Cooperation or Competition?: Climate and Trade at COP28

Recent climate progress arguably owes more to industrial competition than to the 2022 United Nations Climate Change Conference (COP27) climate summit. The US has spent more than $200 billion on the manufacture and deployment of clean energy technologies, a step-change increase from only one year ago.[1] The IRA is expected to mobilize more than a trillion dollars in government spending and trillions more in private investment to fight climate change.[2] The legislation also prompted a wide swath of countries to increase clean energy spending as they vie for investment and industries of the future. The EU, for its part, began to enforce its Carbon Border Adjustment Mechanism (CBAM) this past October.[3] A motley crew comprised of the US and the BRICS countries (Brazil, Russia, India, China, and South Africa) have pushed back, but the EU CBAM has likewise spurred governments to strengthen their stances against carbon emissions by considering strong carbon pricing or improving their capacity to measure embedded carbon. It seems tariffs and subsidies—rather than diplomacy—are in the driver’s seat when it comes to upping global pressure to reduce emissions.

Against this backdrop, trade will inevitably hang over COP28, though it will not feature in official negotiations. The United Arab Emirates (UAE), this year’s host, has acknowledged the urgency of this issue by including, for the first time ever, trade as one of its themed days, and representatives from the World Trade Organization (WTO) will be in attendance at the conference. The WTO is unlikely to depart Dubai empty-handed, so observers may expect an announcement from the organization aimed at reducing tensions around CBAMs—perhaps around aligning accounting methodologies.

While expectations for the outcomes of climate and trade discussions in Dubai remain low due to the issue’s newcomer status at global climate talks, here the authors discuss areas where some progress could be made.

A Climate Club for Trade

COP28 could kick off weightier climate-trade work. Last year, the G7 under Germany’s presidency stated its intention to form a so-called climate club, a group of countries between which trade barriers are lowered in recognition of mutual progress on climate.[4] After incubating with the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA), the climate club will formally launch in Dubai on December 1.[5] If successful, it could become the focal point for international cooperation on climate, trade, and development issues. As one of the authors has suggested,[6] the goal of a climate club would be to advance consensus across a wide range of climate, trade, and development policies.

What Success Could Look Like

A successful COP28 could launch a club to tackle the following topics:

Aligning on allowable subsidies. The US and other developed countries could agree to limit domestic sourcing provisions for green subsidies to clean technologies that require public support to commercialize. They could also pledge concessional financing and technology assistance to developing countries in the same sectors that they support internally with green subsidies. In turn, developing countries could pledge not to limit imports of clean energy. All parties would have to agree to refrain from pursuing cases at the WTO against one another.

Harmonizing approaches to border carbon adjustment. Creating consensus around carbon accounting, though seemingly arcane, carries geopolitical importance. Uncoordinated approaches could lead to different prices for the same products, compelling countries to tussle over tariffs. The EU and other CBAM countries could also incentivize developing countries to crack down on carbon leakage by offering concessional financing to help them comply and lower emissions. Such a measure would help the EU CBAM, in particular, avoid regressive impacts on poorer countries and provide global benefit, since most emissions come from the developing world.

Coordinating sustainable supply chains. Developed countries can pledge to help developing countries move up the value chain in emerging clean energy technology supply chains by catalyzing investment in mineral refining [7] as well as battery component and solar cell manufacturing. Such investments would abrogate the need for export controls on raw materials, which would fragment markets and create more green trade friction.

Advancing WTO reform. While some believe that the WTO is ill-equipped to balance the climate benefits of green industrial policies with their potentially negative consequences on global trade,[8] there is no substitute for the WTO’s centrality in global trade. The climate club could provide much-needed stimulus to restart talks around WTO reform. The conversation could start with more limited changes to existing agreements like General Agreement on Tariffs and Trade (GATT) Articles XX and XXI, which deal with exceptions to the trade rules. Discussions would have to recognize the need to balance public subsidies to jumpstart green industries—which may not emerge without government support—with the goal of agreeing to lower tariffs on environmental goods to make the energy transition more affordable globally.

COP28 Will Set the Tone

It remains unclear how the intersection of climate and trade will feature in COP28’s formal negotiations as well as official agenda and, when it does, discussions may hold more peril than promise. But success on any of these fronts—likely requiring months, if not years, of negotiations—would decrease trade risks and increase climate opportunity. The G7 would need to welcome emerging markets and developing economies (EMDEs) into the fold to achieve meaningful outcomes. Lowering tariffs on environmental goods, transferring technologies that the IRA makes affordable, and redistributing CBAM revenues to industrial decarbonization efforts in EMDEs could all help accelerate the energy transition in the Global South without encouraging trade fragmentation. For all of this, COP28 could be the starting point.

Notes

[1] Rhodium Group and MIT Center for Energy and Environmental Policy Research, “The Clean Investment Monitor: Tracking Decarbonization Technology in the United States,” September 13, 2023, https://rhg.com/wp-content/uploads/2023/09/The-Clean-Investment-Monitor_Tracking-Decarbonization-in-the-US.pdf.

[2] Josh Saul, “Goldman Sees Biden’s Clean-Energy Law Costing US $1.2 Trillion,” Bloomberg, March 23, 2023, https://www.bloomberg.com/news/articles/2023-03-23/goldman-sees-biden-s-clean-energy-law-costing-us-1-2-trillion.

[3] Philip Blenkinsop and Kate Abnett, “EU Launches First Phase of World’s First Carbon Border Tariff,” Reuters, October 2, 2023, https://www.reuters.com/business/environment/eu-launches-first-phase-worlds-first-carbon-border-tariff-2023-09-30/.

[4] Paul Carrel, “G7 Establishes Climate Club to Support Green Transition,” Reuters, December 12, 2022, https://www.reuters.com/business/environment/g7-establishes-climate-club-support-green-transition-2022-12-12/.

[5] Zia Weise and Federica Di Sario, “G7 Climate Club to Launch December 1 at COP28, EU Official Says,” Politico Pro, November 15, 2023.

[6] Sagatom Saha and Shayak Sengupta, “Biden’s Signature Achievement Needs to Go Global,” Foreign Policy, October 2, 2023, https://foreignpolicy.com/2023/10/02/biden-ira-climate-global/.

[7] Tom Moerenhout and Kevin Brunelli, “Q&A | How Critical Minerals Fit into Bidenomics,” Center on Global Energy Policy, Columbia University, September 21, 2023, https://www.energypolicy.columbia.edu/qa-how-critical-minerals-fit-into-bidenomics/.

[8] Ana Swanson, “Climate Change May Usher in a New Era of Trade Wars,” New York Times, January 25, 2023, https://www.nytimes.com/2023/01/25/business/economy/climate-change-global-trade.html.

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