How trade and trade finance can assist the transition to net zero


Trade is often seen as the problem not the solution when it comes to climate change. But at COP28 this year in Dubai, where trade is featured as a specific theme for the first time, leading trade organisations outlined how trade can work for a net zero transition.

World Trade Organization (WTO) director-general Dr Ngozi Okonjo-Iweala used the occasion of COP to unveil a 10-point set of “Trade Policy Tools for Climate Action”, as well as principles for helping the steel industry decarbonise. 

The WTO Secretariat’s 10 trade policy tools are designed to accelerate progress towards climate goals and to be integrated into nationally determined contributions and national adaptation plans.

“How can trade work for a net zero transition? How do we get away from the narrative that trade is part of the problem?” said Ms Okonjo-Iweala at the opening of COP28’s Trade House. “We know shipping contributes to carbon emissions, but there are so many things that cannot happen without trade. Trade has lifted more than a billion people out of poverty.”

Ms Okonjo-Iweala said net zero approaches are fragmented and it is difficult for businesses and governments to see what is happening elsewhere. But if the WTO succeeds with principles to help the steel industry decarbonise, they could be applied to other sectors.

As well as ensuring trade policies are designed to facilitate the transition to a cleaner and greener economy, the $10tn-worth of trade finance curated by the International Chamber of Commerce (ICC) is also being brought into alignment with Paris Climate Agreement goals.

Trade finance and the transition to net zero

Working with 80 of the world’s largest banks in trade finance, ICC secretary-general John Denton said it is developing a grading system that provides a positive green “ICC tick”, to more closely align financing in sectors such as textiles and agriculture with climate goals.

“We are taking action,” Mr Denton said at the opening of the Trade House pavilion at COP28 on December 2. “We are not waiting for the G20 finance ministers because if we were, we would never have got started.” 

For 30 years there has never been a trade and climate discussion at COP, said Mr Denton. But a major focus of the trade agenda at this year’s COP will look at how a combination of trade and climate can advance countries’ ambition.

Government procurement, which is worth some $13tn globally, is directly and indirectly responsible for 15% of greenhouse gas emissions, according to the WTO. However, Mr Denton said the close alignment between government procurement and climate is only coming to the fore now.

“We want to use that $13tn of government procurement as a tool to force green procurement,” said Ms Okonjo-Iweala. “We are telling members they have to do it differently.”

She said customs tariffs favour ‘brown’ goods, and that there are lower tariffs on fossil fuels than on electric or hybrid vehicles. “[Countries need to] look at import tariff regimes to make sure you don’t have incentives against renewables. It’s not rocket science, but if you do it, it can be enormously helpful,” she said.

On the issue of import tariffs, the WTO’s Trade Policy Tools noted that crude oil and coal face average tariffs of 0.8% and 1.6% respectively, while renewable energy equipment faces average tariffs of 3.2%, with some economies applying tariffs as high as 12%. 

The 10 trade policy actions highlighted by the WTO Secretariat’s research include:

  1. Introducing trade facilitation measures to reduce greenhouse gas emissions associated with cumbersome border customs procedures 
  2. Deploying green government procurement policies 
  3. Using international standards to avoid fragmentation when upgrading energy efficiency regulations 
  4. Reviewing regulations and restrictions on providers of climate-related services to support climate mitigation and adaptation efforts 
  5. Rebalancing import tariffs to increase the uptake of low-carbon technologies 
  6. Reforming environmentally harmful subsidies to unlock additional resources for climate action 
  7. Facilitating and increasing trade finance to support the diffusion of climate-related technologies and equipment 
  8. Improving how food and agricultural markets function to support climate adaptation and mitigation by easing trade in food 
  9. Strengthening sanitary and phytosanitary systems to protect economies from the spread of disease, pests and other related risks heightened by climate change 
  10. Improving the co-ordination of climate-related internal taxes, including carbon pricing and equivalent policies, to reduce policy fragmentation and compliance costs.

Mr Denton said the ICC is working on developing and strengthening the private market for carbon, and improving the functioning of carbon registers.

Given the multiple approaches to carbon pricing, Ms Okonjo-Iweala said she proposed an idea to finance ministers at the World Bank and IMF’s recent annual meetings in Marrakech to form a task force of international organisations to develop a common methodological approach for countries.

Developing countries and SMEs are struggling

“We have to avoid the ‘spaghetti bowl’ of different rules and regulations with respect to the environment,” said Unctad secretary-general Rebeca Grynspan. “Developing countries and SMEs [small and medium-sized businesses] are really struggling. They cannot navigate a complicated system. Let’s have a coherent agenda that is multilateral.”

The International Trade Centre (ITC) executive director Pamela Coke-Hamilton said the voice of SMEs needs to be amplified in the climate debate. “When we went to COP26 and walked the entire length, there was not one SME represented in terms of what they needed or what their voice was,” she said, adding that one of the main issues is how to work directly with SMEs to translate trade. “Everybody talks at a high level, but who are the ones affected? The small businesses.”

She said financing the green transition is not a problem of money but the ability to access that money. “How do we help prepare SMEs to access those funds?” she asks. “There are pockets of funds available but many SMEs don’t have the proper collateral to get access to those funds.”

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