Greening Trade - Making New Global Trade Agendas Work for a Just Climate and Sustainability Transiti

Greening Trade -MakingNewGlobal TradeAgendasWorkforaJustClimate andSustainabilityTransition

AnalyticalReportwithaSpecialFocusontheEU

PREPARED BY CLIMATE & COMPANY FOR CLIMATEWORKS FOUNDATION

Authors1

John Clancy

Willem van Dommelen

Elisabeth Hoch

Ingmar Juergens

Andreas Loeschel

Oliver Schenker

Isabelle Wilhelm

1 Pleasecontact:isabelle@climcom.org,Analyst,andingmar@climcom.org,Co-CEOatClimate&Company.

JohnClancy,Dr.ElisabethHochandDr.OliverSchenkeraresenioradvisorstoClimate&Company.Prof.Dr.Andreas LoeschelholdstheChairforEnvironmental/ResourceEconomicsandSustainabilityatthe RuhrUniversityBochum WillemvanDommelenwasaJuniorAnalyst atClimate&Companyatthetimeofthewritingofthereport.

1. INTRODUCTION: THE POTENTIAL OF TRADE FOR THE CLIMATE

Well-established mechanisms of international trade and co-operation are at the brink of collapse and calls for reshoring and“strategicautonomy”areheardacrossindustrializedcountries.ProtectionisttariffshaveseenarenaissanceintheUS.The WTO is struggling to maintain relevance, and geopolitical tensions are straining global cooperation and trade agreements As worldexportsaccountforalmost30%ofglobalcarbondioxide(CO2)emissions(WTO,2022a),trustfulinternationalcooperation on supply chains and trade agreements can provide tangible examples that nations and stakeholders can pursue common climateandsustainabledevelopmentgoals.

Key success factors for greentrade, i.e., trade practices that promote a just climate and sustainability transition, are i) transparency and ii) trust. Besides Free Trade Agreements (FTAs), finance, disclosure, due diligence, and supply-chain regulationsincreasinglystartshapinginternationaltraderelations.Well-alignedandharmonizedacrosstradingpartners,these instruments can contribute to the needed transparency and trust. However, until now, these instruments have been largely ignoredinthedebateabouttrade.

Philanthropy’s (geo-)political independence and unique convening power can act as a catalyst to bring stakeholders from trade,climate,environmentandfinancetogether,tointegratethedifferentinstrumentswithinandacrossregions,andtofoster equitable international collaboration. The objective of this report is to guide philanthropic program managers seeking to establishoradaptprograms toleveragethepotentialof greentrade

International trade has often been seen critically by many advocates of stringent climate policies as:

1. It can hinder ambitious domestic climate and environmental policies and international climate deals (Kustanto, 2022) for fear of losing competitiveness on global markets (Chateau, 2022). This can lead production and thus emissions to shiftabroad,knownas carbonleakage (EuropeanParliament,2023b)

2. Climate/environmental provisionsintradedealsarenon-existentornotrobust,as themainobjectivesoftradedealsis to promote economic growth and trade openness. In most countries, carbon-intensive goods face lower tariffs, hence thecurrentinternationaltraderegimeisskewedtowards thesegoods(Cristeaetal.,2013;Shapiro,2021)

3. Thetransportofgoodsacrosslongdistancesiscarbon-intensive(Cristeaetal.,2013)

Yet, combined with climate, environmental and sustainable finance legislation,greentradeis possible:1

1. Trade policies can encourage the exchange of low-carbon and environmentally friendly goods and services by linking market access to environmental performance or giving preferential treatment to goods and services that comply with highenvironmentalstandards.2

1 Moreover, while this report focuses on climate change mitigation, global trade and trade policies can also enhance countries’ economic resilienceandthushelpbolstertheirclimate-changeadaptationstrategies(WTO,2022a)

2 ThisisfacilitatedbytheprovisionsinArticleXXoftheGeneralAgreementonTariffsandTrade(GATT),whichpermitsexceptionstostandard GATTregulationstosafeguardhuman,animal,orplantwell-being,aswellastopreservenaturalresources(WTO,2022a)

2. Multilateral,plurilateral,3 andbilateral climatemeasuresonlow-carbonstandardsandcarbonpricingcanreducetrade barriers (e.g., for clean energy technologies) and alleviate uncertainties for investors, thus increasing the effectiveness ofclimateactions(WTO,2022a)

Todesigneffectiveandefficient greentrade solutions,aclearunderstandingofthecontextoftheirimplementationiskey.Thus, chapter 2 provides a quantitative overview of trade flows in key climate-relevant sectors. Chapter 3 introduces key EU institutions and instruments for green trade Chapter 4 discusses theway forward with philanthropy taking a frontrunner and catalyticrole.

2. MAIN TRADE FLOWS OF THE EU IN KEY CLIMATE-RELEVANT SECTORS

Thischapteridentifiesthemainexportersaswellasthekeyimportersandconsumersofenvironmentallyharmfulcommodities and goods, based on trade and emissions data. This information allows for well-focused international initiatives aimed at greeningtrade

Globally, only seven sectors accounted for approximately two thirds of CO2 emissions embodied in exports in 2015, i.e., emissions generated in the production of goods and services in one country that are consumed in another country. The topemitting sectors were chemicals and non-metallic mineral products (e.g., cement) (accounting for 18.2% of CO2 emissions embodies in exports), basic metals and fabricated metal products (16.1%), computers, electronic and electrical equipment (11.6%),andtransportationandstorage(11.1%)(Yamaho&Guilhoto,2020)

Trade holds substantial importance for the EU, with a value equivalent to 76% of its gross domestic product (GDP) in 2021 (European Union, n.d.) 4 The EU's goods trade landscape is dominated by the United States (US), China, and neighboring countries of the EU (see figure 1), who are also the EU’s main services trading partners (Eurostat, 2023c). Despite ranking only eleventhasagoodstradingpartner,theMercadoComúndelSur(Mercosur bloc(seeannex,p.22))iscrucialforthesuccessof theEU GreenDeal andEUclimateandenvironmentalpolicy,asEUimportsfromMercosurcountriesincludekeydeforestationriskcommoditieslikeagricultural(soy,beef,timber,etc.) andmineralgoods(Müller&Polotzek,2021).

TocombineemissionsdatawithrecentEUtradedata,thischapterincorporatesinformationfromvarioussourceswhichclassify sectors differently. Table 1 summarizes the EU’s largest trading partners in the three key sectors for greentrade: chemicals, rawmaterials,andagriculturalcommodities.

The chemical sector holdsgreatsignificancefor greentrade as,inadditiontohighcarbonemissions,throughoutthelifecycle ofachemicalproduct,thereis ariskforadverseeffectsonhumanhealthandtheenvironment (OECD,2021)

3 We use multilateral to describe very broad, near-global international collaboration (e.g., for the WTO, UN conventions, World Bank), and plurilateraltodescribethecollaborationofonlyseveral(like-minded)countries(e.g.,inclimateclubs).

4 The EU’s total GDP in 2021 was € 14.5 trillion. In the same year, the EU accounted for € 4.3 trillion in total global trade. Intra-EU trade was valuedat€6.8trillion(EuropeanUnion,n.d.)

Furthermore,theEUisheavilyreliantonimportsofdifferent raw materials:Chinaisresponsiblefor98%oftheEU'srareearth elementsupply,andSouthAfricafor71%oftheEU'splatinumrequirements (EuropeanParliament,2021).In2021,amongthe mostimportedgoodsfortheEUwerecrudepetroleum($228billion),refinedpetroleum($179billion),andpetroleumgas($106 billion) (Observatory of Economic Complexity (OEC), n.d.-a) 5 Raw material extraction inevitably affects the environment, as it can impair ecosystem functions, degrade soil, and cause water shortages and biodiversity loss (UBA, 2019). CO2 emissions embedded in the primary production of metals and minerals have been approximated to constitute about 10% of the total globalenergy-relatedemissionsin2018(Bolgeretal.,2021).Besides,rawmaterialextractioncanhavesignificantsocialimpacts onlocalcommunitiesandlaborforces (Reisch,2022)

Chemicals

RawMaterials

AgriculturalCommodities

US(21%) US(27%) US(11%) China(14%) Brazil(10%) UK(21%)

China(18%) UK(10%) Brazil(11%) UK(13%) UK(8%) US(13%)

Switzerland(17%) Switzerland(9%) Ukraine(8%) US(10%) Ukraine(7%) China(7%)

UK(9%)

China(7%) China(5%) Turkey(10%) US(6%) Switzerland(5%)

Table1:TheEU’stopimportandexportpartnersinthechemical,rawmaterialandagricultural sector (Eurostat,2023b,2023a)

Agricultural commodities imports are particularly critical for green trade as agricultural land-use change is the top driver of deforestation and ecosystem conversion, which exacerbates both climate change and biodiversity loss (Mahlich et al., 2022); seeBox1below

5 The main exporting countries for crude petroleum were Saudi Arabia, Russia, Canada, Iraq, and the US (OEC, n.d.-d). As for refined petroleum,themajorexportersweretheUS,Russia,India,andtheUnitedArabEmirates(OEC,n.d.-c,n.d.-b)

Figure 1: Extra-EU trade in goods by main trading partners in 2021 and 2022. Sum is depicted in billion Euros. Original figure is croppedtoshowonlytheEU’stopsevengoodstradingpartners (Eurostat,2022)

Box1:TheCaseofTradeandDeforestation

10 million ha of forests worldwide are lost each year due to deforestation. Economic growth and agricultural expansion (especially for cattle, oil palms, soybeans, cereals, and forestry products), including pure land speculation, are the biggest drivers;thoughthevariationbetweencountriesandregionsislarge(RahmaFebriyantietal.,2022) Itisestimatedthatglobal commodity markets drive one-fourth to one-third of this deforestation and related emissions (Persson et al., 2014) Trade with the EU is estimated to be linked to almost 250.000 ha of deforestation per year (EuropeanCommission,2021) Deforestation is correlated with agricultural output, output is driven by prices, and higher commodity prices are hence associated with more deforestation. As better access to international markets should, ceteris paribus, increase demand for localagriculturalproduction(i.e.,thepreviouslocaldemandplusadditionalinternationaldemand), thisshouldresultinan increase in production and hence a higher likelihood of additional deforestation. Trade growth will, rather obviously, have thebiggestoutput(andhencedeforestation)effectincountrieswithacomparativeadvantageinproducing(andexporting) agricultural and timber goods. Rising prices for agricultural and timber products have increased deforestation in countries includingMexico,Tanzania,Thailand,CostaRica,Australia,andBrazil (WTO,n.d.-b)

In summary, trade may raise commodity prices and – in the absence of relevant policies – incentivize deforestation (Robalino & Herrera, 2010). There is a need for more detailed analytical data and information on the links between international trade (openness) and deforestation,as(i)forest-risk commoditiesare often (around40%)indirectlysourced and remain untraced (Renier et al., 2023). And (ii), there is still an information gap on how deforestation dynamics are impactedbytradedealsincombinationwithnewregulatoryinstruments,suchassupply-chainlegislation.

