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Bringing Everyone to the Table: Climate Change, Developing Countries and Global Trade

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Success or failure in any effort to effectively confront global climate change will hinge on a truly global solution to reducing emissions worldwide. That requires U.S. leadership to take the necessary first step to cut our own greenhouse gas emissions at home as we meaningfully engage those developing nations that are least responsible and least equipped to cope with the adverse effects of climate change. Yet given the global nature of climate change, it is also essential that all of the largest greenhouse gas-emitting nations—developed and developing countries alike—commit to reducing emissions.

The path forward to engaging developing countries is clear—the United States must commit to binding greenhouse gas emissions reductions immediately. At the same time, we must provide adaptation assistance to enable poorer and more vulnerable developing countries to deal with the disproportionate costs of global warming on the developing world, and, on an appropriate timeline, urge major emitting developing economies to make commitments to reduce their own greenhouse gas emissions.

Against this backdrop, the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee today convenes a timely hearing focused on how best to engage developing countries through a new international climate regime that prices the cost of polluting into the price of manufactured goods. The subcommittee is particularly interested in examining the potential effect of a U.S. carbon cap-and-trade program on the competitiveness of American products in international markets.

Several greenhouse gas-intensive industries in the United States, such as aluminum, cement, iron, steel, and glass, have expressed legitimate concern that their products will be placed at a competitive disadvantage if developing countries not participating in an international climate regime (with its potentially higher costs of production associated with carbon limits) are allowed to import cheaper products into the United States. Workers in these industries not surprisingly share these concerns.

In response, numerous unilateral trade-related measures have been proposed as a means to level the competitive playing field for U.S. industry. Trade measures, however, can be a powerful but blunt tool for addressing competitiveness issues. It is worth bearing in mind that our trading partners are likely to respond to our proposals with corresponding enthusiasm for reciprocal measures taken against U.S. products, and for protecting their own domestic industries.

The upshot: Our efforts to utilize unilateral trade measures to engage developing countries must be carefully and cautiously constructed, implemented as a last resort, and based on core principles consistent with our existing international obligations.

Regrettably, the Bush administration continues to find new and creative ways to send mixed signals to our developing country partners with the same result every time: inaction. Some administration officials have simultaneously threatened to coerce developing countries with trade sanctions while other administration officials have denounced the use of these measures as a threat to the multilateral trade regime. These inconsistent approaches are neither constructive, nor representative of a cohesive strategy to meaningfully engage developing countries.

A Comprehensive Approach: The Need for Adaptation Assistance

It is becoming increasingly evident that the world’s poor living in developing countries are likely to bear the brunt of the adverse effects associated with global warming. Vulnerable developing country citizenry will be susceptible to increased frequency and intensity of disease outbreaks and El Nino-type extreme weather events such as droughts, storms, floods, and heatwaves.

Climate change will undoubtedly increase global economic and political instability as well. The reason: Volatile weather exacerbates competition and conflict over natural resources. As a result, those people least responsible and least equipped with the financial and technological resources to cope with the disproportionate impact of climate change will require substantial financial- and capacity-building assistance to help adapt to a changing planet.

The consequences of climate change on agriculture and development in developing countries is projected to be particularly acute. A recent Stanford University study noted that a majority of the world’s 1 billion poor depend on agriculture for their livelihood, and predicted severe crop losses leading to food shortages in Africa and South Asia in a much shorter timeframe than previously anticipated.

Changes in rainfall patterns will undoubtedly affect water availability and soil quality. Other studies have suggested that crop yields in sub-Saharan Africa will fall by 20 percent in some scenarios, and that climate change-induced famine may displace more than 250 million people worldwide by 2050.

The United Nations Development Program recently released an analysis indicating that $86 billion will be required annually—in addition to existing development aid—to address adaptation assistance needs associated with climate change by 2015. Given the magnitude of the coming crisis, it is in the interests of U.S. national security and economic prosperity to provide financing for adaptation assistance to allow the most vulnerable developing countries to prepare for and adapt to the effects of climate change.

This can be done through a well-functioning U.S. carbon cap-and-trade system. We can dedicate a percentage of auction revenues generated from the sale of emission allowances toward helping the most vulnerable people in developing countries adapt to climate change. Other Group of 8 nations (Canada, Great Britain, Germany, France, Italy, Japan and Russia) must also take the lead to ensure adaptation assistance is a fundamental component of their respective domestic climate-change strategies.

In addition, the United States and other developed countries must ensure the financing and implementation of an international adaptation fund, building on recent progress in international climate negotiations, to help developing countries reduce their vulnerability and increase their resilience to climate change. Open and transparent adaptation programs that meet the goals and needs established by local communities must become an international priority.

 

Competitiveness and Trade-Related Measures

 

In order to address competitiveness concerns arising from the potential influx of cheaper imported products from nations not subject to the costs of compliance associated with binding greenhouse gas emission reductions, numerous proposals have been put forward. The European Union Parliament, for example, has called for offsetting tariffs on imports from countries that are not parties to the Kyoto Protocol.

In the United States, a range of proposals are on the table in Congress, including measures requiring, as a condition of entry into the U.S. market, the submission of verifiable emission allowances by importers of greenhouse gas-intensive goods to cover the emissions released during production. Other proposals include the establishment of a performance “carbon intensity” standard that would apply to all energy intensive products produced domestically and overseas. The performance standard would effectively set a limit on the amount of carbon that could be emitted during the production of specific greenhouse gas intensive products, regardless of the country where the production took place.

