Whilst the focus of the world’s media has been on the headline agreement reached by delegates at the COP28 meeting in Dubai in December 2023, the event has provided a forum for debate over a wide range of other climate change related issues. Trade has been one such topic and the World Trade Organisation (WTO) has used the meeting as an opportunity to highlight many of the policies being implemented by governments which seemingly contradict their commitment to carbon reduction.
One such issue is the level of tariffs on green-energy products. The WTO estimates that the average tariff on such goods amounts to 3.2% compared with 0.8% on crude oil and 1.6% on coal. In some countries tariffs are as high as 12%. The WTO believes that a re-balancing of tariffs would be a logical step in encouraging take-up of the new technologies. In the automotive sector, for example, electric vehicles exported to major markets face tariffs that are 1.6 to 3.9 percentage points higher than for fossil-fuel powered vehicles. This situation may worsen if the EU applies tariffs to imports of Chinese battery-electric vehicles.
The WTO also wants more consistency in the way that new green energy tax regimes are implemented, including carbon pricing and equivalent policies, in order to reduce policy fragmentation and compliance costs. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM) is regarded by many developing countries as discriminatory, pushing the costs of carbon mitigation onto the countries least able to afford them. The USA’s Inflation Reduction Act (IRA) is also accused of distorting the nature of trade flows and although it may provide a boost to the development of green technology in the short term, it may also result in more barriers to international trade in renewable energy equipment, an outcome which the WTO regards as regrettable.
Trade finance has also been highlighted as a means to encourage the development of green technologies and equipment. The WTO asserts that it is important for banks and other institutions to enhance their efforts to expand trade finance programmes by developing risk-sharing frameworks that support products underpinning the energy transition.
However, perhaps some of the most attainable gains would result from improved trade facilitation, one of the core functions of the WTO. Reducing border delays by the use of digital documentation could, for example, reduce emissions by up to 85% at land border crossings through lower customs clearance delays, according to the organization. Some of the biggest winners would be in the poorest regions where congestion at borders tends to be highest. Such ‘wins’ could be achieved by wider adoption of the WTO’s Trade Facilitation Agreement (TFA).
Global trade is regarded by many environmental lobbyists as a cause of carbon emissions, rather than as a way of their mitigation. Shipping, road freight and air cargo emissions are all targets of legislation aimed at encouraging green technology adoption. The WTO’s intervention at COP28 is designed to re-balance the argument by pointing out that fragmentation of trading systems can result in more emissions, not less. It seems unlikely, though, in the present political environment that their argument will make much headway, given the ascendancy of policies promoting protectionism and national subsidy which are now being adopted by most developed and developing countries.
Author: John Manners-Bell
Source: Ti Insights