World Trade Report 2022: Climate change and international trade

2022

WORLD TRADE

REPORT

Climate change and

international trade

What is the World

Trade Report?

The World Trade Report is an

annual publication that aims to

deepen understanding about

trends in trade, trade policy issues

and the multilateral trading

system.

What is the 2022

Report about?

The 2022 World Trade Report

explores the complex interlinkages

between climate change and

international trade, revealing how

international trade and trade rules

can contribute to addressing

climate change.

Find out more

Website: www.wto.org

General enquiries:

enquiries@wto.org

Tel: +41 (0)22 739 51 11

Cover image:

Kamarjani, Bangladesh

Technicians travel with their equipment by rickshaw to install a solar power system at a rural house

built on Kharzanir Chor, an island on the Jamuna River. These islands come and go over a period

of around 10 to 20 years and thus connecting them to the national grid is impractical. However,

a programme of rural electrication is being rolled out using solar panels and batteries installed

at individual homes.

Contents

Acknowledgements and disclaimer 2

Abbreviations 4

Foreword by the WTO Director-General 6

Key messages 8

Executive summary 9

A. Introduction 16

1. The next great transformation 18

2. Harnessing the transformative power of trade 20

3. Overview of the report 23

B. The role of trade in adapting to climate change 26

1. Introduction 28

2. Why does climate change adaptation matter? 28

3. International trade and trade policy can support climate change adaptation strategies 34

4. International cooperation is essential to assist countries in adapting to climate change 39

5. Conclusion 47

C. The trade implications of a low-carbon economy 50

1. Introduction 52

2. Achieving a low-carbon economy is an imperative but faces challenges 52

3. A low-carbon economy would change trade patterns and provide new trading opportunities 57

4. International cooperation is essential to achieve a low-carbon economy 65

5. Conclusion 74

D. Carbon pricing and international trade 78

1. Introduction 80

2. Carbon pricing policies can be an important strategy to reduce carbon emissions 80

3. Uncoordinated carbon pricing policies may undermine climate action and lead to trade tensions 85

4. Greater international cooperation is required to advance ambitious carbon pricing policies 90

5. Conclusion 94

E. The decarbonization of international trade 98

1. Introduction 100

2. Accounting for carbon emissions originating from international trade is complex 100

3. International trade affects carbon emissions in multiple ways, both positive and negative 102

4. Reducing trade-related carbon emissions requires greater international cooperation 106

5. Conclusion 112

F. The contribution of trade in environmental goods and services 116

1. Introduction 118

2. There is scope for intensifying trade in environmental goods and services 118

3. Trade in environmental goods and services can contribute to climate change mitigation 123

4. The development and deployment of environmental goods and services require

greater international cooperation 127

5. Conclusion 131

G. Conclusion 134

Opinion pieces

Danae Kyriakopoulou, “Climate inaction: implications for international trade” 30

Gauri Singh, “Green hydrogen requires an appetite for action” 60

Daniel C. Esty, “Trade implications of GHG pricing” 92

Sophie Punte, “Building momentum for zero-emissions freight movement” 110

Bibliography 136

CONTENTS

WORLD TRADE REPORT 2022

Acknowledgements

The World Trade Report 2022 was prepared under

the general responsibility and guidance of Anabel

González and Jean-Marie Paugam, WTO Deputy

Directors-General, and was coordinated by José-

Antonio Monteiro and Ankai Xu.

Director-General Ngozi Okonjo-Iweala, Chef de

Cabinet Bright Okogu, Yuvan Beejadhur and Trineesh

Biswas from the Office of the Director-General,

Robert Koopman, former Director of the Economic

Research and Statistics Division, and Aik Hoe Lim,

Director of the Trade and Environment Division,

provided valuable advice and guidance.

