Written evidence submission from Dr Emily Lydgate, Deputy Director, UK Trade Policy Observatory & Chloe Anthony, Research Assistant, UK Trade Policy Observatory (COP0008)

Call for Evidence

COP26 and international trade and investment

September 2021

 

Emily Lydgate (UKTPO Deputy Director)

Chloe Anthony (UKTPO Research Assistant)

 

About us:

 

  1. Emily Lydgate is a Senior Lecturer in Law at University of Sussex and Deputy Director of the UK Trade Policy Observatory (UKTPO). Chloe Anthony is an ESRC-funded doctoral researcher at the Sussex Law School and a research assistant for UKTPO. The UKTPO, a partnership between University of Sussex and Chatham House, is an independent expert group that initiates and analyses trade policy proposals for the UK; this written evidence is submitted at the request of the ITC Committee. 

 

  1. Note that we limit our response to the first 5 questions.

 

How can international trade and investment contribute to realising the goals of COP26?

 

  1. The headline goal of the COP is to secure global carbon neutrality by mid-century, including through accelerating the phase-out of coal, speeding up the switch to electric vehicles and encouraging investment in renewables (https://ukcop26.org/). As summarized by the recent UK Board of Trade Green Trade report, free trade can support this goal by ‘bringing down the costs of green goods, services and technologies and increasing their uptake’(p. 13).

 

  1. Of course, free trade and international investment protection on their own do not guarantee increased uptake of green goods and technologies: they can also have perverse impacts. For trade to support climate action, domestic policy as well as the international trade system must encourage international trade and investment in low-carbon goods, services and technologies and discourage international trade and investment in high-carbon goods, services and technologies. This is not systematically the case, either in the international trade system or in the UK (as we elaborate below, Q 3).

 

Are international trade and investment likely to feature in the high-level negotiations at COP26?

 

  1. Trade-related measures form an integral part of the domestic policy toolkit for achieving Nationally Determined Contributions (NDCs) pursuant to the Paris Agreement. As well as facilitating trade in low-carbon goods, services and technologies, this toolkit encompasses product bans and performance requirements that can complicate trade, as well as potentially WTO-incompatible subsidies and investment to incentivise domestic production of low-carbon goods and technologies.  Climate change mitigation policies also place competitive pressure on industries, motivating the introduction of compensatory trade-restrictive policies, notably Carbon Border Adjustment measures.

 

  1. Though the Paris Agreement requires countries to achieve NDCs, it doesn’t provide a means to navigate the trade restrictions that may result. Thus the WTO has become a primary international forum regulating what domestic climate measures are permissible. For example, domestic content requirements attached to renewable energy subsidies have attracted a number of WTO disputes.

 

  1. Yet separating trade and climate negotiations is clearly untenable in the long term and spillover of trade issues into climate negotiations seems poised to take place in COP 26. The primary catalyst is the EU’s planned introduction of a Carbon Border Adjustment Mechanism (CBAM) in 2023, which imposes charges equivalent to the EU Emissions Trading Scheme to imports in a small number of heavily-traded sectors. Though not a formal negotiating item, it is seen by some, including LDCs and the BASIC countries, as going against the core Paris Agreement principle of Common but Differentiated Responsibility (CBDR) (see, eg: https://regfollower.com/2021/04/11/eu-basic-countries-express-concern-at-the-proposed-carbon-border-adjustment-mechanism/). It thus may disrupt diplomatic cooperation on other goals, such as securing increased ambition in NDCs to achieve carbon neutrality by 2050. Conversely, COP 26 also presents an opportunity to the EU to make progress in achieving greater global acceptance of its CBAM proposal through, for example, allowing more flexibility for developing countries in its proposal or committing to climate finance. It is beyond the expertise of these authors to predict precisely how these pressures will play out, but it seems very likely that the role and legitimacy of trade restrictions in achieving net-zero targets will feature in discussion between Paris Agreement Parties more than ever before.

 

  1. Article 6 negotiations also have significant crossover with trade issues, particularly with respect to carbon pricing; we address this below (Q. 5).

 

What are the possible impacts of climate change on international trade and investment?

 

  1. Covid-19 and Brexit have made plain that international supply chains leading to the UK are fragile and contingent upon both supply-side reliability and also the regulatory and customs environment on the UK side. Though the driving factors differ, climate change will likely also have significant impacts upon international trade and investment.

 

  1. The 2021 IPCC report concludes that human-induced climate change is already affecting weather and climate in every region across the globe, and every increase in global warming causes discernible increases in the frequency and intensity of hot extremes, marine heatwaves, heavy precipitation, agricultural and ecological droughts, intense tropical cyclones and reductions in Arctic sea ice, snow cover and permafrost. (2021 IPCC Sixth Assessment Report, Summary for Policymakers A.3, B.2). This may lead to a number of impacts. For example, crop shortages may cause export shortages or changes in supplying countries. Extreme weather events may cause short-term disruption. Trade relations also benefit from good diplomatic relationships. Political instability, for which climate change may become a strongly contributing factor, may contribute to a breakdown of trade relations with countries that export to the UK, or the further erosion of the WTO system that provides relatively transparent and predictable rules for national tariffs and regulation. The impacts of mass migration, or attempted migration, to the UK from countries severely affected by drought and other climate impacts may also have spillover effects on supply chains.

