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Climate Change Agreement: Impact on Trade

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During the COP21 summit in Paris, representatives from 195 countries agreed to reduce greenhouse gas emissions to combat climate change. Possible implications for trade.

On December 12, 2015, the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) concluded in Paris with a global agreement to reduce greenhouse gas (GHG) emissions and combat climate change.

Representatives from 195 countries confirmed the objective of ensuring that the earth’s temperature rises by less than 2ºC and pledged to strive to keep this increase below 1.5ºC so as to protect island states, which are threatened by rising sea levels. The Paris Agreement will be signed on April 22, 2016, in New York and will enter into force 30 days after being ratified by 55 countries representing at least 55% of global GHG emissions.

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Before COP21, most countries had drawn up an action plan detailing the actions they would take to reduce GHG emissions. However, these were considered insufficient to keep global warming below the UNFCCC target of 2ºC, and so the Paris Agreement establishes each country’s emissions should be reviewed every five years from 2020 onwards, without the option of their being able to reduce their pledges. Efforts will also be made to achieve “emissions neutrality” in the second half of the 21st century, which implies as much carbon being absorbed as is emitted. The agreement includes a non-punitive mechanism of compliance that will be overseen by a committee of experts.

In addition to the commitments made by national states, a large number of cities—including many in Latin America and the Caribbean—regions, companies, and organizations from civil society will develop initiatives to contribute to the fight against climate change, which are recorded on the NAZCA portal and in the Lima-Paris Action Agenda.

 

Common but Differentiated Responsibilities

The Paris Agreement establishes “common but differentiated responsibilities” in the fight against climate change: all countries must play a part, but the different responsibilities and capacities of each will be taken into account, depending on their economic realities. As such, developed countries will have to cut their GHG emissions to greater degrees than developing countries, although these must also broaden their mitigation efforts and make progress on limiting their emissions. The agreement also acknowledges that the circumstances of the least developed countries and small island developing states are exceptional.

The agreement recognizes that from 2020 onwards, US$100 billion will be required annually to finance climate change adaptation and mitigation projects. Developed countries will contribute to the financing of developing countries’ mitigation and adaptation actions and must provide quantitative and qualitative information every two years. For their part, developing countries are invited to make voluntary contributions for the same purpose and the Paris Committee on Capacity Building will be created to help them achieve these commitments.

 

Green Bonds

The agreement also establishes a voluntary market mechanism to contribute to GHG emission mitigation and support sustainable development. In other words, one country’s emissions reductions may be used by another to meet the commitments it has taken on as a nation. The green bond system may be used by public and private entities and the resulting benefits will go towards the adaptation of countries that are particularly vulnerable.

 

Possible Implications for Trade

The Paris Agreement establishes that the concerns of the economies most affected by the response measures—particularly developing countries—should be taken into account when it is being implemented, although it does not specify that climate change action should not become disguised protectionism. This contrasts with the Kyoto Protocol[1] and with earlier drafts of the Paris Agreement, which stated that unilateral measures should not become unnecessary restrictions to international trade and especially that developed countries should not apply them to goods and services originating in developing countries.

This opens up the possibility of growing trade conflicts arising due to the adoption of restrictive trade measures that are supposedly justified by the fight against climate change. Exports from developing and the least-developed countries are most vulnerable to this type of practice, and increased difficulty in external market access may limit the resources available to these countries for taking climate action. Consequently, the agreement poses the challenge of finding forms of sustainable production and consumption that allow reductions in global GHG emissions and improvements to international integration to be achieved. The conflicts that may arise between climate action and trade point to the need for an agreement at the World Trade Organization (WTO) that takes both issues into account.

 

Box: Trade and Climate Change at INTAL50
 

The link between trade and climate change was a topic of discussion at the main event to mark INTAL’s 50th anniversary through the presentations given by Aaron Cosbey (IISD) and Ricardo Meléndez Ortiz (ICTSD and E15).

Aaron Cosbey argued that progress on the elimination of barriers to trade in environmental goods and services at the WTO has been slow and emphasized the importance of national and regional policies to promote these, placing special emphasis on trade and investment (video [in Spanish]).

Despite the fact that the share of Latin American and Caribbean countries in the global market for environmental goods is small—with the exception of Mexico’s production of solar panels and heaters and pressure measuring instruments—they do have export potential in this field. Cosbey drew attention to the cases of ethanol in Brazil—where public policy played a key role—solar rooftop heaters in Mexico, and HCFC-free fridges in Colombia. He also emphasized the importance of developing and harmonizing compulsory or voluntary energy efficiency standards in the region to expand the size of the potential market.

Ricardo Meléndez Ortiz argued that climate change presents both challenges and opportunities that should be taken advantage of through innovation and integration (video [in Spanish]).

With regard to COP21, he emphasized the importance of national efforts to reduce GHG emissions. In this context, he stressed that current emissions have to do with countries’ installed capacity in terms of capital goods and infrastructure, so a significant change in the energy matrix will be required. He also discussed renewable energies and argued that trade in the technological components that are required to generate these energies (e.g. wind towers, photovoltaic panels) is more important than trade in the energies themselves. He further underlined the need to reduce the carbon content of exports to avoid the negative impact of response measures in other countries.

Sources: UNFCCC, ICTSD.

 

[1] Article 2.3 of the Kyoto Protocol establishes that countries that committed to reduce their emissions “shall strive to implement policies and measures […] in such a way as to minimize adverse effects, including the adverse effects of climate change, effects on international trade, and social, environmental and economic impacts on other Parties, especially developing country Parties.”

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