Trade, Climate, and Bali

Victor Menotti*

The world's economic policymakers are addressing climate change with an unprecedented level of engagement at the Bali conference. While the negotiations for a new global climate accord to replace the Kyoto Protocol wrap up in Nusa Dua, numerous trade ministers are meeting to initiate an informal dialogue on climate, as are finance ministers.

Trade and finance officials are getting involved because cutting emissions in time to avoid catastrophe will inevitably have an impact on the global economy. It also means that global economic institutions must adapt to today's ecological realities. If climate change is indeed the global emergency we believe it to be, then climate protection must become a new lens through which we view the rules of trade and finance.

Re-prioritized values must guide global governance to recognize ecological limits and to agree on equitable ways to live within them. Trade ministers aim to discuss in Bali how trade policy can contribute to climate protection. Several proposals have been informally tabled for discussion.

Empowering Policymakers

A critical question in Bali is whether any proposals ultimately empower trade policymakers or climate policymakers. At a time when governments urgently need to intervene in markets by sending clear signals that shift the decisions of energy investors and consumers, the idea of reducing the rights of government through binding trade disciplines is, at best, unhelpful, and, at worst, antithetical to the new directions we need to explore. Even proponents of more trade liberalization, such as the US Trade Representative and the World Bank, in their reports on trade and climate admit that the most important factor for shifting energy investment, production, and technology transfer toward a new carbonless economy is government action to internalize carbon costs.

No decisions or positions taken in Bali should foreclose any policy options for climate protection. The most important contribution trade policy can make to climate protection is to not only safeguard but actively increase the policy space that climate negotiators need to act urgently. Trade Ministers could also declare that whatever is agreed to at the Bali climate change conference will not be subject to challenge at the World Trade Organization.

Environmental Goods and Services

The United States and European Union proposed in Geneva on the eve of this meeting a two-tiered scheme to eliminate barriers on goods and services, starting with import tariffs on the trade in technology that reduces greenhouse gases. The proposal is based on the World Bank's recently released report arguing how trade liberalization can contribute not to protecting our climate but to increasing trade in energy technologies, specifically clean-coal, wind, solar, and energy-efficient lighting.

While the transfer of clean energy technologies certainly needs to be accelerated, reducing marginal tariffs is a disappointing and possibly dangerous idea for our climate. Nations are free to lower tariffs by their own will, so there's no need to force liberalization and bind nations to zero tariffs. Efforts to combine climate and job creation policies may also be set back if tariffs are eliminated in these infant industries. Other areas of trade policy could facilitate transfer of clean energy technology.

The only outcome claimed by the World Bank study is the huge gains in trade volumes, from 3.6% to 63.6%. Amazingly, even though trade in cargo is fueled by one of the dirtiest of all energy sources (bunker fuel), not one proponent seems to ask about the inherently increasing carbon footprint that will result from shipping around the planet  more of the goods on the proposed list of 50 types of turbines, towers, tanks, tubes, and other goods. The Bali conference could easily undertake a climate assessment of any trade liberalization proposal, with a view to the principal of first do no damage to climate.

Wrong Venue

The WTO is not a competent venue to determine which technologies are climate friendly, and the United Nations Framework Convention on Climate Change (UNFCCC) already has a mechanism to accelerate  transfer.

Waiting for results from the finalization of the WTO's Doha Round, which are hung up due in large part to developed country failures to deliver on past promises from the previous round of trade negotiations, is too far off in the distance for adequately dealing with emergency actions needed now. Climate concerns should not be used to give Doha new legitimacy. Moreover, the US-EU breakthrough priorities for a Doha deal have included the opening of markets for energy services companies like Halliburton in countries with large oil and gas reserves, so any benefits from trade in clean tech would be offset with the WTO's deepening our dependence on fossil fuels.

The fundamental flaw in the US-EU-World Bank proposal is its failure to recognize some of its own basic assumptions and findings, particularly the fact that the most important factor driving the adoption of new clean energy technologies is government action to internalize carbon costs. Putting a predictable price on greenhouse gases is what will move markets most, yet empowering trade rules can only reduce the necessary role governments must play in shifting to new energy supplies by sending signals to energy investors, producers, and consumers. Cost internalization can come in many forms, including caps and/or taxes on carbon, renewable energy criteria, or even energy-efficiency standards.

