Four Changes to Trade Rules Could Facilitate Climate Change Action

Global climate cooperation has collapsed but the need for action has not disappeared. This column argues that only radical technological progress can reconcile climate-change goals with development. It argues that four changes in WTO trade rules could facilitate climate-change action and technological advances without unduly damaging trade.

The research on the links between trade rules and climate-change action has mostly been concerned with how far climate-change action is constrained by current trade rules pertaining, for example, to border-tax adjustments (Horn and Mavroidis 2011), subsidies (Green 2006) and exports of natural gas (Levi 2012 and Hufbauer et al. 2013).

The research reflects – in part – the assumption that climate-change action (e.g. carbon-price increases) can be taken as a given. But our approach and proposals are predicated on:

• The current reality that action on climate change is proving fiendishly difficult.
• The assumption that only radical technological progress can reconcile climate-change goals with the development and energy aspirations of humanity (Mattoo and Subramanian 2012).

The relevant question then is: can trade rules be designed or changed to facilitate – in any way, direct and indirect, economic and political – climate-change action, including by fostering technological progress, without unduly damaging trade? In a new paper (Mattoo and Subramanian 2013) we propose changes in four areas.

Green subsidies

Under current WTO rules, economy-wide subsidies for clean energy would be permissible because they are not specific to an industry. However, any form of export subsidies including those involving clean energy and/or green technologies is prohibited (Pauwelyn 2009). Domestic subsidies for specific industries for the development and production of green products are not prohibited but actionable by partner countries if the latter believe that their domestic production or exports are adversely affected (Green 2006).

On the face of it, these rules are an example of how trade negotiations can produce disciplines that are good for global welfare by preventing wasteful subsidy wars driven by influential producer groups (think agriculture and aircraft makers).

In relation to climate change, however, these rules curtail three important benefits of subsidies.

• First of all, any subsidy that promotes clean energy and green products at home confers a benefit also to partner countries because there is less CO₂ in the atmosphere.
• Second, a country also makes available cheaper green products and technologies to other countries, and that encourages their use, taking us closer to the social optimum.
• Third, there is an arguably bigger, political-economy benefit.

Prospects for climate change action in the US in the form of a carbon tax or cap-and-trade do not seem bright. One development may galvanise action in the US: the threat that green-technology leadership will be captured by China. In other words, the US needs a Sputnik moment of collective alarm at the loss of US economic and technological ascendancy.

The global battle against climate change is thus being fought with a depleted arsenal (see, for example, Acemoglu et al. 2012). Countries that have the financial means to do so should be allowed to deploy industrial policy to promote clean energy and green technologies. What the world needs is unbridled competition or even a race initiated by a change in global trade rules to facilitate large scale support for the development and production of the currently under-supplied green goods.

Thus, we would propose altering current rules in the following manner. Production subsidies for specific green products and technologies should be permissible. Partner countries should not be able to take action unilaterally or through WTO dispute settlement against them. Export subsidies related to green products and technologies should not be prohibited. However, since they carry greater risks of mercantilist abuse, they should be regulated more strictly than production subsidies.

Border-tax adjustments

A lot has been written on this subject. Based on previous work (UNEP and WTO 2009, Mattoo et. al. 2013), we proposed a possible compromise between no border tax adjustments, which is best from a trade perspective, and adjustment based on carbon content of imports, which is attractive from an environmental perspective. This compromise would involve taxes based on the carbon content in domestic production rather than that embodied in imports. Countries could accept this principle as a pragmatic and negotiated compromise between not just trade and environmental concerns, but also between the interests of different countries.

An alternative to import taxes would be for the exporting country to impose taxes on exports, which could be designed to have the same environmental consequences as the import-based border taxes. The big difference would be that the tax revenues would be collected by the exporting countries rather than the importing countries. International cooperation, in the form of coordination and information sharing between importing and exporting countries (but also more broadly in the form of clarifying existing rules) would help walk the narrow path between carbon tax avoidance (if the exporting country under-taxes) and double taxation of carbon (if the importing country taxes what has already been taxed).

