Trade must be taken more seriously as an environmental issue

Countries’ carbon footprints are determined by what they buy and sell from each other, not just by their own production. So trade policy should play a role in countries’ efforts to decarbonise – alignment of the two is long overdue, write Laurence Tubiana and Richard Baron.

Laurence Tubiana is CEO of the European Climate Foundation. As France’s climate change ambassador at COP21, she was an architect of the landmark Paris Agreement. Richard Baron is director of the Trade Programme at ECF and leads the work of the 2050 Pathways Platform.

For the first time in its history, the UN’s annual climate summit will dedicate part of its agenda to trade policy.

Taking place on December 4 at COP28 in Dubai, the Trade Day will offer a much-needed focus on the vital role that international trade can play in the transition to a net-zero emissions global economy, alongside areas of more traditional concern such as energy, transport, and deforestation.

It is a subject that we at the European Climate Foundation (ECF) have been working on for several years now. Europe’s Green Deal target of net-zero by 2050 is one of the most ambitious climate targets in the world; it is also a global trading power.

The climate and trade policy communities need to consider the intersection of the two topics. For one, oil, gas and coal account for a staggering 40% of the volume of maritime trade. We can expect fewer tankers on the horizon as the world phases out fossil fuels.

Beyond this, traded goods account for around a quarter of greenhouse gas emissions, through the fossil fuels used in their production and transport across the globe.

Countries’ carbon footprints are determined by what they buy and sell from each other, not just by their own production. So trade policy should play a role in countries’ efforts to decarbonise – alignment of the two is long overdue. At the same time, trade plays a part in facilitating the exchange of environmental goods and services, without which the global transition will not be possible.

Over the last year, ECF conducted a strategic foresight project, ‘The Future of Trade in a Net Zero World’. The work set out three plausible “explorative” scenarios for 2040. To varying degrees, they all describe a world wrestling with increasing climate impacts on trade infrastructure and agricultural production, as well as geo-political tensions.

Several lessons can be drawn: the world of the next two decades is likely to contain unsettling surprises – but will be best able to navigate these and secure climate-aligned outcomes through trade cooperation and reforming the existing multilateral institutions.

The EU has led the way in this alignment, with the world’s first carbon border adjustment mechanism, alongside its regulation on deforestation-free products, and directive on corporate sustainability due diligence. However, a recent study found 1,000 climate change-related non-tariff measures introduced globally, indicating the green shoots of a more widespread reappraisal of trade.

The introduction of flagship “green trade” measures has not been easy – unsurprising given the current trade system and rules were never designed to take account of climate emissions. This dissonance has helped to fuel diplomatic tensions, as when many countries reacted negatively to measures to green the US economy under its Inflation Reduction Act and the EU’s response to it. Add to that politicians talking up the need to re-shore strategic industries and perceived failures to consider the impact on other countries, and the optics worsen.

These geo-political strains amount a serious challenge to the alignment of trade and climate and must be addressed. In this complex landscape, a simple appeal to shared values will not be enough for the EU. Its trade policy needs to support rather than hinder the climate ambition and development aspirations of trading partners.

As we argue in our report, the EU needs a step-change in approach, recognising that many of the new green trade instruments are perceived as coercive by some trading partners. Put another way, the bloc will have to offer some “carrots” alongside the “sticks”.

The supply of critical raw materials at the heart of the industrial transition is set to dominate the climate trade agenda. Meeting the rapid increases in demand for CRMs – like lithium for electric vehicle batteries – will not be possible without a far more equitable approach. This means satisfying producer countries’ desire to retain more of the value of what lies beneath their feet and avoiding the “resource curse”. In practice, this means investing in processing and manufacturing facilities in producer countries and sharing know-how. To do this, the EU will need to mobilise significant sums of public and private money.

The bloc must also play its part in bolstering the climate resilience of partners’ trade infrastructure – as well as its own. This year’s drought in the Panama Canal may be just a foretaste of future disruption to global trade routes due to climate change.

These are all important discussions to be had in Dubai, but a single Trade Day at COP doesn’t on its own signal the mainstreaming of trade as an environmental issue. We must make sure that this first exchange on the alignment of trade with climate goals at the UN Climate Convention is used as a catalyst to bring trade in from the cold. From here on it should be a regular fixture on the climate policymaking calendar.