Written evidence submission from ODI (COP0014)

 

Written evidence submitted by ODI experts

to the International Trade Committee inquiry

on COP26 and international trade

  1. ODI is a leading global affairs think tank. We inspire people to act on injustice and inequality. We focus on research, convening and influencing, to generate ideas that matter for people and planet. Find out more about ODI and our new strategy here: www.odi.org/en/about/
  2. ODI researchers who have contributed to this submission are Jodie Keane*, Laetitia Pettinotti, Max Mendez-Parra, Dirk Willem te Velde, and Simon Maxwell.

*Contact person: Dr Jodie Keane

Summary

 

  1. Greenhouse gas emissions embodied in the production of traded goods and services account for 38% of all emissions.
  2. Climate compatible trade essentially comes down to a trade system that supports the transition to decarbonised energy and resilience for all.
  3. Trade and trade policy can support or hinder a shift to less GHG intensive production by changing (a) product specialisation; (b) production’s energy efficiency.
  4. The trade-related policy toolbox includes reporting and certification, full carbon pricing, carbon market development, and investment in greening value chains. All need to be underpinned by improved information about GHG emissions associated with different stage of production and consumption.
  5. These issues feature on the UNFCCC agenda – but importantly, cannot be delivered without corresponding action in the WTO. This has been difficult, however: there is a marked disjuncture between the UNFCCC and WTO agendas.
  6. Blockages have arisen with regard to: the Environmental Goods Agreement; the Agreement on Climate Change Trade and Sustainability; the Trade Environment Sustainability Structured Discussions; and the greening of Aid for Trade.
  7. As an active member of the WTO, as well as President of the COP, the UK can help to reform trade policy in climate compatible ways. In doing so, it will want to recognise the special needs of developing countries, especially Least Developed Countries, for example in terms of compliance support in the context of border carbon taxes.


Introduction

 

  1. To keep global average temperatures well below 2oC above pre-industrial levels, there needs to be an urgent reduction in emissions, and the trade system could help to support climate-compatible development by encouraging sustainable production. Reaching net-zero emissions on a global scale by mid-century is essential. To simultaneously meet this target and harness trade to achieve the Sustainable Development Goals, trade must become more transformative and climate compatible in all its dimensions – scale, composition and use of technologies.
  2. International trade has the potential to accelerate decarbonisation through facilitating more resource-efficient supply chains and the uptake of clean technologies. However, neither the climate nor trade architecture is currently equipped to facilitate coordination across these important policy arenas. The international architecture including trade policy and support measures, must change to better support climate compatible trade, investment and development. Actions required to achieve this entail improvements on carbon accounting standards and Monitoring, Reporting, Verification (MRV) systems to ensure effective greening of Aid for Trade, trade preferences and value chains with specific support to low and middle-income countries to ensure fairness.
  3. This submission focuses on the following questions of the call for evidence: 1. What are the possible impacts of climate change on international trade and investment? 2. 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; 3. Are international trade and investment likely to feature in the high-level negotiations at COP26?;

 

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

  1. The impacts of climate change on trade depend on countries and sectorsvulnerability and this will be product and market specific. Some of the main physical effects will be on the scale (i.e. traded quantities) and composition (i.e. the type of product), which will influence how goods are produced (technique) and transportation. The transmission of impacts, sudden or gradual, will affect production and productivity and therefore tradable sectors; this in turn will reshape economic structures and investments to result in changes in trade patterns (Figure 1).

 

 

 

 

Figure 1: Climate change impact transmission chain to international trade

 Chart

Description automatically generated with low confidence

Source: Keane et al., 2020

 

  1. Value chain-specific analyses are required to understand the degree of exposure of firms and countries to climate-related shocks and then to subsequently understand impact transmission and vulnerability pathways (see examples in Table 1). Countries and regions need to understand not only the direct impacts of climate change on their sectoral production and trade flows, but also effects within destination and source markets. In addition, regulatory changes related to climate change adaptation and mitigation will also shape international trade and investment flows.

