Can Trade Save the Planet? The Rise of Green Trade Deals

International trade agreements and climate change policies are increasingly entwined as nations strive to balance environmental sustainability with economic prosperity. This article examines the ways in which climate policies—such as carbon pricing, subsidies for renewable energy, and green trade incentives—are affecting the dynamics of international trade. It looks at the opportunities these policies bring, with a particular emphasis on new developments like green finance, trade in environmental goods, and carbon border adjustments (CBAM). The article highlights the necessity of coordinating trade and climate goals in order to promote sustainable global economic growth.

 Illustration about the Paris Climate Conference joined by 195 countries

A C&EP Article by Shubham Pani | Edited by Albin KS | Research And Publication Desk

Climate Change Policies: Redefining Global Trade Agreements

A shift in global governance has been sparked by the urgent reality of climate change, and trade agreements have emerged as a key forum for tackling environmental issues. In the past, economic priorities have dominated international commerce, with little regard for the effects on the environment. However, this environment has changed due to the growing urgency of climate change, which forces nations to include sustainability in their trade strategies. The understanding that global trade, which has a big impact on patterns of production and consumption, ought to support initiatives to lower greenhouse gas emissions and increase environmental resilience is reflected in this integration. Trade agreements are increasingly being impacted by climate change policies, which highlight their ability to reshape economic relationships and support sustainable global growth.

The Impact of Climate Policies on Trade

The dynamics of international trade are being significantly shaped by climate policies, with a number of important initiatives causing change. These consist of:

CBAM, or the Carbon Border Adjustment Mechanism: The CBAM seeks to level the playing field for domestic sectors by enacting taxes on imports from nations with laxer climate regulations. For example, by levying financial penalties on imports that are high in carbon, the EU's CBAM seeks to decrease carbon leakage.  The export of carbon-intensive products to the European Union, such as steel, cement, and aluminium, could be impacted by the Carbon Border Adjustment Mechanism (CBAM) , which would have a big impact on India. To remain competitive in global trade, India must adjust by strengthening its own green energy projects, accelerating the adoption of greener technologies, and bringing industries into line with international carbon requirements.

Trade in Environmental Goods and Services: Trade in green technologies and services, such as wind turbines, solar panels, and energy-efficient products, is one growing sector of global trade.Countries can hasten the shift to sustainable economies by lowering tariffs on certain commodities. However, attempts to advance green trade are hampered by trade disputes that frequently centred around intellectual property rights, technology transfer, and domestic industry protection.

Renewable Energy Subsidies: Subsidies for renewable energy can encourage the adoption of sustainable energy, despite the fact that they have caused trade disputes. For instance, tensions between the US and China have arisen as a result of disputes over subsidies for solar panel makers. International organisations like the World Trade Organization (WTO) frequently struggle to resolve these disputes, even though subsidies are crucial for reaching climate goals since the balance between fair trade and climate objectives remains complex. Climate change is disrupting supply chains, increasing trade costs, and reshaping comparative advantages.

Bridging the Divide: Global North and Global South Perspectives

The inclusion of climate change policies in international trade agreements highlights the gap between the global North and the global South while also signalling a widening global division of dedication to sustainability. Historically, the largest contributor to greenhouse gas emissions has been the wealthy countries that make up the Global North. These countries are at the forefront of initiatives like CBAMs and stringent environmental rules in trade, which the EU intends to fully implement by 2026. Carbon-intensive imports, which account for over half of industrial emissions in the EU, will be covered by the CBAM. It is anticipated to affect $8 billion in exports from nations like China, Russia, and India each year. These more stringent carbon regulations provide difficulties for India's steel and aluminium industries in particular.

The Global South, where industrial processes are still carbon-intensive and green transitions necessitate significant financial and technical support, is frequently subjected to disproportionate economic burdens notwithstanding the good intentions behind these initiatives. The historical disparity in accountability for climate action could be exacerbated by this injustice.

Climate change measures can be seen by the Global South, particularly India, as trade obstacles that unfairly penalise developing economies while shielding sectors in wealthier countries. These countries stress the necessity of a slow shift to sustainable practices that are in line with goals for economic growth and poverty reduction. Despite these obstacles, the Global South—led by countries like India—is driving the transition to renewable energy by utilising innovation and natural resources. While the Global South welcomes green policies as possibilities, the Global North must accept its historical responsibilities and provide assistance through technology transfer and climate funding in order to achieve equity. This well-rounded strategy promotes sustainable commerce and mutual global development for India.

