What’s Up (and Down) with Green Trade?
With Martin Cameron
In 2020 the total value of world trade — exports and imports — totalled around US$ 44 trillion — amounting to 52% of world GDP. In some countries, such as Ireland, the Netherlands, Singapore, Vietnam, and a few others, the value of trade is even much higher than GDP. Although the share of trade in world GDP has declined from a high level of 61% in 2008, it remains a robust economic growth and development engine. It allows countries to specialize in production and diversify consumption, achieving higher welfare levels than would be the case under autarky. It also spreads ideas and innovations, thereby boosting productivity growth, efficiency, and adoption of best practices.
But there are also downsides to trade. One downside that has provoked a backlash against globalization is that trade gains are often unequally distributed within and between countries and often threaten jobs and livelihoods.
A second downside, particularly pertinent given the COP26 meeting in Glasgow, is that trade significantly contributes to greenhouse gas (GHG) emissions. It does so through two main channels: the higher levels of consumption and production that it enables, and the second is the GHG emissions from the transport of goods. Around 25% of global carbon emissions are due to overall transport. International freight transport contributes about 7% of total global carbon emissions — and shipping around 2,5%. Moreover, and of great concern, emissions from international maritime and air transport continue to increase rapidly — between 2009 and 2019, emissions from these modes of international transport grew in double digits, respectively, by 47% and 77%. According to the International Transport Forum (ITF), carbon emissions from trade-related freight transport will grow. The transport sector is “one of the hardest sectors to decarbonize”. It relies “heavily on fossil fuel for propulsion and is still a long way from being able to switch to cleaner energy sources.” Moreover, “zero-carbon technologies that can be applied at scale to large ocean-going ships do not yet exist.” It is also very often small developing countries that face the most difficult geographical challenges, such as being an island state or covering rugged terrain, or being landlocked, that depend more on international freight movements and complex value chains.
Therefore, decarbonizing the transport sector is essential to reach the 45% reduction in carbon emissions by 2030 that may be necessary to limit global warming to 1.5 degrees Celsius. This will require stricter and more precise commitments concerning transport in countries’ new Nationally Determined Contributions (NDCs) at COP 26. Rich countries also need to stick to their financial obligations to developing countries to mitigate and adapt to climate change. Following the 2015 COP 21 in Paris, only 10% of parties specified carbon reductions in their transport sector. Rich countries fell far short of the targeted US$ 100 billion annual transfers of climate finance to developing countries. They should do better this time around.
There is a third downside to trade from the carbon emissions perspective. Firms can use it to avoid national taxes on carbon emissions, for instance by importing (rather than making) goods that are carbon-intensive in manufacturing. This leads to so-called carbon leakage. Thus, trade can undermine national efforts to reduce carbon emissions. Many countries are therefore reverting to and/or planning to restrict exports of certain goods and impose taxes and/or restrictions on the imports of others. For example, the EU has banned the export of plastic waste to non-OECD countries, as per its 2019 Green Deal (EGD) and proposed in July 2021 a carbon border adjustment mechanism (CBAM). The CBAM will essentially tax imports of embedded carbon emissions from non-EU countries and will be phased between 2023 and 2026.
Although trade, therefore, presents severe challenges to carbon reduction efforts, there are ways in which the structure and content of trade can be made to contribute positively. Trade may even be essential to achieving proposed targets in carbon reduction. This is because trade is a way to spread green (environmental) goods and green technologies throughout the world — in other words, to scale up the use of carbon-reducing goods. Open trade provides countries with access to the technologies and inputs that can help countries to lower their missions. Having a global market for such green goods, such as solar panels, e-bikes, and others, provides economies of scale, which are required to make their products cheaper, viable and sustainable.
“Green” goods more formally are “environmental goods” defined by the OECD and Eurostat as goods that are used “to measure, prevent, limit, minimize or correct environmental damage to water, air and soil, as well as problems related to waste, noise and eco-systems, [including] cleaner technologies … that reduce environmental risk and minimize pollution and resource use.”, referred to as the Common List of Environmental Goods (CLEG).
The good news is that growth in global trade in environmental goods is now outpacing overall merchandise trade. This growth is driven by demand from the renewable energy sector, such as for solar photovoltaic (PV) panels. Figure 1 depicts the change in imports of environmental goods, as defined by the OECD, extended to include renewable energy goods between 2014 and 2020.
Countries could do more to encourage such trade — to up the volumes of exports of environmental goods. An obvious step is to reduce tariffs on imports of environmental goods — too many countries levy import tariffs on environmental goods. Another step is to extend the list of environmental goods. And thirdly, more help could be provided for local producers of environmental goods to find export markets — and preferably to find closer markets, to reduce emissions from freight transport. The availability of “big data” on trade and the development of algorithms makes it much easier than before to identify such export opportunities, as we explain elsewhere. To illustrate this in the case of solar panels, we used our export market finder model to find an external market worth at least US$ 215 million for the exports of solar panels from the Netherlands. Figure 2 shows the breakdown of this market into various regions. Making use of this untapped export potential could offer a boost to produce solar panels in the Netherlands, offering an alternative source that is less carbon-intensive than importing solar panels from China, and help bring down the local costs of solar panels by reaping the benefits of economies of scale.
Finally, while the EU’s CBAM is an essential measure to curb carbon leakages, it may have the unintended effect of paradoxically reducing trade in environmental goods. This would be more likely if the definition of sectors and products to which it is applied is expanded to include, e.g., downstream products of, for example, aluminium: much of the solar panel industry relies on extruded aluminium frames for assembly. This example reflects the fact that there is still some incoherence between circular economy policies and trade policies. Given the importance and size of trade globally, it is becoming more urgent than ever to resolve these incoherencies.