 

Table 1: Climate change risks across the value chain

 

Stage of production

 

Risks

Examples

Production

Agriculture and mining

  • Biophysical risks
  • People risks
  • Extreme weather events
  • Shortages of labour

Manufacturers

  • Biophysical risks
  • Trade risks

 

  • Limited water supply
  • Transport hubs disrupted with knock-on effects on supply of inputs

Goods and services providing sectors

Retailers and distributors

Trade risks

 

Interruptions or delays in supply

Transportation

Biophysical risks

 

Access to transport routes affected by extreme weather

Utilities

Biophysical risks

 

Reduced output due to water scarcity

Information businesses

Biophysical risks

Disruption of operations by extreme events

Services providing sectors

Financial businesses

Finance risks

Increased risks of default

Real estate businesses

  • Biophysical risks
  • Finance risk
  • Damage to buildings
  • Loss of value

Biophysical risks: impact on transboundary ecosystems can affect all countries sharing the ecosystem services; People risks: people’s mobility to adapt to climate change; Trade risks: trade can transmit risks across markets via supply chains; Finance risks: climate can impact the flow of capital and valuation of assets.

 

Source: Keane et al., 2020

  1. A feedback loop is at play, as trade is an underlying driver of GHG emissions globally (Keane et al., 2020. ODI report linked here). Embodied GHG emissions in the production of traded goods and services worldwide are estimated to represent about 38% of global emissions per year (Krishnan and Maxwell, 2020. ODI report linked here). Trade requires energy and resources, which are currently mostly GHG emission intensive.
  2. The conceptual interaction between trade and GHG emissions (Figure 2) can be framed as:
  1. composition effect: countries specialise in certain production sectors, hence the GHG intensity of their trade depends on their products’ specialisation and the energy intensity of their production;
  2. technique effect: energy efficiency is key to production and trade can support improvement in efficiency gains. In the context of high emission intensity of energy, improving energy efficiency can lead to emissions reduction;
  3. scale effect: underpinning every production process is energy. If the energy used for production has high GHG intensity, potentially compounded by low energy efficiency production processes and high energy intensity product specialisation, then increased trade equates to more GHG emissions.

 

  1. Lastly, international transport – road, rail, aviation and shipping – largely powered by fossil energies, is a contributor to GHG emissions from trade and underpins any trade process.

Figure 2: Trade and GHG emission nexus

Diagram

Description automatically generated

Source: Keane et al., 2020

  1. Climate compatible trade essentially comes down to a trade system that supports the transition to decarbonised energy and resilience for all. Given trade’s key role in innovation diffusion, it can help mitigate and adapt to climate change. The recent growth in low carbon technologies, such as solar panels, driven by trade has resulted in reduced prices for consumers and reduced emissions for producers. So, trade is also an instrument in the climate transition.

 

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. At COP26, in addition to meeting more ambitious targets there remains considerable overhang from COP25 in relation to the climate regime and its institutional framework. This is a tough negotiation given the unresolved issues since COP25, including finance, carbon markets and transparency.
  2. There are a number of areas currently under discussion at COP26 that have direct links to trade policy, as indicated in Table 1. Some of these issues are currently being discussed within the WTO, as indicated in Table 2, but not all.
  3. The UK is participating in some of these discussions at the WTO, and has, for example, reformed its tariffs and liberalised already on some environmental goods, but it could do more, especially in order to support trade and development.
  4. Based on a comparison of the key trade-related issues for negotiation at COP26 and how these are being taken into account within WTO trade discussions to which the UK is party to, it is fair to say there is limited alignment.

 

Table 1: COP26 Negotiation Areas and Links to Trade Policy

Subject 

Issues

Links to Trade Policy

Carbon Markets 

Like Kyoto Protocol, the Paris Agreement provides for market mechanisms, but rules and regulations are unresolved. Agreement on MRV needed for integrity in carbon markets.

