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COP26 and international trade: new green trade inquiry and report launched

COP26 and international trade: new green trade inquiry and report launched

Overview

On 22 July 2021, the House of Commons International Trade Committee ("ITC") launched an inquiry targeting the international trade aspects of COP26 ("Trade Inquiry").

In recent weeks, the UK Government has been keen to emphasise the potential opportunities to use international trade to further environmental goals through the promotion of 'green trade,' following the Board of Trade issuing a new report on 21 July 2021 setting out the "the economic case for green trade and the opportunity for Global Britain to accelerate the global green transition by promoting free and fair green trade" (the "Green Trade Report").

The Trade Inquiry has been tasked with considering how international trade and investment are being considered as part of the COP26 agenda, and how the Government’s trade and investment priorities align with its objectives for COP26.

What is meant by "green trade"?

While the Government does not offer any definition of "green trade", several elements to a green trade policy can be drawn out of the report, including the following:

  • Trade policy can encourage the development and uptake of environmentally preferable goods, services, and technologies by improving cross-border access, creating favourable conditions for innovation by offering grants or tax incentives, reducing tariff and non-tariff barriers to trade in green goods and services, and increasing competition in the market which in turn promotes efficient production and accessible pricing;

  • climate change threatens trade patterns, in ways ranging from reduced availability of food to difficulties experienced by economies currently reliant on high-carbon exports such as steel or cement. Trade policy decisions can take account of these actual or potential harms and direct the market accordingly; and

  • green finance is an essential piece of the green transition, and investments should be channelled towards sustainable investments, and the report underlines the value of the UK's strong financial sector and desire to implement green financial standards.

What is the ITC?

Established in 2016, the ITC scrutinises the spending, administration, and policy of the UK's Department for International Trade ("DIT"), and other associated public bodies. It is appointed by the House of Commons and is currently chaired by Angus Brendan MacNeil MP.

Why is the Trade Inquiry important?

While some aspects of international trade, such as shipping, aviation and road haulage have a more obvious impact on the environment, the fact that many multilateral trade agreements continue to consider environmental matters as being of secondary importance, has meant the Government is enabling poor climate performance and ambition from its trading partners by failing to make the environment a key negotiating point. By contrast, the EU has openly said that environmental protection is a red line in its own trade negotiations, including with the UK in the Trade and Cooperation Agreement.

An inquiry such as this therefore provides a welcome opportunity to increase key stakeholders' focus on the detrimental aspects of international trade, acknowledging how climate change might impact trade in the future, while hopefully encouraging better international trade practices going forward.

For instance, climate change may affect international trade by causing damage to infrastructure or making certain transport routes more difficult to navigate. This could lead to food shortages or a slow-down in manufacturing.

As set out by the Chair of the ITC, "…as the host nation for the COP26 climate change conference, the UK has a responsibility to lead from the front on environmental issues. The Government has identified opportunities to promote ‘green trade’ on the world stage, but it is not clear how these ambitions will fit with the aims of COP26 and how any environmental impacts of international trade can be mitigated."

What evidence is the Trade Inquiry looking for?

The specific questions in the call for evidence are as follows:

  • How can international trade and investment contribute to realising the goals of COP26?

  • Are international trade and investment likely to feature in the high-level negotiations at COP26?

  • What are the possible impacts of climate change on international trade and investment?

  • To what extent does the Government’s trade policy align with the objectives of COP26? This includes, but is not limited to, its actions at the WTO, its G7 presidency, and its bilateral and plurilateral trade agenda.

  • What discussions, if any, are planned to develop a multilateral approach to carbon pricing systems (including border adjustment mechanisms), green subsidies and investment funds, the curbing of fossil fuel subsidies, a circular economy and sustainable supply chains?

  • What impact could an agreement on finance at COP26 have on trends in international investment?

  • What engagement has there been between the COP26 Unit and the Department for International Trade on the Government’s agenda for its Presidency?

The Trade Inquiry is asking for written evidence to be submitted by 7 September 2021.

What did the Green Trade Report say?

The Green Trade Report focuses on the role that free trade and a free market can play in potentially helping to accelerate the global transition to a low-carbon economy. The Green Trade Report emphasises that by removing barriers to trade (including some industrial subsidies), this may encourage the uptake of green technologies around the world.

One of the key features of the Green Trade Report is that, in connection with carbon leakage (see our briefing), the UK will not follow the EU's proposal to address the issue through implementing a carbon border adjustment mechanism, despite being championed by Andrea Leadsom, the former Secretary of State for Energy and Climate Change, who said it would allow for a more level playing field for UK companies against international competitors from less climate ambitious countries. Instead, it recommends a different approach involving:

  • initiating international dialogue;

  • plugging data gaps that prevent existing solutions from being effective;

  • agreeing common product standards; and

  • if required, enforcing product standards through trade policy.

While such an approach may be more sophisticated than a simple carbon border adjustment mechanism, the negotiation of all four parts of the UK's proposed strategy may end up being too difficult to work in practice.

Criticism of the Green Trade Report

While welcomed by some, the fact that part of the Green Trade Report focused specifically on the idea of challenging 'green protectionism', whereby it is said environmental aims are used as a 'cover' to enact protectionist policies, has also been met with criticism, particularly at a time when the UK should be embracing a climate leadership role with the COP26 conference only a few months away. Many place a large part of the blame for climate change on the shoulders of unrestricted trade without corresponding regulatory controls. That said, those supporting the findings of the Green Trade Report have emphasised that these kinds of measures could make it harder for the UK to export low-carbon technologies in the future.

What is clear from the Green Trade Report is that the UK Government currently sees traditional free market thinking as one of the most important aspects of solving the climate crisis, which is likely to shape its policy response following COP26. Questions remain, however, over whether this method of dealing with the climate crisis will be fast enough.

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