Global Sustainability Agenda #19: Reimaging the Global Trade System Aligned with National Commitments to Net-Zero GHG Emissions

Global Sustainability Agenda #19: Reimaging the Global Trade System Aligned with National Commitments to Net-Zero GHG Emissions

Global Sustainability Reality

February was warmest on record globally, say scientists (The Guardian)

Cities are sinking, and it’s making them more vulnerable to climate change (The Verge)

Inland waters are a blind spot in greenhouse gas emissions (Phys)

How one of the coldest, darkest towns on Earth is trying to get more energy from the sun (Wahington Post)

SpaceX, Google Join Forces To Fight Planet-Killing Threat From Orbit (Forbes)

Global Sustainability Business Impact

The EU’s carbon tax may devastate a country it is trying to keep alive: Ukraine (Politico)

The Importance of Sustainable Supply Chains to Unlock Global Decarbonization (Earth)

Reports Of The Death Of ESG Are Greatly Exaggerated (Forbes)

EPA leaves out existing natural gas plants from carbon rule, including some in Pennsylvania (WESA)

Texas challenges US EPA limits on oil and gas industry methane emissions (Reuters)

Forces shaping the future of energy (S&P Global)

5 Takeaways From The SEC’s New Climate-Related Disclosure Rule (Forbes)

US SEC adopts climate rule that may face challenges despite dilution (Reuters)

Digitisation is the key to taking renewable energy to the next level (Wired)

SEC Approves New Climate Rules Far Weaker Than Originally Proposed (NY Times)

Company level disclosure key to financing green transition, says ESMA chair (Reuters)

Carbon Neutral versus Net Zero, and why offsets may not be the answer (Stockhead)

The path forward

Around the world, the introduction of new policies such as the US Inflation Reduction Act, the SEC’s New Climate-Related Disclosure Rule, the European Union’s Carbon Border Adjustment Mechanism (CBAM), Corporate Sustainability Reporting Directive (CSRD), and European Sustainability Reporting Standards (ESRS) signals a concerted effort to expedite decarbonization and climate action. However, these policies have also sparked trade tensions and raised concerns about protectionism. The International Energy Agency (IEA) emphasizes that a successful transition to clean energy necessitates increased trade in clean energy technologies and products.

Today, a profound reevaluation of the structure of the trade system is underway. Key considerations include its focus areas and how it balances the drive for economic advancement with other critical policy objectives. The lack of attention to these additional policy objectives has contributed to significant criticism of the trade system.

This period of reassessment underscores the importance of aligning trade policies with broader societal goals, such as environmental sustainability and social equity. Achieving a balance between economic interests and these vital policy objectives is essential for fostering inclusive and sustainable global trade.

When the WTO was launched in 1995, it was recognized in its first paragraph of what’s known as the Marrakesh Agreement that set this organization up: “Relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.”

Trade liberalization was not the ultimate end of this agreement or the trade system broadly. The end was sustainable development. Trade is simply a means to get there.

The rules-based global trading system serves as the backbone for much of global trade. However, the World Trade Organization (WTO) has increasingly encountered challenges and calls for reform, particularly concerning sustainability and climate change issues.

The world has taken considerable time to acknowledge the necessity of ensuring that the trading system aligns with commitments to sustainable development and climate change action. There is now an opportunity to support nations and blocs of nations striving to forge a clean energy future. They seek to ensure that their companies operating within their jurisdiction are not disadvantaged by adhering to stringent climate change standards.

The global trading system must align with climate change commitments to ensure a sustainable future. Nations have implemented diverse policies to induce energy efficiency, reduce consumption, and shift to clean energy sources. International organizations like the IMF and World Bank have developed strategies to guide member states in greenhouse gas (GHG) mitigation and adaptation.

However, the World Trade Organization (WTO) commitments appear modest compared to the urgency of the climate crisis. A reevaluation is necessary, recognizing that environmental challenges cannot be solely managed by environmental ministries. Instead, an integrated approach across various policy domains is essential.

Here are some critical steps that could be taken to improve this alignment:

A Trade System aligned with national pledges for achieving net-zero GHG emissions: A trade system aligned to achieve net-zero emissions globally by 2050 could help enhance accountability for the production, transportation, shipment, distribution, and consumption of internationally traded goods.

