Copenhagen and the Lessons From Global Trade Reform

Authors: Uri Dadush, Vera Eidelman
Originally published by the Carnegie Endowment for International Peace

Copenhagen is not likely to deliver a legally-binding, multilateral agreement on carbon emissions, nor is such a deal likely anytime soon. Having overcome similar challenges to those now confronting multilateral negotiations on climate change, agreements on free trade offer several important lessons on how to move forward from Copenhagen.

The trade experience shows that far-reaching reform can take place even in the absence of a global deal. Countries should recognize their self-interest in reforming, and the largest countries can lead the way through unilateral measures, as well as bilateral and regional deals. Such efforts are already well underway, but some measures, such as border carbon taxes, must be resisted. Though multilateral approaches may not lead to new targets, they can help promote these autonomous initiatives.

Obstacles to a Global Binding Agreement

Several obstacles currently confront climate change negotiations. First, much like a multilateral agreement on trade liberalization, a global agreement on emissions reductions would require countries to cede sovereignty on a strategic economic issue—something they are understandably reluctant to do.

In addition, each of the 192 countries involved in multilateral negotiations favor solutions that reflect their particular state of development. In the case of climate change, because developed countries have higher carbon emissions per capita while developing countries have higher emissions growth rates, the former call for limits on growth, while the latter call for large cuts in levels in the advanced countries. Because developed countries are overwhelmingly responsible for today’s high carbon concentration, developing countries are even more reluctant to act and instead argue that developed countries should provide them with financial and technological assistance.

Similar differences existed between developed and developing countries with respect to tariff cuts; in order to protect infant industries and retain policy space in the event of shocks that they were ill-equipped to manage, developing countries were generally more resistant to reductions.

As with free trade, though the benefits of carbon cuts are widely understood, the actual process through which the economy will adapt to them is not. The timing and extent of climate change remain enormously uncertain, even more so than were the potential effects of tariff cuts.

Finally, similar to trade liberalization, controlling emissions will have important distributional effects, as some sectors and regions emit more than others, and some are more dependent on non-renewable energy. Such differences greatly complicate the political economy of reform.

Progress in Trade: Parallels for Emissions Cuts

Despite these difficulties, trade has been liberalized enormously in the postwar era. Tariff barriers have been slashed and import quotas on manufactured products have been eliminated. World trade has grown at twice the rate of world GDP over the last thirty years.

However, only in the early GATT years, when membership was small and developing countries were bystanders, did multilateral negotiations lead to actual trade liberalization. Instead, autonomous, unilateral reform and, in recent years, bilateral and regional agreements have been the predominant vehicles for tariff cuts. Communication and transportation technologies, both new and old, have also played a crucial role in reducing trade costs and promoting trade.

Similar to the early GATT rounds, the Kyoto Protocol established hard targets, but for only 37 countries—all of whom were OECD members or, at the least, economies in transition. However, unlike the GATT’s early success, Kyoto’s overall target has not been met. The few country-level successes that have occurred are largely the result of economic collapse in Eastern Europe, which greatly reduced emissions. Meanwhile, emissions have grown substantially in those countries that now account for a significant portion of world emissions but were not required by Kyoto to reduce levels. As with trade, striking a global deal will be extremely difficult, but progress can be made on unilateral, bilateral, and regional levels.

	Actual Percentage Change (1990-2007)*	Kyoto Target
Russia	-33.9	0
EU15	-4.3	-8
Japan	8.2	-6
United States**	14.4	-7
Canada	26.2	-6
Australia	30	8
Mexico	49.8	None
South Africa	50.5	None
South Korea	112.3	None
India	140.5	None
Iran	142.5	None
China	174.5	None
*Data for the United States is from 1990-2006. Data for Annex 1 Parties covers all greenhouse gases; data for non-Annex 1 parties covers carbon emissions only.
**The United States did not ratify the Protocol.
Sources: UNFCCC; Energy Information Administration.

At the same time, carbon emissions cuts face challenges—and opportunities—that free trade did not. The coordination problems are greater than in trade—a small country’s mitigation efforts will have essentially no impact unless other countries act in concert. In addition, there is a natural ticking clock for climate change, whereas deadlines in trade talks are self-imposed. While this limits the time available, it also motivates action and makes autonomous, as well as multilateral, processes even more important. Finally, while only governments can dictate trade policy, cities, firms, and households can do much to mitigate carbon emissions.

Lessons for Climate Change

The experience of trade provides several important lessons for emissions cuts: autonomous processes are essential, deals among like-minded nations can greatly contribute to progress, technology plays a central role, and multilateral approaches can contribute significantly even in the absence of a global binding deal on emissions..

Autonomous Reforms

Autonomous reforms occur when they are perceived to be in the reformer’s self-interest. The case for such reform is clearest for adaptation to climate change, as countries have a vital interest in adapting regardless of a global deal, and will do so to the best of their ability. At the same time, collaboration—through financial and technical assistance—is also desirable as capacity is greater in developed countries.
Mitigation of emissions—the heart of the climate change problem—can also occur autonomously. The largest emitters—China, the United States and the EU, which accounted for 21, 20, and 14 percent of 2007 carbon emissions, respectively—likely have the most to lose in absolute terms if climate change goes unchecked and also stand to have the largest impact on total emissions if they take action. In addition, they have the financial and technical resources necessary for mitigation.

