By Shahina Azeezdeen
Effective climate change policy requires consideration of multiple complex factors, and often includes the balancing of trade benefits against the benefits of more environmentally sustainable practices. Although implemented under the understanding that they ensure environmental protection, such policies could have positive or negative trade impacts. Shahina Azeezdeen, the Research and Publications Manager – Internal from the Moot Court Bench International Trade Law Program, interviews Vishva Subramaniam — an expert on Aid for Trade measures relating to Climate Change at the World Trade Organization. Vishva is an Economic Affairs Officer at the WTO and worked as a Research Assistant at the Institute of Policy Studies of Sri Lanka. He holds a Master’s in International Affairs (Trade and Environment) from the Graduate Institute of International and Development Studies and a B.Sc. in Economics and Mathematics from Birmingham-Southern College.
Q: Could you give us an introduction to the different types of climate change policies, specifically with regard to WTO’s policy on climate change?
A: Since the Paris Agreement in 2015, Climate Change has emerged an increasingly important topic at the World Trade Organization and other multilateral organizations. At the WTO, more and more Members have expressed interest in addressing trade and climate change issues. However, text-based negotiations on this topic have been, let’s say stymied, by a lack of clarity on how trade and climate interact with each other. Research has not clearly established how cross-border trade effects the climate and conversely, how climate change impacts trade patterns.
Nevertheless, WTO agreements have always prioritised sustainable development. If you look back to the preamble of the Marrakesh Agreement, which is the agreement that establishes the WTO, the first article says that “sustainable development” is a key objective of the organization. It is worthwhile to note that this text was agreed upon in 1994. Sustainable development did not effectively enter the multilateral lexicon until 2015. You can thus say that there was a degree of forward thinking among Members on the issue of global externalities when the organization was established.
Now, on the topic of climate objectives. Firstly, at the outset, we can say that the WTO rulebook complements domestic climate change objectives. This is because WTO rules help establish a transparent and predictable trading system for goods and services essential for combatting climate change. For example, let us look at renewable energy technologies like solar PV and wind turbines. Under Most Favoured Nation (MFN) considerations, all WTO Members are obliged to bind tariff rates to a percentage value that they cannot exceed. Such tariff bounds are in place for products associated with these technologies as well. This bound reduces trade costs and improves transactional predictability, therefore increasing affordability and the diffusion potential of renewable energy products in local markets.
Many WTO Members feel that we can go beyond MFN bounds, to create a new set of trade rules that increase the reach and affordability of climate-related goods and services. Negotiations for an Environmental Goods Agreement (EGA) is one example of this thrust. The EGA is a plurilateral initiative involving forty-six WTO Members that was started in 2014. Through EGA negotiations, Members tried to carve out a list of critical environment-related goods that would be liberalised (i.e., be traded on zero-tariff terms). Unfortunately, negotiations have stalled since 2016, as Members (among many other reasons) are yet to agree on what constitutes an “environmental good”. This is because many of the goods that can be classified as serving an environmental purpose are assembled using industrial products that may have various uses. For instance, assembling a solar panel requires rotary panels and thermostats. These in turn can be used to assemble other products, with “non-environmental” uses. Members are hesitant to create flexibilities that may create unintended spillovers effects affecting other industries.
Secondly, another critical angle we must consider is the compatibility of domestic climate policies with non-discriminatory provisions found in the WTO rulebook. To elaborate, WTO laws are underpinned by “non-discrimination” obligations, in that trading partners must treat each other equally. But climate policies can create trade distortions, as those entering the market will now need to comply with domestic regulations. So, there are grounds for a contradiction here – climate policies can come into conflict with WTO laws.
This is where the flexibilities provided by “Article XX of General Agreement on Tariffs and Trade (GATT) General Exemptions” come into play. Article XX lays out specific contexts where Members can be exempted from WTO rules to fulfil domestic policy objectives. However, this flexibility comes into legal play if and only if it can be shown that a unilateral policy is unavoidable (for example, to protect an exhaustible resource) and that local firms also must comply with equivalent domestic measures. So, for instance, if a WTO Member enacts a climate-related policy, the Member must be able to show (if requested in a consultation) that the policy is critical to protect domestic environmental interests and that domestic producers also face a policy burden roughly equivalent to that faced by the importer. The latter obligation fulfils the WTO’s “National Treatment” provisions under Article III of GATT.
