Written evidence submission from Friends of the Earth England, Wales and Northern Ireland (COP0002)
COP 26 and international trade
- Friends of the Earth England, Wales and Northern Ireland was established in 1971. We have local groups in around 130 neighbourhoods, and support more than 260 Climate Action groups. We are part of an international network of 75 national groups, counting over 2 million members and supporters globally. Friends of the Earth supports strong environmental standards and alternative approaches to trade, which put the needs of local communities and our environment at the forefront.
- International trade has large and ongoing impacts on our climate. These occur directly via the increased emissions associated with the facilitation of increased extractivism, consumption and movement of goods. They also occur indirectly, via the barriers international trade rules and investor protection mechanisms place in the way of domestic climate action.
- However, trade and investment have been largely excluded from debate during climate negotiations and G7 meetings, and the impacts of trade are not addressed by the Paris Climate Agreement. At a domestic level, the UK government has failed to publish a trade strategy, or to ensure cohesion between individual trade policy decisions, the UK’s net-zero goal and international climate commitments.
- This means that both internationally and domestically, trade and climate aims are placed in conflict. As things stand, the UK’s trade policy risks undermining COP objectives, particularly to “Secure global net zero by mid-century and keep 1.5 degrees within reach”.
- The UK is hosting climate talks this autumn, and COP26 president-delegate Alok Sharma has been clear that ambition and urgency are required – calling for all parties to come together to “do what is necessary to turn things around in this decisive decade”. If the UK aims to set the pace and tone of commitments, they must have immediate and tangible impact across policy areas historically neglected in – and neglectful of – climate action.
- The year following COP talks in November 2021 offers a time for the UK to consider how existing bilateral and multilateral deals might be updated to respond to the climate crisis, how best to include trade emissions in UK data, and how to introduce ambition into new trade deals. Internationally, COP provides a springboard from which nations should come together to evolve international trade and investment rules to support, rather than undermine, climate aims.
- We recommend that the UK government:
- Ensures individual trade and investment agreements explicitly support climate objectives.
- Commits to no Investor-State Dispute Settlement (ISDS) in future trade agreements, reviews all current UK ISDS exposure and takes action to suspend provisions or terminate relevant agreements.
- Brings an end to all support for fossil fuel projects overseas, and refocuses UK overseas financial support on the provision of transparent, targeted climate finance via the Green Climate Fund.
- Ends domestic policies that act as subsidies for fossil fuels within the UK, and pushes for other G20 nations to do the same.
- Supports a ‘climate waiver’ at the World Trade Organization, to ensure nations can take necessary climate action.
- Show leadership in meeting the Copenhagen goal of US$100 million in climate finance each year, and challenge other wealthy nations to do the same.
- Ensure that free trade agreements (FTAs) do not promote the outsourcing of emissions or lead to carbon leakage.
- Approach trade and investment from a climate-justice perspective.
- Use the year following November’s climate talks to develop a dialogue on climate and trade.
- Benchmark, monitor and reduce consumption emissions.
- Bolster the implementation of the Paris Agreement via FTAs and provide support to partner nations to achieve COP goals.
How can international trade and investment contribute to realising the goals of COP26?
- It is widely recognised that achieving climate goals will require significant policy change, so it is critical that trade and investment policy is a high priority for overhaul, if it is to stop presenting an obstacle to climate action, let alone support the realisation of these goals.
- Trade often operates in ways that directly work against climate goals. As currently designed, trade rules seek to liberalise and increase trade volumes. They do not discriminate between the promotion of trade in goods with social or ecological benefits and growth in high-emitting industries such as cement or steel. This means that climate-damaging emissions tend to grow as a result of trade deals, yet negotiation of new deals continues even as it directly conflicts with the steps needed for nations to meet their Nationally Determined Contributions (NDCs). The 2020 Production Gap report suggests this trend is likely to continue, finding that on average, nations are planning a 2% average annual increase in fossil fuel production, when a 6% annual decrease is needed to meet the goal of limiting global warming to 1.5°C.
- To support the realisation of the goals of COP26, trade should change in the following ways:
- Individual trade and investment agreements must explicitly aim to support climate objectives. This means they should require and commit to full implementation of Paris goals – supported by ongoing monitoring – as a condition of ratification and ongoing trade benefit. They should include binding language to prevent the regression of existing environmental standards, provide parties with the freedom to implement policies to enhance environmental protection, and ensure that both investment and production subsides are directed towards the development of green industries, rather than those exacerbating the climate crisis. The scope of trade agreements may need to be reduced, and provisions outside of environment or sustainable development chapters added, to bring the full text in line with climate and environmental goals.
