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How global trade can become more compatible with the climate regime

Policymakers should change some rules – and make more use of others. This follows from an agenda paper by experts from twelve countries in the top journal Science. From Lund University, we find researchers from the Faculty of Engineering (LTH) and School of Economics and Management (LUSEM).

– Published 28 June 2022

Containers in a harbour.
In the journal Science, an international research team – with several researchers affiliated with Lund University – has now shed light on how trade policy can help the climate. Photo: Unsplash

Senior researcher Michael Jakob of the Berlin-based climate research institute Mercator Research Institute on Global Commons and Climate Change (MCC), has led a team of experts in analysing how the global trade regime can become more compatible with the climate regime.

Currently, the EU is introducing Carbon Border Adjustment Mechanisms (CBAM) as a measure to both protect domestic industry and to “incentivise” EU's trading partners to strengthen their climate ambitions.

”We argue that this approach needs a more diplomatic focus and my contribution – together with Valentin Vogl and Marlene Arens – is the idea to develop ’Green Material Clubs’ that build much more on technical cooperation than carbon prices,” comments Max Åhman, Associate Professor in Environmental and Energy Systems Studies at the Faculty of Engineering (LTH), Lund University.

How trade policy can support the climate agenda

Michael Jakob is the main author of the Science article, as well as the editor of the book Handbook on Trade Policy and Climate Change. He has summarised the recent article in this way:

Border Carbon Adjustments (BCAs) as a basis for a Climate Club? We argue that countries need BCAs to enable ambitious domestic climate policies, but that BCA is not a sufficient incentive for club membership. 

Five ways in which trade policy can support the climate agenda:

  1. A diplomatic BCA agenda. Border Carbon Adjustments (BCAs) should be least trade-restrictive. Multilateral efforts to reach negotiated solutions should come first. If BCAs are applied, they need to be transparent with reference to purpose, data, default values, exemptions, revenue use, and review and phase-out criteria.
  2. Use the WTO to reform fossil fuel subsidies. The WTO can strengthen transparency of energy subsidies through improved notification by its members, counter-notification by other members, and by addressing fossil fuel subsidy reform in the Trade Policy Review Mechanism.
  3. Clear rules for settlement of renewable energy disputes. Local content requirements for renewable energy can increase domestic support for climate policy, but are also a barrier to diffusion. Temporary and adaptable local content requirements subject to regular assessment cycles are a compromise.
  4. An agreement on environmental goods. Progress could be started by removing small tariffs on clean goods and gradually tackling higher ones. This should also include non-tariff trade barriers, e.g. packaging and labelling requirements or technical standards and norms.
  5. Green materials clubs. A club could implement common green industrial policies. This could start with common long-term deep decarbonisation visions, later strengthened by support for research, development, and diffusion of technologies and infrastructure planning.

Up to now, these options to make the trade regime work for the climate have not been exploited. Growing urgency to transform the global economy towards climate neutrality could give new impetus for restructuring the trade regime in a climate-friendly manner.

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Authors from Lund University

  • Max Åhman

  • Astrid Kander
  • Magnus Jiborn
  • Valentin Vogl
  • Nicolai Baumert
  • Viktoras Kulionis
  • Marlene Arens.

More about the publication and the researchers in the Lund University Research Portal

More about the article in Science

In the renowned journal Science, an international research team has now shed light on how trade policy can help the climate.

The research team brings together the expertise of 33 experts from twelve countries, mostly from the fields of economics, law, and political science, who published a book on the subject in March. One of the participating countries is Sweden, with several researchers affiliated with Lund University contributing.

“Countries will need to carefully navigate between the desire to respect trade rules and the need to implement effective climate policies,” the article says.

This creates difficulties, for example, for the EU Commission's proposal to impose the rising carbon price in Europe on importers from overseas.

“Prior diplomatic efforts, even-handed application and transparent administration could substantially increase the chances of a border carbon adjustment regime to survive WTO scrutiny." Without it, there is a risk of carbon leakage, i.e. relocation of production and corresponding CO2 emissions to regions with less climate protection. This would both hinder efforts to protect the climate and impair prosperity in Europe.

Overall, the article concludes, the potential of the trade regime to advance climate policy under the umbrella of the WTO has not yet been fully exploited.

“The options discussed above will face political obstacles. Yet growing awareness of the urgency to transform the global economy towards climate neutrality could give new impetus for restructuring the trade regime."

Learn more: Addressing the architecture of global trade in the context of climate (MCC Berlin)