To spur green development international pacts need to engage with finance and trade.
This week in Bonn delegates gather for another conference on climate change—after the UN Secretary-General’s conference staged last month in New York, and prior to the Conference of the Parties under the now defunct Kyoto Protocol meeting in Lima at the end of the year. The Lima meeting is the last chance to formally set an agenda for the Conference of the Parties to be staged in Paris at the end of 2015, where the world will have the chance to create a new instrument to curb global warming.
The Kyoto Protocol was deeply flawed—and not just because the US never signed up.
The Bonn conference is billed as a meeting of the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP)—a mouthful that signals further talk and little action to do something significant on climate change. The “Durban Platform” arose from the Conference of the Parties that met to decide the future of the Kyoto Protocol in 2012, when the protocol was due to expire. The Durban platform was a compromise that saw parties agree that a successor protocol would be legally binding; that it would involve China and India as well as the United States (which had never ratified the Kyoto protocol); that its terms would be defined by 2015 and that it would come into effect by 2020.
It is easy to get lost in the institutional intricacies of these UN-brokered agreements, and to see them as the world’s best bet for a solution to climate change mitigation. But in fact the Kyoto Protocol was deeply flawed—and not just because the US never signed up. It framed the fight against global warming as one involving rhetorical commitments by countries to reduce their national carbon emissions—without ever engaging in promotion of the green industries that would actually be needed to supersede fossil fuels, nor engaging with the trade issues and financing issues that would be needed to effect a global energy transition. It was all framed as if individual countries’ governments could effect the transition on their own, without engaging with trade, production or finance.
It is now abundantly clear that this myopic approach will not work. It is as if the world trade system and its body, the World Trade Organization (WTO) were a gear wheel spinning in one way, and the United Nations Framework Convention on Climate Change (UNFCCC) were spinning in another way, and the two were never engaging. The WTO’s competition rules uphold free trade without regard to the need of countries like China and India to build green industries. And the UNFCCC’s Kyoto protocol has been upholding commitments to reduce carbon emissions without regard to the actions that countries would have to take to wean themselves off fossil fuels.
Countries find themselves referred to the WTO for disciplinary action whenever they try to take steps to build their own green industries. Both China and India have been referred to the WTO by the US, the EU and Japan, for alleged breaches of the WTO rules on fair competition. These disputes are likely to become more frequent and—and increasingly bitter—unless some “climate-friendly” rules are brought into being to change the terms of the game.
For a successor to Kyoto (let us call it a “Paris Protocol” for that is how it will likely emerge) all this will have to change. Let me propose an agenda for both the WTO and the UNFCCC Conferences that will actually confront the problem, in a way that is consistent with the green growth development pathway that China and some other countries are pursuing. For the WTO, there needs to be recognition that countries will have to be allowed to build green industries if carbon emissions are to be reduced. This means allowing countries to impose such tools as local content requirements, for a specified time and for specified products, to allow countries to build industries producing, say, wind turbines or solar photovoltaic cells, if they wish to do so. China has shown that it was able to build a wind turbine industry from virtually a standing start to a world competitive industry from around 2005 to 2010 through the use of local content requirements, which after just a few years saw a value chain created in China to drive wind turbine production and technology development.
The WTO is no stranger to exemptions carved out to its general rules. Under the General Agreement on Goods and Services (GATS), Section XX, there are allowed exemptions (for specified periods) to allow countries to deal with, say, public health concerns, or the protection of natural resources. Under the Agreement on Subsidies and Countervailing Measures (SCM) there was initially exemption for subsidies deemed to be “positive”—but that has lapsed.