The imperative to internalize carbon costs should compel policymakers to protect and expand the policy space of climate policy makers so that they have the freedom to enact necessary measures. Subsidies As suggested in the background papers for trade ministers meeting in Bali, one area where trade policy could reduce its restraints on climate policy is by increasing flexibilities to allow the many forms of public support needed to accelerate the research, development, and deployment of clean, efficient, energy technologies.

International cooperation should expand, but national and sub-national governments must still be allowed to support their own transitions. Even President George W. Bush's programs and proposals for supporting industry efforts to increase innovation of energy- efficient equipment and to accelerate the adoption of climate-friendly technologies may face uncertainty under world trade rules.  Emissions allocations also face uncertainty as unfair subsidies, raising questions about Kyoto's extension of carbon markets, Brussels attempt to include aviation, and Washington's efforts to enact almost anything Congress is currently considering. Investors are also asking for incentives in renewable energy outlay costs, so getting the incentives right may also require getting the trade rules right.

Governments should share a common interest in safeguarding the policy space for specific subsidies aimed at shifting to socially stable and ecologically sustainable energy supplies.

Investment Barriers

The trade ministers gathered in Bali are also discussing the question of non-tariff barriers to investment, which could cover zoning codes, tax incentives, operating permits, or just about any measure governments enact that somehow impact investment. Non-tariff barriers have too often in recent trade policies implied the legal protections for the environment or community development. Again, trade policy must keep away from restricting governments from internalizing costs in energy investment and production.

The rules on new investment in energy infrastructure will determine the future of our climate. The International Energy Agency (IEA) recently forecast that $22 trillion in new energy infrastructure will need to be financed over the next 25 years to meet what it calls runaway demand for energy, led by China and India. That's why investors everywhere are calling for governments to put a price on carbon so that they can plan which energy infrastructure projects to finance. Even OPEC's recent Riyadh Declaration communicated the need for oil-importing countries to clarify their intentions about future demand for petroleum. Why invest in something that must be phased out?

Some of the most important mechanisms for guiding energy investment are the permitting processes that determine which production facilities will be built, where, and for whose benefit. Licensing processes need to be public and participatory if we are to ensure that energy production is ecologically sustainable and actually helping the poor.

Intellectual Property

The transfer of clean energy technologies, and the funds to finance it, is one of the most glaring broken promises of the Rio de Janeiro 1992 Earth Summit that today remain undelivered by industrialized nations.

If developing nations are to leapfrog over the dirty development model industrialized nations have used, then the world will need governments to embody a new spirit of international cooperation.

Even in one of the emerging clean energy technology sector's key epicenters of activity, the San Francisco Bay Area of California, there is no consensus within the industry about the necessity for global monopoly patents on important new clean energy technologies.  Its world-class hub of universities, innovators, entrepreneurs, and investors working with environmentalists make it a microcosm of the energy revolution. Yet among many leaders it is not clear how much a barrier, if at all, intellectual property is in transferring clean energy technologies. Many agree that, if climate change is indeed the emergency we believe it is, then patents should not be used to withhold important innovations.

More assessment of these issues is needed. The Bali conference, in collaboration with trade policy community, could be the appropriate arena through which to carry out such an assessment in order to guarantee its climate-first perspective.

Anyone wishing that the WTO would take up the issue of energy subsidies in its official agenda need only observe how it rules on agriculture subsidies have been developed and applied to see reasons to justify the deep lack of trust among the public and WTO Member Nations. Energy subsidies offer an example where expanding the WTO's mandate, which is almost one-way in its outlook to remove government's role in the economy in order to increase trade, could complicate if not make impossible a final product that actually protects the climate.

Governments should cooperate multilaterally to eliminate perverse subsidies for fossil fuels that endanger our climate, but they should be carried out in the appropriate arenas with missions focused on doing so.

Conclusions

International relations are increasingly viewed through the lens of energy concerns, so governments can keep open all their options by rejecting any new restraints on their exercising appropriate responsibilities to pro-actively shape the new clean energy economy.

Expanding trade rules over climate can only complicate and delay our pursuing what is needed most: strategic intervention by governments to correct what has been called history's most massive market failure.

No decisions or positions taken in Bali should foreclose any policy options for climate protection. The most important contribution trade policy can make to climate protection is to not only safeguard but actively increase the policy space that climate negotiators need to act urgently. Trade Ministers could also declare that whatever is agreed to in Bali won't be subject to WTO complaints.

* Victor Menotti is program director at the International Forum on Globalization. vmenotti@ifg.org. He was in Bali for the climate change conference and this article first appeared in Foreign Policy In Focus.

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