This sounds easy, but we know better. After all, nothing at the WTO comes easy! It is not easy to empirically prove the critical nature of a unilateral policy and to equate national treatment provisions for domestic climate-related trade policies. But there has been a lot of very interesting cases that budding trade lawyers such as yourself may find interesting in this context. Excellent references can be found in this article drafted by WTO colleagues.
So where are we at currently? Members are continuing to pursue climate change discussions, primarily through the Committee on Trade and Environment (CTE). The CTE Membership has the mandate to identify, understand and negotiate on matters relating to trade and the environment. WTO Members also meet in a few complementary working groups (or streams) that act as a platform for information sharing. These include for instance the Trade and Environmental Sustainability Structured Discussions (TESSD), the Informal Dialogue on Plastic Pollution and Environmentally Sustainable Plastics Trade (IDP) and the Fossil Fuel Subsidy Reform (FFSR) initiatives.
Q: How does Aid for Trade measures come into play in relation to WTO climate change policies? What kind of Aid for Trade measures have been given effect in this respect?
A: The Aid for Trade initiative emerges from the Hong Kong Ministerial Conference in December 2005. During the initial phase of the Doha round, WTO Members realised that developing countries and Least Developed Countries (LDCs) need adequate supply side capacity support to benefit from the multilateral trading system. As an example, let us take Bolivia, a WTO Member categorized as a Landlocked LDC (LLDC). If Bolivia does not have the proper infrastructure (railways, roadway etc.) and firm-level policy support, its trade costs will be higher than competitors. It cannot be competitive in the international market. The benefits of joining the WTO therefore cannot be realised. This is the gap that Aid for Trade is supposed to address.
Since trade is a broad and complex activity, Members were not able to create an exact definition for Aid for Trade. Instead, Aid for Trade support falls under four broad categories. There are support for: i) trade Policy and regulation – that is assistance to build and formulate effective trade policy; (ii) trade-related economic infrastructure – that is investments in ports, roads power plants etc to help expand supply-side capacity; iii) Productive capacity-building – that is support to strengthen domestic institutions and increase export competitiveness (like the work done by the International Trade Centre); and iv) adjustment assistance – helping those who face the burden during trade liberalization.
It is important to note here that the WTO does not disburse Aid for Trade assistance. The organization’s involvement is part of the “coherence” mandate that was mandated by the Aid for Trade task force (which set up the Initiative). As part of the coherence mandate, the WTO monitors and evaluates the initiative, and encourages coordination between Aid for Trade stakeholders.
Aid for Trade is part of the Overseas Development Assistance (ODA) package. And we see that ODA in aggregate is steering towards climate change objectives. For example, Members of the OECD (Organization for Economic Co-operation and Development), who are often the main donor States, have committed to aligning their development assistance to Paris commitments. Significant multilateral and regional lending institutions like the World Bank, Asian Development Bank and the Inter-American Development Bank have made similar commitments.
Naturally this has also influenced Aid for Trade alignment to climate objective measures. Aid for Trade is slowly starting to help countries, developing countries, and LDCs benefit from this transition. It is moving away slowly from brown investment into green infrastructure and support for Micro, Small and Medium Enterprises (MSMEs) to adopt greener practices. WTO and OECD research in fact reveals that 51% of all Aid for Trade commitments made in 2021 pursue climate objectives. We expect climate alignment to only increase over the coming years.
Q: When looking at Sri Lanka, some of the countries that Sri Lanka trades with include countries like the US, China, India, and the EU. Are there any trade related climate change policies that have been implemented in these countries?
A: Some countries have taken significant steps in adopting a climate agenda. Examples I can point to are the United States (USA) and the European Union (EU), two significant export markets for Sri Lanka. They have enacted several domestic policies that may have ramifications for Sri Lanka’s export potential.
One policy measure that has received substantial attention recently at the WTO is the EU’s Carbon Border Adjustment Mechanism (CBAM). In effect, the CBAM will be a levy or surcharge on the import of carbon-intensive products into the EU market. It has been designed to reduce “carbon leakage”, that is the flight of production into countries with less-stringent pollution standards so as to benefit from lower compliance costs. Hypothetically the CBAM can ensure that all goods consumed in the local market comply with carbon-regulations.
