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Greening Global Trade

For the past 15 months, Professor Daniel Esty has been co-leading the Remaking Global Trade for a Sustainable Future Project at the World Trade Organization. Ahead of Climate Week NYC, he discusses how international trade can be remade to support sustainable development and the transition to a low-carbon future.

Thousands of policy experts, political, business and community leaders, and others will soon gather at Climate Week NYC for a series of events and dialogues aimed at accelerating the pace of climate action. Not too far away from these activities, at the Port of New York and New Jersey, mass quantities of goods will be loaded and unloaded from cargo vessels and container ships as they make their way through the global trading system — everything from wood pulp to auto parts to orange juice. The World Trade Organization (WTO), with 164 member states representing over 98% of global trade and global GDP, is the only global organization dealing with the rules of trade between nations, but in recent years it has come under criticism for being out of step with the times, particularly for its commitment to a sustainability agenda that is in sync with the Paris Agreement’s commitment to reach net zero greenhouse gas emissions by 2050.

Such criticism comes as no surprise Daniel Esty, Hillhouse Professor of Environmental Law and Policy, who has been making the case for integrating, and implementing in practical terms, sustainability principles into global trade agreements for the past 30 years. It a reoccurring theme in his research, and it was a collaborative work published in 2021, “Remaking Global Trade for a Sustainable Future,” that caught the attention of World Trade Organization Director-General Ngozi Okonjo-Iweala, who asked him to work with her on developing a sustainability agenda for the WTO. YSE News recently talked to Esty, who is on leave from Yale until January 2024, about his work on the Remaking Global Trade for a Sustainable Future Project and the opportunities and obstacles to greening global trade. 

Q: You have been making the case for integrating a comprehensive sustainability agenda into global trade policy for a long time, even before the World Trade Organization was formed. Can you talk a little bit about your earlier work?

Sure, after I left the EPA in 1994, where I had worked on negotiations for the 1992 Framework Convention on Climate Change and the environmental provisions in NAFTA, I wrote a book titled, Greening the GATT. I made the case that international trade rules and institutions needed to be significantly reformed to address environmental concerns while still promoting economic growth and development. The GATT, short for the General Agreement on Tariffs and Trade, is the multi-national trade agreement, signed in 1947, that is in effect under the WTO framework. 

At the time (mid-1990s) the consensus was that it was fine to have trade policy on one track and the environment on an adjacent track, but I made the case that you couldn’t do trade policy in an appropriate way without taking on board environmental concerns. I argued that if there were uninternalized externalities, as economists would say, that occurred because of the economic activities associated with that trade, you couldn’t be confident that you were improving social welfare. It might be that these uninternalized externalities, such as the harms from pollution, were so big that the trade was a net loss overall. I wouldn’t say that the trade world took a lot of it on board at the time. The pace of progress has been slow and somewhat scattered. Perhaps the most notable achievement, or sign of global progress, until now was that fact that when the WTO was formed in 1995, written into it was a core commitment to sustainable development. So that was a pretty big impact, but it was still largely underattended to and not really implemented in a serious way until now, when there is suddenly a big interest. 

I think the fact that there is going to be a dedicated trade day at COP 28 in Dubai, the first one in COP’s history, is a sign of how great the interest is in figuring out how the international trade system can be reimagined and remade to deliver sustainable outcomes.”

Daniel Esty, Hillhouse Professor of Environmental Law and Policy

Q: Why do you think that there is so much interest in incorporating a sustainability agenda into global trade now?