Notably,transport emissions contribute to the GHG emissions ofall other traded goods In2022,thetransportsectoremitted 7.98 Gt of CO2, accounting for almost 22% of global emissions (International Energy Agency, 2022) Roughly 30% of these emissions can be allocated to international trade-related freight transport, equaling approximately 7% of total global emissions (OECD&ITF,2016).About80%ofinternationaltradetakesplaceviasearoutes (Global ShippingWatch,n.d.). While maritime shipping is a relatively environmentally efficient way to transport cargo, its massive scale contributes 3% of global GHGemissions,whichismorethantheaviationsector (OurSharedSeas,2023)

3. KEY PLAYERS, FRAMEWORKS AND INSTRUMENTS IN THE EU

Recent years have seen a dynamic development in multilateral, plurilateral,6 bilateral, and unilateral policies and regulations inthefieldsoftrade,climateandenvironment. Theimportanceofsustainablefinanceinstruments(inparticularsustainability reporting and transparency) has also been growing rapidly – a key ingredient for green trade. This chapter presents the most relevant instruments in the EU’s policy toolbox and the responsible EU institutions. FormoredetailonEU instruments and abriefcontextualizationofWTO,OECD,G7,G20,andMercosur,pleaserefertoannex6.2

Free Trade Agreements (FTAs) can strongly affect international collaboration on other trade and climate and environmental issues, as in the case of the EU-Mercosur FTA and the European Deforestation-Free Product Regulation (EUDR). Meanwhile, carbonpricingmechanismsliketheEU’sEmissionsTradingSystem(ETS)and,directlyrelatedtothat,CarbonBorderTaxesand specifically the EU Carbon Border Adjustment Mechanism (CBAM) have been at the center of discussions about

6 We use multilateral to describe very broad, near-global international collaboration (e.g., for the WTO, UN conventions, World Bank), and plurilateraltodescribethecollaborationofonlyseveral(like-minded)countries(e.g.,inclimateclubs).

competitivenessconcernsandinternationalpolicycoordination.Supply-ChainRegulationsestablishenvironmentalstandards for trading partners upstream (specifically the EUDR and Corporate Sustainability Due Diligence Directive (CSDDD)). Lastly, sustainable-finance instruments (specifically Disclosure Regulations and Taxonomies) can greatly facilitate green trade by enhancing transparency and setting benchmarks and standards to report, evaluate and compare the environmental performanceandfootprintofeconomicactivitiesandtheassociatedtradedcommodities,goodandservices.WiththeEUasa recentfrontrunner,such(regulatory)instrumentshavepickedupmomentumacrosstheglobe7

The European Commission, the executive branch of the EU, uses these instruments to leverage trade as a potent tool to advance the environmental agenda, recognizing the link between international trade and climate policy.8 Within the Commission, the Directorate-General for Climate Action (DG CLIMA) and the Directorate-General for Trade (DG TRADE) are essentialplayers.DGTradenegotiatesFTAsandaddressestrade-relatedchallengesanddisputeswithpartnercountries.ItsUS counterpart is the US Trade Representative.9 A number of additional “DGs” are involved in green trade related issues, in particular for specific policy files like CBAM (DG TAXUD) or the EUDR (DG ENV) In the European Parliament, the International TradeCommittee(INTA)isresponsibleandplaysakeyroleintheEU’stradepoliciesandnegotiations.10

4. HOW TO MAKE A NEW GREEN TRADE ARCHITECTURE WORK

Building trust between international partners and different policy spheres is essential to unlock trade’s massive potential fortheclimate,environmentandsustainability. Thisrequirestransparencybasedoncomparableandmeaningfuldata,which can be generated by effective sustainable finance instruments such as disclosure frameworks. This data is instrumental in shapinguseful greentrade instrumentsthroughimprovedpolicydesignandequitableinternationalcollaboration.

Section 4.1 explores how the complementary generation and use of data, incentives and regulations combined with sectorspecificapproachescanhelptobuild greentrade Section 4.2 exploreshowtoadvancegovernanceandfacilitatecollaboration across the different spheres. Section 4.3 explores how to combat adverse distributional effects and ensure equity (and ownership)alongsupplychains. Each section provides the key recommendations for philanthropic action.

4.1. Sector-SpecificApproaches,Data,IncentivesandRegulationsforGreenTrade

Lookinginto private sector action, greentrade issues andsustainablefinancetools playanincreasinglyimportantrole. More and more firms are adopting eco-labelling to create and expand markets for eco-friendly products (WTO, 2022a). Others disclosetheirenvironmentalperformanceeithervoluntarilyorincompliancewithreportingobligations.Theprivatesectorhas launched initiatives like the GHG Protocol Corporate Accounting and Reporting Standard, and organizations like CDP, GRI or,

7 Thefirstinternationalcomparisonofdisclosuretrends,globaltrendsonbiodiversitytaxonomies

8 E.g.,theCommission’sDirectorate-GeneralforClimateAction(DGCLIMA)hasadedicatedunitresponsibleforinternationalcooperationand linkingwithothercap-and-tradesystems(EUWhoiswho,n.d.),andtheEUiscommittedtocounterothercountries’subsidiesincompetitive areasofthegreentechrace,suchastheUS’sInflationReductionAct(IRA),asshowcasedbytheEU’sNet-ZeroIndustryAct,apartoftheGreen DealIndustrialPlan.

9 Meanwhile, in China, there is no one dedicated government agency for trade-related issues, which may be handled by the Ministry of Commerce(MOFCOM),theGeneralAdministrationofCustoms(GAC)orotherChineseauthorities.

10 Inturn,intheUSCongress,severalcommitteesareconsultedregardingtradepolicy,suchastheCongressionalCommitteeon Agriculture andtheHouseCommitteeonSmallBusinesses.

withamorenarrowfocusonfinancialmateriality,SASBandmorerecently,theISSB,havemassivelyadvancedcorporates’uptakeofenvironmentalimpactandriskassessmentingeneralandGHGaccountinginparticular.Thisisimportantaswidespread mandatory reporting empowers trade-focused companies to take on pivotal roles in formulating trade policies, defining their dataprerequisites,andevaluatingtheviabilityandcostofdeliveringthisdata.

Taxonomies and disclosure regulations can satisfy data and transparency needs but must be aligned internationally to minimize compliance and transaction costs. Sustainable-finance and green-trade instruments share the challenges of data availability, comparability, and lack of common standards. Internationally aligned disclosure regulations and taxonomies are thus imperative. Comparable and compatible data can help the implementation of instruments like carbon border taxes and supply-chain regulations, while also building trust among stakeholders through a commonly established data regulation framework.Similarly,suchalignmentcanmakeiteasierfortradenegotiatorstoincorporateeffectiveclimateandsustainability provisionsintoFTAsastheycanbemorepreciselymonitoredandgoverned.

Disclosure standards and their effective implementation through national regulation are key instruments for enhancing transparency on environmental impacts and risks along supply chains. Reducing information asymmetries and enhancing a common understanding of the materiality (i.e., relevant for market participants) and pertinence of environmental risks and impactssectorbysectorwillbeinstrumentalfor greeningtrade

The materiality of environmental information has also been confirmed by the massive increase in its use by financial institutions around the world, the strong commitment of many corporates to mandatory reporting frameworks (see, e.g., the ‘Make It Mandatory’ campaign (Business for Nature, n.d.)), and the dynamic evolution of respective reporting standards and regulations openly supported by financial supervisors and central bankers in leading trading nations (China, the US and Germany),11 otherG20countries (Climate&Company&ClimateFocus,2022) andbeyond(Climate&Company,2021)

But simultaneously developing disclosure standards with divergent ambition levels poses a risk of insufficient harmonizationandambitionaswellasimplementationgapsbetweendifferentregimes.Thevaryingcoverageofkeydisclosure criteria(e.g.,content,materiality,scope(Climate&Company,2023))mayhinderfinancialactorsfromconsideringsustainability risksandimpactssystematically.

Advancing the alignment and implementation of a mandatory disclosure framework in all key trading nations will thus be crucial tocontinuethisdynamicandeffectivelyusedisclosuretobuildtransparencyandtrustamongtradingpartners.Closer international alignment of disclosure regulation would facilitate the cross-border flow of sustainable finance and reduce compliancecostsforfinancialandnon-financialcorporates.

There is a major risk, however, that the road to coherence will lead to a race to the bottom regardingambitionandscientific rigorofthesestandards.Notably,theglobalstandardsunderdevelopmentbytheISSBhavetheeconomicandpoliticalsupport tobecomethenewglobalbaselineforsustainabilitydisclosures.However,thisisamidstconcernsaboutitscurrentlyveryshortterm focus on financial risk and a larger debate about the role the different standards should play for an effective disclosure landscape. In the meantime, the focus should be on demonstrating the feasibility of comprehensive reporting in key sectors andcountries.Priority action and pilot projects should thus start in trade-exposed and environmentally important sectors and supply chains (seechapter2).

