This study seeks to improve our understanding of the relationship between response measures, economic diversification and international trade rules, and accordingly identify the positive opportunities that the current proliferation of regional and bilateral trade agreements brings for diversification and climate change mitigation. In doing so, the study explores the following questions: (i) what are the trade-related response measures included in the INDCs/NDCs and how are these measures designed? (ii) What are the implications of these measures on the economic diversification of the states adopting the measures and on other states? (iii) What is the role of free trade agreements in the mitigation of climate change and how are these agreements constructed in a way to allow a space for the implementation of response measures?
On 12 December 2015, the Paris Agreement was adopted by consensus by the 195 Parties to the United Nations Framework Convention on Climate Change (UNFCCC). One year removed from this historic moment, 163 Parties (including the European Union, on behalf of its Member States) have begun detailing the individual commitments that they are expected to make in order to reach the overall mitigation objective of the Agreement, namely that of “holding the increase in the global average temperature to well below 2 °C above pre-industrial levels”, while pursuing efforts to limit the temperature increase to 1.5 °C.
An effective implementation of the 163 Intended Nationally Determined Contributions (INDCs) that have so far been submitted to the UNFCCC (122 of which have been automatically converted to Nationally Determined Contributions, or NDCs, upon their countries’ ratification of the Paris Agreement) will necessarily require states to take effective steps to minimize the adverse effects of their response measures but also, where possible, to create positive synergies between climate change mitigation and economic development. This holds particularly true for those countries whose economies are currently highly dependent on a narrow range of carbon-intensive exports, calling for substantial investments and policy interventions aimed at supporting low-carbon innovation, encouraging the transfer of technologies, boosting high-value added sectors and more generally promoting economic diversification.
The extent to which response measures and economic diversification will be capable of operating in a mutually supportive way will depend not only on the design of domestic policies, but also (and perhaps more importantly) on the international trading system, which provides the underlying conditions of competition, market access and market creation that must support a longterm decarbonization of the world economy. As such, this study seeks to improve our understanding of the relationship between response measures, economic diversification and international trade rules, and accordingly identify the positive opportunities that the current proliferation of regional and bilateral trade agreements brings for diversification and climate change mitigation. In doing so, the study explores the following questions: (i) what are the trade-related response measures included in the INDCs/NDCs and how are these measures designed? (ii) What are the implications of these measures on the economic diversification of the states adopting the measures and on other states? (iii) What is the role of free trade agreements in the mitigation of climate change and how are these agreements constructed in a way to allow a space for the implementation of response measures?
Response measures in the INDCs/NDCs: the (overlooked) importance of trade
This study represents the first attempt to comprehensively map the 163 INDCs/NDCs submitted by Parties to the UNFCCC in order to identify and categorize response measures that interact with the world trading system. The results are, in a way, unexpected. The occurrence of traderelated measures, including financial and direct trade measures (e.g. taxes, subsidies, carbon pricing mechanisms, FITs, tariffs, import bans) is pervasive throughout the INDCs/NDCs, suggesting the possibility for the climate and trade regimes to substantially interact in the implementation of the Paris Agreement.
On the one hand, some of these interactions may remain hypothetical, in the sense that several measures may, or may not, have implications for trade depending on the instruments and measures adopted at the domestic level to implement them. A majority of the measures that have been mapped as part of the study, particularly green industrial policies and measures taken in the energy sector, appear to fit this description. On the other, the INDCs/NDCs analysed as part of this study have also been found to include a significant number of response measures which are directly relevant for trade. In part as a consequence of the chosen mapping format, these measures broadly fall within two categories identified in the study, namely financial and direct trade measures and green government procurement practices.
Response measures and economic diversification: a mixed picture
In expanding its analysis of the interactions between climate change mitigation policies and the international trading regime, this study builds upon the mapping of trade-related commitments in the INDCs/NDCs and evaluates such commitments against the long-standing UNFCCC work streams on economic diversification and response measures. While economic diversification had been mainly discussed in the past as a means of minimizing the adverse effects of response measures, the bottom-up nature of the INDCs/NDCs changes this relationship. More specifically, the possibility for developing countries to design their nationally determined contributions in the light of respective national capabilities provides them with an opportunity to enact response measures that promote their own economic diversification and development.
Looking at the current mitigation commitments of UNFCCC Parties, there is certainly scope for the INDCs/NDCs to promote diversification, particularly in the territory of countries where the measures are implemented (for example by incentivizing the transition to a diversified energy mix, fostering innovation through standards and labelling requirements, protecting infant industries through green government procurement practices, and so forth). At the same time, it is important to recognize that response measures might also entail cross-border effects (e.g. effects on the economic diversification of other countries), thus emphasizing the importance of coordinated mitigation actions at the regional and international level. The evidence for such cross-border effects is mixed, as the nature and magnitude of their impacts will largely hinge upon the design of domestic policies which are not necessarily reflected in the INDCs/NDCs. In addition, the way in which national implementation is carried out will also likely involve trade-offs.
The incorporation of response measures in free trade agreements: the complementary role of trade
The assessment of the climate-related provisions of current free trade agreements, conducted with the help of Professor Jean Frédéric Morin’s TREND Codebook, suggests that the existing international trade regime provides many opportunities to mitigate climate change challenges while supporting economic diversification. First, economic growth that result from the liberalization of trade in goods and services generates useful economic resources to allow the transition from fuel intensive industries into cleaner and less polluting industries. Second, FTAs provide a suitable framework to reduce/eliminate barriers on environmental goods and services, which leads to lowering the cost of green energy technologies. Finally, many FTAs appear to incorporate some of the response measures included in the INDCs/NDCs as a way of strengthening the capacity of states to fulfill their climate change commitments and achieving more stringent and more precise obligations compared to multilateral environmental agreement.
In this context, the most pressing challenge when designing FTAs appears to be that of finding a balance between promoting trade liberalization on the one hand and allowing a policy space for countries to implement their obligations under the UNFCCC on the other, in order to ensure that trade rules positively contribute to, rather than undermine, the overarching objectives of climate change mitigation and economic diversification.
The full report can be found here.