Climate Leadership and Trade Agreements: From Competitive Disadvantage to Mutual Benefits of Transatlantic Technology and Innovation Exchange

September 27, 2013

On September 27, 2013, AGI hosted a seminar on “Climate Leadership and Trade Agreements: From Competitive Disadvantage to Mutual Benefits of Transatlantic Technology and Innovation Exchange” with AGI Fellows Dr. Reimund Schwarze and Ulrike Will. Although negotiations on the Transatlantic Trade and Investment Partnership (TTIP) have been underway, environmental and climate concerns have not been central to the on-going discussions. This seminar presented different ideas to link climate issues to the trade negotiations, including standards harmonization, tariff reductions, and border adjustments (BA).

Environmental deterioration and climate change has long been a concern for the international community. The first best—and most effective—solution for climate problems are multilateral ambitious greenhouse gas reduction aims. However, climate negotiations within the United Framework Convention on Climate Change (UNFCCC) stagnate. Within multilateral trade negotiations, namely the Doha Round of the World Trade Organization (WTO), environmental agreements are not successful either.

Despite its limited effectiveness, it is worth discussing unilateral climate protection (a second best solution). However, the implementation of higher industrial standards or market-based climate mechanisms has been difficult on the unilateral level as well. Countries fear that a unilateral upgrade of environmental standards will compromise their competitive advantage in industrial production. For energy-intensive industries, unilateral domestic environmental policy changes could result in outsourcing production to countries with lower environmental standards (carbon leakage effect). So far, the carbon leakage effect is reduced by exemption of carbon-intensive industries of climate protection, which is counterproductive for the climate protection aims.

A unilateral BA could be one option to avoid the carbon leakage problem without compromising the climate protection aims and therefore, provide the necessary incentive for more climate protection. BAs can be imposed on imports applying domestic climate regulation (e.g., a tax) on foreign products or on exports rebating products from this regulation. However, such trade restriction faces political and WTO law problems. The possibility of disguised protectionism can create an atmosphere of distrust in international negotiations, within both the UNFCCC and WTO.

To avoid these problems the linkage between climate interests and trade liberalization can be an option. This approach might refer to the current TTIP negotiations but also to free trade agreements in general.

At first, the impact of free trade agreements on the climate must be analyzed, i.e., without any additional climate regulation in it. Given this baseline it can be said which impact the additional climate regulation might have. The biggest advantage of free trade agreements for climate protection is a higher competition able to lead to more efficient production and to technology exchange. The biggest challenge for the climate is the growth of production probable to go hand in hand with higher greenhouse gas emissions. It depends on the net effect of a free trade agreement if an additional climate regulation is useful (positive list) or if climate issues should be taken out (negative list).

The seminar discussed three instruments where climate (or other environmental) issues can be interrelated with trade liberalization: standards harmonization, selective tariff reductions, and bilateral BAs.

If both states agree upon a bilateral BA, this can ensure financial compensation for climate standards that are not met without the BA being challenged at the WTO dispute settlement body. The difference to the unilateral BAs would be that the scope of the BA is limited to two countries, which might make it easier to agree on the instrument. If the BA is part of an agreement it is less probable that it is challenged by one of the members. However, BAs are not at all attractive for the state that pursues the low climate protection level. Therefore, it is only likely to be accepted if the state with the higher climate protection interest provides good incentives to accept the BA. This incentive is not very likely to be given if the BA is higher than the existing tariff rates. As tariffs, at least between industrialized countries, are already low, the selective tariff reduction for green production (or the selective tariff maintenance for climate-intensive goods) is also unlikely to have a big impact on climate protection.

Harmonizing standards appears to be the most attractive instrument to connect the climate agenda with trade liberalization. First, by synchronizing environmental standards, participating countries will not challenge legal requirements on non-discrimination rules.  Second, embedded complementary rules of Research and Development sharing facilitate technological transfer and innovation in environmentally-friendly technologies. Third, the harmonization of standards can extend to trade partners beyond the transatlantic trade liberalization negotiation, thus creating incentives for other international partners to voluntarily upgrade to higher climate standards. Although implementing higher standards across the board incurs higher costs for all participating partners, technological innovations and market competition help elevate efficiency in productivity in similar developmental conditions. Thus, it is feasible for OECD countries to engage in trade liberalization, with which higher environmental standards may apply.

The conclusion of the seminar was that as long as the growth effects of trade liberalization do not destroy the climate protection effect, the harmonization of standards has the highest potential to result in a co-benefit for climate protection interests and trade liberalization. If trade liberalization leads to high net growth of greenhouse gas emission it might be better to preserve the states’ right to have its own climate protection standards.

DATE: Friday, September 27, 2013
TIME: 12:00pm – 1:30pm
1755 Massachusetts Avenue, NW, Suite 700
Washington, DC 20036

Support for this event was provided by the German Federal Ministry of Education and Research.