The nexus between climate change, agriculture and trade

Challenges in Integrating Climate Policies with Trade Rules

There are various obstacles to incorporating climate policy into trade agreements:

Sovereignty and Compliance Issues: Trade restrictions related to climate change may be seen by certain nations as violations of their sovereignty, especially if they place a heavy cost on domestic industry. For example, nations that lack the resources to enact stringent climate policies may view trade policies like CBAM as unfair, which could spark opposition in some areas.

Disparities Between Developed and Developing Countries: Trade agreements' climate rules may disproportionately impact developing countries, which might not have the resources or technology to adhere to strict environmental regulations. International accords must address this by containing clauses that assist developing nations, such as efforts for capacity-building, technology transfer, and financial help.

Trade Conflicts and Enforcement Issues: The incorporation of climate policies into trade agreements has resulted in a rise in trade disputes as nations contest climate-related policies they see to be discriminatory or unjust. It is difficult for nations to enact ambitious climate measures without fear of reprisal since there are unclear dispute resolution procedures for trade concerns relating to climate change. It is essential to create strong enforcement mechanisms in order to successfully settle these conflicts.

Emerging Trends in Climate and Trade Integration: India's Collaboration with Other Nations

Despite the challenges, several emerging trends are reshaping the intersection of climate policies and trade agreements. These include:

Greening of Supply Chains: India is beginning to harmonise its trade policy with international demands with respect to sustainable sourcing and eco-friendly manufacture. This also includes collaboration with other countries through agreements like the Indo-Pacific Economic Framework (IPEF), which focuses on green supply chains and the incorporation of renewable energy in the low-carbon production of textiles and other goods.

Green Trade Financing: India is establishing green finance partnerships with state-owned as well as international entities such as the Asian Development Bank And the Green Climate Fund. It is expected that these partnerships will increase India's investments in renewable energy and sustainable agriculture while bilateral agreements India has with countries such as Japan and Germany will support green infrastructure projects.

Regional And Bilateral Agreements: India is also bringing climate objectives into regional agreements like the bilateral understanding with the European Union, which is eager to support the implementation of the Paris Agreement. Cooperation with Africa and South East Asian regions to form the International Solar Alliance (ISA) will serve to increase trade in renewable energy technologies and enable climate-friendly regional cooperation.

India's proactive engagement with emerging trends in climate and trade integration highlights its commitment to balancing economic growth with sustainability. By greening supply chains, leveraging green trade financing, and embedding climate priorities into regional and bilateral agreements, India is positioning itself as a key player in the global transition to a low-carbon economy. These collaborations not only strengthen India’s trade relationships but also contribute to global efforts to combat climate change.

Case Study: The EU-Mercosur Trade Agreement

The EU-Mercosur trade agreement serves as an example of climate policy adoption in international trade. The agreement made in 2019 includes the obligation to implement the Paris Agreement, curb deforestation, and foster sustainable agriculture. At the same time, the agreement also emphasises the shortcomings of merging trade with environmental objectives. Problems have emerged regarding the fulfilment of these environmental obligations, especially in areas where deforestation is a prominent problem. This case demonstrates how difficult it can be to achieve environmental outcomes in negotiated trade agreements and emphasises the need for enforcements for environmental standards in trade agreements.

Conclusion

Including climate change policies into international trade agreements is a step closer to achieving global sustainability. This integration carries dislocated challenges such as sovereignty, compliance, and inequalities between developed and developing countries however it provides great opportunities as well. Climate policies can foster innovation and competitiveness while also enabling the expansion of sustainable industries. As trade expands worldwide, it is critical to devise policies that address climate action and trade goals in a mutually reinforcing manner. International trade agreements can facilitate a more sustainable and resilient global economy through strict enforcement, funding of developing nations, and promoting green trade practices. Fronting these trends can help countries adapt to the challenges of climate change and international trade relationships.

References

1. WTO. (2022). World Trade Report 2022. Available at: https://www.wto.org/english/res_e/booksp_e/wtr22_e/wtr22_e.pdf

2. OECD. (2017). Climate Change and Trade Policy Interaction. Available at: https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/05/climate-change-and-trade-policy-interaction_2704c02d/c1bb521e-en.pdf

3. UNCTAD. (2021). UNCTAD Study Shows Trade’s Untapped Potential for Climate Action. Available at: https://unctad.org/news/unctad-study-shows-trades-untapped-potential-climate-action

4. India Environment Portal. (2018). Climate Change and Trade Policies. Available at: http://sa.indiaenvironmentportal.org.in/files/cph_trade_climate.pdf

5. FAO. (2021). The Impact of Climate Change on the Transport of Goods and Services. Available at: https://openknowledge.fao.org/server/api/core/bitstreams/bdec39f0-159a-43dd-9eee-1b8905b08ba9/content#:~:text=Changes%20in%20the%20climate%20system,transport%20of%20goods%20and%20services