Does International Trade Mitigate or Exacerbate Climate Change?

The relationship between international trade and the climate is complex. In the same way that trade liberalization can create “winners” and “losers,” international trade can mitigate or exacerbate climate change and its impacts. To reduce global greenhouse gas (GHG) emissions and achieve the commitments of the Paris Agreement, countries need to minimize the negative and maximize the positive effects of trade on the environment. International development practitioners and donors can play a role in supporting countries, especially the low-income countries most vulnerable to climate change, by supporting policies and practices with net positive effects on climate change.  

Minimizing the negative

High costs of trade. Greenhouse gas emissions generated by the production and transport of exported and imported goods and services have increased and represent, on average, 20-30% of global GHG emissionsXu, Ankai, et al. “Trade and Climate Change - World Trade Organization.” Trade and Climate Change, World Trade Organization, Nov. 2021, https://www.wto.org/english/news_e/news21_e/clim_03nov21-4_e.pdf.. With global trade projected to continue growing, emissions from trade-related freight transport will grow by 290% by 2050“The Carbon Footprint of Global Trade Tackling Emissions from International Freight Transport.” International Transport Forum , OECD , 2015, https://www.itf-oecd.org/sites/default/files/docs/cop-pdf-06.pdf..

How to minimize:

• Emissions related to trade transport can be mitigated through more efficient transport technologies, using alternative fuels, improving transport infrastructure, and transitioning to more carbon-efficient means of transportationBrenton, Paul, and Vicky Chemutai. “The Trade and Climate Change Nexus.” The World Bank, International Bank for Reconstruction and Development / The World Bank, 29 Sept. 2021, https://openknowledge.worldbank.org/handle/10986/36294.. The European Parliament, for example, is currently voting on regulations to increase alternative fuel infrastructure for charging and fueling vehicles as a way to decarbonize road transport, which is the largest carbon emitter compared to air and sea“The Carbon Footprint of Global Trade Tackling Emissions from International Freight Transport.” International Transport Forum , OECD , 2015, https://www.itf-oecd.org/sites/default/files/docs/cop-pdf-06.pdf..

The issue of competitiveness. Trade can lead to the specialization of carbon-intensive industries when countries have different environmental standards. For example, country A, which has high environmental standards, may find it cheaper to import a carbon-intensive product or move its production to country B, which has lower environmental standards (carbon leakage). Country B has a competitive advantage in producing carbon-intensive goods, and Country A, while not generating pollution within their territory, is increasing the production of carbon-intensive products abroad. Countries with high environmental standards also pass additional compliance costs down the supply chains of carbon-intensive goods, raising prices and lessening competitiveness in international markets.

How to minimize:

• Border carbon adjustments are emerging as an environmental trade tool to help countries mitigate the effects of carbon leakage. With a border carbon adjustment in place, imported goods face costs of carbon emissions like those applied if the imported product was produced domesticallyBrauch, Martin Dietrich, et al. “Event Highlights: Carbon Border Adjustments in the EU, the U.S., and Beyond.” Event Highlights: Carbon Border Adjustments in the EU, the U.S., and Beyond | Columbia Center on Sustainable Investment, Columbia Center on Sustainable Investment, 19 Nov. 2021, https://ccsi.columbia.edu/content/event-highlights-carbon-border-adjustments-eu-us-and-beyond.. Although no country has adopted border carbon adjustments to date, the European Commission proposed to phase in a carbon border adjustment mechanism starting in 2023 as part of a package of policies to support the European Green DealParry, Ian, Peter Dohlman, Cory Hillier, Martin Kaufman, Kyung Kwak, Florian, Misch, James Roaf, and Christophe Waerzeggers. 2021. “Carbon Pricing: What Role for Border Carbon Adjustments?” IMF Staff Climate Note 2021/004, International Monetary Fund, Washington, DC.. Border carbon adjustments are technically complex and require careful design and robust technical capacity to implement.