While disclosure frameworks enable a comparison of reported data, taxonomies provide benchmarks and a framework to evaluatecountries’ambitionandperformancelevels.Tofacilitatetheharmonizationofdifferenttaxonomies,“commondesign features” are key, such as the overarching principle, scope, and environmental performance criteria (Climate & Company & WWF, 2022) Better alignment of taxonomies makes their more normative nature compared to disclosure frameworks more manageable (taxonomy: what counts as “sustainable”; disclosure: “just report”): While views about the ambition level may differ, international taxonomy frameworks with a common scope and screening criteria still substantially enhance transparency.

11 EU: CSRD adopted entered into force in 2023; SEC consultation launched in 2022; China plans to introduce “mandatory disclosure of climate-relatedinformation”,althoughnotimeframehasbeenannounced(Hodgson&Nauman,2021)

While work on taxonomy alignment is ongoing at G20 level, between the EU and China as well as the UK and EU, thereisno agreementononestandardizedframeworkyet.12

Common taxonomies can guide trade policy makers and negotiators by outlining, sector by sector, the most material environmental risks and impacts, and should hence be explicitly considered in trade agreements. Common taxonomies also can ultimately help to create trust in the “fairness” of measures like carbon border taxes. Mapping the activity-based focus of taxonomies to the product-specific scope of trade negotiations and regulations would be an important step to unleash the potentialoftaxonomiesfor greentrade

Overall, a concrete opportunity to foster greentradelies in targeting key sectors through sectoral agreements rather than entire economies. Sectoralapproaches,asappliedforcarbonbordertaxes,wouldsendadirectpricesignaltoalimitedsetof sectors,aswellasa(lesser)signaltoothersectorswhichmaybesubjecttosuchregulationinfuture (Jürgensetal.,2020) Such afocusedapproachcouldleveltheplayingfieldinthosekeysectorsfasterthanacomprehensiveapproachwhichwouldtake longer to negotiate and implement. In addition, cooperation (including technology transfer) among like-minded regions is easiertoorganizeundersectoralapproaches.

The current environment provides a good basis for the uptake of sectoral approaches by the most important actors: data and metrics are increasingly available, disclosure frameworks will lead to even more data generation, CBAM poses a credible threatforinaction,andallpartiesseemtoneedfairandtrustfulgovernancemechanisms(seechapter4.2)thatcouldwellalign withsector-specificapproaches.

OuranalysisandrecommendationsfocusonreducingtheGHGemissionsofhigh-emittingsectors(i.e.,“makinggoodsclean”), which we regard as the more pressing issue. Another relevant dimension addresses the advancement of clean energy technologies(i.e.,“makingcleangoods”),whichwealsocoverinoursectionongreentechnologytransferintheannex

Recommendationsforphilanthropicaction

4.1.1 Fosterresearch,datagenerationandthedevelopmentofsector-specificapproaches

• Showcase the benefits of sector-specific approaches and encourage policymakers to incorporate these into trade policies.

• Alert trade experts to key - highly traded - sectors from a climate/environmental perspective that require immediate attention, taking both a high emissions/environmental impact and a high mitigation potential perspective. Such sectors may include chemicals, raw materials, agriculture, transport, and/or, more specifically, sectors in scope of CBAMandEUDRononehand;andcommoditiesandsectorscriticalfortheenergyandsustainabilitytransition

• Concentrateefforts onthe primaryproducers,exportersandimportersin high-emitting and high-mitigationpotential sectors(seechapter2)toreducecomplexityandmovefast. Alsoconsiderpoliticalviabilityinthisstrategicfocus.

• Focus on indirect sourcing and further emissions hidden in the most important supply chains. This includes evaluations of how geographical shifts of energy trade affect the effectiveness of climate and environmental policy (suchastheRussianwaronUkraine).

• Include analyses on the risk of reshuffling (loopholes and countermeasures) and sectoral dynamics (i.e., sectoral scenarios and sensitivity analysis) and effective countermeasures (such as the here mentioned harmonized sustainablefinanceframeworks,commonstandardsaswellasstrategicglobalpartnershipsforambition,seechapter 4.2).

• Sponsorresearchon:

12 The G20 Sustainable Finance Roadmap has prioritized, among other areas, the work on taxonomy-based approaches to facilitate international interoperability and encouraged jurisdictions to consider using the ‘same language’ (G20 Italia, 2021). Efforts in this direction aretheEU-ChinaCommonGroundTaxonomydevelopedbytheInternationalPlatformonSustainableFinance(TaxonomyWorkingGroup, 2022), and advice of the UK’s Green Technical Advisory Group (GTAG) to consider an adopt or revise approach to align the UK and EU taxonomies(GTAG,2022)

• the effectiveness of sector-specific approaches, including sectoral climate clubs (see also Box 2 in chapter 4.2),sectoralcarbonbordertaxesandlinkedinstruments,

• sector-specific scenario analyses and suitable equivalency regulations that support partner countries in raising climate ambition through means other than carbon pricing (e.g., through credible, time-bound transitionplans)

4.1.2 Supportpolicyeffectivenessbyassessingandsupportshaping greentrade relevantlegislation

• FocusonCBAMandothercarbonbordertaxes/adjustmentmechanismsaswellasEUDRandfurtherlandusechange and deforestation-relevant legislation; how CBAM-type mechanisms interact and work together (rather than fragmentingandhamperingtrade)isacriticaldimensionoftheireffectiveness.

• Analyze the negotiation dynamics of environmental and social provisions in FTAs and the effectiveness of (less) ambitioninthecontextoftheCBAM,EUDRetal ;focusontheEU-MercosurFTA

• Investinstrategicdisseminationandcommunicationofresults(employinga“whoneedswhatwhenapproach”)with clearcost-benefitmessagestoshapecurrentandfuturepoliciesandtradeagreements.

4.1.3 Promotethedevelopmentofharmonizeddisclosureframeworksandcommon-groundtaxonomies

• Advocateforafast-trackprioritizationofreportingstandardsandtaxonomiesfortrade-exposedandenvironmentally relevantsectorsandcountries;especiallythosethatstillneedtotransform13 (notstickingto greenniche sectors).

• Supportinter-operabilityofglobaldisclosureframeworks(ESRS,GRI,ISSB,TCFD,TNFD,etal )

• Fosterawareness-raisingfortheneedofgloballyinter-operableESGdisclosureregulationscoherentwithCBAM,EUDR andsimilarlegislationamongcorporatesandfinancialinstitutions

• Enhance knowledge-sharing on good practices for disclosure standards between businesses and countries and explore options to reduce the reporting burden, especially for SMEs, by combining data provisions and use under thesedifferentlegislations.

4.2. Advancing Governance and Overcoming Collaboration Challenges for Green Trade

Effective collaboration between different spheres remains a challenge, despite growing appreciation for the importance of trade and trade policy by climate and environment experts and for the importance of climate and environmental issues by trade experts (as reflected in the legislation and agreements discussed above). Both spheres function very differently at the core. While climate/environmental negotiations are open, relatively transparent and policy-based, trade negotiations are the opposite; rules-based, negotiated behind closed doors and only presented at the very end when finalized to parliaments and thepublic.Thelinktothesustainablefinancesphereisevenlessestablished(see4.1).Fosteringandacceleratingcollaboration and alignment between the dynamically evolving instruments of transparency, due diligence, trade and supply-chain regulationstoagreeoncommonstandardsandmetricshelpsbuildtrustandhasgreatpotentialfor impact.

The decision-makers of each sphere need to better understand, promote and leverage the available instruments of the other spheres in order to makegreentradea reality. Thus,policymakersandnegotiatorsneedaccesstoevidence-basedand well-communicated analyses of these interlinkages and current policy incoherencies. For example, supply-chain regulations andalsoCarbonBorderTaxesreducethecomplexityofall-encompassingmulti-orbilateral climateandtradenegotiationsto arelativelyhomogenousandsmallsetofeconomicactivitiesofhighenvironmentalrelevance.TheEUDRandtheCBAMcould henceserveaspilotsabouthowtoachieveagreementamongsttradingpartnersaboutaspecificenvironmentalobjectiveand howtoimplementit.Several countries areconsideringtheintroductionofcarbonborder measuresin responsetoCBAM(see alsoBox4onCBAMinannex6.2),whichcanbeseenasadesiredimpact(snowballeffect)oftheEuropeanCBAM.Ontheother hand, this dynamic also bears the risk of leading to market fragmentation and undesired barriers to trade. To amplify the desired “snowball” effect and mitigate the risks, fostering strategic partnerships around both EUDR and CBAM (as a starting point)andonthewider greentrade landscapebetweentheseimportantglobalplayerswillbeextremelyimportant.Thefuture

13 See,e.g.,theClimLabelsproject

responses of other countries to the EU CBAM deserve specific attention of philanthropy and civil society as well as the interaction of the different response policies and legislations. Will an equilibrium be achieved in the next decade? Clearly, a widespread imposition of carbon prices triggered by CBAM would be the desired outcome, as opposed to the creation of separatetradeblocsorapotentialbreakdownoftheglobaltradingsystem.

Itis,however, not a trivial task to better link different legislation and agreements,asthecaseofMercosur-EUFTAvs.EUDR shows. Ideally, they would work together to enhance trade and make that trade “deforestation free” (Karsenty & Picard, 2021; Ritchie,2021),seeBox2.Butthiskindofco-operationdoesnotjusthappen;needstobefacilitatedandincentivized.

Box2.GovernanceChallengesAroundtheMercosur-EUFTAandtheEUDR

PartnercountriesaffectedbytheEUDRhavebeenclaimingrepeatedlythattheyhavenotbeensufficientlyconsultedinthe makingofthisregulation.RulestobeimposedbytheEUDRarebeingquestionedaspartofMercosur’snegotiationstrategy. Inturn,aratifiedFTAmightsupportthesuccessfulimplementationoftheEUDRbyenablingthepoliticalbuy-inofMercosur intotheEUDRandthusavoidingmarketdiversionofforest-riskproductsintoregionswithnoorlessstringent(supply-chain) regulations.