As for the WTO, itself, I think a large part of it because Director General Okonjo-Iweala, herself, is very committed to the idea that there needs to be a re-envisioning of the WTO broadly and a new trading system built with sustainably at its core. In the larger trade world, one of the things going on is that there are now countries insisting that trade be done on a sustainable basis going forward. Most notably, the European Union is implementing later this year something called the Carbon Border Adjustment Mechanism (CBAM). CBAM is the EU’s particular version of a border carbon adjustment mechanism, which is a term you hear everywhere in the trade world now. Border carbon adjustment mechanisms, or BCAs, are a mechanism by which a special tariff (or border tax) is imposed to take away whatever cost advantage a producer may have had in operating in a location or country with a lesser standard of climate change commitment. The goal of a carbon adjustment mechanism is to protect the competitiveness of domestic industries that are making investments in reducing their greenhouse gas emissions and prevent what’s known as carbon leakage. When industries or companies with high greenhouse emissions move production processes to places with lower standards, you may see an increase in GHG emissions elsewhere. Because climate change is fundamentally a global, not a national or a regional issue, this effect known as carbon leakage, can negate the positive impacts of the stringent climate change requirements of high-standard nations.

Q: What challenges do you foresee with CBAM, the EU’s particular version of the border carbon adjustment mechanism?

First, I would say that the principles behind CBAM are conceptually correct, and for the purposes of achieving a sustainable future, essential. However, I do think there are some flaws in its current proposed structure. First, the only thing it looks at is a carbon charge, so it gives no credit to countries for policies that are not explicit greenhouse gas pricing. For example, it gives no credit to the U.S. for all the investments that are being made in clean energy under the Inflation Reduction Act (IRA) and the CHIPS Act.

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Second, in deciding what the proper price is for a deficit of climate change policy (coming from external trading partners), the EU uses their own price on greenhouse gases rather than some commonly agreed upon price.

Third, there isn’t much leeway for trading partners to demonstrate that the greenhouse gas emissions from their production are actually lower on that product than they might be in Europe. For example, if you’re shipping flowers from Kenya to the EU, and they’re produced in Kenya under natural conditions, a lot of sunlight and water, they may not be able to compete with Dutch flowers produced in high-intensity greenhouses under the current configuration of CBAM because the EU is potentially going to say unless the Kenyans can demonstrate the footprint of their product to our standards we’re going to impute to them the same level of greenhouse gas emissions per flower as the Dutch flowers. Yet, in actuality, the Kenyan flowers may come in with half the footprint, even after transportation is factored in, of the Dutch product.

Lastly, it has no real dimension for equity. It doesn’t define a structure for helping developing countries meet the EU’s sustainability standards, even though there’s an existing precedent for doing this, treating countries that are the same the same and treating countries according to their circumstances, in both climate and trade law. That’s a key part of what I’m working on at the WTO, how best to implement a carbon border adjustment mechanism.

Q: Can you tell us a bit more about the Remaking Global Trade for a Sustainable Future Project and the panel discussion taking place at the Yale Club during Climate Week NYC?

Over the past six months, we have held 10 workshops in cities around the world to explore what the reform agenda should be and look at places and ways in which the sustainability agenda and the trade system bump, or sometimes crash, into each other. These workshops brought together academics, practitioners, and industry and government experts to delve into areas ranging from sustainable transportation to trade’s role in promoting a circular economy to social dimensions of sustainability, such as poverty, labor rights, and worker impacts, among others. The reform agenda has been adopted from the ideas that emerged from these workshops.

The principles of that agenda are going to be released at a four-day Public Forum at the WTO headquarters in Geneva from September 14 to 18. Then, the first outreach session will be in the context of Climate Week NYC at a panel discussion at the Yale Club on September 20. Members of the project team, including Jan Yves Remy, director of the Shridath Ramphal Centre for International Trade Law, Policy and Services of the University of the West Indies, Rachel Kyte, dean emerita of the Fletcher School at Tufts University, and myself will lay out elements of the agenda. It really kicks off a new phase of the project which is to open a conversation around the world about how the global trade system can be remade to support and not undermine sustainability. I think the fact that there is going to be a dedicated trade day at COP 28 in Dubai, the first one in COP’s history, at which people are going to be asking the same questions I’ve been asking for 30 years is a sign of how great the interest is in figuring out how the international trade system can be reimagined and remade to deliver sustainable outcomes.

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