Are national Incentives to reduce carbon emissions likely to harm global trade?

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By Hugo Griffin

3rd Year

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Introduction

• In this project I will be looking at :
• What is globalisation?
• Has globalisation been an engine of economic development?
• How does global trade work?
• Are there global trade agreements?
• Are there global agreements for carbon emissions?
• What have the US and EU done since the Parid agreement 2015?
• What is the US doing to reduce carbon emissions?
• What is europe doing to reduce carbon emissions?
• EU vs US 
• Does the green transition cause de-globalisation?
• Can we get the best from EU and US?
• My conclusions 

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My project links to the above UN Sustainable Development Goals (SDG) 

SDG 8 - "Decent work and Economic Growth":  I want to know does global trade mean that people across the world are better off particularly those in the developing world

SDG 9 - "Industry, Innovation and Infrastructure":  I want to know does global trade mean that countries across the world are better off

SDG 12 - "Responsible Consumption and Production" : I want to know do Government incentives to reduce carbon emissions encourage consumption and production of goods which impacts positively in equal measures in both developing and developed countries

SDG 13- "Climate Action": I want to know does global trade affected positively or negatively by Government incentives to reduce carbon emissions

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What is globalisation?

• Globalisation is the process in which businesses or other organisations develop to a global or international scale.  
• Globalisation is the process in making the world one big marketplace through trade and culture.

Has globalisation been an engine of economic development?

https://ourworldindata.org/is-globalization-an-engine-of-economic-development

Economic development between 1820 and 2015

https://ourworldindata.org/is-globalization-an-engine-of-economic-development

How does Global trade work?

• Ever since Adam Smith published The Wealth of Nations in 1776, the vast majority of economists have accepted the proposition that free trade among nations improves overall economic welfare. Free trade, usually defined as the absence of tariffs, quotas, or other governmental impediments to international trade, allows each country to specialize in the goods it can produce cheaply and efficiently relative to other countries. Such specialization enables all countries to achieve higher real incomes.

https://www.econlib.org/library/Enc/InternationalTradeAgreements.html#:~:text=The%20WTO%20oversees%20four%20international,TRIPS%20and%20TRIMS%2C%20respectively).

• The world Trade Organisation or WTO is in charge of managing the global trade agreements. There are 4 global trade agreements, the two main ones are; 
• GATT (Genral agreement on tariffs and trade) - In 1947, the GATT was signed by 23 countries, The GATT later turned into the WTO but the agreement is still in place. Since it was signed in 1947, the average tariff has fallen from 40% to 5%
• GATS (the General Agreement on Trade in Services) - The GATS provides a framework of rules governing services trade and provides a way to help solve disputes between countries

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Are there global agreements for trade?

https://www.econlib.org/library/Enc/InternationalTradeAgreements.html

Are there global agreements for carbon emissions?

• UN Framework Convention on Climate Change (UNFCCC), 1992. 197 countries took part, including the United States, the landmark accord was the first global treaty to directly address climate change. It started an annual forum, known as the Conference of the Parties, or COP, for international discussions aimed at stabilizing the concentration of greenhouse gases in the atmosphere. These meetings produced the Kyoto Protocol and the Paris Agreement.
• Kyoto Protocol, 2005. The Kyoto Protocol was made in 1997 and entered started in 2005, it was the first legally binding climate treaty. It required developed countries to reduce emissions by an average of 5 percent below 1990 levels, and established a system to monitor countries progress. 
• But the treaty did not include developing countries, including major carbon emitters China and India, to take action. The United States signed the agreement in 1998 but never ratified it and later withdrew its signature. 
• The US feared that unequal responsibility for emissions reduction for developed countries only would continue to give China and India an unfair competitive advantage in global trade. THerefore in 2009 they secured an interim agreement with China and India that they would assume responsibility too for setting emissions reduction targets (pre- Paris COP – see over)

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https://www.cfr.org/backgrounder/paris-global-climate-change-agreements

"Promised Land" by President Barack Obama

Are there global agreements for carbon emissions?

• Paris Agreement, 2015. The most significant global climate agreement to date, the Paris Agreement requires all countries to set emissions-reduction pledges. Governments set targets, known as nationally determined contributions (NDCs), the goal is to prevent the global average temperature from rising 2°C above preindustrial levels and to keep it below 1.5°C 

https://www.cfr.org/backgrounder/paris-global-climate-change-agreements

What have the US and the EU done since the Paris Agreement 2015?

And do their Action have impact on Global trade and competition

What is the latest that the US is doing to reduce carbon emissions? 

