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COP28: How to change the conversation on climate and trade

Container ships loading/unloading in port
For the first time at a climate conference, there will be a day dedicated to the role of global trade in the energy transition at COP28 (Photo: Mrzphotoproducer/Envato)

Trade will have its own day at COP28, but experts are unconvinced discussions will focus on answering the thorny questions that will have to be tackled if the global trade in goods is to genuinely boost climate action and help bring down emissions

“Trade is part of the solution to the climate crisis,” said Ngozi Okonjo-Iweala, director-general of the World Trade Organization, as she unveiled plans in October 2023 for a trade pavilion at COP28.

Okonjo-Iweala has been vocal about her belief in the synergies between trade and climate action since she was appointed to lead the WTO in 2021, and for the first time at a climate conference, COP28 will dedicate a day to the role of trade in the energy transition.

Marc Vanheukelen, former EU climate ambassador, EU WTO ambassador and trade director at the European Commission, has a list of subjects he “hopes” will be discussed around trade at COP28, but “I don’t harbour too many illusions”, he says.

“There is lots of discussion about how trade should become more instrumental in helping the fight against climate change,” Vanheukelen tells Sustainable Views. “But I think it is fair to say that until now all this has stayed fairly general and I am afraid COP28 will be more of the same.”

He singles out three issues he believes should be on the COP28 agenda.

First up is a call for a discussion about how tariffs could be removed from environmental goods to facilitate the dissemination of clean tech products.

“We tried in 2016 with the Environmental Goods Agreement, but it fell flat,” says Vanheukelen. “I haven’t seen any real attempt to get this off the ground again.” There is also the thorny question of what exactly constitutes an environmental good, he notes.

Figures published by the UN Conference on Trade and Development in March 2023 show that trade in “environmentally friendly goods”, defined as products designed to use fewer resources or cause less pollution, such as electric vehicles, non-plastic packaging and wind turbines, grew by around 4 per cent in the second half of 2022, reaching a record $1.9tn.

The second issue Vanheukelen lists is that which the EU is trying to engage with through its carbon border adjustment mechanism, whereby the same product, like steel, is treated differently when traded because of the way it is produced. The ability to discriminate in this way is “not really allowed by the current multilateral trade book”, he says.

Vanheukelen is optimistic about the potential for the CBAM to bring about change. “I think it has been carefully crafted and I think there is a very fair chance it will be considered WTO compatible as it doesn’t discriminate between domestic and foreign producers,” he says. Further, “one of the intentions of CBAM is that it is imitated elsewhere”, he adds. Indeed, the UK chancellor Jeremy Hunt announced the introduction of a UK CBAM in this week’s Autumn Statement.

Subsidised solar panels

Vanheukelen’s third ask for COP28 is for a discussion on “environmentally helpful and harmful subsidies”. He cites the 1994 WTO Agreement on Subsidies and Countervailing Measures, which was designed to reign in government “beggar-thy-neighbour” public financing schemes. But, he continues, the ASCM was not designed with climate change in mind and does not allow for the fact that environmentally helpful subsidies in one country can scale up clean technology, make it cheaper and thereby benefit the rest of the world.

“It is, in part, because China heavily subsidised solar panels that we have so many solar panels on European and American rooftops,” says Vanheukelen.

Yet, such a stance is unlikely to garner much favour from EU officials, who are desperately focused on trying to create a “made in Europe” energy transition and are deeply concerned that the EU’s loss of its solar industry could be repeated for other clean technologies.

Ten years ago, the EU imposed anti-dumping and anti-subsidy measures on imports of solar panels from China after seeing the devastating impacts on Europe’s solar industry from cheaper imports.

In September 2023, the European Commission launched an investigation into whether to impose punitive tariffs to protect EU electric vehicle producers against cheaper Chinese imports it says are benefiting from state subsidies. The commission is also scrutinising foreign subsidies as part of a broader swathe of action to support the EU wind industry.

Meanwhile, the Financial Times reported last week that France has signalled it would agree to delay the introduction of tariffs on electric vehicle sales between the UK and EU, which were due to come into effect in January. Some EU countries are concerned that any void left by the UK would be filled by Chinese cars, with impacts on EU competitiveness.

It is, in part, because China heavily subsidised solar panels that we have so many solar panels on European and American rooftops

Marc Vanheukelen, former EU climate ambassador

 

Vanheukelen describes the need to reduce emissions, while creating jobs and growth in new industries as “a very difficult and delicate balancing exercise”. He says: “This is not only about fighting climate change, it is also about who has a leading edge in the fourth industrial revolution.”

In this sense, “industrial policy and climate policy” are “uneasy bed fellows”, he says, expressing empathy for EU manufacturers who are struggling, but insists again on the potential global benefits.

