healthy lives and promote well-being for all at all ages. In addition to the physical danger of extreme temperatures — heat stroke, kidney failure and more — climate change is causing an increase in mosquito-borne illnesses that were once confined to tropical areas and are now spreading to subtropical regions. As the Bill & Melinda Gates Foundation points out, “Mosquitoes thrive in warm weather, and the world is getting warmer, which can extend disease transmission seasons.” Floods brought on by excessive rainfall can increase the transmission of water-borne diseases, such as typhoid fever, cholera, leptospirosis and hepatitis A.

More and more attention is now being paid to the linkage between climate change and the SDGs. At the High Level Political Forum on Sustainable Development recently held in New York, the UN Department of Economic and Social Affairs released a report, “Harnessing Climate and SDG Synergies.” A key finding for the report is that “climate and development objectives must be effectively integrated financially and budgetarily across sectors.”

Introducing climate value in trade

Global trade, if done the right way, can lift the economies of developing countries and help the world to achieve the peace and prosperity we seek through the Sustainable Development Goals. Given that climate change impedes progress toward those goals, it stands to reason that we should make trade part of the solution to the climate crisis. With every decision we make on trade, the question must be asked: Does this make things better or worse for the climate?

Trade can affect the climate — putting more greenhouse gases into the atmosphere, or less — in two ways: By the carbon embedded in the goods that are traded around the world, and by the means with which we transport those goods.

While many industrialized countries have implemented environmental standards to make their manufacturing sector cleaner and reduce carbon emissions, those standards introduce an added cost for goods. Some companies, in order to reduce costs and be more competitive in the marketplace, move their operations to countries where such standards are less stringent or non-existent (and where labor is much cheaper). This practice is known as “offshoring.” By offshoring their production, these companies are essentially offshoring their carbon emissions

The issue of embedded carbon came up in a speech this spring from John Podesta, Senior Advisor to the President for Clean Energy Innovation and Implementation:

“And when you seriously account for the emissions embodied inside tradable goods… the emissions from the production processes that create the commodities and manufactured products that we buy and sell on the global market… then traded goods account for about twenty-five percent of all global emissions.”

In his speech, Podesta announced that the Biden administration is setting up a White House Climate and Trade Task Force to promote the trade of climate-friendly goods. The task force will have three focus areas:

  • A climate and trade policy toolkit to address carbon leakage, carbon dumping, and embodied carbon in general.
  • Ensure the gathering of “credible, robust, and granular data” to implement smart climate and trade policies.
  • Identify what more the U.S. can do to further position producers to thrive in the new race-to-the-top environment. 

The establishment of the task force is a welcome development, as we find ways to encourage manufacturers throughout the world to clean up their act so that we don’t play whack-a-mole with climate pollution. I’ll discuss some of the tools to help accomplish this a little later.

As mentioned, another way global trade impacts climate change is through the transportation of goods. Shipping accounts for 2 percent of the world’s carbon emissions, according to the International Energy Agency. These emissions come from container ships, the vast majority of which burn oil-based fuels for propulsion. Last year, the International Maritime Organization adopted a strategy to reduce GHG emissions to net zero by 2050. Once ships reach port, of course, goods are transported by rail and truck, and electrification of those modes of transportation will be necessary to fully decarbonize the “last mile” of the shipping process.

Tools to secure climate value in trade

Carbon Border Adjustment Mechanism: Money talks, as they say, and the best way to decarbonize goods in international trading is to provide an economic incentive. The European Union currently has a price on carbon through its Emissions Trading System, with the objective of reducing emissions from energy and the production of products. Late last year, the EU began implementing a Carbon Border Adjustment Mechanism that will evaluate the carbon content of certain goods — cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen products. Once a baseline is established for the carbon in Europe’s goods and the goods coming from other countries, the EU will impose a levy on imports that are dirtier than those made in Europe, thereby maintaining a level playing field for European manufacturers. This will provide a strong incentive for other countries to either price carbon or clean up their manufacturing processes. Canada, which has a carbon fee and rebate pricing system, is considering a CBAM policy

PROVE IT Act: Legislation is making its way through Congress to lay the groundwork for a CBAM in the U.S. The PROVE IT Act, which has already been passed by the Senate Environment and Public Works Committee and was recently introduced in the U.S. House, would assess the carbon content of certain products — much like those covered by the EU’s CBAM — made in the U.S. and in other countries. Once that data is collected, the next step would be to impose a fee on imports that are dirtier than U.S. products, or to negotiate waivers on CBAMs where data shows the U.S. is measuring up to others nations’ clean production.

Other tools: In addition border adjustments, the World Trade Organization has identified 10 Trade Policy Tools for Climate Action:

  1. Trade facilitation: Speed up customs clearance, reducing GHG emissions associated with inefficient customs procedures and road freight by adopting trade facilitation measures.
  2. Government procurement: Drive lower carbon emissions by using government procurement as a tool.
  3. Regulations and certification: Use international standards to avoid regulatory fragmentation when upgrading energy efficiency regulations.
  4. Services: Accelerate mitigation efforts, support adaptation and assist disaster recovery by reviewing domestic regulations and restrictions for providers of climate-related services.
  5. Import tariffs: Help accelerate the transition to a green economy by rebalancing tariff policies that may inadvertently benefit carbon-intensive sectors.
  6. Subsidies: Unlock additional resources to assist climate action by reforming environmentally harmful support measures.
  7. Trade finance: Support the diffusion of climate-related technologies and equipment by facilitating and increasing trade finance, such as loans and guarantees.
  8. Food and agriculture: Improve how food and agricultural markets function, while contributing to climate action, by easing trade in food.
  9. Sanitary and phytosanitary measures: Protect economies from the spread of disease and pests exacerbated by climate change by strengthening sanitary and phytosanitary systems.
  10. Internal taxation and carbon pricing: Reduce policy fragmentation and compliance costs by improving coordination of climate-related, non-discriminatory internal taxes, including carbon pricing and equivalent policies.

Cooperation is key

In the movies, we often see scenarios where the world is faced with an existential threat like an asteroid on a collision course with the Earth (“Armageddon”) or an attack from alien invaders (“Independence Day”). In those situations, the nations of the world come to realize that their petty differences pale in comparison to the extinction of humanity. They set aside those differences and cooperate with each other for the greater good.

Climate change has the potential to be an extinction event, but because it is unfolding on a lengthy timeline, governments kick the can down the road in order to avoid civilization-wide transformation needed to address the problem. However, we’re running out of road, as evidenced by the climate-related disasters that are piling up at an ever-quickening pace and climate costs that financial regulators project could lead to economic collapse. We need to move beyond zero-sum brinkmanship and allow cooperative climate action to improve prospects for all of us.

Cooperation among nations is the key to holding climate change at bay and preserving a livable world for all. One of the provisions of the Paris Climate Agreement, Article 6.8, calls for cooperative implementation of measures for the “overall mitigation of global emissions.” Those measures include but are not limited to…

  • Valuing investments in nature restoration through green finance and incentives for sustainable land use and incubation of new conservation-enabling enterprises—for instance supporting regenerative food production”
  • Non-market approaches” (policies that drive cooperative decarbonization, or OMGE, without using emissions trading), including carbon taxes, tax reform, border adjustments, financial regulations, transparency and reporting requirements, clean energy standards, bilateral trade arrangements to accelerate deployment of clean energy systems, and development finance conditionalities.

Trade is the exchange of value between nations, and so it carries huge potential for spreading solutions that will help stop the existential threat of climate change. Let’s not squander that potential.