Policy equivalence and interoperability: To uphold and strengthen the interoperability of national policies to facilitate global trade, a core function of the world trade system, member nations should collaborate to establish consensus on assessing equivalence among varied policies.

For example, the EU has focused on emissions pricing, while the US has adopted a policy emphasis on subsidies in support of the clean energy transition as the primary tool for reducing emissions.

Prioritizing a strategy to foster policy interoperability is preferable to the proliferation of trade disputes, where nations challenge each other’s climate change policies as violating WTO regulations.

Measurement protocols for GHG emissions: To align the trading system with national net-zero emissions goals, accountability for the production, transportation, and consumption of traded goods must be promoted. This involves establishing equivalences across divergent climate change policies and developing measurement protocols for GHG emissions associated with traded goods.

GHG adjustment mechanisms and just transition: A global social cost of GHG emissions should be established, and border GHG adjustment mechanisms are necessary to prevent competitive disadvantages and carbon leakage. However, these adjustments must consider fairness across countries, particularly in providing transition assistance to less industrialized nations.

Carbon Pricing Mechanisms: Implement carbon pricing mechanisms, such as carbon taxes or cap-and-trade systems, to internalize the environmental costs of trade and incentivize low-carbon production and consumption patterns.

Green Standards and Labeling: Develop international standards for environmentally sustainable products and establish green labeling schemes to help consumers make informed choices. Harmonizing these standards can facilitate trade while ensuring products meet high environmental standards.

Shipping Industry: The shipping industry, a significant contributor to GHG emissions, requires transformation. The IMO’s GHG reduction plan is a step forward, but the WTO should support its implementation and integrate maritime transportation into broader decarbonization strategies.

Hard-to-abate sectors: Carbon-intensive sectors like steel production need decarbonization efforts. As seen in the Steel Standards Principles, the WTO’s role in convening discussions and setting sustainability standards demonstrates its potential to drive sectoral sustainability. However, unilateral measures like the EU’s Carbon Border Adjustment Mechanism (CBAM) should consider equity concerns and ensure interoperability with diverse economic systems.

Promotion of Clean Technologies: Encourage the transfer of clean and renewable energy technologies through trade agreements and initiatives. This can help developing countries leapfrog to cleaner energy sources and reduce reliance on fossil fuels.

Support for Climate Adaptation: Include provisions in trade agreements to support climate adaptation efforts, particularly in vulnerable developing countries. This could involve providing technical assistance, financial support, and capacity-building measures to help countries adapt to the impacts of climate change on trade and economic activities.

Addressing Deforestation and Land Use: Combat deforestation and promote sustainable land use practices by incorporating trade agreement provisions to protect forests and biodiversity. This could include measures to prevent illegal logging, promote sustainable forest management, and support the conservation of natural ecosystems.

Dialogue and Cooperation: Foster dialogue and cooperation among countries to address the intersection of trade and climate change effectively. This could involve establishing multilateral platforms for sharing best practices, coordinating policies, and addressing common challenges.

Capacity Building: Provide support for capacity building and technical assistance to help countries implement and enforce environmental provisions in trade agreements effectively. This can help ensure that countries have the necessary infrastructure and expertise to comply with their climate change commitments.

Ultimately, a sustainable trade system must prioritize environmental goals while promoting fairness and cooperation among nations.

By integrating these measures into the international trade system, countries can work together to promote sustainable development, mitigate climate change, and achieve the objectives of the Paris Agreement and other global climate commitments.

Beatriz Canamary

Beatriz Canamary is a consultant in Sustainable and Resilient Business, Doctor and Professor in Business, Civil Engineer, specialized in Mergers and Acquisitions from the Harvard Business School, and mom of triplets. Today she is dedicated to the effective application of the UN Sustainable Development Goals in Multinationals.

She is an ESG enthusiast and makes it possible to carry out sustainable projects, such as energy transition and net-zero carbon emissions. She has +15 years of expertise in large infrastructure projects.

Member of the World Economic Forum, Academy of International Business and Academy of Economics and Finance.