TheFTAnegotiationsevolvedverydynamicallyinthesecondhalfof2023.Thedeadlineforapoliticaldealornodealsetby bothsides(December7of2023)wasnotmetdespitethedesireofbothsidestoclosethedealbeforetheArgentinianchange ofgovernment. However,the negotiationsarecontinuing withanew“deadline”: theEU electionin 2024.Itcontinuesto be highlyuncertainhowthenegotiationswillturnout(Gijs&vonderBurchard,2024).Inthecaseofapoliticaldeal,themonths or even year after the deal will be important for developing technical details on its implementation – an opportunity for philanthropic action. This could include, for example, details within the scope of the agreement’s sanction-based dispute settlementprovisions,ontailoredcapacitybuildingorenhancedcooperationcommitmentslinkedtotheEUDR(Voituriezet al.,2023).

On a multilateral level, international organizations needbettercoordinationwitheachother,especiallyalongprioritysectorspecific workstreams. An example of this is the agricultural sector, which is currently addressed separately by the WTO and UNFCCC, with limited progress (Diogo & Kaukab, 2023). Despite recent attention to agriculture, COP27 negotiations failed to produce significant decisions on food systems or sustainable diets. The WTO continues to struggle with the unresolved Doha Round,includingagriculturalissues.Aligningdiscussionsandnegotiationsonagriculturebybringingbothsecretariatstogether couldleadtosynergieshere.But,giventheconstrainedcurrentstatusoftheWTOanditsdisputesettlementprocess,afocused, pluri- rather than multilateral approach tointernational greentrade cooperation(suchasforexampleClimateClubs,seeBox 3 and the G20 efforts around the Sustainable Finance Road Map, see 4.1) may be more practical in order to create tangible successstoriesthatcanultimatelylaythegroundforareformedmultilateralarchitecture.

Box3.“Coalitions”ofLike-MindedCountries:ClimateClubs

ProposedbyleadingclimateeconomistslikeWilliamNordhaus(2015),climateclubsaimtoreducethefree-riderproblemin international climate policy. By applying carbon border taxes or other trade sanctions on countries not sufficiently committed to reducing GHG emissions, countries willing to decarbonize could leverage their economic clout to incentivize otherstoalsolowertheiremissions.Meanwhile,countrieswillingtocommittodecarbonizationcanjointheclubandbenefit from preferential trade agreements and other support. If the climate clubs succeed in inducing even non-like-minded countriestojoinoralignrulesoutofself-interest(togetmarketaccess)theclubscanbecomeapowerfulinstrument.

However,thecurrentproposaloftheG714 tofoundaClimateClubismuchsofterthantheoriginalideaasnotradesanctions orcarbonpricingpolicyschemesareplanned.Instead,animportantpillaristheadvancementofindustrialdecarbonization focusing on sectoral strategies and standards for green industrial products. One major challenge is thatsome large players liketheUSarenot(yet)onboard.15 Meanwhile,variousnon-G7countrieshavejoinedin,includingemergingeconomieslike Argentina,Colombia,andIndonesia (Unger&Thielges,2023)

14 Other relevant fora in this context are the G7 Industrial Decarbonization Agenda (IDA), the Clean Energy Ministerial Industrial Deep DecarbonizationInitiative(IDDI),theHydrogenActionPact(HAP),theBreakthroughSteel&Cement,andtheFirstMoversCoalition. 15 Interviewinformation.

Also, non-governmental actors are key to further greentrade Frontrunner corporates andtheirtradebodiescancontribute todiscussions ongreentrade policiesandcorrespondingreportingrequirementsandfeasibility,aswellasbecomeadvocates for rapid and ambitious international alignment CSOs and climate activists have traditionally been skeptical of free trade, especiallyFreeTradeAgreements(FTAs).InEurope,partlyduetoclimateactivists’environmentalexpertise,criticalassessment and advocacy as well as government negotiators’ nascent receptiveness have resulted in the improved sustainability provisions. In order to fully leverage the positive potential of green trade, also green CSOs need to further develop their understanding of the need and means to leverage the potential of trade and trade policies. Together with philanthropy, civil societycanplayakeyroleinnudgingustowardsapositivechainreactionofCBAMsforexample.Research,too,mustcontribute tobridgethespheres,includingtoovercomerelevantdataandregulatorygapsfor greentrade Researchersfrequentlyconduct impactanalysesontradeandclimate.Buttheyareoftendisconnectedfromongoingpolicyandregulatorydevelopments.This leads to“moreofthesame”kindofanalyses andmediacoverageonpotential impactsof tradeontheenvironment (see,e.g., Tuxá&SolBrasier,2023).Moreaccessible,high-qualitydataandclosercooperationbetweenresearchers,tradenegotiatorsand policymakerswouldhelpimprovethe“real-world”usefulnessandapplicabilityofresearch.

Recommendationsforphilanthropicaction

4.2.1 Supporttrustandconsensus-buildingeffortsbetweenstakeholdersfromdiversejurisdictionsandspheres

• Starting with CBAM and EUDR sectors, set up fora, workshops, and conferences, as well asnon-public discussions to jointly develop equitable governance solutions, foster joint leadership and strategic partnerships for ambitious solutions; philanthropy acting as an honest broker and independent, credible facilitator between countries and regionswithdifferentrealities

• Address the cooperation gap between Trade policymakers/negotiators and Climate/Environment policymakers/regulatorsalongsideclimateandenvironmentalexperts.Includedataandfinanceexpertstobridgethe gapbetweentrade,environmentandfinance

• Make use of research and policy analysis results (see recommendations under 4.1) for these events to facilitate open discussionsaboutsector-specificapproaches,harmonization,equivalencydefinitionsandfairsolutions.

4.2.2 Supportfocused,plurilateralratherthanmultilateralapproachestointernationalco-operation

• Create tangible and credible plurilateral success stories, jointly elaborated between philanthropic foundations and partnersfromkeycountries/jurisdictions.Thesecanultimatelylaythegroundforareformedmultilateral greentrade architecture.

• Focus on plurilateral cooperation along supply-chains through complimentary and environmentally/socially ambitious policies and (due diligence) regulations between key countries/jurisdictions that minimizes trade distortions;fosteracommonunderstanding ofenvironmentalandsustainableperformanceandhence,equivalency.

4.3. Combatting Adverse Distributional Effects and Ensuring Equity Along Supply Chains

Distributional effects ofgreentradeneedfurtherattentionand greentrade legislationandagreementsneedsignificantsocial investments and create tangible benefits for firms, workers and other actors along value chains (e.g., marginalized or underrepresentedgroups/gender,affectedIndigenousandtraditionalcommunities)toprovidetheeconomicbasisneededfor popularsupport.16 Tradeand greentrade cansimultaneously helpandhinderaffectedworkersandcommunities (ILO&WTO, 2007)

One example of specifically connecting distributional effects, climate goals and trade negotiations is to foster the negotiation power of Developing Countries (especially LDCs) regarding solutions for loss-and-damage compensation as part of trade

16 Interviewinformation.

deals. This could indirectly also increase the pressure on wealthier countries to reduce emissions and be used for enhanced nationaladaptationmeasuresandtransitionpathways.

SMEs are an important part of climate-relevant value chains, especially in the Global South (Runde et al., 2021; UNFCCC, 2021).Insub-SaharanAfrica,theymakeupmostoftheprivatesector(Rundeetal.,2021) MeanwhileintheASEANregion,SMEs account for 41% of GDP (UNFCCC, 2021). Their activities often involve a significant share of the environmental damage, especially in the context of agricultural commodities, deforestation, and land degradation. Yet, SMEs often struggle to comply with financial and trade regulations and the related documentation requirements and due-diligence obligations, preventing them from reaping the benefits of international trade on which they depend. A recent study found that the gains from integrationintovaluechainsareevengreaterforsmallerthanforlargerfirms (Boffaetal.,2021)

Globalalignmentofsupply-chainanddisclosureregulationscanhelpmakeinternationalmarketsmoreaccessibleforSMEs and is key for avoiding negative social and distributional effects.17 After all, a significant share of industrialized countries’ environmentalandsocialrisksandimpactsarehiddeninthesupplychainandhenceoftenoutsidetheirjurisdiction.

The potential exclusion of smallholders from markets due to complex traceability requirements represents another main criticism of upstream countries towards supply-chain regulations like the EUDR.18 This criticism was brought forward by Indonesia (on behalf of 14 developing countries) at a meeting of the WTO’s Agriculture Committee in November 2022 (WTO, 2022b) and afterwards on several occasions and letters to the European Commission. There is a need for firmly embedding well-designed transition finance schemes in supply-chain regulations. This would increase acceptance, reduce fears, and accelerateimplementationwhilehavingpositivedistributionaleffects.Butassuchschemesarecurrentlylacking,philanthropy cancontributetovoicesuchclaims.Alsofromadomesticpolicyperspective,successfulandfastimplementationshouldhave thehighestpriority.

Turning verification and certification into business opportunities and sources of income for local actors and their organizations19 is another concrete idea to reduce negative distributional effects of land-use/deforestation-related legislation or disclosure requirements. Similar to supply-chain regulations, disclosure regulations and taxonomies also require enhanced data on environmental and social impacts, verification, and audits, and it is difficult for companies and auditorstoverifyinformationfromabroadandtoincorporateeffectivemechanismstopunish,forinstance,greenwashing.