A breakdown of what the Inflation Reduction Act will be spent on:

• Manufacturing clean energy products - $10 billion will be spent on manufacturing electric vehicles, wind turbines and solar panels. An additional $30 billion will be given out as tax credits to companies to accelerate domestic manufacturing of these goods. $20 billion will be given out as loans to build new electric vehicle manufacturing factories and another $2 billion to revamp existing plans on car plants
• Cutting emissions - $20 billion on cutting emissions in the agriculture sector with another $3 billion spent on reducing emissions at the ports. The act also allocates $9 billion to be given to the government to spend on American-made clean technologies 
• $3 billion is allocated to U.S. postal services to buy electric vehicles 

https://www.cnbc.com/2022/07/27/inflation-reduction-act-climate-change-provisions.html

Continued:

• Research and development - $27 billion for clean energy technology accelerators to support deployment of technologies that curb emissions and $2 billion for breakthrough energy research in government labs 
• Preserving and supporting natural resources - $5 billion in grants to support healthy forest, forest conservation and tree conservation and $2.6 billion in grants to conserve costal habitats
• Support for the states - $30 billion in loans and grants for states to advance in clean energy transitions 
• Environmental justice initiatives – More than $60 billion to address unequal effects on pollution on low-income communities 
• For individuals – A $7,500 tax credit when buying an electric vehicle and $4,000 tax credit when buying a used one (will only be available to middle or low-income earners

https://www.cnbc.com/2022/07/27/inflation-reduction-act-climate-change-provisions.html

What is Europe doing about carbon emissions?

The EU green deal

• The 'Green Deal' is Europe's strategy to transition the EU economy into a sustainable economy. The aim is to become the first climate-neutral continent in the world by 2050. There are many different funding mechanisms in place to fund the Green Deal plan which is estimated to cost around €1 trillion when completed, €528 million will come directly from the EU budget with another €279 million coming from the EU invest program from different public and private sectors and the remaining €144 million coming from national co-financing.
• The main elements of the Green Deal are: 
• Climate action                           - Eliminating pollution 
• Clean energy                             - Farm to fork 
• Sustainable industry                - Preserving biodiversity 
• Buildings and renovations      -  Research and development 
• Sustainable mobility                - Preventing unfair competition from carbon leakage 

https://www.nortonrosefulbright.com/en/knowledge/publications/c50c4cd9/the-eu-green-deal-explained

• Climate action – Between 1990 and 2018, greenhouse gas emissions in the EU were reduced by 23%. The EU aims to reduce it by 55% compared to 1990 by 2030 
• Clean energy - the production and use of energy accounts for more than 75% of EU's greenhouse gas emissions, the EU aims to reduce this by relying more on renewable sources the H.E.P or solar energy
• Sustainable industry – The industry accounts for 20% of EU greenhouse emissions. The EU aims to reduce this is many different was like encouraging businesses to transition online. It also aims to secure critically needed raw materials for clean technologies
• Buildings and renovations – Buildings are responsible for 40% of the consumption of the EU's energy consumption and 36% of greenhouse gas consumption. The renovation wave is a strategy to renovate buildings to increase energy consumption efficiency  
• Sustainable mobility – The sustainable mobility policy aims to reduce transport emissions; EU transport sector aims to cut carbon emissions in transport 90% by 2050 in a number of different ways such as doubling the train system around Europe and zero-emission marine vessels to be on the marking with around 30 million zero-emission cars in operation

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• Eliminating pollution – Pollution is a significant driver in biodiversity, therefore the EU has proposed a 'Zero pollution action plan', this proposes pollution elimination be considered in all policy developments and also decouple economic growth from the increase of pollution
• Farm to fork – Food systems are responsible for around 21-27% of greenhouse gas emissions and use a huge amount of natural resources. The farm to fork scheme will focus on reducing waste and transforming the manufacturing, processing, retailing, packaging and transportation of food.
• Preserving biodiversity - In the last 40 years, the population of wild species has fallen by 60% due to human activities. The EU Biodiversity strategy will work with the Farm to Fork strategy on focusing on restoring forests, soils and green areas in the city. The European Commission estimates that €20 billion per year is needed to fund the biodiversity strategy. 
• Research and development - Many Green Deal initiatives require new technologies and transforming the supply chain. Many research and development initiatives will be funded by Horizon Europe, which has pledged over 35 per cent of its €95.5 billion budget to achieving EU climate objectives
• Preventing unfair competition from carbon leakage - The EU Commission is therefore proposing a Carbon Border Adjustments Mechanisms to ensure that the price of imports reflects more accurately their carbon content. This measure is proposed to be designed to comply with World Trade Organization rules and other international obligations of the EU.

