Navigating trade and the role of WTO at COP28

The role of trade and trade policy is increasingly being considered in discussions to further climate action. Trade will be in the spotlight at the upcoming UN climate conference in Dubai, with the World Trade Organisation (WTO), co-leading Trade Day, marking the first time that trade will feature as a theme in the conferences.

The WTO, which regulates and facilitates international trade, will co-lead this Day along with host country, the United Arab Emirates on December 4, at the Conference of Parties to the UN Framework on Climate Change (COP28) being held from November 30 to December 12. The WTO came into existence in January 1995, a little over two years after the first Earth Summit in Rio de Janeiro in Brazil in June 1992.

In addition to the Trade Day, the WTO Secretariat will also host the first Trade House Pavilion at the COP28 which will be a dedicated space for discussions and solutions on how trade can help meet climate goals.

The WTO has in fact granted exceptions for environmental issues which means members can adopt trade-related measures aimed at protecting the environment and “these measures are not necessarily discussed at the WTO. And those that come up for discussion are not necessarily raised as formal disputes; they are often raised and discussed at the Committee level.”

In 2022, the global trade governing body dedicated its annual publication, the World Trade Report, to climate change in which it explored interlinkages between climate change and international trade. The report highlights how climate change is reshaping countries’ economic and trade prospects. It also makes a case for how trade can be a force multiplier for countries’ adaptation efforts by reducing costs and increasing impacts. Trade can reduce the cost of mitigation and speed up the low-carbon transition and the creation of green jobs, notes the report, adding that “International trade cooperation can make climate actions more effective, and the low-carbon transition more just, by minimising trade frictions and investor uncertainty.”

Climate change also found frequent mention in the 2023 annual report of the WTO, where is the term was used at least 119 times. The WTO director general (DG), Ngozi Okonjo-Iweala is quoted in the report stating that trade is the missing part of the puzzle for achieving more ambitious and effective climate action.

Experts that have been observing the climate COP have mixed opinions about trade being on the climate agenda.

In a recent publication by the Boston Consulting Group (BCG), the Associate Director, Tim Figures, is quoted as saying, “The fact is, the world cannot decarbonise without the help of the global trading system. Many of the things we need—like lithium for batteries or rare earth minerals for wind energy—will be widely available only through international collaboration and trade.” Talking about why trade is on the COP28 agenda, he points out another trend. Several countries are implementing policy measures to promote or support local industries in the name of climate mitigation and that “…tension between promoting fair trade and preventing carbon leakage plays out” in these policies, he writes. These actions are creating tension among countries, he indicates.

Expressing displeasure about the trade organisation’s involvement on a platform for climate decisions, Abhijit Das, an expert in international trade and former head of the Centre for WTO Studies at the Indian Institute of Foreign Trade, told Mongabay India, “Many developing countries, including India, have been at the forefront of arguing that environmental issues are better addressed on specialised platforms like the UNFCCC and various multilateral environmental agreements, rather than within the WTO.” Das highlighted that this approach is motivated by the concern that developed countries may use the WTO-environmental linkage to restrict the elbow room and limit the space available for developing countries to pursue catch-up industrial policies.

Regarding the Trade Day on the COP28 agenda, Das asserts that the WTO is a member-driven organisation and the event does not have the endorsement of WTO membership. It is a unilateral decision made by the Secretariat of the WTO. The membership was not consulted on this issue, he says.

Environment and emerging challenges

Ships navigating the Panama Canal — pivotal for 40 million tonnes of goods and 5% of global maritime trade— have currently been encountering six-day delays amid the Canal’s worst drought in 143 years. These delays have affected some 16 million tonnes of throughput so far. This is one example of how trade is being affected by climate change – the drought is an immediate effect of the El Niño climate pattern, which makes Panama hotter and drier, notes a media report, but scientists suggest that climate change might be making dry periods last longer and raising temperatures in the region.

The climate related challenge has also increased the trade of environmentally friendly goods, and also sees barriers imposed by countries. United Nations Conference on Trade and Development (UNCTAD) estimates indicate a 4% rise in trade for environmentally friendly goods—those designed to use fewer resources or cause less pollution—reaching a record $1.9 trillion in the latter half of 2022. UNCTAD has recently documented more than 1,000 non-tariff measures related to climate change implemented by approximately 100 countries.

The WTO’s 2022 annual report states that removing barriers to trade in environmental products can contribute to addressing climate change. It claims, “Eliminating tariffs and reducing non-tariff measures on some energy-related environmental goods and environmentally preferable products could increase global exports in these products by $109 billion (5%) and $10.3 billion (14%), respectively, by 2030.” However, uncoordinated trade-related climate policies could give rise to trade tensions and heighten marketplace uncertainty, it asserts.

The trade tension is visible, particularly with a new policy the European Union has proposed- the Carbon Border Adjustment Mechanism (CBAM), a policy that charges a tariff on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. India has expressed concern at the WTO about the growing use of environmental measures as protectionist non-tariff barriers, such as CBAM.