Local verification schemes can enable local actors to structurally empower themselves as drivers of local transformative development processes while also helping to maximize the global benefits of more effectively achieving climate and biodiversitytargets.Brazilallowsforexampleforparticipatoryorganiccertification(ParticipatoryGuaranteeSystems).Organic certification schemes in Europe do not include that option, thus participatorily certified organic Brazilian products are not recognizedasorganicwhenbeingexportedtoEurope.Thathindersexportsoflocallyproducedandcertifiedorganicproducts (Bioeconomy).Potentialrisksofsuchanapproachwouldneedtobeassessed. 20

Similartosupply-chainregulations, carbon border taxes, and more specifically CBAM, have faced critique of protectionism and unfair treatment bysomecountries.Consequently,theEuropeanCommissionmaywishtoconsiderwaysto“sweetenthe deal” for trading partners. For example transition finance schemes, FTAs or climate agreements could convince partner countries to accept the implementation of “sticks” like carbon border taxes and market access approaches like the EUDR. Nonetheless, stakeholders in all countries may ultimately benefit from the data generation set in motion by supply-chain regulationsandCBAM.21

17 AndfacilitatescomplianceamongSMEsandotherbusinessescomparedtoascenariowithmultipledifferentregulations.

18 Interviewinformation.

19 Bridgingtheintent-actiongapinsustainableconsumptionpolicyand:EnablingLocalGovernancetoMitigatetheClimateandBiodiversity Crises|ThinkTwenty(T20)India2023-OfficialEngagementGroupofG20

20 Interviewinformation.

21 Interviewinformation.

Recommendationsforphilanthropicaction

4.3.1 Fostercapacity-developmentmeasureson greentrade

• Fostergeneralcapacitydevelopmentontrade,internationaltradelaw,andtradenegotiationstoenablegovernments andfurtheractorsinDevelopingCountriestonegotiate greentrade agreements;thatcouldincludeforexamplelossand-damagecompensationforclimatechangeaspartoftradedealsandreinvestmentintotransitionandadaptation pathways

• Pilot and initiate longer-term support schemes (not just one-off “projects”) through (philanthropic) alliances, to recognizetheextendedtimeframesoftradenegotiationsaswellastransitionprocesses(ratherdecadesthanyears).

4.3.2 DevelopinnovativeapproachestostrengthenlocalfarmersandcommunitiesaswellasSMEs

• Implement pilot studies for simplified data reporting and due diligence solutions for SMEs across all green traderelevantlegislation(see4.1)upstreamanddownstreamsupplychainsandpromotetheirinclusioninthescopeofthe legislation.

• Implement pilot studies on local verification schemes for deforestation and land-use change, especially in remote (tropical) areas, including addressing risks (e.g., confidentiality, trust, corruption, power relations) and adequate mitigationmeasurestomakesuchinnovativeapproacheswork

• Scale up these solutions by promoting the inclusion of legal provisions for local participation in MRV within green trade-relevantlegislation(e.g.,intheguidelinesforauditors).

4.3.3 Assessandfostertransitionfinanceschemes

• Explore politically, economically and technically feasible ways of allocating revenues generated by carbon border taxestojusttransitionfinanceschemesbackintoeachcountryand/orgenerallyintolow-incomecountries(Cernicky & Oswald, 2022), and assess the effectiveness of such approaches. This might be very challenging to achieve as this was kept out of the CBAM by the EU. But joint thinking and collaboration between (EU and partner countries’) trade, environmental and development cooperation policymakers, philanthropy, research and CSOs could lead to new creativesolutionsthatareperceivedasfairbyall(includingclassicalfinancialdevelopmentcooperation,JEPTs,Loss andDamageFund,etc).

• Explorefurtheroptionsonhowtheuni-,bi-orplurilateral agreementsandregulatorymeasures(seechapter4.1)can ensuresystematicfinancial flows todevelopingcountriesandemergingeconomiesupstreamtohelpthemstemthe transition,includingpositivedistributionaleffects.

5. PUBLICATION DETAILS

COMMISSIONEDBY

ClimateWorksFoundation,moreinformationontheprojectpage

CREATEDBY

Climate&Company-TheBerlinInstituteforClimateTrainingandResearchgGmbH

JohnClancy,WillemvanDommelen,ElisabethHoch,IngmarJuergens,AndreasLoeschel,OliverSchenkerandIsabelleWilhelm Ahornallee2|12623Berlin

www.climateandcompany.com|hello@climcom.org

ACKNOWLEDGMENTS

The authors would like to extend their heartfelt gratitude to the Global Intelligence Team of ClimateWorks Foundation, specificallyDanPlechatyandAlexFisher, fortheirexceptionalsupportinthisproject.

Moreover,theauthorswouldliketoexpresstheirsinceregratitudetoRichardBaron(EuropeanClimateFoundation),JanBörner (University of Bonn), Miguel Castro (previously EU Delegation to Brazil), Susanne Dröge (Umweltbundesamt), Javier Godar (Stockholm Environment Institute), Antoine Oger (Institute for European Environmental Policy), Emily Rees (CropLife International), Bettina Rudloff (Stiftung Wissenschaft und Politik), Artur Runge-Metzger (Germanwatch and Mercator Research InstituteonGlobal Commons andClimateChange,previouslyDGCLIMA/EuropeanCommission),CliveCusens,LiyanaNayan, Simon Pfluger, Louise Simon and Max Tetteroo (Climate & Company) as well as Helene Banner, Kristina Mensah, and Lindy Whitehousefortheirinsightfulcontributionsandvaluable comments.

6. ANNEX

6.1. Abbreviations

ASEAN: Association of Southeast Asian Nations

CBAM: CarbonBorderAdjustmentMechanism

CCM: Carboncreditingmechanism

CDP: ClimateInsightAction(formerlyCarbonDisclosureProject)

CO2: Carbondioxide

COP27: ConferenceoftheParties27

CORSIA: CarbonOffsettingandReductionSchemeforInternationalAviation

CSDDD: CorporateSustainabilityDueDiligenceDirective

DG CLIMA: Directorate-GeneralforClimateAction

DG ENV: Directorate-GeneralforEnvironment

DG FISMA: Directorate GeneralforFinancialStability,FinancialServicesandCapitalMarketsUnion

DG INTPA: Directorate-GeneralforInternationalPartnerships

DG JUST: Directorate-GeneralforJusticeandConsumers

DG TAXUD: Directorate-GeneralforTaxationandCustomsUnion

DG TRADE: Directorate-GeneralforTrade

EEAS: EuropeanExternalActionService

ESRS: EuropeanSustainabilityReportingStandards

ETS: Emissionstradingsystem

EU: EuropeanUnion

EUDR: EUDeforestationRegulation

FTA: Freetradeagreement

G20: GroupofTwenty

G7: GroupofSeven

GATT: GeneralAgreementonTariffsandTrade

GDP: Grossdomesticproduct

GHG: Greenhousegas

GRI: GlobalReportingInitiative

GTAG: GreenTechnicalAdvisoryGroup

HAP: HydrogenActionPact

IDA: G7IndustrialDecarbonizationAgenda

IDDI: CleanEnergyMinisterialIndustrialDeepDecarbonizationInitiative

ILO: InternationalLabourOrganization

INTA: InternationalTradeCommittee

ISSB: InternationalSustainabilityStandardsBoard

ITF: InternationalTradeForum

LDCs: Leastdevelopedcountries

Mercosur: MercadoComúndelSur

MRV: Monitoring,reportingandverification

n.d.: Nodate

OEC: ObservatoryofEconomicComplexity

OECD: OrganizationforEconomicCo-operationandDevelopment

SASB: SustainabilityAccountingStandardsBoard

SMEs: Smallandmedium-sizedenterprises

TCFD: TaskForceonClimate-relatedFinancialDisclosures

TNFD: TaskforceonNature-relatedFinancialDisclosures

TSD: Tradeandsustainabledevelopment

TTIP: TransatlanticTradeandInvestmentPartnership

UBA: Umweltbundesamt(GermanEnvironmentAgency)

UNFCCC: UnitedNationsFrameworkConventiononClimateChange

US: UnitedStates

WTO: WorldTradeOrganization

WWF: WorldWildlifeFund

6.2. Overview of Instruments and Institutions Relevant for GreeningTradewith a Special

FocusontheEU

Presentedinalphabeticalorder

CarbonBorderTaxes

Carbon border taxes are a unilateral means to align GHG reduction incentives for domestic and foreign producers when levels of climate ambition and carbon pricing differ between countries. They can protect domestic industries from adverse effects of domestic climate-mitigation policies, reduce carbon leakage, and encourage global emission reductions. However, theyfacelegal,administrative,andpoliticalchallenges.Morespecifically,carbonbordertaxesarerelativelyeasytoimplement with CO2 pricing, but difficult with other command and control (i.e., standards and other non-price mechanisms) policies in place.TheyalsorequirereliableandcomparabledataonCO2emissions.

Whether incentives are effectively aligned with emissions depends on the exact design of the scheme. If, for instance, due to lack of individual data, sectoral emission-intensity benchmarks are used to compute the border tax, the foreign producer has littleincentiveto reduceemissions. Hence,theincentive alignmentworksonly ifthetaxisproducer-specific. This,in turn, isthenadefactoextensionofclimatepoliciestoexportingcountries.Third-partyverificationcouldserveasasolutiontoensure thevalidityofthesetaxes.

Economic theory suggests that countries with lower carbon prices gain a comparative advantage, particularly in energyintensive sectors and industries (Stefan & Rutherford, 1993). Carbon border taxes are one measure to address such competitiveness concerns (Prazeres & Xie, 2021). They are currently being considered or implemented in multiple countries and regions (Brauch et al., 2021). This border tax adjustment counteracts market distortions caused by cross-country differencesindomesticclimatepolicies–inparticularcarbonpricing.Itaimstomaintainindustrialcompetitivenessandavoid the shift of production and emissions to countries with weaker environmental standards (i.e., carbon leakage) (Stefan & Rutherford, 1993) Böhringer et al. (2016) studied the game-theoretic incentive structure and found that the use of carbon border taxes is in principle a credible and effective incentive to induce emission reduction measures in countries that previously did not regulate emissions.

Introducing carbon border taxes can be challenging due to potential trade disputes, administrative complexity, and compliance costs. Additionally,thereisaconcerningphenomenonknownas reshuffling:companies/countriesmayselltheir carbon-intensive products to regions without carbon border taxes while sending cleaner products to those which impose carbon border taxes. Moreover, goods may be transported via third countries with preferential access, exploiting loopholes in thecarbontaxsystem.Thiscancompromisetheintendedincentivetoreduceemissionsinthe productionprocess.22

Box 4:TheEU CarbonBorderAdjustmentMechanism (CBAM) isthe first implementation of a carbon border tax. Starting in 2023, CBAM will initially apply to iron, steel, cement, fertilizers, aluminum, electricity, hydrogen, certain precursors, and downstreamproducts (EuropeanCommission,2023).FromOctober2023 untilDecember 2025,companiesinthesesectors mustreporttheiremissionsbutnotmakepayments.Startingin2026,companieswill berequiredtopayfortheiremissions, andadditionalsectorsmaybeincluded.CBAMalsoallowsforthepotentialinclusionofindirectemissionsandaimstocover all Emissions Trading System (ETS) goods by 2030. Bellora and Fontagné (2023) consider CBAM as promising to reduce carbon leakage but warn that it may cause competitiveness losses in export markets for downstream sectors that are not coveredbyCBAM.