• Strengthening local and national governments to monitor, track, and enforce compliance with climate regulations and laws can help with the successful implementation of climate change policies. In Indonesia, Chemonics, through the USAID Sustainable Environmental Governance Across Regions (SEGAR) activity, is working in targeted jurisdictions with high conservation values and high carbon stock to strengthen environmental governance and natural resource management. By bringing seven million hectares of biologically significant areas under improved management, the activity will reduce 55 million metric tons of carbon dioxide emissions and mobilize $45 million of investments to support biodiversity conservation, sustainable forest management, and sustainable land use.

Deforestation and environmental degradation. Increased demand for commodities across borders contributes to deforestation and environmental degradation emissions. Approximately 26 percent of deforestation can be attributed to international demandPendrill, F., Persson, U. M., Godar, J., & Kastner, T. (2019, May). Deforestation displaced: trade in forest-risk commodities and the prospects for a global forest transition. Environmental Research Letters. IOP Publishing Ltd. Retrieved October 27, 2021, from https://iopscience.iop.org/article/10.1088/1748-9326/ab0d41.. With the global population projected to grow by one billion in the next decade, protecting our forests must be a critical component of our global response to climate change.

How to minimize:

• Creating incentives to mitigate deforestation and environmental degradation can help mitigate rising global temperatures and natural disasters. Chemonics, through the USAID-funded Colombia Páramos and Forests project, is implementing nature-based solutions to support Afro-Colombian indigenous communities developing Reduced Emissions from Deforestation and Forest Degradation (REDD+) projects. Such REDD+ projects protect 650,000 ha of tropical forests on the pacific coast and generate carbon credits to sell to companies looking to reduce carbon tax liabilities. To date, REDD+ projects generated 6.1 million verified carbon units worth US $24 million that will be reinvested in community infrastructure, social services, and governance activities.
• To prevent environmental degradation, the Páramos and Forests project also launched a Payment for Environmental Services (PES) mechanism that pays landowners in the subalpine forests to conserve their ecosystems and maintain their environmental services. The PES approach creates incentives to preserve carbon-sequestering land systems and related water resources that supply the Colombian population with potable water.  

A policy challenge. Carbon-sensitive trade policy and international cooperation are necessary to combat the global climate crisis. Tariff and non-tariff barriers to trade in most countries are lower on dirty industries than on clean industries, where “dirty” is defined by its carbon emission per dollar of outputShapiro, Joseph S. “The Environmental Bias of Trade Policy.” The Quarterly Journal of Economics, vol. 136, no. 2, 16 Dec. 2020, pp. 831–886. May 2021, https://doi.org/https://doi.org/10.1093/qje/qjaa042.. Instead of putting a carbon tax on pollution-intensive goods, this creates an inherent subsidy (in the form of lower tax rates) on internationally traded “dirty” goods, estimated at US $85 to US $120 per ton of CO2, more than double the estimated global social cost, and optimal tax rate, of CO2 emissionsShapiro, Joseph S. “The Environmental Bias of Trade Policy.” The Quarterly Journal of Economics, vol. 136, no. 2, 16 Dec. 2020, pp. 831–886. May 2021, https://doi.org/https://doi.org/10.1093/qje/qjaa042.. The rules stipulated in the World Trade Organization (WTO) Article XX of the General Agreement on Tariffs and Trade allow members to adopt trade-related measures for the protection of the environment, which impact climate, assuming they do not discriminate or restrict international tradeBaron, Richard, and Justine Garrett. “Trade and Environment Interactions: Governance Issues.” OECD ILibrary, Organization for Economic Co-Operation and Development (OECD), 2017, https://www.oecd-ilibrary.org/trade/oecd-trade-and-environment-working-papers_18166881..  Still, most trade agreements that have environmental regulations do not propose restructuring tariffs to promote greener tradeBrenton, Paul, and Vicky Chemutai. “The Trade and Climate Change Nexus.” Open Knowledge Repository, The World Bank, 29 Sept. 2021, https://openknowledge.worldbank.org/handle/10986/36294..

