In December, negotiators at the COP28 climate summit agreed on a transition away from fossil fuels. While some officials celebrated this commitment, many environmental advocates noted that the most important outcome of COP28 in Dubai was actually this Global inventoryIt found that global greenhouse gas (GHG) emissions are still rising, reaching a record high of over 40 billion tonnes in 2023.
Even in countries where emissions are falling (including the United States, where emissions have fallen by more than 20% since their peak in 2007), reductions remain far behind the pace needed to achieve net Achieving the Glasgow Climate Pact's 2021 mid-century target of zero emissions. This deficit led to pervasive questions among those gathered in Dubai: What's next? How do we strengthen the global response to climate change?
Some of what is needed is known. More funding for the energy transition, particularly blended finance to support the investments in clean power generation needed in developing countries. Better defined policies that provide clear incentives for business, community and family engagement in transformative change. And increased leadership from the business community, which must inevitably play a central role in reshaping the foundations of the global economy. But none of this is new.
Sustainability must not become a competitive disadvantage
It is becoming increasingly clear that the key to a sustainable future lies in companies rethinking their business models. What was striking at both COP28 and the World Economic Forum in Davos last month was how many business leaders understood that it is time to move away from net zero greenhouse gases accept (which over 9,000 companies have now implemented).
But as CEOs around the world get down to business and begin to calculate their transition plans, there is a general concern that some companies will shirk the new sustainability standards and profit as a result. Or, as economists would say, free riders will end up being winners as others rise to the company's demands Sustainability is imperative and thereby bear costs that lead to a competitive disadvantage.
Put simply, top executives see a way to meet the demands of climate change and sustainability more broadly, but are reluctant to undertake the fundamental restructuring required unless they can be assured that their competitors – not just domestically but also internationally – will do the same. Likewise, those in the financial world who are providing the capital for this transition want to be assured that the companies they are lending money to will not see their sales or profits fall in the face of unfair competition from companies that have the global commitment to climate action ignore, collapse and bring their goods and services to market at lower costs.
What is needed is a mechanism to ensure that companies move forward together across sectors. In fact, one of the biggest stories at COP28 was the presence of the dynamic Director-General of the World Trade Organization (WTO), Dr. Ngozi Okonjo-Iweala, who believes a revitalized trading system could help spread needed clean energy technologies, projects, infrastructure, best practices and innovative ideas around the world quickly and at scale.
The sensitive issue of trade blocs and subsidies
As the host government of COP28, the UAE has increased the focus on trade as a solution to climate change by organizing a thematic trade day and trade pavilion for the first time in three decades of annual climate change summits. As a result, hundreds of side events and policy discussions in Dubai focused on the potential of a reimagined trading system that could form the backbone of the rules and enforcement the global economy needs to align with the global community's commitment to a low-carbon future.
The European Union has expanded the logic of trade as a critical point of policy leverage for progress on climate change by advancing its Carbon Border Adjustment Mechanism (CBAM), which will impose special tariffs on goods entering the EU (initially in five countries). high emissions). industries, but ultimately on a larger scale) produced in jurisdictions with less strong climate commitments. In particular, the EU intends to measure the difference between the greenhouse gas emissions fee in the producing country and the EU's carbon price (which was around $100 per tonne for most of 2023) and, based on the difference, a CO2 – Make border adjustments.
While some nations and trade ministries complain about the EU's green protectionism, many others believe the CBAM is conceptually justified. Why should a company be allowed to gain a competitive advantage in international markets if it does not comply with its existing environmental commitments? From a political perspective, the EU's approach or something similar seems essential. This is the only way to get companies in an industry to join forces and prepare for a sustainable future, without having to fear that those who take the first steps will have to pay a price for their competitiveness.
There are of course questions about the analytical basis of the EU protocol for measuring greenhouse gases in the context of traded goods, the price basis for EU tariffs and the question of why the CBAM only recognizes explicit carbon pricing and not a broader range of carbon pricing Climate change policies that reflect the diversity of strategies to limit greenhouse gas emissions around the world.
These are all issues that the WTO can address. In effect, it provides a neutral forum to bring parties together to negotiate sustainability standards and ensure that the foundations for border adjustment mechanisms are transparent, science-based and fair to developing countries.
Similarly, the WTO would be well positioned to redefine the trading system's approach to controversial subsidies, such as the clean energy incentives contained in the U.S. Inflation Reduction Act. Historically, when challenging a subsidy at the WTO, the only question asked was whether it disrupted trade. But many critics, such as those pushing the WTO reform agenda, called it that Villars framework for a sustainable trading system, see this as the wrong starting point. In fact, the first paragraph of the 1994 Marrakesh Agreement, which established the WTO, states that trade relations should be conducted “in accordance with the objectives of sustainable development and the protection and preservation of the environment.”
So perhaps the first question should be: What is the purpose of the subsidy in question? Followed by: Does government support increase or decrease sustainability? In this regard, fossil fuel subsidies or production-based agricultural programs would be discouraged. But subsidies for clean energy or helping farmers transition to sustainable agriculture would get the green light as long as those programs meet certain basic requirements to minimize impacts on trade.
As officials from the WTO's 164 member states gather in Abu Dhabi for a ministerial conference, there is an opportunity to begin reforming the WTO, enabling it to deliver on its sustainable development mandate and establishing the trading system as a mechanism to sustain the Set the world on track to achieve the promised reductions in greenhouse gas emissions.
With a new focus on establishing agreed (and therefore legitimate) bases for sustainability standards and subsidy review, a revitalized WTO would be able to restore public trust and political support around the world and breathe new life into the trading system. And it could prove to be a crucial institution in a coordinated effort to save the planet.
Dan Esty is the Hillhouse Professor of Environmental Law and Policy at Yale and co-director of the Redesigning global trade for a sustainable future project. His book published in 1994 Making the GATT more environmentally friendly, helped spark the debate about how to align the trading system with society's sustainability goals. Professor Esty spent 2022-23 on public service leave from Yale at the World Trade Organization.
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