Carbon Border Adjustment Measures and WTO compliance.

Proof of equivalence, standards.

Market access issues inc. for LDCs.

Technology 

Technology Mechanism established under the Paris Agreement (Art. 10). Implementation far from clear.

TRIPS flexibilities in view of Covid-19 

Environmental Goods and Services discussions 

Finance

Existing instruments require recapitalisation, funding shortfalls. COP15 commitment of $100bn every year by 2020 for developing countries not met.

Current prog of Aid for Trade runs until 2022. Since 2006, an estimated $450bn channeled to developing countries. However, limited environmental indicators and climate change not mainstreamed.

Transparency

Reporting and review mechanisms under consideration, e.g. GHG inventories 

Critical obligation, but longstanding issues regarding compliance (as membership increased) and enforcement (e.g. stalled dispute settlement mechanism).

 

 

 

Table 2: Climate Related Discussions at WTO

Issue/Negotiations

Current UK role/position

Future?

Environmental Goods Agreement: Revived in 2014 but then stalled 2016. Continued issues regarding what goods should be listed as ‘environmental

Seek to continue negotiations

Pioneer new list approach based on closer UNFCCC/WTO interaction (tech) and needs specified in NDCs?

Agreement on Climate Change Trade and Sustainability: Plurilateral (2019), 5 members, focus: Fossil Fuel Subsidies; Sust Standards; Environmental Goods and Services (EGSs)

Not currently a member

Join and expand remit to include carbon standards?

Trade Environment Sustainability Structured Discussions: Discussions - 2020: Focus:

Fossil Fuel Subsidies/Environmentally harmful subsidies; EGS inc. NTB; Plastics & circular economy; Greening AfT; Trade & CC (CBAMs)

Participating

Different groups likely to progress across pillars inc. UK – current focus EGS 

Could do more on Gr AfT; Trade and Climate – Carbon Standards...

  1. Within the climate and trade nexus, actions for the WTO and the UNFCCC, that the UK could champion, include:
  1. Ensuring trade negotiators participate in Article 6 negotiations under the UNFCCC or move beyond simply WTO technical observations of UNFCCC discussions towards greater collaboration between climate and trade negotiators regarding carbon markets.
  2. Reporting on trade-related policy to address GHG reductions and mitigation/adaptation efforts should be regularized. The assessment of emissions in trade should feature within WTO trade policy reviews.
  3. Promoting a multilateral approach that focuses on processes or production methods and builds capacity on carbon accounting, and standards.   
  4. Securing the conclusion of negotiations to end harmful fishing subsidies provides momentum for a multilateral approach to reduce fossil fuel subsidies.

 

  1. Ensuring investment facilitation efforts should also consider how to support efforts to adapt to and mitigate climate change and avoid related conflicts.

 

 

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

  1. Given the previous analysis of how the UKs trade policy as identified within multilateral discussions is aligned with the objectives of COP26, this section identifies how trade and investment could and should feature within multilateral policy discussions (thus we do not cover what the UK should include in its FTAs). The following points pick up on some of the issues for discussion at COP26 which link to UK trade policy and related international trade support measures:
  2. In relation to carbon markets A common reference price on carbon, underpinned by the appropriate Measuring, Reporting and Verification (MRV) systems, will reduce trade tensions through the imposition of unilateral border carbon measures, as recognised by the high-level commission on carbon pricing.  

 

  1. Common standards are needed to support the environmental integrity of emission trading schemes and for equivalent measures to be recognised to limit the imposition of Border Carbon Adjustments (BCA) (Mendez-Para et al., 2020. ODI brief linked here).

 

  1. Article 6 of the Paris Agreement anticipates the need for common standards. However, the design of carbon markets must also be done in line with WTO principles to ensure fairness of access, transparency and minimise any trade distorting effects. Agreement on the principles of BCAs are needed by WTO members, especially since G20 members encourage carbon pricing mechanisms.