- This shift must be supported by a change in approach at the WTO. Recent years have seen a growing number of WTO legal challenges against policies designed to tackle climate change. If the rules of international trade and investment are not updated to take account of the new reality of domestic carbon reduction policies, these challenges are likely to increase. This would create additional trade friction, further decrease the functionality of the WTO dispute-settlement mechanism, and could threaten the UK’s new commitment to a 78% cut in carbon emissions by 2035.
- Action to reform international trade and investment in support of COP goals must address both sides of fossil fuel funding. This means ending flows of UK investment supporting fossil fuel extraction abroad (and the rights of UK companies to sue Global South trade partners for taking climate action) and cutting the rights and opportunities available for foreign investors to support and perpetuate fossil fuel funding in the UK.
- Investment protection measures must be reformed. The legal regime for international investment is made up of over 3,000 International Investment Agreements. Many of these include Investor-State Dispute Settlement (ISDS) mechanisms, which allow firms to sue governments for measures which harm their profits. This can have disastrous effects on the environment and efforts to tackle climate change. For example, ISDS has been used by businesses to challenge water pollution controls in Germany, a ban on fracking in Canada, and various regulations on mining in East Asia and South America.
- In 2021, the Sabin Center, Grantham Research Institute and Hasselt University collaborated to identify climate-related ISDS cases, finding 13 filed between 2012 and the present. They noted that while these cases do not always contain explicit references to climate change, they all relate directly to the introduction, withdrawal or amendment of a policy measure explicitly developed to meet a country’s climate goals, and can be broken down into 3 categories – demands for states to compensate businesses for introducing climate measures, removing climate measures, or taking decisions relating to the giving of environmental permits. Compensation demands relating to the removal of climate measures appear to respond primarily to the phasing out of support originally designed to make renewable energy more competitive. Given this, the most likely areas for future claims in a world striving to limit warming to 1.5 degrees would be in opposing action taken to further climate and environmental goals. The report authors concluded: “Aligning national policies with climate needs will inevitably affect investments in the field of fossil fuel infrastructure right across the supply chain. Therefore, the more compelling the need to adopt ambitious and abrupt measures to pursue climate objectives, the higher the risk of ISDS cases being brought against host States.”
- ISDS has also been linked to a chilling effect on the development of new regulation driven by climate policy – even where formal cases are not launched or are dropped in the pre-action stage. While evidence about how the threat of ISDS action impacts policy development outside of the public domain is limited, a 2017 study focusing on investment treaties in Canada found that concerns relating to trade and investment agreements, particularly ISDS, featured highly in government decision-making processes relating to new regulation. Officials in environment-related ministries said possible investor litigation had a “huge impact” on decision-making. The report authors assert that their research suggest that following initial, public, ISDS cases, government may “adapt their decision-making to avoid ISDS risks by vetting proposals internally”.
- There is now a real risk that ISDS will become a vehicle for challenging new regulations that are essential for fighting climate change. These could include action to discontinue fossil fuel subsidies, introduce stricter controls on emissions, enact policies which limit or deny permits for fossil fuel extraction or infrastructure, phase out specific energy sources, and implement decisions which lead to the ‘stranding’ of fossil fuel reserves. China and India have both proposed using such tools to pursue their international climate objectives.
- The UK did not include ISDS in its recent trade agreements with Australia and Japan, nor is it expected to be included in the UK-New Zealand FTA. However, the UK would have to seek explicit side-letters in CPTPP to be exempt, and the government has not yet committed to do so. The UK should make ISDS exemptions a red line for accession to CPTPP, and adopt a no-ISDS position in all future trade negotiations. A full review of all current UK ISDS exposure should be carried out, and action taken to suspend provisions or terminate relevant agreements, including the Energy Charter Treaty. This would demonstrate the government’s seriousness about tackling climate change.
- Approaches to subsidies must change. The UK government maintains that “The UK does not give any subsidies to fossil fuels” in a domestic context. However, this does not mean the UK does not provide financial support for fossil fuel companies – rather that such support is constructed in such a way as to fall outside of International Energy Agency definitions of a subsidy. In fact, January 2021 analysis by energy firm Rystad concluded that the UK’s fiscal regime offered the best conditions globally for fossil fuel investors.
- This is part of a global problem. Annual fossil fuel subsidies were valued at US$5.2 trillion in 2017, equal to 6.5% of the global economy. The UK government has historically supported overseas fossil fuel investment – with financing of £3 billion allocated to fossil fuel projects between 2010 and 2014 through UK Export Finance (UKEF). Overall, over 99% of UKEF energy funds have been used to support fossil fuels.
