Securing climate compatible trade boils down to trade supporting the transition to decarbonised energy sources and enhanced resilience for all. International trade is an invaluable mechanism to support transitions to less greenhouse gas (GHG) intensive and more resilient production by diffusing innovation, influencing country or regional product specialisation and the energy efficiency of production. But in order to achieve this we argue there needs to be much greater coordination between trade and climate policy-making.
At COP26, many of the negotiation streams have a direct link to trade policy. They include negotiations under Article 6 to reach agreement on (i) carbon markets, including the monitoring, reporting and verification; (ii) technology and (iii) climate finance. But the trade implications of these topics are rarely acknowledged or coordinated with current climate and environmental sustainability discussions at the World Trade Organization (WTO).
Reconciling climate and trade agendas
With just a few weeks to go before COP26 and WTO’s 12th Ministerial Conference (MC12), we are at a stage where there is limited alignment between the United Nations Framework Convention on Climate Change (UNFCCC) and WTO agendas. So, what can the UK, as the co-host of COP26 and an active (and indeed, founding) WTO member do to reconcile those agendas, while recognising the specific needs of low and middle-income countries?
The UK can support trade policy reform for climate at the multilateral level in four key ways.
1. Promote a two community approach to carbon accounting and standards
First, given that all trade related climate instruments need to be underpinned by improved information about GHG emissions associated with different stages of production and consumption, the UK can support action on promoting a multilateral approach. This should focus on processes and production methods, and it should build capacity on carbon accounting and standards. In addition, there are still carbon accounting issues as shipping and aviation currently fall outside of the scope of territorial carbon under the UNFCCC framework.
On the trade side, while trade and environmental sustainability structured discussions (TESSD) continue at the WTO, and within plurilateral discussions for agreement on climate change trade and sustainability (ACCTS), the issues around carbon accounting, standards and pricing do not yet feature. But we know improvements in carbon accounting are needed. This is becoming especially critical as compliance to carbon border adjustments mechanisms (CBAM) by low and middle-income countries, or proof of equivalence, will require strengthened capacity-building on carbon accounting and certifications.
2. Support improved coordination between climate and trade communities around carbon markets
Second, regarding international carbon markets covered under Article 6 of the Paris Agreement, the UK could support greater negotiation coordination between trade and climate communities. Indeed, the design of carbon markets should be undertaken in line with WTO principles to ensure fairness of access, transparency and minimise any trade distorting effects. Agreement on the principles of CBAM are needed by WTO members, especially since G20 members encourage carbon pricing mechanisms.
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 CBAM, as recognised by the high-level commission on carbon pricing. Common standards are key in this case to support the environmental integrity of carbon markets. So, there is a need to ensure trade negotiators participate in Article 6 negotiations under the UNFCCC or move beyond WTO technical observations of UNFCCC discussions towards greater collaboration between climate and trade negotiators regarding carbon markets.
3. Boost access to low carbon and resilient technology
Third, the UK could tap into the Technology Mechanisms discussions within the UNFCCC to pioneer an approach to progress on Environmental Goods and Services. 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. However, technology that can swiftly change production methods is not always immediately accessible, especially to low and middle-income countries.
In the trade arena, given the contentious issues around the lists used to define Environmental Goods, which are key to achieving climate targets, the discussions at WTO stalled in 2016. In addition to making progress within the TESSD, the UK could seek to support a multilateral process, that reviews the technological needs specified within low and middle-income countries’ Nationally Determined Contributions (NDCs). This would require detailed analytical work to understand NDCs’ technological operationalisation and ensure that trade is mainstreamed. In this way the UK could support closer collaboration between WTO and UNFCCC. Such an approach would also support the movement towards the greening of Aid for Trade (AfT).
4. Ensure Aid for Trade and climate finance work effectively together
Last, the UK is one of the largest AfT providers channelled to low- and middle-income countries. However, the environmental impact of this finance source and its contribution to mitigation and adaptation is not well understood at present.
With an unrivalled perspective of the issues conveyed by way of its role as co-host of COP26, it could help to take the necessary steps now to ensure that trade related support takes greater account of country’s climate objectives as communicated within their NDCs, as well as work to ensure alignment with climate finance principles.
Improved coordination between AfT and climate finance comes at a time when the COP15 commitment by high income countries to provide $100 billion a year by 2020 to low- and middle-income countries has still not been met and is likely to be the subject of difficult negotiations, especially in view of budgetary pressures because of the Covid-19 pandemic. Ensuring these two strands of vital finance work more effectively together in the future is urgent.
The climate emergency does not afford us any continued misalignments between trade and climate policy agendas. We have the tools, we know the issues at stake and how they relate. The UK must use its leadership to steer international trade on a climate compatible trajectory through greater coordination with climate negotiations.