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How can we deliver a climate-focused trade agenda?

Combatting climate change at the pace necessary to avert catastrophic impacts on the planet and societies requires significant shifts in both trade and production worldwide

By: EBR - Posted: Monday, September 20, 2021

"Stable, open trade brings growth, scale, innovation and technology diffusion, which can be leveraged to accelerate decarbonisation and facilitate adaptation to climate change."
"Stable, open trade brings growth, scale, innovation and technology diffusion, which can be leveraged to accelerate decarbonisation and facilitate adaptation to climate change."

by Jessica Gladstone, Janet Whittaker and Jeremy Stewart*

The Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment report once again focused international attention on the acute urgency of climate action. Combatting climate change at the pace necessary to avert catastrophic impacts on the planet and societies requires significant shifts in both trade and production worldwide.

Trade policy is one way of sending signals to the interconnected supply chains that keep our economies humming. Trade policy can be instrumental in facilitating the shift to a sustainable economy and the transition to net zero. Active engagement among the policy, business, and academic and NGO communities will enable opportunities to be identified for trade policy to play its part in accelerating climate action.

In addition to broad stakeholder engagement, it is critical to develop an effective interdisciplinary approach to trade and climate policy. The two are inextricably linked across many aspects of the global economy – particularly finance, energy, transport, agriculture and infrastructure.

To kick-start this dialogue, Clifford Chance and the World Economic Forum interviewed over 30 businesses from different sectors and regions to ask how policymakers could best support their decarbonisation goals. All of the businesses interviewed either operated global or regional supply chains or relied on cross-border trade for elements of their business.

The overwhelming majority of businesses we spoke to had developed sophisticated emissions reductions strategies across their supply chains and signalled that they were ready and willing to accelerate their decarbonisation efforts if supported by the right regulatory environment.

Insights from the business community about green trade policy

Across the board, our interviews identified that businesses want to ensure that governments’ trade-related climate responses are based on transparent, open and non-discriminatory approaches, with the flexibility to respond to changed circumstances and leave open pathways for consensus. They agreed the optimum approach is to achieve global solutions; however, it is clear that unilateral and plurilateral mechanisms will also play a key role in spurring action, driving ambition and developing innovative approaches to trade-related climate challenges.

Building on these principles, a number of common themes emerged, including:

-Addressing traditional trade barriers (such as tariffs, non-tariff barriers and product standards) is important to cut costs and red tape around decarbonisation.
-Reducing market distortions that incentivise emission-intensive activities (such as fossil fuel subsidies) can spur investment in climate-friendly alternatives. It is also important to ensure businesses are not disadvantaged when taking a leadership role in tackling emissions.
-Harmonising standards for measuring embedded carbon in traded goods must be a key emerging priority for trade policy. This issue is brought into sharp focus by the EU’s proposed Carbon Border Adjustment Mechanism (CBAM), as well as the development of standards and taxonomies for enabling green finance.
-Facilitating the efficient diffusion of new and emerging technologies across markets will be critical.
-Trade agreements should be harnessed to advance climate action. The scope of issues covered by trade agreements has expanded over time to account for a wide range of emerging issues. The critical importance of climate change for all stakeholders means trade agreements should include ambitious, binding and enforceable commitments on climate change.

Many of these priorities – such as cutting tariffs on climate-friendly goods, reducing non-tariff distortions and phasing out fossil fuel subsidies – build on existing initiatives and could, in theory, be pursued quickly on a unilateral and plurilateral basis, with the potential to scale up participation in the longer term. Other priorities – such as harmonising standards for measuring embedded carbon and aligning on carbon-based trade policies like CBAM – are more complex and require dialogue to develop the foundation for a mutually supportive international system of trade and climate policy.

How the business community can support delivery of a climate-focused trade agenda

While some "quick wins" may emerge, many elements of an effective climate-focused trade agenda require ongoing collaboration between policymakers and the business community. Technologies for decarbonisation are evolving rapidly. It is essential to ensure that international and domestic trade, as well as the regulatory environment, facilitate the rapid rollout of these technologies – including throughout the developing world. This requires exchange between trade and climate policy-makers, and the global business community. Organisations such as the World Economic Forum provide an ideal platform for facilitating this work.

While government action on trade and climate change is crucial for change at the macro level, there is a range of actions individual businesses can undertake to support climate focused trade.

There are many opportunities available for trade policy to support climate action, but time is quickly running out. Rapid solutions should be implemented where they exist, and efforts to resolve the most complex trade and climate policy challenges must be accelerated.

In each case, the perfect must not become the enemy of the good. Now is the time for action.

*Partner, Clifford Chance and Senior Counsel, Clifford Chance and Senior Associate, Clifford Chance
**first published in: www.weforum.org

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