- In December 2020, Prime Minister Boris Johnson announced an end to support for overseas fossil fuel projects via UKEF . However, this commitment does not directly cover support provided via other government departments or institutions including the Private Infrastructure Development Group (PIDG) or the CDC Group, nor projects already in the development phase. And it provides exemptions for continued support of gas power and infrastructure. This means the $1 billion already pledged by the UK to support a liquefied natural gas project in Mozambique is unaffected, and these loopholes will allow for future investment in other, similar projects. Up to 94% of CDC’s investments in fossil fuels would not be excluded due to exemptions within the policy, and together, the CDC Group and PIDG would be able to maintain existing investments currently totalling well over US$1 billion – with no bar on future investments.
- The OECD’s own reports paint a gloomy picture of progress on even the limited commitments made at the G20: “G20 member countries reaffirmed their commitment to rationalise and phase out ‘inefficient fossil-fuel subsidies that encourage wasteful consumption’ over the medium term, while ensuring targeted support for the poorest, in the Riyadh Leaders’ Declaration of 22 November 2020 […] Nevertheless, G20 country support levels remain unchanged in nominal terms to those of a decade ago, at USD 159.3 billion in 2020 compared to USD 161.8 billion in 2010”.
To ensure that all forms of UK finance are in line with the objective of keeping global temperature increases below 1.5 degrees, the government should:
- Bring an end to all support for fossil fuel projects overseas, including that provided via the CDC, or covering gas power.
- End domestic policies that act as subsidies for fossil fuels within the UK, and push for other G20 nations to do the same.
- Refocus UK overseas financial support on the provision of transparent, targeted climate finance via the Green Climate Fund, alongside the support and technology transfer needed to kickstart climate action, adaption and mitigation measures.
- The government must ensure that FTAs do not promote the outsourcing of emissions or lead to carbon leakage. One possible method to address this problem would be for the UK to institute a carbon border adjustment mechanism (CBAM). However, CBAMs are not a silver bullet, and more work will need to be done to identify approaches that combine equity, feasibility and ambitious environmental outcomes. In her 2021 report, Greening International Trade, Carolyn Deere Birkbeck concludes: “While several proposals exist on ways to design border carbon adjustments (BCAs) that are effective, fair, transparent and compatible with WTO rules, key political tasks are to avoid unnecessary discrimination between domestic producers and importers, support trading partners in the transition to decarbonization, and acknowledge BCAs as just one item of a broader agenda for aligning trade policy with climate goals”.
- Trade and investment must be approached from a climate-justice perspective. The wealthiest nations, including the UK, should hold trade policies that reflect our historical responsibility for the climate crisis, and recognise that UK wealth was built to a large extent upon the extraction of resources from other parts of the world. Within the UK, this approach would mean considering, in context and combination, the impact that large-scale investments and the trade in goods and services have on climate change. It would require embedding the concept of common and differentiated responsibility into both the ways in which the UK trades, and how the government supports a globally fair transition. It would require developing a trade policy and WTO position that holds polluters politically and financially responsible for their ecological debt.
- Green ‘solutions’ to the emissions crisis are likely to reinforce the current imbalance of power globally, because access to and benefit from greener goods is unevenly distributed. A UK trade policy incorporating climate justice would attempt to embed equity into trade and investment relationships, ensuring that the most vulnerable shouldn’t bear the burden of trade regimes and the needs of richer nations any longer. It would aim to address, rather than exacerbate economic imbalances, increase global capacity and resilience to respond to climate change, and support trade partners to achieve their NDCs in ways that benefit their populations.
Are international trade and investment likely to feature in the high-level negotiations at COP26?
- International trade and investment are rarely discussed at climate talks. Although subjects including green finance and emissions trading may feature in COP26 debates, these are focused on attributing and shifting responsibility for climate change, while bringing in additional funds for action to mitigate emissions, rather than tackling the ways in which trade is driving the climate crisis or restricting funding of damaging activities.
- This is problematic because it does not allow nations the space in which to consider the impact of trade on emissions trends and sequestration capacity, nor the relationship between trade and investment patterns and achieving NDCs.
- The UK should use the year following November’s climate talks to develop a dialogue or a series of roundtables on climate and trade, where Global South nations could outline needs and discuss how they can align the two policy areas.
What are the possible impacts of climate change on international trade and investment?