The lead authors of the report are Marc Bacchetta,

Eddy Bekkers, Cosimo Beverelli, Mateo Ferrero,

Emmanuelle Ganne, Rainer Lanz, José-Antonio

Monteiro, Roberta Piermartini, Daniel Ramos and

Ankai Xu. Other authors are Absar Ali, Antonia

Carzaniga, Svetlana Chobanova, Lory Iunius,

Jonathan Hepburn, Thomas Kräuchi, Juneyoung Lee,

Kathryn Lundquist, Sajal Mathur, Hanh Nguyen, Yves

Renouf, Victor Stolzenburg, Enxhi Tresa, Ayse Nihal

Yilmaz, Khadija Zaidi and Ruosi Zhang.

Other written contributions were provided by Marc

Auboin, Christophe Degain, Peter Donelan, Kartikeya

Garg, Simon Hess, Gergana Kiskinova, Katharina

Laengle, Reto Malacrida, Jeanne Metivier, Marie

Isabelle Pellan, Philippe Pelletier, Rishab Raturi,

Melvin Spreij, Ludivine Tamiotti, Antony Taubman,

Jessyca Van Weelde and Xiaoping Wu.

The following colleagues in the WTO Secretariat

provided valuable written comments on drafts of the

report: Ratnakar Adhikari, Antonia Carzaniga, Mireille

Cossy, Violeta Gonzalez, Ulla Kask, Arne Klau,

Gabrielle Marceau, Clarisse Morgan, Juan Pablo

Moya Hoyos, Marie Isabelle Pellan, Cédric Pene,

Michael Roberts, Stela Rubinova, Melvin Spreij,

Karsten Steinfatt, Sainabou Taal, Antony Taubman,

Cristian Ugarte and Xiaoping Wu. Valuable research

assistance was provided by Francesco Bellelli, Basile

Feller, Tracy Frei, Benjamin Ignoto, Socrates Kraido

Majune and Xiao Yang.

External contributions were received from Daniel

C. Esty (Yale Law School), Danae Kyriakopoulou

(London School of Economics and Political Science),

Sophie Punte (We Mean Business Coalition) and

Gauri Singh (International Renewable Energy

Agency). Background research were also received

from the following WTO Chairs, in coordination

with Mustapha Sadni Jallab and with support from

Sandra Rossier of the Knowledge and Information

Management, Academic Outreach and WTO Chairs

Programme Division: Soledad Aguilar (Latin American

Faculty of Social Sciences), Osman Gulseven (Sultan

Qaboos University), Nada Hazem, Myriam Ramzy and

Chahir Zaki (Cairo University), Sufian Jusoh (National

University of Malaysia), Zhang Lei and Jiang Yue

(University of International Business and Economics),

Thuto Lucy Matobo (National University of Lesotho)

and Boopen Seetanah (University of Mauritius).

The following individuals from outside the WTO

Secretariat also provided useful comments on

early drafts of the report: Rolando Avendano,

Magnus Benzie, Chad Bown, Paul Brenton, Vicky

Chemutai, Brian R. Copeland, Rob Dellink, Klaus

Desmet, Yann Duval, Koffi Aseye Makafui Elitcha,

Robert J. R. Elliott, Daniel C. Esty, Marco Fugazza,

Ian Douglas Gillson, Christian Gollier, Jean-Marie

Grether, Stephane Hallegatte, Katy Harris, Dirk

Heine, Bernard Hoekman, Michael Jakob, Euijin

Jung, Stephen Karingi, Alexander Kasterine, Alexey

Kravchenko, Vesile Kulacoglu, Bruno Lanz, Jia Li,

Jeremy Lucchetti, Tatiana S. Manolova, Nicole

Mathys, Jason McCormack, Nanno Mulder, Hildegunn

Kyvik Nordås, Ralph Ossa, Joseph Pryor, Bernard

Sinclair-Desgagné, Ronald Steenblik, Aleksandar

Stojanov, Shawn W. Tan, Mara Tayag, Robert Teh,

Shunta Yamaguchi and Irina Zodrow.

