TRALAC Hotseat Comment

JB Cronjé, a tralac Researcher, comments on trade and climate change.

The science behind global warming is well established. There is growing acceptance that the average temperature of the earth is on the rise as a result of the emission of greenhouse gases caused by human activity. The global greenhouse gas levels (measured in carbon dioxide equivalents) are likely to grow over the coming decades resulting in a further increase in temperature.

The Intergovernmental Panel on Climate Change (IPCC) was launched by the World Meteorological Organisation and the United Nations Environment Programme to undertake scientific assessments of studies on climate change. Their first assessment led to the adoption of the United Nations Framework Convention on Climate Change (UNFCCC) to achieve stabilization of greenhouse gas concentrations at a level that would prevent dangerous anthropogenic interference with the climate system. As a result a supplementary agreement, the Kyoto Protocol, was concluded to establish legally binding obligations on industrialised countries for the reduction of greenhouse gas emissions to at least 5% less than 1990 levels over the first commitment period from1998 to 2012. At the 13th UNFCCC Conference of the Parties meeting in Bali, Indonesia, the parties agreed on a “Bali Action Plan” with the aim of reaching an agreement on both long-term cooperative action on climate change and a post-2012 regime in terms of the UNFCCC and Kyoto Protocol respectively. The objective is to conclude both negotiating efforts at the 15th Conference of the Parties to the UNFCCC meeting in December 2009 in Copenhagen, Denmark.

The IPCC has extensively studied a stabilization of emissions scenario considered to be representing the upper sustainable limit for avoiding dangerous human interference with the climate system. According to this scenario global emissions should be limited to a maximum of 550 parts per million (ppm) carbon dioxide-equivalent (CO2-eq) which would correspond to an average earth surface temperature increase of 3° C. This would imply an annual reduction in global GDP of 0.25 to 2.5%. In 2005, the global average atmospheric concentration for CO2 was 379 ppm with a further addition of 2 ppm each year.

The impact of climate change will be experienced most directly through changes in the frequency and intensity of extreme weather events such as droughts, hurricanes, typhoons, floods and heavy precipitation. Consequently the trade-related areas most vulnerable to climate change are agriculture, fisheries, forestry, tourism and trade infrastructure that is at risk of damage from rising sea levels and the occurrence of extreme weather events. However, the countries that will be most adversely affected from climate change also have precious little to do with global greenhouse gas emissions.

Mitigation and Adaptation is the two major approaches for dealing with climate change. Climate change mitigation refers to policies for reducing greenhouse gas emissions and/or enhancing the capacity of carbon “sinks” (oceans and forests) to absorb carbon dioxide. Climate adaptation on the other hand refers to responses to reduce the negative consequences of climate change by increasing the ability of humans and ecosystems to deal with changes. The most pressing issue that needs to be dealt with in this regard is technology development and transfer including a solution on how to deal with intellectual property rights relating to such technologies.

The emission of carbon dioxide is an externality to economic activity, meaning that it is not regulated or priced in the market place. A key policy instrument approach to internalize the environmental externality is by setting a price on the carbon content of the energy consumed or on the CO2 emissions generated in the production and/or consumption of goods. The two types of pricing mechanism used to encourage change in behaviour are internal taxes and cap-and-trade systems.

Carbon taxes are usually calculated by measuring the carbon content of fossil fuels that is produced during combustion. A carbon tax can also be used in combination with an energy tax based on the energy content of energy sources. The tax can either be levied on consumers or producers.

The cap-and-trade system on the other hand fixes a cap on total emissions that are translated into allowances (permits) to cover emissions. These permits can be traded or auctioned at a price determined by the market. A number of emission trading schemes have been introduced at the national level including in the USA and EU. However a number of challenges need to be addressed to curb the volatility of the carbon market. The Kyoto Protocol created an international emission trading system combined with a clean development mechanism that allows industrialized countries to offset their emissions in developing countries by investing in environmental-friendly projects.

In the absence of a uniform approach to combat climate change concerns over carbon leakage and competitiveness can lead to the implementation of border adjustment measures to level the playing field between taxed domestic producers and untaxed foreign competition.

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