Summary: Fostering Low Carbon Growth

Fostering Low Carbon Growth: The Case for a Sustainable Energy Trade Agreement1 This sheet is a Q&A based summary of the issues paper“Fostering Low Carbon Growth: The Case for a Sustainable Energy Trade Agreement� by a team of experts at ICTSD,produced by ICTSD in collaboration with the Peterson Institute for International Economics and the Global Green Growth Institute.

How Can Trade Policy Help Efforts to Mitigate Climate Change?

Climate change is an unprecedented challenge facing humanity today. Given that fossil fuel-based energy use is the biggest contributor to anthropogenic greenhouse gas (GHG) emissions, a rapid scale up in development and deployment of renewable or sustainable energy sources could significantly reduce the emissions responsible for climate change.

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Figure 1: World energy-related CO2 emissions by scenario 45

WEO 2010: Current Policies Scenario

40

WEO 2009: Reference Scenario

35

WEO 2010: New Policies Scenario

30

WEO 2010: 450 Scenario WEO 2009: 450 Scenario

25 20 1990

1995 2000 2005 2010

2015

2020 2025 2030 2035

Source: International Energy Agency (IEA). World Energy Outlook 2010.

On the development side, developing countries are faced with the challenge of ensuring access to energy for millions of people and powering rapid economic growth in a low-carbon manner. Most countries are also seeking ways to enhance their energy security by reducing their reliance on fossil-fuel imports.

Trade policy can facilitate the transformation to a lower-carbon economy by addressing and reducing barriers on trade in sustainable energy goods and services. However, current trends in trade policies show that there are still significant restrictions on goods and services for sustainable energy producers. This slows down the increase in sustainable energy production and hinders the opportunities for developing countries to sustainable energy access.

The first challenge is the problem of the higher cost of sustainable energy deployment when compared to conventional fossil fuel sources. The initial cost for the investment in sustainable energy is high. This problem is worsened by the fossil fuel subsidies, which make the gap in cost between sustainable and fossil fuel energy even bigger.

The second challenge to address is trade policies that create barriers for renewable energy development. Such policies make it difficult for developers to optimise their supply-chains, compounding the disadvantages that clean energy already faces.

1

ICTSD; (2011); Fostering Low Carbon Growth: The Case for a Sustainable Energy Trade Agreement. International Centre for Trade and Sustainable Development, Geneva, Switzerland. The full paper is accessible at: http://ictsd.org/i/publications/117557/.

Should Action to Address Market and Trade Barriers be Taken by All or Just a Handful of Countries?

The majority of trade in equipment and components used almost exclusively for sustainable energy generation, is very concentrated in a handful of countries. Key traders of these products are among the top GHG-emitting countries and are represented within the G-20. Hence, many countries with the greatest stake in addressing climate change through sustainable energy deployment also have an important stake in ensuring stability and predictability of trade flows and market access. Thus, while it is desirable that all countries act, the greatest impact would come from the G-20 group.

But Aren’t Barriers to These Sustainable Energy Goods and Services Being Addressed as Part of the WTO Doha Negotiations on Environmental Goods and Services (EGS)?

Currently, little or no progress is made within the Doha round on negotiations concerning the removal of trade-barriers on environmental goods and services, as the negotiations as a whole are stalled. The existing trade in sustainable energy goods and services is currently shaped by a combination of existing WTO rules, regional trade agreements and bilateral investment treaties. The uneven application of these agreements, combined with numerous grey areas of regulation, fails to provide clarity and predictability for investors. However, even if the Doha negotiations were to make progress, they would not address all these ambiguities as many of them fall outside the scope of the mandate.

Are There Examples of Issues and Market Barriers That Specifically Need to be Addressed?

A number of specific issues and challenges can be identified. First, there is no globally agreed-uponlist of environmental goods or services on which trade barriers should be reduced. Second, local content requirements are often used in domestic policies to boost local investment,but such requirements can also constrain effective organisation of sustainable energy supply chains, since much of the expertise and manufacturing in the sector is highly localised. Third, although subsidies in the sustainable energy sector today are needed to foster investment, certain subsidy types can also have adverse trade impacts by giving an unfair advantage to domestic producers. Fourth, export restrictions or dual pricing on materials needed for the production of equipment for sustainable energy production can raise costs for developers or prevent them from procuring the needed supplies altogether (see Figure 2 below).

