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How global trade can help the climate

The climate policy potential of international trade rules agreed by the World Trade Organization (WTO) still has room for improvement. Policymakers should change some rules – and make greater use of others, according to an article now published in the leading scientific journal Science by experts from twelve countries, including researchers from the Potsdam Institute for Climate Impact Research (PIK).

Climate policy is currently treading a fine line. On the one hand, governments must become more ambitious, make climate-damaging economic activity more expensive and, if necessary, safeguard this externally through trade policy measures. On the other hand, they must abide by the rules agreed upon in the World Trade Organization (WTO) at a time when the international order is being shaken. In the journal Science, an international research team – including Leonie Wenz and Sven Willner from PIK – now sheds light on how trade policy can help the climate in this situation.

“Countries must carefully balance the desire to comply with trade rules with the need for effective climate policies,” the article says. Tricky, for example, is the EU Commission’s proposal to impose Europe’s rising CO2 price on overseas importers, it says. “Early diplomacy and a uniform and transparent application could considerably increase the chances that a CO2 border adjustment will hold up before the WTO.” Without it, there is a threat of carbon leakage, i.e. relocation of production and corresponding CO2 emissions to regions with less climate protection – the global climate would not be served, but there would be less prosperity in Europe.

Edward Elgar Publishing
© Edward Elgar Publishing

Conversely, climate policy could harness the WTO to curb the fossil fuel subsidies that still exist around the world. These subsidies amount to $350 billion a year – a huge economic incentive for climate-damaging behavior.

Trade policy could also help the climate by reducing tariffs. From a global perspective, these are significantly higher for end products than for raw materials and intermediate products, even though the production of end products is much less CO2-intensive. This imbalance effectively means a negative CO2 price of $90 per ton. “This is the opposite of what a climate-friendly trading system should deliver,” the research team cautions.

The research team brings together the expertise of 33 experts, mostly from economics, law and political science, who published a book on the subject in March.


Potsdam Institute for Climate Impact Research (PIK) 2022

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