CIAO DATE: 11/2008

Can Trade Policy Support the Next Global Climate Agreement?

September 2008

Carnegie Endowment for International Peace

Abstract

The global community should incorporate trade-related measures into any post-Kyoto multilateral climate agreement, concludes a new paper from the Carnegie Endowment.

Recent WTO rulings indicate an increasing willingness to restrict trade based on the environmental impact of goods production. However, the trade community remains concerned that such restrictions will be used to protect domestic industries, reducing efficiency, and potentially spark a tit-for-tat trade war. Margaret Lay examines the relationship between the trade and climate regimes to determine how the global community can best use trade measures to strengthen climate policy while upholding the goals of the multilateral trade system.

Key conclusions:

• Ad hoc national policies-the EU carbon tariff proposed in 2007, for example-are less effective than multilateral agreements because they target single nations, muting the incentive for firms within targeted nations to improve their production processes. Unilateral policies are also more open to challenge under WTO rules.
   
• With sufficient participation, trade restrictions can induce cooperation by reluctant states and discourage free riding by creating a credible threat of reduced business, as happened with the 1987 Montreal Protocol banning trade in chlorofluorocarbons (CFCs).
   
• Multilateral trade restrictions can also strengthen the global climate regime by preventing carbon-intensive industries from migrating to countries with looser environmental standards. A multilateral carbon tariff, for example, removes the incentive to migrate by offsetting the lower cost of operating under a lax climate regime.

Lay concludes:

"Amid concerns about protectionism and skewed incentives to firms in developing countries resulting from these national-level tariff proposals, the trade and environment policy communities appear to be headed for a major clash over climate-related trade measures. Yet previous uses of multi- and unilateral trade measures to support environmental policy suggest that trade measures could be designed to build upon the synergies between the two regimes. Climate policymakers aware of the synergies could develop trade-related measures that support climate policy and are consistent with the concerns of the multilateral trade community."

Resource link: Can Trade Policy Support the Next Global Climate Agreement? [PDF] - 222K