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Trade in a carbon-constrained world: adapting to climate change and the changing global trade environment

Written by Jodie Keane

New products, services and mindsets will be needed in the transition to a low carbon global economy. Developing countries will need help to adapt to the physical effects of climate change itself and to the changing rules and regulations (public and private) likely to shape trade in products and services, in a carbon constrained world. Poor countries will need to adapt to the new market opportunities arising from efforts to mitigate climate change, as well as to climate change itself.

This blog argues that the two efforts are related: tapping effectively into new market opportunities that arise from global efforts to mitigate climate change could release additional resources for investments to increase resilience to climate change and adaptation to its impact.  It reviews some of the new products and services that are going to be needed as we move to a global low carbon economy, and how existing trade instruments and new sources of climate change finance could  work together to harness new market opportunities for poor countries. It refers specifically to opportunities in the agricultural sector, the main source of comparative advantage and employment in poor countries, and the sector most vulnerable to the physical effects of climate change, as well as begin the sector that is most distorted globally as a result of trade policy. 

What products and services will be in demand in a carbon constrained global economy?
There are three main categories with particular relevance for agricultural exporters:

  1. Carbon: Around one third of the total carbon mitigation efforts required to avoid dangerous climate change (i.e. an increase in global temperatures of not more than 2oc) fall within the ‘terrestrial carbon’ category. This refers to the carbon that is locked up in soils and forests and is released if land is cleared, or sequestrated if good agricultural practices are applied and forestry reserves are left alone or encouraged to expand. Almost half of sub-Saharan Africa’s (SSA) emissions come from the land use change and forestry sector (LUCF). Expanding the scope of carbon markets to include a soil compliance market for the Least Developed Countries (LDCs) – most of which are located in SSA – could enable new sources of climate change mitigation finance to play a greater role in promoting sound land management practices, with all the related impacts on productivity.
  2. Certified low carbon agricultural products: That low carbon products must be certified as such is likely to be a growing trend in the transition to a low carbon economy. The effective inclusion of LDCs and low income agricultural exporters in carbon labelling schemes could offer important opportunities for global carbon emissions reductions by incentivising increased trade. Kenya, for example, is a far more carbon efficient production location for cut flowers than the Netherlands, even if the emissions associated with air freight are included. A carbon accounting exercise using life cycle analysis would, most probably, reveal the same result if applied across a range of other agricultural products, including those that are processed. Increased trade in certified low carbon agricultural products is a global climate change mitigation strategy. But without a well designed accounting methodology there are risks that some low carbon products are not recognised and that poor producers will, therefore, lose out.
  3. Biofuels and other environmental goods: Bioethanol produced from sugar cane is the most GHG efficient biofuel in terms of greenhouse gases (GHG). However, concerns that land may have been cleared to produce other types of biofuel (such as palm oil) have given  this type of low carbon fuel a bad press. Bioethanol is not recognised in the current list of environmental goods and services in circulation. But LDCs and low income country exporters of sugar cane could seek alternative markets to the EU, as preferences for sugar in this market are reduced, and as demand in other markets for low carbon fuel, such as bioethanol, increases. This may include international export markets as well as the domestic market to substitute for other types of fossil fuel use.        

How could and should existing trade facilitation tools and new sources of climate change finance work together?
To capitalise on global carbon mitigation efforts, as suggested, there are a number of ways in which existing trade facilitation measures could be put to use. For example, the experience of the CDM to date suggests that LDCs are likely to need assistance to access carbon trade opportunities, including help to verify and certify emissions offset. (The high transaction costs associated with project preparation and implementation are finance related barriers.) As carbon markets develop globally, there may be lessons to learn from the experience of participation in other types of commodity markets to date by LDCs and low income countries. If carbon labelling becomes more prominent, developing countries should be involved in standard setting and commensurate support should be given to national accreditation systems. Experience from other types of ethical labelling schemes suggests that the high costs of proving compliance can reduce coverage, and bar entry  for some producers.  

Aid for Trade aims to help developing countries design and implement trade policy effectively and help their  producers to compete, given the policies, markets, products and conditions which they face now and in the future As a recent review suggests, there is clearly scope for Aid for Trade and new sources of climate change mitigation finance to work together: both are about the delivery of global public goods; and many donors programming Aid for Trade are also providing mitigation and adaptation finance. But coordination between institutions and programmes needs to be improved and checks and balances put into place.

Policies that support and promote trade in low carbon products are vital to the mitigation of dangerous climate change. This applies to all products and sectors, but particularly in relation to agriculture: the increased stress to agricultural production systems that could result from climate change makes reform in global agricultural policies even more important and urgent."