Combating the new wave of climate-related trade protectionism

ByHindustan Times
Dec 08, 2022 11:46 AM IST

The article has been authored by Jahanwi Singh, economist, Export-Import Bank of India.

Several countries across the world are recording a sustained reduction in greenhouse gas emissions. In case of advanced economies in particular, CO2 emission per capita has fallen by 1.8 Gt since 2000. However, there is growing evidence that this reduction in emissions by advanced economies can be partly attributed to the displacement of emission-intensive production to developing economies. In several developed countries, while production-based emissions have stagnated or declined, the consumption-based emissions, which is adjusted for trade, continues to increase.

There has been a steady increase in environment-related notifications and measures by World Trade Organization (WTO) member countries.(AP Photo)
There has been a steady increase in environment-related notifications and measures by World Trade Organization (WTO) member countries.(AP Photo)

It is obvious that there will be little impact on global emissions if advanced economies with cleaner technologies and stricter environmental policies transfer their polluting industries to developing countries, leading to a mere transfer of the source of emissions rather than any actual decline. It becomes more problematic when these advanced economies start penalising developing countries for the offshored polluting activities.

There has been a steady increase in environment-related notifications and measures by World Trade Organization (WTO) member countries. In 2020, 16.7% of all notifications submitted by WTO members were environment-related, and over the last decade, nearly one third of all environment-related trade measures were climate-related. The United States (US), the European Union, Canada, and Japan together accounted for nearly half of the climate-related measures notified during 2011-2020.

The measures are expected to gain further traction, with several advanced economies announcing measures for incentivising use of less polluting technology in production processes beyond their borders. The European Commission, for example, has proposed a Carbon Border Adjustment Mechanism, under which levy would be imposed on imports of certain specified goods, such as cement, fertilisers and metal products. The US is also contemplating a polluter fee on certain carbon-intensive imports. Instead of compensating the developing countries that are bearing greater health and social costs due to offshoring of the polluting industries, the developed economies are imposing a penalty on imports from the developing countries. The levies would have a major impact given the dominance of these countries in global trade.

These climate-related measures would be challenging for developing countries, that are often net exporters in terms of CO2 emissions embodied in trade. India, for example, is a net importer of merchandise, but a net exporter of CO2 emissions embodied in trade. In 2021, India was the 18th largest merchandise exporter, and the country constantly runs a merchandise trade deficit. However, it was the third largest net exporter in terms of CO2 emissions embodied in trade in 2019, after China and Russia. Given the carbon-intensive exports from India, the proposed levies on imports by the US and the EU would impact India’s exports. It may be noted that the US and the EU together account for more than one-third of India’s merchandise exports.

These are several issues with the levies on carbon-intensive imports. First, calculations of the carbon content in imports from various countries and suppliers are complex. Secondly, these levies could be another conduit for protectionism. Thirdly, this is also not in line with the Paris Agreement principle of Common but Differentiated Responsibilities and Respective Capacities. Developed countries should provide finance and technology to developing countries to support the transition, rather than employ punitive measures to compel costly transitions.

One reason cited by developed countries for unilateral action is less than satisfactory progress through multilateral forums. A global mechanism of carbon pricing could obviate the need for unilateral border carbon adjustments by the advanced economies. Carbon pricing basically places a price on the greenhouse gas emissions, thereby creating a financial incentive to reduce emissions. The global carbon pricing policies could have differentiated carbon price floors for countries at different income levels. This needs to be complemented with mechanism for financial and technological support by the developed economies for facilitating the transition in developing economies.

India could also develop a carbon pricing framework to foster its commitment to a low-carbon future, as also to ensure resilience to the climate-related protectionist fervour. A framework of carbon taxation may be developed, linked to the quantum of carbon emissions, with exemptions to sectors such as agriculture which may not be sufficiently equipped for such taxes, and micro and small enterprises in low carbon-emitting sectors. A comprehensive emission-based cap-and-trade system may also be introduced. Under this system, sector-wise limits on emissions are defined, and if a firm does not use up its allowance, it can sell the remaining allowance to firms exceeding their emission allowance. An example of emission trading in India is the Perform, Achieve and Trade (PAT) Scheme of the ministry of power, which has witnessed a gradual deepening and widening. The scheme can be expanded to more sectors, and with longer-term guidance on future emission caps to enable companies to undertake transition activities.

Finance would also be a key driver of the transition. While international financial resources would be pivotal for transition in developing countries, the domestic financial sector in India may also be galvanised to facilitate the move towards a low-carbon development trajectory. In this context, the Reserve Bank of India’s discussion paper on climate risk and sustainable finance sets the broad contours for future developments in the banking sector. However, an essential first step should be definition of a sustainable finance taxonomy in the country. Taxonomy helps in forming a common framework to delineate economic activities that are considered sustainable, set the disclosure obligations, facilitate verification, and mitigate the risk of greenwashing.

The article has been authored by Jahanwi Singh, economist, Export-Import Bank of India.

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