Most large emitters, including China, the United States, the EU, Russia, India, Japan, South Korea, Mexico, South Africa, and Brazil have already announced non-binding emissions-cutting plans.

Furthermore, efficiently using non-renewable energy and increasing renewable energy’s share in energy use—both central to mitigation—are in the national interest of every country. Regardless of climate change, the cost-saving benefits of the former and the long-term benefits of the latter are clear; climate change only ups the ante.

Grassroots initiatives have also emerged as the risks associated with climate change have grown clearer. Individuals have changed eating habits, product preferences, transportation choices, and travel plans to mitigate climate change.  Governments can further promote such initiatives through improved information and regulation.

Cities have also taken action into their own hands and set their own targets. Even as the U.S. federal government refused to sign the Kyoto Protocol, hundreds of mayors signed an agreement in 2007 to advance its goals.

Industrial groups and companies have made individual commitments to cut emissions as well, motivated by the opportunity to both cut energy costs and project a green image.

Coordination Among Large Emitters and Regions

Coordinated action will lead to even greater mitigation efforts.  There are at least two sets of natural groups that can lead the way.

The first consists of the largest emitters. Though they have both the incentives and the ability to act alone, the effect will be even more substantial if they act together. The six largest emitters—China, the United States, the EU, Russia, India, and Japan—were responsible for nearly 70 percent of carbon emissions in 2007. Given their political and economic weight, action by these countries would also place strong pressure on others to follow suit. The provision of technical and financial assistance, as discussed below, could provide additional incentives.

Regions or subregions, where coordination mechanisms such as the EU, NAFTA, and ASEAN often already exist, offer the second natural grouping.

Regional and bilateral agreements are already on their way, with coordination among the EU nations most advanced. Climate change has also become an integral part of regional and bilateral discussions, ranging from the China-United States and United States-EU strategic dialogues to the recent APEC and Commonwealth Heads of States meetings.

These dialogues can be turned into climate deals. While legally-binding agreements would be ideal, credible non-binding targets, accompanied by mechanisms for monitoring and information exchange, would go a long way.

Technology

Technology’s capacity for helping countries adapt to and mitigate climate change is huge. As the trade experience has shown, most progress comes from the spread of existing technologies, not the development of new ones.

In the case of climate change, countries can use existing technology to improve the efficiency of renewable energy sources, increase the safety of nuclear power and the disposal of nuclear waste, substitute natural gas for oil and coal, and reduce the energy intensity of GDP. The Intergovernmental Panel on Climate Change’s (IPCC) 2007 report details the technology currently available by sector, as well as its scope for mitigation.

Countries and international forums should build the skills necessary for operating technology, as well as increase the affordability of and financing for it. The initial set-up investment is only the first step; support for long-run operating capacity is crucial. Finally, the general business climate must be improved if technology is to spread rapidly and efficiently.

Multilateral Agreements

Experience in the trade arena suggests that, though multilateral agreements are unlikely to set new targets to reduce emissions for now, they can serve several other important purposes.

Most importantly, they can induce countries to bind themselves legally to measures they have already adopted, thus preventing backtracking, as the latest WTO rounds have done. Over time, multilateral agreements can also establish enforcement mechanisms akin to the dispute settlement system in the WTO. Such agreements can greatly improve predictability, particularly if they also include monitoring mechanisms. However, even this will not be easy. In the trade arena, such deals were only concluded after elaborate safeguards allowing for temporary exceptions were introduced.

Multilateral agreements can also establish principles for international collaboration and set frameworks that guide unilateral, bilateral, and regional action, much like the roadmap that came out of the UN Climate Change Conference in Bali. In addition, they can provide an international timeline, keeping pressure high on individual countries.

Multilateral approaches can also establish non-binding targets for emissions and technical assistance, as well as modalities for technology transfer, and they can increase transparency by developing a mechanism for uniform data provision.

Finally, they can establish a division of labor among the relevant UN agencies.

International development banks can take on a more active role as well, setting an example with the projects they choose to fund.

What Not to Do

As shown by the border carbon taxes currently being considered by the U.S. Congress, country-based processes can go astray. Multilateral processes should seek to discipline them.

Why are border carbon taxes misguided? As has been argued in publications by the Peterson Institute, the World Resources Institute, and the OECD, they would affect only a small number of sectors. Few sectors are both tradable and generate sufficient emissions to suffer a significant competitive disadvantage from tighter standards. Computing the appropriate border tax is also horrendously complicated and would require many arbitrary assumptions. In addition, border adjustments would likely be highly divisive, potentially leading to a protectionist backlash and discouraging collaboration on climate change mitigation.

A Path Forward

If Copenhagen fails to close on a binding global deal, hope is not lost. Rather, through autonomous reforms and deals among like-minded countries—which may eventually be consolidated at the multilateral level—the world has a productive path to follow toward solving the planet’s most pressing challenge.