Trade is a tool; wield it carefully

The time I’ve spent at ICTSD has taught me a lot about the relationship between trade and the environment, and in this blog I’ve taken a moment to reflect on what I’ve learned. Enjoy!

Many people think of trade as being this big evil machine that destroys the environment on its path towards specialization and economies of scale.

If left to its own discourse trade could lead to this “race to the bottom” where countries open to international trade and investment adopt looser environmental standards in order to not lose international competiveness.

The opposite may also hold true. Trade allows countries to get more of what they want, which includes environmental goods. If appropriate institutions are in place then the demand for higher environmental quality could lead to effective regulation, and a lower level of desired pollution.

What is difficult to argue about, however, is that trade and climate change are interconnected in more ways than one.

Firstly, climate change will lead to physical impacts on trade including changes to what countries specialize in and export. For example, production patterns for coffee, which is the second largest traded commodity after oil, are shifting due to changes in climate.

Secondly, trade contributes to climate change through the emissions that result from transporting goods and services around the globe. Trade also contributes to climate change because when a country opens itself up to trade it usually results in economic growth and therefore more production and consumption. This growth can then enable governments to tackle climate change (China is a good example of this!).

Thirdly, trade policy itself can be used to combat GHG emissions. Trade barriers can limit diffusion and uptake of renewable energy technologies. If trade in clean technologies can be liberalized then it will result in the scaling up of production, innovation, and development due to lower costs. The Environmental Goods Agreement (EGA) currently being negotiated in the World Trade Organization (WTO) is one example of this.

Lastly, climate policies can affect trade both negatively and positively. Trade can be used to maximize where the climate benefits are, for example, through carbon markets such as an Emissions Trading Scheme (ETS). In an ETS a cap is set on the amount of carbon emissions allowed and then firms can trade allowances for a certain amount of pollution. Getting the right price signals can be difficult. The EU, for example, over sold allowances that messed with the price, limiting the quantity of emissions reductions.

Many institutions have been looking at the benefits of linking emissions trading schemes or even creating a special club of carbon markets where a country with an ETS can transfer allowances with other countries that also have ETS’s. Mitigation can be more effective but there would have to be an incentive to join the club. The club would need to provide goods from which others are excluded, and one possibility being discussed is the use of border carbon adjustment measures. Countries outside of the club would be charged a tariff on imports to make up for the carbon price difference.

I think that there is a huge opportunity for trade to be a part of our solution towards a more sustainable future, by encouraging investment and transfer of cleaner technologies, but it’s a tool that must be wielded carefully.

There must be a balance between supporting open trade while ensuring that governments can respond to pressing environmental challenges of the 21st century.