CBAM addresses otherwise missing mirror clauses, whichaim to ensure imported products meet domestic standards. The GATT Article XX on General Exceptions allows exemptions from regular GATT rules to “protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources”. These sub-clauses make a compelling case for countriesimplementingunilateralprotectiveclimatemeasures.

The introduction of CBAM has prompted reactions in other regions across the world. IntheUS,whiletherearenofederal measuresinplacethatfully complywiththe"explicit"carbonpricerequirementofCBAM, certainstates likeCaliforniahave

implementedtheirownETS.TheinitialCBAMsectorsarenotexpectedtohaveasignificantmonetaryimpactonEU-UStrade relations. The total value of American exports subject to CBAM during the initial phases is around 1.2 billion USD, primarily consisting of iron and steel (990 million USD) and aluminum (330 million USD). It could even boost American exports since their products have lower carbon intensity compared to less-developed countries (Figures et al., 2021) Moreover, with the introductionoftheIRA,theUShasputpoliciesinplacethatmaketheirgoodslesscarbonintensive,potentiallyreducingthe computedbordertaxinthefuture.

Several countries have announced their own carbon border measures in response to CBAM. The UK and Brazil are planning similar mechanisms, while Canada and Australia are considering to follow suit (Hancock & Pfeifer, 2024; Mingote, 2023) China plans to use its own ETS to counteract the effects of CBAM. One option for China would involve bringing additional industries under the purview of a carbon pricing mechanism, thereby enhancing their compatibility with CBAM (Pongratz, 2023) India is planning to ask for EU concessions to align its planned national carbon market with the ETS (Srivastava,2024).

CarbonCreditingMechanisms(CCMs)

CCMs allow countries, companies, organizations, or individuals to profit from achieved emission reductions by receiving and selling verified carbon credits (certificates).TheydifferfromETSorcarbontaxesastheparticipationinCCMsisvoluntary, however,thecreditscanbetradedbothvoluntarily(voluntarycarbonmarket)orforcompliancepurposes(e.g.,withnationally determinedcontributions,ETS,theCarbonOffsettingandReductionSchemeforInternationalAviation(CORSIA),orcarbontax schemes) (UNFCCC, 2022). Trading can occur on voluntary carbon-market exchanges, market standard platforms (e.g., Gold Standard),business-to-consumeraswellasbusiness-to-business(e.g.,carbonprojectdevelopers)orbetweencountries,such astheArticle6bilateralcooperationagreementbetweenSwitzerlandandGhana

Althoughtheconcept(CO2-baselineandcreditsystem)ofthemechanismisconstant,therearesignificantdifferencesbetween different CCMs. Some involve authorizing government bodies (CDM, JCM, Article 6); others do not. Especially when trading credits of the latter, private sector underlying methodologies and standards need to be treated with caution to not risk reputational damage (greenwashing). According to a recent investigation by SourceMaterial of three scientific studies, only a fraction of the claimed carbon credits of forestry projects where no government bodies were involved led to the claimed emission reductions (Guizar-Coutiño et al., 2022; T. A. P. West et al., 2020, 2023). However, when governmental bodies are involved (such as the UNFCCC for the CDM, cooperating countries and the UNFCCC for Article 6) as well as, for example, the private Gold Standard, such claims about CCM do not apply and it is expected to remain as the Paris Agreement’s Article 6.1 clearly states that “Parties recognize (…) to promote sustainable development and environmental integrity” (UNFCCC, 2015) Therefore,infuture,certainCCMs,suchasArticle6,willlikelygeneratemoreexpensivecredits,asthemechanismaimstoavoid doubleemissionclaimingandtopromotesustainabledevelopmentinitsgovernment-approvedprojects,unlikecertainprivate sectorCCMs(e.g.,VERRA),whererisksremain.

CoalitionofTradeMinistersonClimate

In2022,the CoalitionofTrade MinistersonClimate was launched,thefirst ministerial forumdedicatedtodiscussionsof trade and climate at the global level. The members encompass major economies like the EU, US, UK, and Japan, as well as smaller island nations and developing states across Africa, Latin America, and Asia. There is potential for them to do similar work as theCoalitionofFinanceMinistersforClimateAction,launchedin2019.

CorporateDisclosureRegulations

Corporate sustainability disclosure is a crucial (sustainable finance) instrument to achieve transparency on the sustainability impacts,risks,andopportunitiesassociatedwithcorporates andtheirproductsandservices.Toevaluate carbonequivalency and enable carbon benchmarking, and to establish trust in supply-chain measures or carbon border adjustments, sectoral agreements, transparency and international alignment are essential. However, combining international harmonization with

highambition,againstthebackdropoflimitedcapacityonthepartofSMEs,nationalregulatoryandintheabsenceofenforcing mechanisms,remainschallenging.

Without transparency, important information asymmetries persist and drastically reduce market efficiency. Risks cannot be appropriately priced, and preferences cannot be adequately expressed in consumption, financing, and investment decisions.Thisresultsinwelfarelossesforshare-andstakeholdersbyincreasinguncertainty,searchcostsandundetectedrisk exposures. Research has provided vast evidence that increased sustainability disclosure can reverse these effects (Cho et al., 2013;Christensenetal.,2021;Dhaliwaletal.,2011,2012)

The empirical literature is unequivocal about the fact that relying on voluntary disclosure is not enough (Hibbitt & Collison, 2004;Jeffrey&Perkins,2013;Korca&Costa,2021),whilemandatoryreportingisshowntoinfluencereportingqualityandESG performance positively (Chen et al., 2018; Hąbek & Wolniak, 2015) Mandatory disclosure regulations enable investors, consumers, and other stakeholders to make informed decisions and exert pressure on companies to reduce emissions.

Currently, several key disclosure frameworks are being developed in parallel around the world. In2022,forexample,three proposalsforsustainabilitydisclosurestandardswereelaboratedfortheEU,theEuropeanSustainabilityReportingStandards (ESRS), for the US, by the Securities and Exchange Commission (SEC), and the International Sustainability Standards Board (ISSB). In 2023, parts have already been published (the ISSB’s IFRS S1, S2), are about to be completed (the EU’s ESRS Set 1, DelegatedAct),ortobeelaborated(ISSB’sbiodiversitystandards&EU’sESRSSet2).Multiplefurthermandatoryandvoluntary disclosurestandardsarebeingdevelopedfordifferentjurisdictions,suchastheGlobalReportingInitiative(GRI)andTaskforce onNature-relatedFinancialDisclosures(TNFD).

Box 5: In the EU, the Corporate Sustainability Reporting Directive (CSRD) significantly expands what companies need to discloseinterms ofsustainabilityinformationregardingawidearrayofESGissues(ascomparedtothe2014 Non-Financial ReportingDirective(NFRD)).Companyreportingshallbeguidedbyamaterialityassessmentbasedonadouble-materiality perspective. Specific novelties also include the obligation for companies to provide “forward-looking” (as well as retrospective)informationandplanscompatiblewiththeParisAgreement’s1.5°Cgoal.

Thecorrespondingstandards,the ESRS,translatetheDirective’sobjectivesintocross-cutting,topical,andsectordisclosure requirements. Currently, the European Commission is translating the first set of ESRS standards (cross-cutting and topical) into a Delegated Act. However, the mandatory nature has been reduced to voluntary reporting through a materiality assessment, whilst additional flexibility is proposed in the materiality assessment methodology – a major risk for its effectivenessinprovidingtransparency.

EmissionTradingSystems(ETS)

More and more jurisdictions rely on ETS to regulate and reduce GHG emissions in their economy. ETS allow them to set a caponallowableemissionsandallowingentitiestobuyandsellemissionallowances.Thistradeinemissionpermitsresults in a carbon price which provides a financial incentive to reduce emissions. The EU’s ETS, one of the first and largest of its kind, covers around 40% of the EU’s GHG emissions. It controls emissions in the energy and manufacturing industries as well as in the domestic aviation sector and will gradually include the maritime transport sector from 2023 to 2025 (European Commission,n.d.-a;EuropeanParliament,2023a).

In 2021, China's national ETS started operating. Itcoversthepowersectorandintotalmorethan4billiontonsofCO2,making it the world's largest ETS. In addition, several US states such as California use ETS to regulate CO2 emissions in key sectors (CenterforClimateandEnergySolutions,n.d.) ICAP’sETSmap providesforahelpfuloverviewofthevarious (48!)ETSaround theworldandtheirstateofimplementation.

While the three biggest trading blocs have their own separate, domestic (national or sub-national) ETS, varying in scope and environmental ambition, these schemes have not yet been directly linked to reap the potential efficiency gains from a larger

market.23 Indirect linkages have, however, been established through certain features of ETS and via a different set of instruments.

Carbon Crediting Mechanisms (CCMs) (such as the Clean Development Mechanism) or Carbon Border Taxes, both discussed above,effectivelylinknationalclimatepoliciesliketheETStointernationalmarketsandthetradeinproductsandcommodities (incl.emissionreductioncredits).

Sectoralapproachesareanotherexampleofalong-standingdiscussionabouthowtoleveltheplayingfieldforcompaniesthat aresubjecttonationalclimatepolicies(suchastheETS).WhilehavingfeaturedalreadyintheEuropeanCommission’sImpact Assessment of the 2008 reform of the EU-ETS, they have not yet been implemented. In one form or the other, sectoral approachesdo,however,playaroleforindividualsectorssuchasaluminumandsteelintheongoingEU-USclimateandtrade conversations(FinancialTimes,14August2023)whilealsorepresentinganobviouspotentialpolicyinstrumenttobepromoted viaclimateclubs(seealsoBox3inchapter4.2 onpage9).

