South Bulletin (Issue 40): 10 September 2009 

Vicente Paolo Yu 

Issues that link trade competitiveness and climate change policy reflect how developing countries view the policy regimes under the UN Framework Convention on Climate Change (UNFCCC) and the World Trade Organization (WTO).

For developing countries, the priority is how the issues affect their development prospects.

The relationship between trade and climate change measures in the climate regime is governed by, among others, Art. 3.5 of the UNFCCC which states that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.”

This language, in fact, reflects Art. XX of the General Agreement on Tariffs and Trade (GATT), which allows WTO members to adopt measures that may be inconsistent with their WTO obligations if such measures are, inter alia, “necessary to protect human, animal or plant life or health” or are related “to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”, provided that these measures “are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.”

From the perspective of developing countries, trade measures are not the best nor the most appropriate means for addressing climate change. Rather, there is great concern that the use of trade measures by developed countries ostensibly to address climate change concerns may in fact have the effect of restricting the market access of developing country products in developed countries and enhancing the competitive edge that developed countries have in global trade, thereby “locking in” the current inequitable development gap between developed and developing countries.

Trade Liberalization in Environmental Goods and Services

Proposals in the WTO for market opening by developing countries to developed countries’ environmental goods through precipitate tariff and non-tariff barrier elimination inconsistent with their development context could lead to a situation of technology-dependency in which developing countries depend on developed countries as the providers of such goods without developing the ability to manufacture such goods on their own.

A more appropriate approach requires the promotion of broader policy measures designed to support developing countries’ ability to adopt, adapt, and innovate on such goods (such as flexibilities in IPR regimes, technology transfers, support to research) as well as develop their own environmental goods. This also requires funding support.

Technology Transfer and Intellectual Property Rights

An essential component of global action to address climate change is the continuous innovation and rapid diffusion of climate-related environmentally sound technologies (ESTs) under conditions that would allow all countries, especially developing countries, to eventually adopt, adapt, innovate and produce such technologies on their own. Although the transfer of ESTs from developed to developing countries is, under the UNFCCC and its Kyoto Protocol, a treaty commitment on the part of developed countries, actual transfers on a non-commercial basis have not really taken place.

IPR issues are important to consider since most ESTs are patented technologies owned by firms in developed countries, and there are an increasing number of patents on climate related technologies. Developing countries in the UNFCCC negotiations have pushed for a relaxation of existing IPR regimes.

Standards-Setting

Energy efficiency standards can be regulatory vehicles that can be used to promote energy efficiency and change energy producer and consumer behaviour. However, there are great variations in terms of the methodologies, technical bases, testing modalities and procedures, and enforcement processes in defining and implementing such standards. In this context, developing countries have generally stressed that the development of such standards must be consistent with the WTO Agreement on Technical Barriers to Trade. Furthermore, due consideration must be given for the specific national circumstances of developing countries when standards are to be applied. The UNFCCC recognizes the need to ensure that such standards-setting does not adversely impact developing countries. In shaping such international standards, developing country participation must be ensured. Also, standards must provide for flexibility to allow developing countries to reflect in such standards their own development context.

Since the 1990s, energy-intensive industries in developed countries have become subject to carbon taxes and higher energy efficiency standards. Although the competitiveness impacts of domestic carbon-based taxation and regulation in developed countries on their energy-intensive industries may in most cases not be significant or are indirect and oftentimes mitigated by exemptions or subsidies, developed countries still seek to address perceived adverse competitiveness impacts arising from asymmetrical carbon-based taxation and regulation through carbon-based border adjustment measures.

A recent example is the “American Clean Energy and Security Act of 2009”. Among others, it would authorize the US President to establish an International Reserve Allowance Program no later than 30 June 2018, if by 1 January 2018 a multilateral agreement that meets US negotiating objectives on climate change (e.g. objectives that essentially require that the agreement include binding mitigation commitments for “major emitters” including developing countries) has not entered into force with respect to the US.

This international reserve allowance program would be applied to imported goods where 15 percent or more of US imports of such goods are produced or manufactured in countries that do not essentially do not have the same level of GHG mitigation actions or commitments as the US.

It would require US importers to purchase and submit international reserve allowances as a condition for being able to import into the US foreign-produced goods. This international reserve allowance requirement is essentially a carbon-based trade-related border measure.

It would effectively increase the transaction cost of other countries – especially non-Annex I UNFCCC Parties – in exporting their products to the US. In consequence, the application of the International Reserve Allowance Program to various goods from developing countries would then reduce the trade competitiveness of exporters of the goods covered thereby.

However, studies have suggested that addressing carbon competitiveness concerns using a system of border adjustment measures may not necessarily be effective, especially in light of the “administrative requirements, costs and technical practicality” of border adjustments that serve as the “greatest barriers to their implementation,” nor in terms of meeting any objective they might have of getting other countries to adopt more stringent carbon emission regulations – especially if the trade flows of the countries concerned with respect to the products covered by the measures are not large or significant to the exporting country.

The potential of having their exports be discriminated against as a result of such subsidies and border measures in the name of climate change raises deep concerns among developing countries. The ability to access developed country markets for their exported goods remains a major component in many developing countries’ development strategies.

Hence, carbon-based border adjustment measures are likely to be seen as disguised protectionist measures that would arguably be contrary to UNFCCC Art. 3.5 and various WTO rules. Border barriers to their exports will have adverse implications on the extent to which developing countries will be able to generate trade-derived capital surpluses to invest domestically in building up improved development-oriented physical, human and financial infrastructures. Such measures would have detrimental effects on the ability of UNFCCC Parties to engage constructively with each other with arriving at an agreed outcome at the conclusion of the process under the Bali Action Plan. Border adjustment measures are likely to be highly politically divisive.

Carbon Competitiveness and Leakage

The issue of “carbon leakage” – i.e. a relocation of carbon-intensive industries from countries with stringent climate change-related rules (such as GHG emission restrictions leading to lower emissions) to countries with less stringent rules or without such rules (leading to increased emissions)

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  • has been flagged by developed countries as a major issue. But developing countries are suspicious that this issue has been raised because the developed countries want to ensure that they continue to maintain their trade competitive edge with respect to high-value-added and energy-intensive manufactured products. These industrial sectors

• especially iron and steel, cement, chemicals – form the backbone for industrial diversification and the development of a manufacturing base for higher-value added products. Developing countries are concerned that developed countries want to use the “carbon leakage” argument to enact measures to prevent them from climbing up the manufacturing value chain.

As stressed in Art. 4.7 of the UNFCCC, in implementing climate change-related actions, the first and overriding priority of developing countries is economic and social development and poverty eradication. This priority underlines, shapes, and influences developing country perspectives, positions and actions on climate change. Initiatives, proposals, or suggestions that may adversely impact on the ability of developing countries to promote and achieve their development objectives would, hence, be reacted to negatively.

To unblock the negotiations and send positive negotiating signals, developed countries should refrain from adopting border adjustment measures, pushing for trade liberalization of climate-friendly products of export interest to developed countries, and adopting standards that may act as barriers to the exports of developing countries.

In the ultimate analysis, issues of trade competitiveness and climate change are about the sharing of the shrinking global emissions budget. These issues are therefore a reflection of a broader global policy debate over the developing countries’ role and influence in global governance.

Vicente Paolo Yu is the Coordinator for the Global Governance for Development Programme, South Centre. This is a summary of a forthcoming paper which will be published by the South Centre. The author can be contacted at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it