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International trade law and climate change: a virtuous circle?

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Benson Jonathan
Jonathan Benson

Senior Associate

London

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29 October 2021

International trade law can contribute to the delivering global climate and sustainability goals, but tensions and challenges remain. 

The link between international trade law and global climate and sustainability goals

It is increasingly recognised that international trade law has a significant role to play in delivering global climate and sustainability goals.  Whilst international trade and investment will not feature heavily in the negotiations at COP26, embedding environmental and sustainability-related considerations into international trade law is increasingly an area of focus amongst States.  In this blog post, we look at some of the recent initiatives in this area and how they could result in a virtuous circle where international trade law helps to mitigate against further climate change.  We also examine some of the tensions and challenges in this area.  Businesses will need to keep abreast of developments in this field as they reshape the trading landscape in years to come.

Recent State initiatives

Over recent years a number of States have sought to factor environmental considerations into their trade policies.  A notable example is the effort by six countries (Costa Rica, Fiji, Iceland, New Zealand, Norway and Switzerland) to negotiate the Agreement on Climate Change Trade and Sustainability (ACCTS).  The ACCTS would remove tariffs on environmental goods and introduce new and binding commitments for environmental services, create disciplines to eliminate fossil fuel subsidies and further the development of guidelines in relation to voluntary eco-labelling programmes and associated mechanisms to encourage their promotion and application.  Relatedly, at the WTO, since November 2020, the Trade and Environmental Sustainability Structured Discussions have given renewed focus to the interplay between trade and environmental sustainability, with similar issues to those under consideration through the ACCTS being deliberated.  

Bolstering “Trade and Sustainable Development” FTA chapters

States are also increasingly bolstering the “Trade and Sustainable Development” chapters in their Free Trade Agreements (FTAs).  Whilst generally these chapters in FTAs are relatively weak, the EFTA States (Iceland, Liechtenstein, Norway and Switzerland) have recently taken a lead by developing and updating articles on a number of topics including “Sustainable Forest Management and Associated Trade”, “Trade and Climate Change”, “Trade and Biological Diversity”, “Trade and Sustainable Management of Fisheries and Aquaculture”, “Trade and Sustainable Agriculture and Food Systems”, “Promotion of Trade and Investment Favouring Sustainable Development” and “Responsible Business Conduct”.  This move by the EFTA States could result in other States or groups of States following suit.

FTAs and the politics of climate and sustainability 

Due to pressure from civil society, the successful conclusion of FTAs is also increasingly conditional on environmental considerations being properly addressed, particularly where the relevant FTA involves the liberalisation of trade in agricultural and food products.  A key example of this trend is the EU-Mercosur FTA which remains under negotiation, despite having been agreed in principle in June 2019.  This FTA would result in a significant tariff reduction on agri-foods.  Reportedly, to meet concerns in the EU around the terms of the deal, particularly around deforestation and Brazil’s commitments to the Paris Climate Accords, the European Commission is seeking pre-ratification commitments from Brazil on these points.  Another example is the recent EFTA-Indonesia Comprehensive Economic Partnership Agreement which only narrowly survived a referendum in Switzerland with the liberalisation of trade in palm oil being a key factor in the debate.  That agreement allows for the creation of a novel link between compliance with an international sustainability standard and tariff reduction on palm oil.

Using other international trade-related measures to further climate and sustainability goals

Other trade-related instruments are also being brought to bear to meet sustainability and climate-related goals.  A notable example is the EU’s proposed Carbon Border Adjustment Mechanism (CBAM) which is intended to equalise the price of carbon between domestic products and imports and ensure that the EU's climate objectives are not undermined by production being relocated to countries with less ambitious climate change-related policies.  Other examples include a proposed EU moratorium on all new oil, gas and coal projects in the Arctic and a Norwegian proposal to amend the Annexes of the Basel Convention to promote the recovery of uncontaminated and sorted plastic waste, and incentivise the environmentally sound management of plastic waste to limit the amount that ends up in the marine environment, which became effective on 1 January 2021. 

Challenges and tensions

However, international trade law can also be in tension with achieving sustainability and climate-related goals.  Many measures are vulnerable to challenge and so-called “green” products are often targeted by trade defence measures.  By way of example, the CBAM may yet be subject to a WTO challenge. “Green” products such as solar cells and wind turbines also are the target of trade defence measures which increases costs and slows deployment; a fact that may result in the use of trade defences being disciplined in relation to “green” products in the future. Furthermore, investor-State litigation is being used by companies in relation to climate-related measures, perhaps most prominently in Europe by German energy group RWE’s claim under the Energy Charter Treaty against the Dutch government reportedly for €1.4bn in damages over the country’s decision to phase out coal by 2030.

For further insights into developments related to climate change and environmental issues, see our Countdown to COP & Beyond blog.