The WTO is the place for a wider discussion on this subject, says Vanheukelen. He underlines the need for “disciplines” on environmental subsidies — they should not be allowed to be used as “an alibi to wipe out the industry of others”. But he insists the differences between environmentally helpful and harmful subsidies and how to deal with them should be up for discussion.

Regarding harmful subsidies, he cites the data published by the International Monetary Fund in August 2023, which shows that fossil fuel subsidies reached $7tn in 2022, equivalent to 7.1 per cent of global gross domestic product. “Explicit subsidies (undercharging for supply costs) have more than doubled since 2020 but are still only 18 per cent of the total subsidy, while nearly 60 per cent is due to undercharging for global warming and local air pollution,” says the IMF.

“The ASCM has a list of prohibited subsidies,” says Vanheukelen, suggesting this should perhaps be enlarged to include subsidies to fossil fuels to “tell the world that in seven or 10 years, subsides for the production and consumption of fossil fuels should be outlawed”.

Wrong diagnosis

“The incorporation of trade angles in the climate conversation is valuable and overdue,” Tom Wills, managing director of UK non-profit Trade Justice Movement, tells Sustainable Views. “We are very pleased to see this trade and climate day at COP.”

Wills says he is “anxious,” however, that while “the focus is right, the diagnosis is wrong”. He adds: “The global trading system is designed to increase production, consumption and to lower barriers to trade, and it seems that the response to the climate emergency is to follow roughly the same path with some small tweaks. It is great we are talking about trade but we need to change the conversation.”

At COP28, Wills would like to see a discussion around how the rules governing technology transfer and IP protection can be changed to enable countries and companies in the global south to develop their own clean technologies rather than having to buy from corporates in the global north.

He would also like more focus on what initiatives like the CBAM will mean for poorer countries. “Anything that brings global emissions down is positive, but we are concerned this approach will disproportionately punish countries in the global south that have not had the investment historically to develop non-carbon-intensive technologies,” he says.

It is great we are talking about trade but we need to change the conversation

Tom Wills, Trade Justice Movement

 

In a report, timed to be released as UK chancellor Jeremy Hunt announced his Autumn Statement, the Trade Justice Movement calls for some developing countries to be exempt from the scope of a UK CBAM scheme or to be given long transition periods.

“We don’t propose that this adds up to a free pass for poorer countries to just continue to follow polluting industrial policies, but without support, investment and transition periods we think it is unlikely that these countries will just magically start producing clearer goods,” Wills explains.

Vanheukelen says that with direct foreign investment or technology transfers to these countries, “producers in third countries that are exporting to the EU will have an incentive to change”.

Is ISDS needed?

Wills’ third wish for the COP28 agenda is the much-maligned investor-state dispute settlement mechanism, which environmental campaigners have insisted for years allows big corporates to undermine policies aimed at reducing emissions or protecting nature.

The most-criticised body in this system is the Energy Charter Treaty, which Germany, France, the Netherlands, Spain and Poland have all announced plans to withdraw from because of its incompatibility with the Paris Agreement, and the UK is expected to announce its decision on whether to stay or leave the ECT later this month.

The Guardian reported last week that Klesch Group Holdings Limited, a Jersey-based oil-refining company, is using the ECT to sue the EU, Germany and Denmark for at least €95mn over a windfall tax introduced during the Ukraine war that it sees as a “pretext” for undermining fossil fuel companies.

While many believe the ECT may be tottering towards its end, it “is just one part of a global structure”, says Wills. “We need to dismantle the ISDS system wholesale.”

A briefing published ahead of COP28 by the International Institute for Environment and Development and the Columbia Center on Sustainable Investment shows fossil fuel businesses have been awarded more than $80bn of taxpayers’ money through ISDS since the first case was brought in 1977.

Vanheukelen’s stance on the issue is less radical. “ISDS should not unduly constrain the policy space of countries and should be modernised,” he says. “But we need it otherwise many companies will hesitate to invest, especially in third countries that are not well known for an independent judiciary. ISDS gives them the possibility of international arbitration.”

A final call from Wills is for free trade agreements to include “strong binding commitments on the environment and climate”. Analysis by the UK government on the recent FTA between the UK and New Zealand estimates the deal will lead to an increase of “around 50 per cent in transport emissions associated with trade with New Zealand”.

While trade reform per se to genuinely boost the energy transition may be slow going, Vanheukelen believes that EU policies such as the recent EU anti-deforestation law that will ban products from areas linked to the destruction of forests, will have an impact on trade globally.

“The EU is using more and more access to the internal market as a normative lever to promote sustainability worldwide,” he says. “It is a powerful instrument, but it does not make us friends all over the world.”

A service from the Financial Times