Responding to the evolving scenario from the WTO perspective, Shantanu Singh, a Public International Law lawyer, says, “According to the legal text of the WTO, measures aimed at protecting the environment can be excepted and WTO members are free to adopt policy measures subject to those conditions, but a longstanding mandate for discussions within the WTO’s Committee on Trade and Environment has been to keep trade and environmental policies mutually supportive. With CBAM and numerous autonomous measures by several countries, the focus of the discussion in the Committee has increased, and it is taking on a different shape. Several countries are expressing concerns about autonomous measures, and the majority of these concerns are that these measures may not be compliant with WTO law and the principles of the UNFCCC.”

Carbon Border Adjustment Mechanism

The EU proposed the Carbon Border Adjustment Mechanism (CBAM) in 2021. The mechanism is to protect local industry that has been following the Emission Trading System (ETS), launched in 2005 by the EU. ETS was launched to ensure that industries operating within its borders align with emission reduction goals. It allows companies to trade emissions to meet their targets. However, the EU is concerned that its current approach may disadvantage local industries, potentially leading to carbon leakage—industries moving to places with fewer regulations.

CBAM entered its transitional phase on October 1, 2023, during which industries will have to report their emissions. Once the permanent system begins on January 1, 2026, importers will need to report annually the quantity of goods imported into the EU the previous year and the greenhouse gases associated with their production. This mechanism places a charge on carbon-intensive products imported into the EU, ensuring that the carbon cost of imports matches that of domestically produced goods. Initially, it will apply to specific items like cement, iron and steel, aluminum, fertilisers, electricity, and hydrogen—industries at the highest risk of carbon leakage due to their carbon-intensive nature.

Describing CBAM as a breakthrough, if not an actual departure from the past, WTO Deputy Director General Jean-Marie Paugam stated while speaking to a European Economic and Social Committee public hearing in 2021, “It is the most important announcement on climate change from the perspective of the trading system.”

There are other countries that are in the process of announcing measures like CBAM. The UK is contemplating, Australia is seeking industry input on CBAM, Taiwan passed a “Climate Change Response Act” with CBAM elements in January, and the USA is exploring the potential for a carbon border tax.

However, these unilateral measures have not been well accepted, especially in developing countries. On November 7, while talking to industry, Union Minister of Commerce & Industry Piyush Goyal stressed upon fair treatment for Indian producers, opposing unfair taxes, especially those impacting the steel industry, amid concerns about the CBAM. India is talking to the EU about bringing back the money it collected as a carbon tax from Indian companies with the claim that it would help India meet its climate goals.

China has asked for multilateral negotiations over CBAM three times in 2022. In the latest communication on November 10, it expressed concern that some measures are being unilaterally rolled out in response to climate change without sufficient evidence, discussion, or consensus on key issues.

Another conflict relates to the carbon price. Every country has a different carbon price. In this scenario, how will it affect the CBAM mechanism? Responding to this, Singh mentioned that currently, there is no multilateral mechanism to determine a global carbon price. Therefore, the WTO has been trying to get involved by developing tools to determine equivalence. The WTO’s 2022 report highlights this too.

Expectations from COP28

Each year, the parties to the UNFCCC convene in Bonn, Germany, to negotiate crucial climate change matters, shaping the agenda for the upcoming COP. During this year’s meeting, several countries voiced concerns about CBAM, saying that certain developed nations are implementing unilateral coercive measures under the guise of climate action. It gives a glimpse of how COP28 is going to deal with the trade issues.

Experts that Mongabay India spoke to say that as several developments unfolding in recent years, trade will inevitably cast its shadow over COP28, even though it won’t be officially addressed in negotiations.

While talking to Mongabay India, an adjunct research scholar at the Center on Global Energy Policy at Columbia University SIPA, Sagatom Saha added, “The WTO seems ill-suited at the moment to encourage sustainable trade or discourage trade barriers embedded in green industrial policies. I hope the increasing intersection of climate and trade policies highly restarts the process of WTO reform. I also expect the WTO to reclaim some space with an announcement of its own around accounting methodologies.”

“On COP28, I expect the G7 Climate Club to be launched, which hopefully can prove an effective coordinating mechanism on climate tariffs, green subsidies, supply-chain coordination, and other pressing issues,” he added.

The G7 is an informal forum of seven leading industrial nations and democracies: Canada, France, Germany, Italy, Japan, the UK and the US. It aims to make a climate club that works for bold climate goals by mutual cooperation.

However, Abhijit Das says that there is likely to be some articulation of how trade can contribute to reducing environmental problems. But it might not be a hard obligation. It might be worded in soft language. “This, of course, assumes that developing countries like India and Asia, Africa and others will negotiate hard and prevent any outcome, which ostensibly is for protecting the environment, but in reality is about developed countries securing market access in developing countries,” he adds.

Banner image: Trucks line up for unloading at the Tanjung Priok port. Jakarta, Indonesia. Photo by Murdani Usman/CIFOR on Flickr.