Jodie Keane (Senior Research Fellow, ODI)
19 March 2020
The world is facing major climate change challenges. A number of important international discussions and negotiations are planned for 2020 that relate to trade and the environment. These include discussions around the 12th World Trade Organization (WTO) Ministerial and under the United Nations Framework Convention on Climate Change (UNFCCC), as well as deliberations by Commonwealth Heads of Government and Ministers as part of the United Nations Conference on Trade and Development. The decisions taken, avoided, blocked or misconstrued in these fora will influence how the international support architecture that governs trade and the environment supports or hinders inclusive and sustainable economic transformation.
Existing structures of production, consumption and transportation must be radically transformed to avert a global rise in temperatures beyond 2°C by 2050, to affect how and what we trade within global value chains and their processes of production. The international support architecture must urgently support these processes in order to secure climate-compatible trade and development strategies for the advancement of environmentally sustainable structural economic transformation.
This blog explores the issues and sticking points regarding securing ‘climate-compatible trade and development’ in view of important discussions this year. It explores the issues regarding advancing sustainable structural economic transformation. It identifies sectors at risk and reasons for this. It outlines the imperative of securing climate-compatible trade and development strategies to boost export diversification. And it concludes with key policy issues for consideration in 2020.
The international dynamics
The Sustainable Development Goals, adopted by Heads of Government in 2015, call for the following:
Take urgent action to combat climate change and its impacts (Goal 13)
Double the least developed country share in global exports by 2020 (Target 17.11)
Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework (Target 8.a)
Progress on these goals will be under increased scrutiny this year in view of major international events and given the ‘early harvest’ of some SDGs sought by 2020, including Target 17.11.
The Agenda for forthcoming discussions at the 12th WTO Ministerial could include a statement on trade and the environment to signal high-level political commitment to a multilateral trading system that better supports environmental sustainability. However, while it is true that much goodwill must be garnered at the highest political levels, bolder actions on multiple fronts are urgently required in order to avert the current climate crisis.
On the carbon emissions front, Nationally Determined Contributions must be dramatically increased at COP26 in order to achieve the Paris Agreement and zero carbon by 2050. The implications of more ambitious measures – recognised by the UNFCCC framework as having trans-boundary effects through the trade mechanism – must be seriously taken up by WTO members, either collectively or through like-minded approaches (e.g. through open plurilateral negotiations). Bridging UNFCCC and WTO frameworks means viewing climate and trade not as foes but instead as very important and close friends.
The scale of the task ahead is formidable. Emissions reductions commitments need to quadruple to limit global temperature rise to 1.5°C above pre-industrial levels. Many developing country governments are unlikely to take on such commitments where these are considered diametrically opposed to their traditional trade and development objectives.
Currently, levels of finance available through the Green Climate Fund fall well short of the total cost of implementation of climate action plans for 80 developing countries that have specified their financing needs (as part of the Paris Agreement) at an estimated $5.4 trillion – the order of magnitude of the total amount spent on energy subsidies every year in the world.
There are continued questions around how new sources of climate finance, traditional official development assistance and Aid for Trade could and should work together in order to support developing country-led trade and development strategies that upgrade environmental, social and economic outcomes. This is despite all parties to the Paris Agreement – 183 countries as of November 2018 – being committed to ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (Article 2.1c); with continued silence as to how to reconcile the issues regarding how commitments will affect trade.
How to secure climate change-compatible trade and development that boosts structural economic transformation?
ODI’s SET programme defines economic transformation as a continuous process of:
- moving labour and other resources from lower- to higher-productivity sectors (structural change) and
- raising within-sector productivity growth.
Climate change is directly linked to patterns of economic transformation and will increase the urgency with which labour must move from low-productivity agriculture into higher-productivity sectors. Opportunities to release labour and other resources from lower-productivity activities into others include horizontal and vertical economic diversification, defined as:
- horizontal export diversification (extensive margin) into completely new export sectors
- vertical diversification (intensive margin) out of primary into manufactured exports.
Adaptation to the physical effects of climate change and related regulatory effects will affect both of these strategies. New strategies at the country level need to be designed, to increase the resilience of existing productive structures, to move into new products and services related to global climate change mitigation efforts and to make full use of rights provided by the international trade regime.
These strategies include relieving the current deadlock in liberalising trade in environmental goods and services; considering new lists based on science; bringing into the WTO discussions around accounting for carbon and related monitoring, reporting and verification frameworks within specific sectors; and securing an outcome on fisheries subsidies negotiations at the Ministerial, which could secure momentum to address fossil fuel subsidies. Momentum at the multilateral level is crucial. If the system cannot deliver, in this last decade of action to advance the 2030 Agenda, critical reflection is required on what new types of partnerships, coalitions and likeminded action groups are necessary.
Sectors at risk from climate change
The risks of inaction are getting higher and certain patterns of economic transformation are becoming impossible. Sectors most at risk from both the physical and the regulatory changes involved in climate change are also those on which developing countries rely for economic and social development. The most vulnerable countries to climate change are typically those with the least diversified exports. These tend to be the lowest-income countries, since export diversification tends to rise with incomes. Entry into low-skilled manufacturing sectors (e.g. garments) through the expansion of the GVC mechanism over recent decades has provided one major pathway out of poverty, for millions. Now, border carbon adjustment measures pose very real risks to such conventional trade and industrial development strategies.
Facilitative rather than punitive measures that encompass broader economic social and environmental upgrading strategies are urgently required. Some examples include:
- Oil, gas, coal: matching with carbon capture and storage technologies
- Energy-intensive trade goods: supporting renewable energy deployment through Aid for Trade; ensuring recognition of equivalent emissions reduction schemes
- Tourism: supporting carbon offsetting markets and carbon accounting for destination countries; ensuring the aviation industry addresses its own carbon footprint
- Agriculture: recognising the important role of good agricultural practices in carbon sequestration; ensuring the maritime industry addresses its own carbon footprint.
Consultations on market-based approaches to reducing greenhouse gas emissions, such as carbon pricing schemes, carbon clubs and border carbon adjustment measures between private and public sector actors, are underway (e.g. led by International Chambers of Commerce). Getting lead firms on board is crucial to address arising risks and threats to conventional trade and development strategies. However, different strategies will be needed to ensure public policy frameworks can induce the shifts required in private sector behaviour. The top 15% of firms typically account for the lion’s share of international trade. It is important to understand how value chain governance can influence who bears the ultimate risks and costs of compliance through movement towards greener production and consumption standards. This requires consideration of how donors can best support environmental in tandem with social and economic upgrading and the effective design of carbon reductions-related standards.
While the economics of climate change have changed dramatically in recent years through the availability of lower-cost technologies, in particular the reducing costs of solar energy (important considering that electricity accounts for around a quarter of carbon emissions), governments and private sector actors still need much more support in their mobilisation. This includes technical assistance on the ground related to project and risk assessment, not so dissimilar to the more general needs of trade-related infrastructure within the broader Aid for Trade framework; an enhanced environmental facility may be needed.
Trade is a key transmission channel of the effects of climate change, which will transcend borders. Effectively acting in response to crises (as the unfolding of the coronavirus now demonstrates) requires governments to act in concert; learn from each other; share information; sustain open trade; and support markets through financial stimuli. All of these actions can help address the climate change emergency; some of them can be initiated now in order to slow, and avert, the climate crisis and induce sustainable structural economic transformation. The numerous important international trade and environment fora this year can help put countries on an inclusive and sustainable economic transformation path.
Photo: Wind turbine farm in Tunisia. Dana Smillie / World Bank. CC BY-NC-ND 2.0