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Climate Change and Trade Regimes: The Quest for Compatibility

May 18, 2010
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On the 13th of this month, Dr Patrick Low, Director of the Economics and Statistics Division of the World Trade Organization, gave a lecture on Climate Change and Trade Regimes: The Quest for Compatibility.

I must admit that I wasn’t particularly excited or intrigued about the prospect of sitting through a lecture that was to be filled with economic jargon and trade policies, even though it was climate related. However, Dr Low’s presentation was clear and succinct, allowing even non-economists to understand the urgency and complexities (well, not all of them naturally) of Climate Change and Trade Regimes, and of course, the quest for compatibility.

A/P Michael Ewing-Chow and Dr Patrick Low

The session was chaired by A/P Michael Ewing-Chow from NUS’s Law and he provided timely response and excellent questions, which fully suscribed the expertise that Dr Low had to offer. The key take-home message of the lecture was that international cooperation is necessary to achieve satisfactory climate action. Dr Low’s lecture touched on the reasons and political motives behind international cooperation, some barriers and challenges as well as the possible solutions to those challenges.

The bottomline was that externalities and spillovers of Climate Change make it difficult for us to imagine that anything can be done or achieved without international cooperation, trade policies included. However, Dr Low noted that interests and motivation for action today are uncoordinatied and differentiated, a classic recipe for disaster.

Dr Low pointed also to the concept of “leakages”, which he divided into two forms: Competitive/Corporation and Environmental. These leakages are the result of the “incompleteness in international cooperation”, Dr Low said.

He argued that there are several challenges for international cooperation:

1. Science, certainty and uncertainty

  • There is enough doubt among the scientific community to create debate, sparking skepticism. This is also exacerbated by the recent “climategate” scandals and IPCC faults.
  • Extreme range of opinions E.g. Nick Stern on the discount rate being close to zero.
  • The non-linearity of atmospheric change, alongside vicious feedback cycles make for extreme levels of uncertainty.

2. Who is responsible?

  • The stock-flow problem and shadow of history
  • The ability to pay
  • Allocation of responsibility of action is the key to the lack of successful international cooperation
  • The relative degrees of susceptibility and vulnerability
  • Ethical and moral responsibility -> Climate Change must be dealt with inter- and intra- temporally.

Dr Low also argued that the absence of thorough understanding among todays politicians and policy makers also act as a significant challenge to international cooperation towards climate action.

Going back to leakages, it is defined as the production and investment decisions in a world of differentiated carbon constraints. Dr Low likened this to the old debates about dirty industries, immigration hypothesis and the race to the bottom discourses he had handled somewhere in the 1980s and 90s. These, he suggested, have had severe consequences on the environment and caused massive levels of degradation around the world.

However, Dr Low was quick to note that there needs to be greater empirical work done to give evidence and to calculate accurately the levels of degradation coming from such “leakages”, in order to effectively match and make compatible both the Climate Regime and Trade Regimes.

Leakage and the Trade Angle

1. Trade and trade-related measures

  • Carbon tax/charges
  • Offsetting subsidies
  • “Unlikeness” and parellel regulatory regimes/policies

Dr Low explained that tax-cum-subsidy options for minimizing leakage while abating emissions would come in the form of

  • Taxing “bads” instead of “goods” in order to shift the tax burden
  • Subsidizing carbon constraining activities with the money earned so as to overcome the problem of incentive-compatibility

2. Non-Cooperative Trade Policy Responses

  • Border Adjustment Tax (BTA): but generally considered unfriendly and may exite retaliation and tension
  • Legal challenges to tax input of carbon, which also bears the problem of “physical incorporation” (which needs a precise and exceedingly difficult task of calculation of carbon content in every input to goods)
  • Article XX of the public defence policy states that certain standards need to be met
  • Subsidies

Subsidies are defined by the WTO as a financial contribution infering/conferring a benefit to a specific industry. There were certain points that Dr Low raised, with regards to Article VIII (1995) that states that if subsidies were not issued to be industry specific, then they would be fine. However, the Article was tagged with a five year life and membership would have to confirm that agreement and it ended up being lost. Thus, Dr Low stressed that there is a need to re-distinguish good and bad subsidies so as to implement the best measures in order to better align both the Climate and Trade Regimes.

Lastly, non-cooperative outcomes were discussed. These were outlined as part of Bottom-Line Risks. It was contended that the trade regime is challenged in solving  trade disputes against a background of climate policy discord, yet there is a need to first have prior commitments between both regimes (Trade and Climate). This ensures that there is NO COMPROMISE later on.

Dr Low argued strongly that “trade action should only be implemented with prior commitments”, or risk the potential weakening of both regimes towards international cooperation. In order to ensure that cooperative solutions result in an optimum outcome, BTA, subsidies or other mechanisms must work to reduce leakages.

Dr Patrick Low delivering his lecture

The lecture concluded with a round of Q&A, which was very insightful into the wonders of trade policy, the economics of climate change, social cost, cap and trade and even Kyoto. I gained much knowledge into the workings of how the Climate Regime links with the Trade Regime (as Dr Low so eloquently put it). Although I am not an expert in the field, especially when it comes to complex economics and trade policies, I hope that my readers roughly understood my summary of Dr Low’s lecture. All errors or mis-interpretation remain my fault. I must say however, that it was one lecture that I felt somewhat more empowered after and perhaps have given me the confidence to look into “less ventured” areas of Climate Change and action. 🙂

Mel

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