Trade and Climate Change: Challenges and opportunities for developing countries

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Interaction between trade and climate change regimes has received much attention lately. While I can think of a number of “climate-positive” reasons for exploring synergies between the two regimes and for aligning policies that could stimulate production, trade, and investment in cleaner technology options, much of focus instead has been on using trade measures as weapons in the global climate negotiations.  This stems mainly from competitiveness concerns in countries that are now racing to reduce GHG emissions to meet Kyoto 2012 targets and beyond and in the US primarily to allay domestic fears of a tightening climate regime. These concerns have led to proposals for tariff or border tax adjustments to offset any adverse impact of capping CO2 emissions. This also has roots in the fear of leakage of carbon-intensive industries such as steel and chemicals to non-implementing countries.

The recent Waxman-Markey bill introduced in the US Congress provides for trade sanctions against countries that do not impose controls on carbon emissions by levying tariffs on certain goods from those countries. The provisions are similar to the earlier bills introduced in the US Senate by Senators Lieberman and Warner and by Senators Bingaman and Specter. If passed in their current form, these bills would require foreign manufacturers and importers to pay for and hold special allowances to “cover” the carbon contained in U.S.-bound products.  The requirement for such purchases would be an alternative to offsetting border measures in the form of tariffs.

Similarly, the European Commission’s plans to tighten Europe's greenhouse gas reduction regime also recognizes the risk that new legislation could put European companies at a competitive disadvantage compared to countries with less stringent climate protection laws, such as the US, China and India.  To address this, the draft legislation includes a "carbon equalization system" that could take the form of an obligation for foreign companies doing business in Europe to obtain emissions permits alongside European competitors.

The issue of imposing trade sanctions on environmental grounds has been much discussed in economic and legal spheres.  The WTO permits members to adopt measures to protect the environment and human health and life as long as such measures comply with GATT rules.  But legal experts remain divided on whether climate-related measures proposed by the EU or the US would be compatible with international trade regulations, as the WTO so far has not come out with clear provisions on the subject.  Some suggest that the offsetting border provisions in the US and EU bills have been carefully crafted to avoid—or survive if necessary—any challenges in the WTO dispute settlement process. 

A particularly thorny issue in assessing the compatibility of trade measures with climate change policy may arise with the application of PPM (Processes and Production Methods)-based measures.  These measures may be targeted at the way products are produced, as opposed to their inherent qualities.  There is still no clear cut WTO ruling on the use of PPMs.

Nonetheless, both the EU and the US proposals could have significant implications for manufacturing trade in developing countries—especially what can be classified as energy-intensive.  Developing countries should be prepared both domestically and externally as the economic and regional impacts cannot be understated. 

The trade and environment debate is now strongly in the climate change arena, mainly in the context of trade in clean energy technologies and on the use of trade measures to combat competitive pressures in developed country industries.

Unfortunately, developing countries so far have shown reluctance to engage the two regimes for the fear of one overwhelming the other.  They fear that the global trade regime should be left alone as there is a danger that it may be used as a proxy for promoting developed country environment/climate agenda which could compromise their domestic interests.  They have yet to openly recognize that the global climate change awareness and discussions surrounding clean energy technologies also offer an incredible economic opportunity for them as they emerge as a major producers and exporters of these technologies.  The developing country response to recent proposals in the WTO to liberalize trade in clean-technologies has been lukewarm at best.

There is imminent danger that trade sanctions of the variety proposed in the US and EU could become real in the face of a non-agreement in Copenhagen on a future climate regime. It is thus in the interest of the developing countries to actively participate and engage in the WTO and other forums such as UNFCCC where trade and climate issues are being debated to ensure that their interests are not compromised.

To read more about trade and climate change, you could try the overview of " "International Trade and Climate Change: Economic, Legal, and Institutional Perspectives," a recent World Bank book that I worked on along with other colleagues. Other useful links are the IISD and UNEP websites on this subject.


Muthukumara Mani

Lead Environmental and Climate Change Economist

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