Fifth, certain technical regulations and standards are designed with the purpose of favouring domestic products and can impose significant costs and unnecessary barriers on producers and exporters. Sixth, there are a number of barriers that persist for the provision of sustainable energy services (especially expert knowledge and construction) as well as government procurement. These rules will need to be clarified or developed further to encourage trade in sustainable energy.

Figure 2: Applied tariffs on selected climate-friendly products, 2008.

135% Electric cars (Egypt)

100

150% Ethyl alcohol (India)

80

60

40

20

South Africa Morocco Brazil Vietnam China Indonesia India Egypt EU US

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US EU Egypt India Indonesia China Vietnam Brazil Morocco South Africa

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Source: ICTSD Analysis based on Vossenaar, R.(2010). Climate-related Single-use Environmental Goods, ICTSD Issue Paper No. 13, International Centre for Trade and Sustainable Development, Geneva, Switzerland.

The Way Forward: How Can a SETA Enable Policy Makers to Use Trade Policy to Positively Contribute to Climate Mitigation Efforts? What Forms Could a SETA Take?

A Sustainable Energy Trade Agreement (SETA) is proposed as a solution to contribute in reducing barriers to the transformation to a lower-carbon economy while increasing energy access in developing countries. Using a holistic perspective in the SETA offers a way of gathering together countries interested in addressing climate change and longer-term energy security while maintaining open markets.

A SETA could be a way forward from the impasse at the present Doha Round by moving away from the single-undertaking approach and by negotiating on a plurilateral basis. It could be a standalone agreement outside of the WTO framework or a plurilateral agreement within the WTO following the model of the Government Procurement Agreement (GPA) or the Information Technology Agreement (ITA).

One potential path to determine the scope of issues would be to have a first phase addressing clean energy goods and services, followed by a second phase expanding upon the first to includea wider scope of energy efficiency products and standards.

Initially, the agreement could focus on key trade-related issues such as tariffs, subsidies, non-tariff barriers, procurement and services. Afterwards, it could proceed incrementally on an issue-by-issue agenda including trade facilitation and transit issues related to energy.

One of the other key issues will be whether SETA will extend Most Favoured Nation (MFN) benefits to non-Members and what implications this could have for potential membership. A SETA would also need clarifications on its relationship with existing WTO agreements and rules on climate change, trade, etc. Furthermore, an adequate dispute settlement mechanism may be required. Including the SETA within the WTO framework would allow for the use of the WTO dispute settlement mechanism.

While a SETA may be conceived of as binding agreement bringing together like-minded countries, the same result, though perhaps less ambitious or far-reaching in terms of geographical scope or issues addressed, could also be achieved by voluntary agreements, or by the inclusion of Sustainable Energy Trade Initiatives, SETIs, as part of bilateral or regional trade and economic cooperation agreements.

ICTSD is grateful for support from the Ministry of Foreign Affairs of Denmark (Danida), the Ministry of Foreign Affairs of Norway and from the Global Green Growth Institute to the SETA-project. In addition, ICTSD wishes to thank its core and thematic donors including; the UK Department for International Development (DFID); the Swedish International Development Cooperation Agency (SIDA); the Ministry of Foreign Affairs of Denmark (Danida); the Netherlands Directorate-General of Development Cooperation (DGIS); the Ministry for Foreign Affairs of Finland; Australia’s AusAid; the Inter American Development Bank (IADB); Oxfam Novib and the Deutsche Gesellschaft fßr Internationale Zusammenarbeit (GIZ).

About the International Centre for Trade and Sustainable Development (ICTSD) Founded in Geneva in September 1996, the International Centre for Trade and Sustainable Development (ICTSD) aims to influence the international trade system such that it advances the goal of sustainable development. In advancing its mission, the Centre has become a leading broker of knowledge and information on trade policy and sustainable development. www.ictsd.org