- The relationship between climate change and international trade and investment is not one-directional. As indicated throughout this submission, flows of international trade and investment have large and ongoing impacts on the climate, and on the ability of nation states to take required climate action.
- The Sixth IPCC report concludes that climate change is likely to have huge impacts across all parts of life. Trade and investment will be impacted in the following ways:
- Changes in weather patterns: Likely to impact food security, agricultural trade and the ability of nations to reliably produce and export foodstuffs. Nations may also shift specialisations in response to changes in average temperatures or policy context, thus impacting trade patterns.
- Extreme weather: Likely to cause disruption to transport, distribution chains and other infrastructure, impacting supply chains for all goods.
- Resource scarcity: Likely to impact the ability and desirability of producing goods requiring large inputs of water or areas of land.
- Economic impacts of climate shocks: Likely to impact the capacity for trade and investment.
- Necessary climate action: Likely to require nations to cease the extraction and combustion of fossil fuels, which may lead to stranded assets if investors do not divest.
- To what extent does the government’s trade policy align with the objectives of COP26? This includes, but is not limited to, its actions at the WTO, its G7 presidency, and its bilateral and multilateral trade agenda.
- There is a huge disconnect between the actions of the government in relation to trade and the objectives of COP26. The aims of climate talks are undermined by trade that exports the UK’s global footprint. Overseas greenhouse gas emissions are increasing as a proportion of the UK’s contribution to global emissions, but are poorly quantified. The UK should adopt a significant share of the responsibility for cutting these emissions – and this responsibility should inform trade strategy. However, to date DIT has not bought forward a written overall trade policy, nor outlined how trade strategy is informed by and supportive of climate ambition. This has led to a fragmented, siloed approach to individual trade negotiations and debates that provides an unstable foundation for cross-government climate action. To tackle this, the UK government could take the following actions:
- Set out a clear, written trade strategy with direct reference to the interaction between trade and climate aims.
- Measure, monitor and reduce consumption emissions and make sure these are reported on our balance sheet. Currently, 46% of UK consumption emissions occur overseas – and these are increasing as a proportion of the UK’s contribution to global emissions.
Bilateral trade agenda:
- Bolster implementation of the Paris Agreement via FTAs. The UK should not make trade agreements with partners who cannot show they have signed and are implementing the Paris Climate agreement to limit global warming to 1.5 degrees. This may mean that the UK and partner countries would spend time increasing or improving action on NDCs on one or both sides before trade negotiations could commence.
- All FTA texts should include a ‘climate clause’ – a binding provision committing all parties to progressing their commitments under the Paris Agreement. Such a clause could build on the approach taken in the EU-UK Trade and Cooperation Agreement and should ensure that parties can take action under the FTA when the aims of the Paris Agreement are undermined by a partner nation.
- Support partner nations to achieve COP goals. Where appropriate, preparations for trade negotiations should include support for countries to ratify and implement key environmental agreements, and for domestic capacity to be built in areas such as the production of green technologies. In some circumstances, for example where there are significant disparities in wealth, countries should be offered access to UK markets without negotiating a trade agreement, so that there is no requirement for reciprocity. This is in line with existing EU agreements, including Everything But Arms and the Generalised System of Preferences, which the UK has committed to replicating.
- Widespread access to green technologies is crucial to meet the Paris Agreement goal of limiting the increase in global temperatures to well below 2 degrees Celsius. This will require considerable technology transfer from North to South because 90% of the increase in global carbon emissions until 2050 is expected to occur in the developing world, while the vast majority of low-carbon technologies are still invented in developed countries. Japan, the US, Germany, South Korea, and France together account for 75% of the low-carbon inventions patented globally from 2005 to 2015. 21 International trade rules contain a number of provisions ostensibly aimed at preventing ‘protectionist’ or mercantilist behaviour. However, in recent years, it has become apparent that in practice they are often at odds with the measures needed to promote and disseminate green technologies.
- The UK should support a climate waiver at the WTO. Trade agreements can shrink the range of policy options open to nations seeking to tackle climate change. This can happen by leaving environmental policies open to challenge on the grounds of discrimination and trade-restrictiveness, even where their key aim is to support a fair transition towards a more sustainable economy and meet other international commitments.
- Any form of export subsidy is prohibited under Part II of the WTO Agreement on Subsidies and Countervailing Measures. This includes export support for clean energy or green technologies. Although countries can introduce domestic subsidies to support the development and production of green products, WTO rules provide other nations with the option to retaliate, if they believe that these subsidies adversely affect their own production or exports – and these rules have been used regularly to challenge moves away from fossil fuels. 41 unilateral trade remedy investigations in the renewable energy sector were initiated between 2008 and 2014, while during the same period no unilateral trade remedies were used against fossil fuel production subsidies.