The EU has notified that the CBAM is compatible to WTO rules. Brussels believes that the CBAM is MFN compliant since all trading partners must comply without exemptions. They argue that CBAM fulfils national treatment rules (Article III) as domestic manufacturers must participate in the EU Emissions Trading Scheme (ETS). And finally, the EU believes that CBAM fulfils conditions to call on Article XX of GATT, as the removal of carbon is necessary to protect the environment.
But (surprise, surprise!) not everyone interprets the rule book this way. Most developing countries have echoed concern that the CBAM is not consistent with the MFN principle. They argue that the measure places an unfair burden on their domestic producers, as many do not have the resources to comply with the measure. This is an evolving discussion at the WTO.
The CBAM comes into effect in 2023 for a limited number of carbon-intensive goods such as cement, aluminium, fertilizers. But of course, this is just the first stage. The second stage will likely involve more goods that developing countries have more exposure to.
Here, I would like to point out that market dynamics are changing globally to favour climate policies. For instance, the Inflation Reduction Act (IRA) enacted by the USA for instance has a lot of clear environmental centric provisions. There is every chance that USA may build on the IRA to enact similar provisions as CBAM for their domestic market.
Roughly 70% of Sri Lanka’s merchandise exports comprises of tea and textiles and garments (T&G) export. The EU and USA are significant export destinations. In the future iterations of CBAM, there is a likelihood that exports from this sector will face more transparency obligation and labelling requirements to prove compliancy. This will place additional costs and complications on the exporter. Therefore, firms and policy makers need to prepare for this so as to ensure that the adjustment costs do not have significant social impacts.
Q: In terms of the best practices in the market, what measures could a country like Sri Lanka take to ensure that they are not burdened by certain climate change policies that, although reflected in the form of a climate change policy, could have certain implications on trade?
A: You see a lot of momentum among developing countries. One area where we see much focus on is in the development and adoption of strategies to measure environmental impact. By measuring, we can find out where companies, countries or sectors stand when it comes to areas of interest for export market (such as embedded carbon and deforestation content). Many countries have already taken steps to align domestic carbon content measurement methods to international standards. They do not want to be standard takers, but rather standard makers in the process.
Another area where developing countries like Sri Lanka have taken positive steps is in the recasting of existing sustainable practices as a strength factor. Take Kenya as an example. Over 80% of electricity generated in Kenya is from clean energy sources (hydro, solar, geo-thermal and wind). That is a huge plus factor. Any good that is produced in Kenya now has a better chance to automatically fulfil carbon requirements. This is useful for domestic producers since they have less concerns of potential market access issues. Secondly, clean energy availability serves as a USP (unique selling point/proposition) to attract investment. Firms (potentially from developing countries with a higher natural carbon footprint) maybe be willing to invest into the domestic economy to ensure they comply with border restrictions in export market.
Another best practise is to employ impact evaluation methods to see who the losers from international policy measures are. For instance, in developing countries like Sri Lanka, there is often this tendency to look at an export sector in aggregate. However, if you look at stakeholder impacts granularly, you may have a scenario where the smaller players (like MSMEs) face more negative impacts than the larger players. It is important to have remedial support measures to ensure that their welfare is not affected by adjustment effects.
Finally, let me throw down a caveat. Development and climate change can contradict each other. This is a juxtaposition that budding professionals from the developing world, such as yourself, are exposed to. Climate change policies can spell adverse development impacts. Let me give you an example. The EU also has a Deforestation-Free (EUDR) policy. The regulation hopes to fulfil a SDG goal of minimizing the environmental impacts of economic activities. However, as argued by a few WTO Members, deforestation is usually directly linked to communities closest to forested terrain. Communities that are statistically the most vulnerable parts of the population. An enactment of a policy that faces deforestation thus does not just have export impacts, but it also affects the most vulnerable communities. Countries need to really understand what is happening there. If adequate assessments are not made, we hurtle into dangerous grounds, where the communities affected are those who are considered as the most vulnerable.
This is a contradiction that WTO Members understand and are currently deliberating extensively upon. Hopefully we will see positive developments in this space in the future.
The views and opinions expressed by experts in the In-Discussion Series of the Comparative Advantage Blog are those of the experts and do not necessarily reflect the views of the Moot Court Bench.
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