 

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 plurilateral trade agenda.

 

  1. According to the UK COP26 website, the goals of COP26 centre on mitigation, adaptation, finance and collaboration: ‘to secure global net zero by mid-century and keep 1.5 degrees within reach’, ‘to protect communities and natural habitats’, ‘to mobilise finance’, and ‘to work together.’ (https://ukcop26.org/cop26-goals/)

 

  1. A strategy that cuts across several of these goals is to lead by example. In its Sixth Carbon Budget, the UK Government’s independent advisory body on climate change, the Climate Change Committee (CCC), has underscored the importance of the UK upholding ambitious national NDCs to encourage global ambition as 2021 president of the G7 summit and COP26.

 

  1. This year countries are due to set their 2030 emissions reductions targets - a key element of their NDCs. The UK has an interim target of 78% reduction by 2035 and the UK’s submitted NDC target is to achieve at least 68% emissions reductions by 2030. The CCC’s 2021 Progress Report welcomed the UK’s new targets but highlighted ‘a large policy gap’ - “credible policies for delivery currently cover only around 20% of the required reduction in emissions” - and ‘a significant ambition gap’ with some policies aligned with the target, such as phase out of petrol and diesel cars by 2030. It also identified a policy gap in accounting for aviation and shipping emissions. (CCC, Sixth Carbon Budget (June 2021) p16; CCC, Policies for the Sixth Carbon Budget and Net Zero (June 2021), p162).

 

  1. The CCC’s recommendation to include international aviation and shipping in the scope of the UK’s carbon budgeting is to be implemented this year, a welcome development with respect to trade and climate integration, and a way of showing leadership at COP 26. However a previous analysis by these authors suggested that the UK would need to take further action for its trade policy to support climate action, including through increased transparency on fossil fuel subsidies and heightened climate ambition in rolled-over and current FTA negotiations (https://journals.sagepub.com/doi/full/10.1177/1461452920960349). Notably, the phase-out of petrol and diesel cars also implies the eventual need to ban their import.

 

  1. Additionally, official figures on UK consumption emissions - the UK’s carbon footprint - show that more than a third of UK consumption emissions are the GHG emissions embedded in imported goods and services. (Defra, UK Carbon Footprint from 1997 to 2018 (July 2021)). Thus the UK should be wary of reducing consumption emissions domestically only to export them to the countries who do our manufacturing. Carbon border adjustment, labelling and performance standards are all trade policy tools that can help counteract this problem but also have diplomatic fallout, though a full discussion of these issues falls beyond the scope of this inquiry.

 

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?

 

  1. We only address the carbon pricing element of this question. With the EU’s unilateral CBAM proposal, which extends its domestic carbon pricing to selected imports, forming a probable source of controversy in COP 26, it is significant that the Paris Agreement’s Article 6.1-6.7 provides the basis for a multilateral approach to carbon pricing systems. As the last part of the Paris ‘rulebook’ that remains unresolved, making progress on Article 6 will form a key focus of negotiations. 

 

  1. An international carbon market would be hugely beneficial in lessening trade and climate conflict. A robust international carbon price would obviate the need for any country to extend its carbon pricing to imports unilaterally. However negotiations have been beset by conflict over many issues, including how to account for NDCs and in particular avoid ‘double counting’, where countries sell permits but still count them toward their domestic targets, (the UK feels strongly this should be avoided) and, whether Kyoto Protocol Cleaner Development Mechanism Units should be transferred to the Article 6 framework (the UK opposes). (See: https://www.adb.org/sites/default/files/publication/541016/sdwp-063-negotiations-article-6-paris-agreement.pdf). Underlying these concerns is the fact that having a strong regulator appears to be a key element of achieving a robust carbon market, as the success of the EU Emissions Trading Scheme demonstrates. This is difficult to achieve through an international agreement which advocates a bottom-up, voluntary approach.

 

  1. Though Article 6 ‘rules, modalities and procedures’ have not yet been finalised, they may also provide international legitimacy and structure to negotiations between smaller groups of like-minded Paris Agreement Parties to cooperate on carbon pricing, or other fiscal measures on climate. However any ‘club’ approach, where for example countries agree to coordinate climate policies and impose tariffs on non-members, will likely be highly controversial, and Article 6.8, which provides a potential home in the Paris Agreement for such international cooperation, remains ill-defined. On the whole, Article 6 forms the most directly relevant part of the Paris Agreement for the unfinished trade policy discussions surrounding global climate mitigation.

September 2021