If the WTO offers such a concession, then the UNFCCC parties need to meet it by broadening the scope of an international climate agreement, to make it encompass not just reductions in carbon emissions but also allowable means to build the green industries needed to effect those reductions. The UNFCCC could endorse short-lived exemptions from world trade rules for new green industries, designating them as public interest exemptions oriented towards mitigating climate change. This would allow the WTO to refer to these UNFCCC-endorsed exemptions as allowable, and not to be subject to the kinds of trade disputes that are crowding the halls in Geneva. At its most effective such exemptions need to be broad-based, allowing the parties to the UNFCCC to keep the list of industries and exemptions up to date. At its least effective (but still better than the current situation) the UNFCCC parties would simply designate a list of goods as “green goods” and through this listing make them candidates for exemption at the WTO.
To show that these proposals are not utopian, consider the point that a group of countries are already meeting in Geneva to hammer out a plurilateral “Environmental Goods Agreement” that would draw up such a list of goods and commit to reducing trade tariffs on the goods, i.e. promote free trade in the goods. This approach is based on the earlier agreement reached by Asia Pacific Economic Cooperation (APEC) countries at their meeting in Vladivostok in 2012, when they drew up a list of goods that would have tariffs reduced to less than 5% by 2015.
The proposed Environmental Goods Agreement (EGA) has at this stage a very narrow agenda (focused on free trade in the goods alone, and not on the conditions of their production). As such it cannot be expected to curb the increasingly acrimonious trade disputes that arise from a narrow interpretation of the rules of free competition.
What I am proposing is far grander than such a narrowly conceived EGA. A Paris Protocol could in fact represent a “grand bargain” between the parties to the UNFCCC, concerned with climate change, and the parties to the WTO, concerned with world trade. A Paris Protocol could take a realistic approach to the encouragement countries need to build the green industries needed to curb carbon emissions. By designating industries (or more narrowly, certain “environmental goods”) as being green, and therefore to be considered as a public good exempt for a designated period from the normal rules of free trade, the WTO would be able to step up and close the circle, by adopting rules that recognize these green industry promotion programs as being needed to create the environmental goods, and not to be subject to the usual rules—thus avoiding the current plethora of trade disputes.
At the same time the Paris Protocol could take a realistic approach to finance, and recognize that tax-based public funds like the Global Climate Fund (with its optimistic target of $100 billion) stand no chance of meeting the real investment needs which will run to tens of trillions of dollars between now and 2030, as the global energy system is transformed. New kinds of credit instruments are emerging like green bonds, which can raise the needed trillions from institutional investors. But who is to define what is “green”? Here too a role can be played by the putative Paris Protocol in specifying the criteria that would define a credit instrument as being green—and thereby opening the floodgates from banks and financial institutions to float green bonds on the world’s capital markets and drive investment towards the needed green industries.
These proposals would complement the steps that China is already taking to green its economy, by building renewable energy industries and creating credit instruments through institutions like the China Development Bank. China’s actions could be expected to be much more effective if they were consistent with global agreements reached through the WTO and the UNFCCC. It is time for a “grand bargain” to be struck between these global entities, so that future generations will be able to designate this moment as the point where our industrial civilization finally took the steps needed to save itself.
John Mathews is professor of management at the Macquarie Graduate School of Management, Macquarie University, Sydney. His book, Greening of Capitalism: How Asia is Driving the Next Great Transformation, is published by Stanford in November.
Many thanks for the piece laying out some significant yet realistic proposals for moving the currently stagnating climate talks forward. It is important especially given those UNFCCC meetings are becoming to be seen by many as 'talk the talk'; and I think the ideas you lay out in the piece can give the meetings, especially the coming one, a real focus and purpose for its agenda. Hope by all means those could be heard by parties to be involved in the CoPs.
Posted by: researcher | October 25, 2014 at 05:18 PM
Great article! Liked and shared on facebook. As you state that China is already trying to green its economy, do you think that they will perform long-term policies or they will change them whether the chinese economic growth slows down?. I think that trying to attract China and other BRICS to a more sustainable energy consumption would be vital to revive the fight against global warming and pollution in general.
Posted by: Rhino | October 24, 2014 at 02:42 PM