Export restrictions on fossil fuels

If greater use of natural gas is on balance globally desirable because it is cleaner than substitutes such as oil and coal (as Helm 2012 argues in his recent book), then restrictions on exports might be harmful for global energy emissions. If the environmental benefits of unrestricted gas are not so clear, the export ban on natural gas should be disallowed on traditional trade grounds. This is then an example where WTO rules need to be tougher on mercantilist practices for the sake of the environment. So, we would support the emerging consensus (Levi 2012 and Hufbauer et al. 2013) in favour of disallowing export restrictions on fossil fuels.

Intellectual property rights protection

To provide more affordable medicines, developing countries are increasingly attempting to dilute patent rights by issuing compulsory licenses (licences granted without the authorisation of the right holder). Developing countries have also argued for weak intellectual property rights to facilitate dissemination of green technologies.

If, however, these countries come to believe that

• Their stakes in preventing climate change are high.
• Technology generation is key to preventing or mitigating the effects of climate change.
• Because they are large emitters of greenhouse gases and because their markets for green technologies are large, technology generation will be materially affected by the property rights protection that they provide;

Then their incentives for strengthening intellectual property rights protection will be enhanced. In this case, rules on intellectual property rights could be strengthened.

One way of doing this would be to tighten the compulsory license provisions at least for the large emerging market economies such as China, India, Brazil, Indonesia, Russia, and South Africa. One possibility, for example, would be to change Article 31 (h) of the TRIPs agreement to say that where compulsory licenses are granted for green technologies, the right holder shall be paid remuneration related to the fixed cost of inventing them (suitably apportioned across the large markets).

Political economy of international cooperation

Thus, we propose here a bargain on trade rules between industrial countries and the dynamic emerging economies that would facilitate climate-change action.

Trade actions/contributions by the dynamic emerging economies could take two forms:

• First, by permitting industrial countries to take bilateral trade agreements – or by imposing export taxes on energy-intensive manufacturing goods themselves – they could facilitate the political economy of industrial countries raising carbon prices;

Energy-intensive industries in the US and Europe would receive some protection against the loss of competitiveness and thus be less resistant to carbon-price increases.

• Second, by strengthening intellectual property rights protection, they could contribute to the global effort at technology development. In turn, industrial countries would agree to modify trade rules to allow subsidies for green goods and technologies, and lift export restrictions on natural gas.

From the perspective of the bargaining dynamic between China on the one hand and the US and EU on the other, there is a possible give-and-take which makes cooperation feasible.

References

•Acemoglu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hemous (2011), “The Environment and Directed Technical Change”, The American Economic Review, 102(1), 131-166.
•Green, A (2006), “Trade rules and Climate Change Subsidies”, World Trade Review, 5(3), 377-414.
•Horn, Henrik and Petros C Mavroidis (2011), “To B(TA) or not to B(TA)? On the Legality and Desirability of Border Tax Adjustments from a Trade Perspective”, World Economy, Hufbauer.
•Gary Clyde, Allie E Bagnall, and Julia Muir (2013), “Liquefied Natural Gas Exports: An Opportunity for America”, Peterson Institute for International Economics, Policy Brief, 13-6, Washington DC.
•Levi, Michael (2012), “A Strategy for US Natural Gas Exports”, The Hamilton Project Discussion Paper, 2012-04, Brookings.
•Mattoo, Aaditya and Arvind Subramanian (2012), Greenprint: A New Approach to Cooperation on Climate Change, Center for Global Development, Washington DC.
•Mattoo, Aaditya and Arvind Subramanian (2013), “Four Changes to Trade Rules to Address Climate Change”, Peterson Institute for International Economics, Policy Brief No 10, Washington DC.
•Pauwelyn, Joost (2009), “Testimony Before the Subcommittee on Trade of the House Committee on Ways and Means”, 24 March.
•UNEP and WTO (2009), Trade and Climate Change: A Report by the United Nations Environment Program and the World Trade Organization, Geneva.