FreeTradeAgreements(FTAs)

FTAs are bi- or plurilateral tools of strengthening political and economic ties between regions and may help to prevent instabilityandconflicts(Beyene,2015;Lee&Pyun,2016;Polachek,1980).24 FTAnegotiationscanprovideaplatformfordifferent countries to discuss how trade can be structured more sustainably.25 To work for the climate, FTAs should secure commitments to environmental and social sustainability in key sectors and accompany them with robust enforcement mechanisms, whichtheytypicallylack(Grübleretal.,2021) Moreover,FTAsarecomplex,andtradenegotiatorscanhavetight objectives(toclosedeals)andmaylackclimateexpertise(e.g.,inDGTrade (Kahlenetal.,2023))aswellascapacity.Itcanalso be difficult to find common ground when perspectives on climate, environmental and social sustainability differ between countries.

Early FTAs, but also the GATT, primarily focused on reducing tariffs, a strategy that proved successful after World War II. However, in today's context, the emphasis has shifted towards non-tariff matters, such as product standards related to health and safety, which are more challenging to negotiate but can have broader environmental implications due to regulatory spillover.ThisshiftalsopresentsaclearopportunitytoincorporateclimateandenvironmentalconcernsintoFTAs.

Since the EU-Korean FTA signed in 2009, EU trade deals have incorporated trade and sustainable development (TSD) chapters, covering topics like climate change, the environment, and labor rights (Titievskaia, 2021). Nonetheless, FTAs have traditionally not garnered much support from European NGOs and climate activists. Especially in the context of the TransatlanticTradeandInvestmentPartnership(TTIP)betweentheUSandEU,NGOsacquiredenormoussocietalandpolitical influence over the success and failure of trade deals (von der Burchard, 2016). Consequently, over the last decade, environmental and social sustainability matters have increasingly gained importance and recognition by all stakeholders involvedinFTAs.26

23 There is vast body of literature on the long-standing discussions about linking national ETS The FSR more recently published a series of reports discussing key features of ETS crucial for linking (see: https://fsr.eui.eu/integration-of-emissions-trading-systems-where-are-we-attoday/).Examplesforotherpapersonlinkingincludethefollowing:Tuerketal.(2009),Santikarnetal.(20018),Ahlbergetal.(2013)

24 Thesearticlesprovideevidenceofanegativelinkbetweentrade(notnecessarilyFTAs)andconflict.However,theinteractionsofFTAsand politicalstabilityanddirectionofcausalityarestillnotfullyuncontroversial.

25 Interviewinformation.

26 AdetailedthoughslightlydatedanalysisofwhetherandhowFTAscanbeusedforclimateandenvironmentalprotection,whichalsozooms in on the EU-Mercosur FTA, was published by the Vienna Institute for International Economic Studies: Grübler et al. (2021). Similarly, the LondonSchoolofEconomicspublishedareportin2022,performingacomparativeanalysisoftradeandsustainabledevelopmentprovisions inFTAs(Velutetal.,2022)

Box6:ImportantFTAsfortheEU

to date. Since 2021, the FTA with New Zealand has been adopted/ratification is ongoing. Source: (EuropeanCouncil,2021)

The EU-Mercosur FTA,ifadopted,wouldconstitutethebiggesttradedeal forbothblocs.After20 yearsofnegotiation,both sides finally reached an agreement in 2019, but the deal has not been ratified by the EU due to environmental and social concernsbysomecountries.Asupplementaryinstrumentonsafeguardswithprominentfocusondeforestationiscurrently beingdiscussed(EU-Mercosur,2023;Neslen&vonderBurchard,2019)

Meanwhile,therecentEU-New Zealand FTA representsanew“goldstandard”duetoitscomprehensiveprovisionsensuring that both parties maintain and advance sustainable development, labor rights, and environmental conservation. This was facilitatedbyasharedunderstandingofsustainabilityamongthetwopartners.

Contrarily, the EU-Australia FTA has been more challenging. Though there have been signals of an increasingly proenvironmentstancefromCanberra (Moens&deLorenzo,2023),comingtoanagreementhasrecentlyprovendifficultinthe agriculturalsector(McLeod,2023;McLeodetal.,2023)

GreenTechnologyTransfer

An important way to support the transition to renewable and sustainable energies and thus the climate and sustainability transition of trading partners is via the transfer of green technologies. Such crucial zero-carbon technologies are expanding rapidlyacrossmanypartsoftheglobe(Makaroff&Kalcher,2023)

Practical examples of supporting this process through policy are bilateral or plurilateral agreements such as the Just Energy TransitionPartnerships(JETP)thataimtosupport,inparticular,coal-dependentemerginganddevelopingeconomies.Several

Figure 2. Notes: This map is not up

countries, such as South Africa, Vietnam, and Indonesia, have made agreements to benefit from higher-income countries’ investmentsupportinordertofacilitatetheircoalexitandestablishgreenhydrogeninfrastructures.

In the digital and information age and considering the increasing importance of credible environmental data and corporate reportingtoensurecontinuedaccessto,e.g.,EUmarketsandfinance(asdiscussedabove),suchtechnologytransferwillhave to urgently promote environmental data collection, evaluation and even assurance to the top of the technology transfer agenda.

Anothercrucial aspecttoconsiderregardingthetransferoftechnologiesas wellas,morebroadly,investment,isthe effective direction of investments from the Global North to the Global South. Investors often express concerns over perceived risks associated with investments in the Global South, which hinders private investments in these nations. This underscores a significant disparity between investors and the countries set to receive the investments. Addressing this is vital for enhancing thecapabilitytoexpandinvestmentsinwaysthatfacilitate greentrade andjusttransitions.27

GroupofSeven(G7)

Given the economic and political clout of the G7 countries (US, Canada, France, Germany, Italy, Japan, and UK) as well as the impactsoftheirsupplychainsandtradeagreementsontheclimateandenvironment,itisanimportantforumtopromoteand harmonizesustainablesupply-chainmeasureswithinthebloctoavoidmarketdeviation.

In 2022, the G7 Presidency was held by Germany. Its overarching goal was “progress towards an equitable world”; sub-goals focused on strong alliances for a sustainable planet, sustainable investments in a better future, and setting the course for economic stability and transformation (G7 Germany, 2022). The Presidency also set out ambitions to enhance the resilience and sustainability of global supply chains, promote rules-based free trade, establish international environmental and social business standards, and encourage companies to contribute to the Sustainable Development Goals (SDGs) through their supply chains, with a focus on sustainable agriculture and deforestation-free supply chains. Moreover, it aimed to strengthen multilateralism, combat protectionism and unfair trade practices, support WTO reform and address market-distorting subsidies. In the G7 Presidency in 2023, held by Japan, resilient supply chains and climate were also high on the agenda (G7 Japan,2023)

However,whileclimatehasgenerally“madeitontheagenda”,G7countriesarelargelycontinuingtofundfossilfuelexpansion and other environmentally policies, with significant public funding and tax expenditure in favour of economic activities and evenlong-livedcapitalstockfurtheraggravatingtheclimatecrisis.In2022,globalfossilfuelsubsidiessurgedtoarecordUSD7 trillion28.Accordingly,moreanalysisontherealeffectsofthisagenda-settingisneeded.

GroupofTwenty(G20)

The G20 group is a key entry point for international cooperation on sustainable supply chains as it includes upstream and downstream countries as well as the most important countries in terms of trade volumes. After Indonesia (2022) and India (2023), the next presidencies will be held by Brazil (2024) and South Africa (2025). Regarding green trade, the following G20 workstreams are worth noting: the Sustainable Finance Working Group, the Agriculture Deputies Group Environment, the ClimateSustainabilityWorkingGroup(bothinthe SherpaTrack),theBusiness20andtheThink20

The G20 Presidencies of Indonesia in 2022 and India in 2023 prioritized, among other issues, sustainable and just energy transitions, respectively (Ao, 2023; Indian Ministry of External Affairs, 2023) Trade and supply chains, in turn, were not extensively discussed during either of the G20 Presidencies, which mainly relates to the members’ different perspectives on thesetopics(e.g.,Russia,US,China)(IndianMinistryofExternalAffairs,2023)

27 Interviewinformation.

28 SeerecentIMFreport,link

MercadoComúndelSur(Mercosur)

The Southern Common Market (Spanish: Mercosur) is a South American trade bloc established by the Treaty of Asunción in 1991andProtocolofOuroPretoin1994.Itisthefifthlargesteconomyintheworld(Mercosur,n.d.)anditsterritorycoverslarge rainforest areas crucial for the world’s climate and biodiversity. The bloc’s full members are Argentina, Brazil, Paraguay, and Uruguay; further countries are associated. Mercosur's purpose is to promote free trade and the fluid movement of goods, people,andcurrency.Eachmemberhasonevote,anddecisionsmustbemadebyconsensus.

The Common Market Council is Mercosur's highest political body. The Common Market Group oversees the day-to-day functioningofthebloc,andtheTradeCommissionoverseestheadministrationofthecommoncommercialpolicyinstruments (Mercosur,n.d.) Tradenegotiations,however,requirerepresentativesofthetradeauthoritiesofthemembercountries.InBrazil, which holds the presidency in the second semester of 2023, this role is fulfilled by the Secretariat of Foreign Trade within the MinistryofEconomy.

OrganizationforEconomicCo-operationandDevelopment(OECD)

The OECD is an international organization which promotes economic growth, stability, and improved living standards among its membercountrieswhilefacilitatingcooperationonglobalissues.Ithas beenanimportantplayerintheformation of trade policies and can help build consensus amongst its members via its trade committees. As early as 1991, the OECD created a Joint Working Party on Trade and the Environment (OECD, n.d.). In 2021, this Joint Working Party published a retrospective report on the years 2008-2020, in which they observed that progress in multilateral trade negotiations has been limited, but regionalapproachesandplurilateralinitiativesrelatedtotradeandtheenvironmenthaveadvanced.Moreover,theyconclude withthegrowingneedfordata,analysis,andpolicyproposals (JointWorkingPartyonTradeandEnvironment,2021)

Supply-ChainRegulations

Supply-chain regulations are unilateral policy instruments to reduce the CO2 (and environmental/ social) footprint of consumer countries in producer countries. Unliketheproduction-based carbonaccountinglogic of policiessuchas theETS and carbon taxes levied on carbon intensive producers, supply-chain policies take a more consumption-based approach by considering the carbon content (or other sustainability-related impacts) embedded in imports and “consumed” by (e.g., EU) corporationsandfinalconsumers.