- Analysis commissioned by the International Chamber of Commerce suggests that a number of measures nations have taken to meet NDCs may conflict with restrictions contained within FTAs. For example, Venezuelan import bans on incandescent bulbs, and tax reductions for energy-efficient appliances in India and South Africa. The UK government has already committed to several measures to meet domestic net-zero commitments, including the phase-out of petrol and diesel vehicles by 2030, increased investment in wind power and infrastructure for electric vehicles, the incentivisation and installation of low-carbon heating, and the decarbonisation of industry. These would all require WTO notification and could all be subject to challenge.
- The UK should therefore support reform of WTO rules, to ensure that countries are able to transition towards more sustainable economies and take action to meet NDCs and domestic goals. This should include removing policy space for fossil fuel subsidies, while increasing the potential for support of truly renewable energy. For example, via a ‘climate waiver’ that would allow nations to impose trade-restrictive climate policy measures in order to advance Paris Agreement obligations.
- The UK should lead G7 nations to provide adequate funds to support nations on the front line of the climate crisis. Wealthier nations must step up and pay to fight climate breakdown, especially those in Europe and North America who have historically contributed the lion's share of emissions. In June, under the UK’s presidency, G7 leaders had an opportunity to honour promises to provide US$100 billion a year to the countries most impacted by climate change. They did not make the most of this chance. The UK should use the remainder of its presidency to push wealthy nations to deliver on these commitments, and continue to champion the need for the G7 to provide promised climate funding under the German presidency in 2022.
What discussions, if any, are planned to develop a multilateral approach to carbon pricing systems (including border adjustment mechanisms), green subsidies and investment funds, the curbing of fossil fuel subsidies, a circular economy and sustainable supply chains?
- We are not aware of any such discussions that are planned as part of the COP26 process, apart from the Forest, Agriculture and Commodity Trade dialogue, which aims to “agree on principles for collaborative action, a shared roadmap on sustainable land use and international trade, and to take action now to protect forests while promoting development and trade”.
- The Agreement on Climate Change, Trade and Sustainability is under discussion at the WTO, and New Zealand has led on proposals in the Trade and Environmental Sustainability Structured Discussions for fossil fuel subsidy reform, but the UK has yet to engage with these debates.
- Carbon Border Adjustment Mechanisms have also been the subject of several state-level proposals, notably in the EU and US. However, the possible utility or impacts of such mechanisms are not currently the subject of planned multilateral discussions within the COP process.
What impact could an agreement on [climate] finance at COP26 have on trends in international investment?
- COP26 could see a recognition from wealthier countries of the failure to deliver required climate finance thus far, and an agreement to meet the current goal of providing US$100 billion a year before the end of 2021. However, rather than a joint agreement, this is likely to take the form of individual commitments by G20 nations to climate finance increases. The UK should set a precedent by doing so, and kick off discussions about the level of climate finance ambition that should be in place by 2025.
- It is likely that such a commitment to climate finance would increase trade in more sustainable goods, including renewable power generation and infrastructure, environmental services and greener investment opportunities. Countries like the UK that have a strong presence in the production of goods necessary for the transition to a 1.5-compliant world are likely to see growth in export markets.
What engagement has there been between the COP26 Unit and the Department for International Trade on the government’s agenda for its Presidency?
- We are unaware of any engagement between the COP26 Unit and DIT. This may mean that there has been no such engagement, which would represent a massive missed opportunity to align trade with climate goals and prevent policy friction.
- However, the COP26 Unit and DIT may be having private discussions without public engagement or transparency. If so, we suggest it would be helpful if such engagement could be made public, and the fruits of any discussions published. It would also be useful if tripartite engagement was facilitated between DIT stakeholder groups, the COP26 unit, and civil society groups engaging in COP.
For more information please contact: Kierra Box
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 This is the option pursued by New Zealand, which signed side-letters with five CPTPP members to exclude compulsory ISDS
 Press release: The UK offers operators best profit conditions to develop big offshore fields; Kuwait, Canada follow, January 2021
 Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates
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 Greening International Trade, 2021
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 See articles Title II - COMPROV.12, Title III - INST.35.4, and Title XI – article 8.5
 Climate Change and Energy Subsidies: Is There a Role for the WTO? - Linklaters
 Climate Change and Trade Agreements – Friends or Foes, 2019
 FACT dialogue
 MC12 declaration on trade and sustainability