Climate Change and the Trading System: After Doha and Doha

Abstract

The Doha climate change conference failed to deliver a credible agreement on climate change mitigation. Meanwhile, the Doha Round of World Trade Organization negotiations has stalled, to all appearances indefinitely, leaving unresolved the multilateral talks on how to reconcile and integrate climate change measures with trade rules. In the absence of multilaterally agreed solutions, countries are implementing unilateral measures, sub-national governments and municipalities are taking their own measures, the corporate world is making strategic bets, and private litigation is being used to force action. Three negative dynamics have emerged endogenously in the interaction between climate change abatement and the trading system. First, trade linkages are inhibiting effective unilateral action due to industrial competitiveness concerns. Second, activist governments seeking to capture the economic benefits of publicly funded abatement measures are coming into conflict with trade rules as they seek to prevent leakage of industrial benefits through trade. Third, while funding of climate change measures is public, delivery of solutions is private; given the essential role of emerging industries in climate change abatement, industrial policy competition has been induced, including through strategic trade policy. Not surprisingly, the resulting rivalries are spilling over into the trade dispute settlement system. This paper surveys developments bearing on the intersection between the trading system and climate change policies. It documents the conflicts that have emerged and considers the scope for changing the dynamic such that, as was proved possible in other important environmental policy areas, trade can strengthen climate change mitigation and the trading system is not itself damaged in the process. Further it comments on the implications of applying first best trade rules in a second best climate change mitigation context.

Keywords: climate change, UNFCCC, WTO, dispute settlement, border carbon adjustments

JEL Classification: F13