Trade and climate transition

The United Nations´ Sustainable Development Goal (SDG) 13 aims for urgent action to combat climate change and its impacts. This article addresses the question of how trade policy can support the climate transition.

There are several channels through which trade policy can make important contributions to mitigating climate change. For instance, it can work towards tackling fossil fuel subsidies, spreading climate friendly technologies and practices, and improving the effectiveness of national climate policies.

Why trade policy matters

In an ideal world we would have an effective global carbon price covering greenhouse gas emissions in all sectors including international aviation and shipping, credits for carbon storage and the price set at the level needed to meet the temperature target set out in the Paris Agreement. In this world, trade policy would not play an important role. Imports and exports around the globe would be subject to the same policy environment, making decisions about where to produce goods less relevant from a climate perspective. However, this ideal situation does not exist, so trade policy still matters.

How can trade policy help?

1. Strengthening national climate policies

Trade and trade policy can weaken or strengthen the effectiveness of national climate policies. National climate policies and their ambitions differ, as they should under the system of nationally determined contributions set out in the Paris Agreement. But this means that firms operating in regions without carbon pricing or equivalent regulation will face lower production costs and may not have the same incentives to decarbonise production methods. If this leads to a competitive advantage on global markets, then production can shift from regions with stricter climate policies to those with less strict policies while increasing emissions. This is often referred to as leakage. In the absence of a global carbon pricing system, several countries and regions are introducing carbon border taxes to counteract leakage in support of domestic climate goals.

The National Board of Trade analysed carbon border adjustments in the following report: Border Carbon Adjustments

2. Reducing the costs of climate friendly goods

Another issue is that trade barriers make the diffusion of environmentally friendly goods and services more expensive. Trade policy instruments that promote innovation, productivity and technology transfer for climate friendly goods and services will help reduce the problem. Removing trade barriers for climate friendly goods and services would help with technology transfer and make the green transition cheaper.

The National Board of Trade has published several reports on this topic:
The Role of Trade in the Green Transition
Trade and climate change – promoting climate goals with a WTO agreement
Green Services in the Single Market
Trade barriers to goods and services important for climate action

3. Open up larger markets with regulatory cooperation

Openness to international markets and competition can bring productivity benefits and lead to the economies of scale required for climate friendly products to compete with high emission alternatives. International regulatory cooperation and the use of international, climate-focused standards can also help reduce technical barriers to trade, promote innovation, and make climate friendly goods and services more competitive. The following report explains how regulatory cooperation can contribute to the climate transition:
Supporting the Green Transition through Regulatory Cooperation within the Trade and Technology Council (TTC).

4. Remove fossil fuel subsidies

Last, and perhaps quantitatively the most important, is the continued existence of massive fossil-fuel subsidies. These policies actively encourage more carbon emissions and distort trade in a way that favours fossil fuel intensive products. The institutions and frameworks of trade offer a useful forum and tools for dealing with the fossil fuel subsidy problem. The National Board of Trade has investigated what might be done in the WTO to address this issue:
Trade and climate change – promoting climate goals with a WTO agreement (chapter 5).