Mandatory regulations limit market access for harmful products or require due diligence on their production/sourcing. In 2021, 60.4% of goods imports to the EU were intermediate goods, i.e., used in companies' production processes (Eurostat, 2022). Therefore, regulating supply chains strongly affects trade relations and upstream companies in the value chains. It also shifts focus to corporations and consumers in downstream countries. From a climate point of view, these regulatory measures might considerably reduce GHG emissions and environmental damage.

However, resistance in producer countries is high and implementation, including stakeholder engagement, challenging. An important opportunity to address this challenge lies in the active involvement of stakeholders in the information supply chain for certification and monitoring.

Without careful consideration and effective countermeasures, including diplomatic efforts and mechanisms to finance both compliance and transition, supply-chain regulations may lead to redirection rather than greening of trade flows. The risk associatedwiththeseupstreamconcerns,unlesseffectivelyaddressed,isoneofleakage,notdissimilartothewell-established carbon leakage discussion associated with national carbon pricing instruments like the ETS. Rather than reducing emissions by incentivizing the low-carbon (biodiversity positive, human rights respecting) transformation of upstream production to comply with, say, EU deforestation standards, exports of commodities and intermediate goods could be shifted to markets withoutanyorinferiorenvironmentalorsocialconditions.

Starting over a decade ago, multiple voluntary initiatives and commitments have risen to address agricultural expansion resulting in forest loss (Amsterdam Declarations Partnership, n.d.), engaging major corporate actors. However, about 40% of companies with the most influence on deforestation still have not adopted policies on deforestation (Pirard et al., 2023), and voluntarycommitmentshavefailedtoinvolvealargernumberofupstreamproducercompanies (Pirardetal.,2023)ortoshift EUconsumptionawayfromproductslinkedtodeforestation (EuropeanUnionLaw,2021)

Consequently,mandatorysupply-chainregulationshavegainedimportancetopromoteandenforcetransparency,traceability, andresponsiblesourcing.TheseincludetheEUdeforestation-freeproductregulation(EUDR,seeBox 7below)(Councilofthe EU, 2023), the UK Environment Act – Schedule 17 (Hoogeveen, 2022; C. West, 2022), and the US Forest Act (Jacobsen, 2022) Other key regulatory measures in the EU with high relevance for supply-chains (and the climate) are the European Corporate Sustainability Due Diligence Directive (CSDDD, see Box 7 below), the French Law on Duty of Vigilance (Légifrance, 2017), the German Supply Chain Law (German Federal Government, 2021), and the Norwegian Law on Transparency (Stortinget, 2021) Theyrequirecompaniestoconductduediligenceregardinghumanrightsandenvironmentalnorms.

Box7:EuropeanSupply-ChainLegislation

The EUDR has been adopted in June 2023 and will become applicable in December 2024. It covers seven deforestationlinkedcommodities(cattle,cocoa,coffee,palmoil,soy,rubber,andwood)andcertainderivedproducts,whichcanonlybe placed on or exported from the EU market to third countries if they are deforestation-free. This means that they must have beenproduced(1)onlandthathas notbeendeforested(legallyorillegally)after31 December2020,(2)incompliancewith relevantlegislationoftheproducercountryand(3)accompaniedbyaduediligencestatementbytheoperatorsandtraders. The implementation of the EUDR is expected to prevent 29% of deforestation-linked commodities from entering the EU market. Legislative expansion into further ecosystems and commodities as well as theinclusion of obligations for financial institutionsarebeingreviewed.

The EU Corporate Sustainability Due Diligence Directive (CSDDD), also called the “EU supply chain law”, is still under negotiation; a compromise is expected by the end of 2023. It aims to ensure that companies comply with their responsibilitiestorespecthumanrightsandenvironmentalnormsintheiroperationsandoverallgovernance.Duediligence shall be exercised to avoid any measurable environmental degradation that affects human health and safety or ecological integrity.Theprocessconsistsofidentifying,preventing,mitigating,andaccountingforadverseimpactscausedthroughout the whole supply chain. Member States will be given two years to transpose the provisions of the CSDDD into national law afteritsentryintoforce.

At national level, the UK included due diligence provisions in the Environment Act 2021, requiring corporates to ensure thattheforest-risk commoditiestheyareusingarenotassociatedwithillegal deforestationandconversion.Detailsarestill being consulted on, and many commentators articulated strong criticism about the narrow focus on illegal deforestation, whichaddspolicyincoherenceandcomplianceburdentointernationallyoperatingcompaniesbydeviatingfromtheEUDR withitsmorecomprehensiveandeasier-to-implementscopeincludingalldeforestation.

In June 2023, a parliamentary debate heard “[p]eers across the political spectrum […] support […] Amendment 91 to the UK Financial Services and Markets Bill, which introduces new regulations for UK financial institutions to prevent the financing of illegal deforestation” (GlobalWitnessJune2023).

Taxonomies

Tradeinstruments normallyregulate(themovement of)products.Taxonomies,butalsomechanismslikeemissiontrading,in turn,regulateactivities.

The rapid growth in so-called green or sustainable financial products (green bonds, sustainability indices, etc.) with often unclear environmental ambition levels has motivated a range of countries, including the EU, to develop sustainable finance taxonomies

First introduced in 2015,29 government- and market-driven taxonomies are classification systems that aim to provide a transparentinvestmentframeworkandcreateacommonlanguagetofacilitateinformeddecisionsonsustainableinvestments and promote sustainable finance. Taxonomies help to identify whether an economic activity contributes to objectives like climate-change mitigation, adaptation, and the protection of biodiversity and ecosystems, and thus reduce the risk of greenwashing. Understanding how ‘green’ an economic activity is can additionally serve as a benchmark for companies and investorstoengagebetterwiththeirbusinesspartnersandstakeholders.

As of December 2022, 28 more taxonomies have been developed or already adopted globally (Climate & Company & WWF, 2022). With different jurisdictions and countries following different taxonomies, the alignment and interoperability between trading countries’ taxonomies will be critical for trade in general and would also facilitate the transparency of and even agreement on common performance levels associated with measures such as carbon border taxes, sectoral approaches and moregenerallythecomparabilityorequivalencyofnationalclimatepolicymeasures.

Driven originally by concerns about greenwashing associated with “green” activities and related financial products, the next phaseoftaxonomydevelopmentwillneedto makesurethatitworksalsofordefining(credibleplansfor)greentransitionsof currently environmentally harmful companies, and to facilitate the flow of finance to where it is most needed for the zerocarbontransformation(see,forexample,Climate&Company’s ClimLabelsproject).

Box8:TheEUTaxonomywasdevelopedin2018andimplementedaspartoftheEuropeanGreenDealinitiativetopromote private-sectorinvestmenttowardsthegreentransition.Itcameintoforceon12 July2020 andcurrently,DelegatedActsare being prepared and concluded to give shape to the regulation. The EU taxonomy follows six environmental objectives: climate-change mitigation, climate-change adaptation, circular economy, pollution, effect on water, and biodiversity. An economicactivityisconsideredtobesustainableifit1)makesasubstantialcontributiontoatleastoneofthesixobjectives, whilst2)notdoingsignificantharmtoanyoftheotherobjectives,and3)complyingwithminimumsocialsafeguards.

WorldTradeOrganization(WTO)

Historically, the most important international trade institution has been the WTO, a multilateral organization aiming to reduce trade barriers, foster equitable trade, and provide a platform for members to negotiate trade agreements and settle disputes. Established in 1995 after the so-called Uruguay Round of negotiations under its predecessor, the GATT, it currently has 164 members representing 98% of world trade (WTO, n.d.-d). However, the Doha Round, the WTO’s latest round of negotiations launched in 2001, was concluded largely unsuccessfully in 2013 with merely an agreement on trade facilitation, leavingmanyotheragendaitemsopen(WTO,n.d.-a)

TheWTOoperatesonseveralkeyprinciples.Themainprincipleaimstoensurenon-discriminatorytradepracticesthroughthe “most-favored-nation”treatment,requiringanytradeconcessionsgrantedtoonecountrytobeextendedtoallmembers,and through “national treatment”, meaning that the tax regime or the standards (hygiene, safety, etc.) applied to imported or exported items from or to another country are identical to the one applied to similar domestically sold or produced items. Otherprinciplesaimtomakethetradingsystemfreer,morepredictable,increasinglycompetitive,andmorebeneficialforless developedcountries(WTO,n.d.-c).

The WTO has historically been criticized for undermining environmental initiatives. It has set a high bar for national industrial policies that could erode the global trade regime, which may also hinder decarbonization efforts. Its interpretation of trade rules in cases like the Indonesia-EU dispute and the U.S. steel and aluminum tariffs has raised concerns about countries’ flexibility in managing their green transitions when green policies are seen to conflict with global trade rules (Tucker, 2022) However, the practical implications of WTO laws and past rulings may be limited due to its ongoing Appellate Body crisis. FundamentalgeopoliticalandgeoeconomicshiftssincetheestablishmentoftheWTOhaveexacerbatedthefunctioningofthe

29 Whilenottermedasa‘taxonomy’,thePeople’sBankofChinapublishedthe1st editionGreenBondEndorsedProjectsCataloguetoestablish precisedefinitionofgreenproject.The2nd editionwasreleasedin2021.

WTO and its dispute settlement mechanisms, and many argue it needs reform to be able to set up new regulations and effectivelyhandledisputesagain.However,itiscurrentlyunclearifandhowthiscanbeachieved (Staiger,2021)

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