How Trade Policy Can Help Save the Climate

Trade policy is a powerful tool that nations can use to complement UNFCCC efforts to reduce global carbon emissions—but it must be deployed strategically.

11/10/2021 | Silverado Policy Accelerator

With the U.N. Climate Change Conference set to wrap up in Glasgow this week, the U.S. and its allies are left with one major question: Where do they go from here? The COP26 meetings have witnessed the unveiling of several ambitious international climate commitments, including landmark deals to reduce methane emissions and reverse deforestation. Despite the conspicuous absences of leaders from China and Russia—two of the world’s largest emitters—the COP26 marked an important step forward in the global fight against climate change, with the global leaders who were present uniting behind the urgent need for nations to meet their climate commitments. The critical work of implementing and enforcing these agreements still lies ahead.

If the meetings in Glasgow have made one thing clear, though, it’s that voluntary international commitments are only as strong as the will of their members to realize a net-zero future. As a new report by the Washington Post this week highlighted, there are significant discrepancies in the methodology countries are using to report emissions to the UNFCCC, resulting in gross under-reporting. These discrepancies further undermine the credibility of the pledges being made, which have already come under criticism by the scientific community for being insufficient to meet the climate challenge.

Moreover, the agreements reached in Glasgow—like the UNFCCC itself—are limited in their ability to hold countries accountable for achieving their goals. If the world is going to meet the objectives laid out in the UNFCCC, the U.S. and its allies need to use every tool available to reduce their own carbon emissions while encouraging—with carrots or sticks—their global partners to do the same.

Trade policy is a tool that can complement UNFCCC efforts to reduce global carbon emissions—but it must be deployed strategically. Of course, trade policy has always overlapped with environmental policy, even if that overlap wasn’t always made explicit in trade agreements. As the free flow of goods across international borders has increased in the past half century, so, too, has the carbon emissions created by that exchange. In recent years, U.S. free trade agreements (FTAs) have included environmental provisions designed to offset this increase and address the downstream environmental impacts of freer trade, including provisions to combat illegal logging, promote forest conservation, improve air quality monitoring, harmonize energy performance standards, and liberalize environmental goods tariffs.

To date, however, trade policy has been underutilized as a tool to contribute to an overall global reduction in carbon emissions. With climate now at the forefront of America’s domestic and foreign policy, it's time to take a fresh look at how trade policy could be used to address the climate crisis.

In reality, trade policy presents a range of tools to help drive better environmental outcomes within and across borders. For example, countries can incentivize the uptake of environmental goods and technologies by lowering or eliminating tariffs on those goods and technologies, thereby making those technologies cost-competitive with dirtier alternatives and more affordable for developing nations. Nations with high environmental standards can also use trade policy to level the economic playing field between themselves and their competitor nations, whose lower environmental standards and lower costs of compliance give their domestic industries a competitive advantage. For instance, adjusting the price of imported goods at the border based on their carbon content—a tool known as a “carbon border adjustment mechanism” or CBAM—not only creates a fairer competitive environment for producers in the U.S. and other countries with similarly high environmental standards, but removes the economic incentives to engage in environmental arbitrage by retaining lower standards, spurring a net-zero ‘race to the top’ among trade partners.

These are only a few of the numerous ways that trade policy can be used to complement the UNFCCC efforts that are already underway while simultaneously holding countries accountable for meeting their commitments. In the coming weeks, Silverado will be continuing this series of climate-related blog posts by examining some fundamental questions about trade policy’s role in addressing the climate crisis. These questions include:

  • What should the objectives of a worker and climate-centric U.S. trade policy be, and what pitfalls should it avoid?
  • What trade tools are available to the U.S. and its allies to realize their goals— including a carbon club, carbon border adjustment mechanisms, trade liberalization measures in environmental goods and technologies, preferences,  and trade capacity building? What are the pros and cons of each option?
  • What is the most effective approach: unilateral, bilateral, plurilateral, multilateral, or some combination thereof?
  • What role should the World Trade Organization (WTO) play in advancing a climate-centric trade policy?
  • Do the existing legal frameworks provide countries with the flexibility that they need to use trade as a tool for combating climate change?

There are no simple answers to these questions, but now is the time for the U.S. to invest its intellectual and political resources into answering them. If we wait too long, we risk missing the window for capturing the power of trade to further global environmental objectives and win first place in the global race for a net-zero economy.