The Brookings Institution Presents ... Trade and Climate Change: A Mutually Supportive Policy

Article excerpt

There are several links between trade and climate change, but in most cases these connections have been viewed as being in tension or in conflict. For example, there is concern that domestic climate change policies promoting renewable energy may be inconsistent with the rules prescribed by the World Trade Organization (WTO). There are further concerns that UN climate change discussions on the role of intellectual property may undermine WTO intellectual property rules.

The potential for conflict between trade and climate change policy is real. However, trade policy can also be used to support climate change action. In particular, an international trade negotiation to reduce trade barriers for goods developed using low-carbon processes could support climate change policy and create incentive for businesses to reduce their greenhouse gas (GFIG) emissions.

Uncertain Costs and Climate Change Policy

At the UN climate change conference in Cancun in December 2010, participating countries agreed that by 20.50 global average temperature increases should be kept less than two degrees Celsius above pre-industrial levels. Yet uncertainties over the costs of reaching this global goal loom large, particularly as this level of emission reductions will require all major economies to make significant transformations in the way they produce and consume energy in their transportation systems, industrial structures, and buildings. Moreover, many of the key climate change technologies, such as carbon capture and storage, smart grids, and storage for renewable energy are not fully developed. Nuclear energy, a key technology which many countries had included under their low emission scenarios, has been taken off the table in Japan and Germany after the recent Fukushima accident in Japan. A 2007 McKinsey & Company report estimates that by 2030 the annual worldwide costs of reducing emissions could be anywhere between US$750 and US$1,500 billion.

However, the discussion of costs in the UN climate change negotiations has been limited to the obligation of developed countries to fund the incremental costs of mitigating and adapting to climate change in developing countries. While developing countries are expected to be the most significantly affected by climate change, developed countries have contributed the most to current concentrations of GHG emissions and have the resources to combat climate change. At the December 2009 Copenhagen Climate Change conference, developed countries proposed two streams of climate change finance--"Fast Start" financing of US$30 billion between 2010 and 2012, and US$100 billion per year to be mobilized by 2020.

In contrast, the costs of meeting GHG mitigation targets have been left to each developed country to address. This is also true for large developing countries such as China, the world's largest GHG emitter, which will also have to significantly reduce its GHG emissions over time. However, China's trade surplus with the United States and European Union (EU) member countries, combined with its large holdings of foreign dept (including approximately US$1 trillion in US Treasuries), has made developed country financing of China's climate change policies politically infeasible.

The costs of reducing GHG emissions in developed countries has also raised concerns about carbon leakage and competitiveness. Carbon leakage arises when climate change policies lead to no net reduction in GHG emissions, as businesses seek to avoid the costs of climate change policies by relocating to developing countries with less strict climate change regulations. Competitiveness concerns are closely related to this issue and arise when the costs of climate change policies, which are most pronounced for carbon intensive industries such as cement, steel, and aluminum, lead to a loss of market share to imports from countries not facing similar carbon costs.

Any assessment of the costs of climate change policy also needs to account for the economic benefits, the most significant in avoiding the costs of climate change. …