How to minimize:

• Supporting trade policy and international cooperation that has positive environmental impacts in the domestic and global economy. Countries should include environmental provisions in bilateral and regional trade agreements and work to remove barriers to trade for green products and low-carbon technologiesBrenton, Paul, and Vicky Chemutai. “The Trade and Climate Change Nexus.” Open Knowledge Repository, The World Bank, 29 Sept. 2021, https://openknowledge.worldbank.org/handle/10986/36294.. For example, the WTO’s Environmental Goods Agreement, currently under negotiation, will eliminate tariffs on environmentally related products (e.g., solar panels), supporting a transition to a green economy. Countries will also need to ensure their domestic climate change policies are taxing dirty and clean goods in a way that aligns with their decarbonization goalsShapiro, Joseph S. “The Environmental Bias of Trade Policy.” The Quarterly Journal of Economics, vol. 136, no. 2, 16 Dec. 2020, pp. 831–886. May 2021, https://doi.org/https://doi.org/10.1093/qje/qjaa042..

Maximizing the positive

Technology transfer. Countries import and export goods and services and exchange knowledge and technology. International trade can help disseminate carbon-efficient and green technologies to help countries lower their reliance on pollution-intensive technologies. Since trade barriers are identified as the largest obstacles to disseminating low-carbon technologies globallyBalogh, J. M., & Mizik, T. (2021). Trade–climate nexus: A systematic review of the literature. Economies, 9(3), 99. https://doi.org/10.3390/economies9030099, trade policy and international cooperation can help unlock solutions to climate change.

How to maximize:

• Promoting the transfer of technology, expertise, and financial resources for sustainability across supply chains. Soy production-related deforestation is a growing environmental concern in South America. Chemonics, with an initial contribution from Cargill, is managing the Land Innovation Fund (LIF) to design, develop and deliver innovative solutions across sectors to help farmers in South America transform the soy supply chain, reducing the environmental and social impact of their operations, and protecting and restoring native vegetation. To date, LIF has awarded $6.8 million in funds to 28 projects resulting in 30 locally led innovative solutions to achieve sustainable and climate-smart agriculture at scale, free from deforestation and conversion of native vegetation.

The other side of competition. As more countries commit to addressing climate change and impose climate-related tariffs and non-tariff barriers on imports, exporting countries will have an incentive to adopt greener production and technology to retain their competitiveness in international markets.  In the case of carbon border adjustments, for example, countries may prefer to impose carbon taxes on their exports to retain tax-generated revenue domestically instead of paying taxes to other countries at the border. Similarly, consumers are increasing their demand for environmentally conscious products putting pressure on companies to set and achieve their net zero emission pledges. To reach their decarbonization goals, companies will have to adopt green production practices along their supply chain and across country borders. 

How to maximize:

• Helping small and mid-size enterprises (SMEs), especially those in carbon-intensive industries, adopt international standards and green standards to remain competitive in international markets. The USAID Moldova Future Technologies Activity (FTA), implemented by Chemonics, partnered with the Agency for the Development and Modernization of Agriculture (ADMA) in Moldova to launch a program that helps agricultural producers procure photovoltaic solar panel equipment to support their transition to a green economy and increase their energy resiliency. A grant fund launched in April 2022, which combines ADMA’s standard financing program with grant funding from FTA, will help agricultural producers fund 50 percent or up to US$130,000 of the investment cost to procure photovoltaic solar panel equipment and equipment insurance.
• FTA is also developing a concept for an SME green technology resilience program to provide grants and encourage firm-level investments in energy efficiency and green production practices so that firms can remain competitive in international markets and increase their resilience to climate change. As part of the program, FTA will support the Organization for Entrepreneurship Development’s “tech upgrade” program that offers US$104,000 to businesses for energy efficiency and renewable energy renovations or US$78,000 for investments in machinery, equipment, or other alternative energy sources. In 2023, FTA will also launch the “Innovate Moldova” initiative to support SMEs and business support organizations on various topics, including their adoption of green technology and business practices.  

Conclusion

International trade untethered from climate change policies will have detrimental effects on climate and the environment. Since international trade is the foundation of our global economy, our collective goal should be to adopt trade policies and practices that promote sustainable trade and a transition to a low-carbon future. Adopting sustainable international trade practices will not be easy; apart from strong political will, countries, especially those will fewer resources, will need access to expertise, technology, and financing to transition to a green economy and achieve their decarbonization goals. Development practitioners and donors can help bridge that gap and support countries to minimize the bad and maximize the good effects of trade on the environment.