 

  1. Improvements in carbon accounting are needed: there are major differences between production and consumption-based accounting. In addition, currently, shipping and aviation emissions fall outside of the UNFCCC and are not accounted.

 

  1. Whilst structured discussions on trade and environmental sustainability continue at the WTO, and within plurilateral discussions for agreement on climate change trade and sustainability, the issues around carbon accounting, standards and pricing do not yet feature.

 

  1. In relation to technology and links to discussions on environmental goods and services, within the Trade, Environment and Sustainability Structured Discussions (TESSD) at the WTO, the UK has emphasised Environmental Goods and Services. However, it has also pointed to the need to consider multilateral discussions, in view of the stalling of the Environmental Goods Agreement at the WTO in 2016.
  1. Given the contentious issues around the lists used to define Environmental Goods, as well as Services, the UK could pioneer an approach based on the Technology discussions within the UNFCCC. Similarly, it could adopt a bottom-up approach that reviews the technological needs specified within Nationally Determined Commitments (NDCs) (understanding the need for more detailed analytical work in order to operationalise NDCs and ensure that trade is mainstreamed). 
  2. In this way the UK could support closer collaboration between WTO & UNFCCC. The technology Mechanism established under the Paris Agreement (Art. 10). Seeks to accelerate, encourage and enable innovation for long-term global response to climate change, but technology that can swiftly change production methods is not always immediately accessible. Options to overcome this include commonly held patents among participant countries or organizations. Lessons can be learned since Covid-19 (Keane et al., 2020 ODI brief linked here).
  1. In relation to climate finance and the potential links to Aid for Trade (AfT), as one of the largest providers of Aid for Trade, the UK should ensure disbursements are supportive of recipients trade-related climate objectives, as specified in their NDCs. The environmental impact criteria of AfT should be strengthened. Climate finance and AfT must be better coordinated. 
  1. The UK could showcase how AfT can support the green transition and work with climate finance to build productive capacity and reduce economic and environmental vulnerabilities (e.g. through an environmental facility). The Enhanced Integrated Framework for Least Developed Countries (LDCs) could provide a model for a broader Environment Facility and demonstrate how AfT could align with climate finance to support just transitions in large developing countries.

 

  1. Finally, in relation to specific initiatives to support sustainable value chains, the UK has proposed legislation to fine firms importing products from deforested areas, but enhanced due diligence across a broader range of environmental criteria is needed to tackle the climate emergency. Developing country suppliers will also need support to adjust, as opposed to exclusion from value chains.

 

  1. As firms move to disclose climate related risks, they must reveal their full emissions and biodiversity impacts. Moving towards full accountability will help progress towards the Paris Agreement commitments, support the building of standards, and alignment with company and country strategies for net zero. It will also assist in understanding competitiveness effects and appropriate government support.


ODI publications on the topic

ODI reports:

  1. The Climate and Trade nexus in Africa | odi.org
  2. Counting carbon in global trade: why imported emissions challenge the climate regime and what might be done about it | odi.org

 

 

ClimXTrade briefs:

  1. Securing climate-compatible trade for development;
  2. Enhancing the resilience of global value chains to climate change: lessons from Covid-19;
  3. Carbon Border Adjustments: a discussion on effectiveness and efficiency;

 

 

Recorded ClimXTrade conversation with trade & climate negotiators:  

  1. The negotiators' perspectives: charting new paths for climate and trade | odi.org

 

 

Opinion blog posts:

  1. Four reflections on the UK's Nationally Determined Contribution
  2. Boosting resilience after Covid-19: Aligning climate and trade strategies for LDCs
  3. How can the EU’s border carbon adjustments avoid unintended consequences for LDCs? | Trade 4 Dev News (enhancedif.org)

 

 

September 2021