As the Energy and Air Quality Subcommittee of the House Energy and Commerce Committee and others examine and assess the merits of these and other unilateral measures, the United States should be guided in its actions by the following brief summary of core principles. First, trade-related measures such as the mandatory submission of emission allowances and carbon intensity performance standards should be seen as policy tools of last resort.

Prior to the invocation of any trade-related measures, the United States should make significant additional efforts at capacity-building and financial assistance with major emitting developing countries to encourage their participation in a multilateral climate regime with binding global emission reductions. Measures should be evaluated on their practical effectiveness in preserving U.S. competitiveness and climate change goals. A measure’s likely effect on encouraging development and trade with developing countries should also be taken into account.

Any obligations imposed by the United States should contain sufficient flexibility to allow our trading partners to meet those obligations, through purchasing emission allowances in the anticipated U.S. carbon allowances market or credible foreign carbon markets, and through extended compliance timelines depending on the level of development and relative greenhouse gas emissions of each developing country. These measures should be considered if a nation fails to negotiate within the context of a multilateral agreement with binding emission reduction commitments. The U.S. president should retain the discretion to impose any trade-related measure on a particular nation based on a thorough analysis of current circumstances.

Second, the scope and applicability of trade-related measures and economic incentives should be relatively narrow. The global “club” of major emitting nations is relatively well-defined. Historically, the United States has been the world’s largest greenhouse gas emitter. China’s total greenhouse gas emissions are estimated to be on par with or exceeding U.S. emissions (at one-quarter of the per capita emissions of the United States). Together, the United States, the 25 member nations of the EU-25, China, Russia, India, Japan, Brazil, Canada, South Korea, Mexico, Indonesia, Australia, Ukraine, Iran, and South Africa account for 80 percent of global greenhouse gas emissions.

Similarly, the class of products, such as aluminum, cement, iron and steel, and glass, eligible for offsetting trade measures to address competitiveness concerns should be limited to greenhouse gas-intensive products and they should be explicitly listed in an open and transparent manner.

Third, the United States should actively encourage the transfer of clean technology to developing countries and increased flexibility in international trade rules for climate-friendly policies. The World Trade Organization multilateral trade regime has an evolving but traditionally negative view of unilateral measures that seek to impose limitations on the process and production of a particular product in another country. Arguably, any trade-related measure that is predicated on the carbon content of a manufacturing process or final product may fall into this category. Recent WTO dispute settlement decisions have demonstrated flexibility in this area. Yet the overall WTO consistency of such measures is unknown, and the WTO has frequently expressed a preference for multilateral measures to accomplish environmental objectives.

Given the important international implications of climate change and its adverse effects on global stability, trade, and all forms of life on Earth, the United States should be actively negotiating at the WTO and other international forums to design multilateral trade rules that explicitly allow for the distinction of products based on their greenhouse gas emissions and content. The case for flexible trade measures to address climate change is compelling; WTO rules should be updated to reflect this reality.

The establishment of open and transparent multilateral rules will have the added beneficial effect of minimizing the need for unilateral measures. Similarly, the United States should be pushing harder for a resolution to the stalled environmental goods and services negotiations at the WTO that seek to lower tariffs and trade barriers to clean energy technology.

Some estimates predict a $500 billion annual market for clean energy products by 2050, and many developing countries have an opportunity to leapfrog the carbon-intensive energy choices of the developed world in favor of more efficient, low-carbon energy technology. President Bush’s recent announcement of a $2 billion fund for clean energy assistance to developing countries is a welcome initiative, but much more needs to be done.

In the short term, the United States should follow through on the recent proposal that the U.S. Export-Import Bank provide 10 percent of its financing capacity to support the export of clean energy products and services while seeking to expand this percentage. Notably, trade in clean energy products need not be exclusively focused on exports. The United States should also encourage the trade of climate-friendly products from developing countries.

Importantly, the transfer of clean technology and capacity-building assistance to developing countries will not only encourage further engagement of developing countries in the reduction of global greenhouse gas emissions. It will also allow our nation to lead the world in innovation and the creation of high-quality jobs here at home.

 

Conclusion

The U.S. approach to engaging developing countries in reducing global greenhouse gas emissions must be proactive and comprehensive. As a necessary first step, the United States has a responsibility to demonstrate leadership and commit to binding greenhouse gas emission reductions. A higher priority must be placed on incorporating adaptation assistance into overall U.S. climate strategy at the domestic and international levels.

Trade-related measures to address competitiveness concerns at home must be used cautiously and with restraint. Measures should be narrowly targeted to address only greenhouse gas-intensive products widely traded in the global economy. Finally, the United States must redouble its efforts to encourage the transfer of clean technology and capacity-building assistance to developing countries while seeking cooperation with our trading partners to make the rules of the WTO multilateral trade regime more flexible.

The efforts of the United States to combat global warming and engage developing countries must not be contingent on the actions of other nations. We must never use the relative progress of other countries at different levels of development and in different circumstances as an excuse for our own inaction. The United States has the capacity and know-how today to cut our emissions and assist developing country adaptation to climate change and participation in reducing emissions on a global scale.

We can and will accomplish these goals while preserving U.S. competitiveness in greenhouse gas intensive products traded internationally. Together, we can confront the challenge of climate change, ensure a strong global economy, and encourage the growth of clean energy worldwide.

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