https://www.nortonrosefulbright.com/en/knowledge/publications/c50c4cd9/the-eu-green-deal-explained

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EU vs US

• The 2022 United States Inflation Reduction Act (IRA) is a significant and welcome climate law. It also includes trade-distortive subsidies, including local-content requirements prohibited under World Trade Organisation rules – the first time the US has done this and a blow to the international trading system that could trigger protectionism in other countries. 
• The expected IRA green subsidies are of similar size to those available in the European Union, except in renewable energy production, where EU subsidies remain far larger. However, there are important qualitative differences. Some IRA subsidies discriminate against foreign producers while EU subsidies do not. IRA clean-tech subsidies are simpler and less fragmented, and they focus mainly on mass deployment of green technologies rather than innovation.
• The IRA will likely harm Europe through its competitiveness effect, while it will likely benefit climate transition in Europe and most of the rest of the world. However, the magnitude of both effects is very uncertain, partly because the IRA will induce substitution away from Chinese inputs. By forcing the reorganisation of supply chains, the IRA may make the EU and other economies more competitive relative to China. It may also initially slow the green transition. But in the longer run, this effect should be outweighed by the reduction in the cost of clean tech driven by the IRA. 
• In responding to the IRA, the EU should not just seek to protect its competitiveness relative to the US but to pursue broader aims, including competitiveness in general, speedy decarbonisation and broad foreign policy and development policy goals. These aims imply that the EU should not impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the IRA’s approach to manufacturing subsidies. Rather, it should focus on boosting its structural competitiveness, formulate a trade policy response that includes reform of the international subsidies regime, and develop an instrument for EU-level subsidies that focuses on early-stage development and increasing EU resilience to trade disruptions.

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https://www.bruegel.org/policy-brief/how-europe-should-answer-us-inflation-reduction-act

Does the green transition cause de-globalisation?

• Energy is a key sector to watch in terms of both globalisation and deglobalisation. The common incentive for nations to address climate change has been a major source of globalised cooperation in recent years. Yet the mechanics of the green transition itself also necessitate a more local focus.
• The push towards a long-term increase in the share of energy coming from renewables is being driven by the reduction of carbon-intensive transportation infrastructure and carbon pricing mechanisms acting as de facto tariffs. Rising concerns about energy security and fossil fuel pricing volatility have also heightened interest in domestic renewables.
• However, as the green transition is a global challenge, Barclays suggests it still needs a globalised approach — one that complements local and regional solutions. Although the rise of renewables will fundamentally reshape fossil fuel trade flows, the green transition will have to be supported by the minerals industry that will be used to build its infrastructure. This will result in the increased trade integration of mineral-endowed countries.
• The era of globalisation may be coming to an end. What replaces it remains to be seen, but it is clear that global cooperation is necessary to confront shared challenges.

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https://www.weforum.org/agenda/2023/01/deglobalisation-what-you-need-to-know-wef23/

Can we get the best from both the EU and US?�Green Trade Agreements *

• The advantage of industry specific green trade agreements is that the major importing economies can aggregate their market power to set rigourous and ambitious standards.  And exporters must agree on how to incentivise their industry to deliver.  All the relevant parties need to work together and if one country tries to block progress, there could be grounds for effective sanctions or simply exclusion from the global market
• For example, green steel would not only be exempt from taxes , the relevant countries e.g. Brazil or China where most of the world's steel is produced would actually agree a set of major incentives to supercharge the industry's transition such as zero interest loans. In this way, we can target the relative price of green steel. The objective is very simply to make green steel far more profitable to produce and cheaper to consume.  

*"Supercharge me – Net Zero Faster" by Eric Lonergan and Corinne Sawers

Conclusions

• Globalisation is good for spreading economic prosperity across both Developed and Developing Economies​
• The major trading blocs e.g. US, Europe, China / India are in a state of flux at present with different approaches to carbon emission reduction
• At present national Incentives to reduce carbon emissions are likely to harm global trade because of either :
• Encouraging local production
• Increasing production costs due to higher investment in green technologies making producers uncompetitive
• To address this concern Government action is needed to adjust trade agreements to ensure that all the major importers and exporters across the major trading blocs are investing in green technologies so that this does not give any one exporter an unfair advantage

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Thank you

Hugo Griffin 

3rd Year

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