Gratitude is also due to the speakers of the World

Trade Report 2022 Webinar Series on Trade and

Climate Change for their insightful presentations:

Brian R. Copeland, Klaus Desmet, Katy Harris, Maria

Huge-Brodin, Jenny Minier, Joseph Sarkis, Misato

Sato, Joseph S. Shapiro, Bernard Sinclair-Desgagné

and Tatiana S. Manolova. Special thanks also go to

Isabelle Albrow Gerard, Carole Boureux, Viktoriya

Lazorenko and Anne Lescure for helping with the

organization of the webinars.

José-Antonio Monteiro and Ankai Xu of the Economic

Research and Statistics Division managed the

drafting of the Report. The text production of the

Report was managed by Diana Dent and Anne

Lescure of the Economic Research and Statistics

Division. The production of the Report was managed

by Anthony Martin and Helen Swain of the Information

and External Relations Division. William Shaw and

Helen Swain edited the report. Gratitude is also due

to the translators in the Language and Documentation

Services Division for the high quality of their work.

Disclaimer

The World Trade Report and its contents are the sole responsibility of the WTO Secretariat, except

for the opinion pieces written by the external contributors, which are the sole responsibility of their

respective authors. The Report does not reflect the opinions or views of members of the WTO. The

authors of the Report also wish to exonerate those who have commented upon it from responsibility for

any outstanding errors or omissions.

ACKNOWLEDGEMENTS AND DISCLAIMER

WORLD TRADE REPORT 2022

Abbreviations

AoA Agreement on Agriculture

APEC Asia-Pacific Economic Cooperation

BCA border carbon adjustment

CBDR [principle of] common but differentiated

responsibilities

CPC United Nations Central Product

Classification

e CO

equivalent

CTE Committee on Trade and Environment

EDB WTO Environmental Database

EG environmental goods

EGS environmental goods and services

EIF Enhanced Integrated Framework

EITE emission-intensive trade-exposed

EKC Environmental Kuznets Curve

EPP environmentally preferable products

EREG energy-related environmental goods

ES environmental services

ETS EU Emissions Trading System

EU European Union

ET environmental technologies

EWE extreme weather event

FFEDC fossil fuel export-dependent country

FFSR Fossil Fuel Subsidy Reform

G7 Group of Seven

G20 Group of Twenty

GATS General Agreement on Trade

in Services

GATT General Agreement on Tariffs

and Trade

GDP gross domestic product

GGP green government procurement

GHG greenhouse gases

GPA Agreement on Government

Procurement

GTM WTO Global Trade Model

GVC global value chain

HS Harmonized System

ICAO International Civil Aviation Organization

IDP Informal Dialogue on Plastics Pollution

and Environmentally Sustainable

Plastics Trade

IEA International Energy Agency

IMF International Monetary Fund

IMO International Maritime Organization

IP intellectual property

ITC International Trade Centre

I-O input-output

IPCC Intergovernmental Panel on Climate

Change

IRU International Road Transport Union

LDC least-developed country

MFN most-favoured nation

MSME micro, small and medium-sized

enterprise

NDC nationally determined contribution

NGO non-governmental organization

NAFTA North American Free Trade Agreement

NTB non-tariff barrier

NTM non-tariff measure

OECD Organisation for Economic

Co-operation and Development

R&D research and development

RCA revealed comparative advantage

RTA regional trade agreement

SCM subsidies and countervailing measures

SDGs United Nations Sustainable

Development Goals

SIDS small-island developing states

SPS sanitary and phytosanitary

STC specific trade concern

STDF Standards and Trade Development

Facility

TBT technical barriers to trade

TeCO

Trade in embodied CO

TESSD Trade and Environmental Sustainability

Structured Discussions

TFA WTO Trade Facilitation Agreement

TPRM Trade Policy Review Mechanism

TRIMs trade-related investment measures

TRIPS WTO Agreement on Trade-Related

Aspects of Intellectual Property Rights

UNCTAD United Nations Conference on Trade

and Development

TRAINS UNCTAD Trade Analysis Information

System database

UNDRR United Nations Office for Disaster Risk

Reduction

UNECE United Nations Economic Commission

for Europe

UNFCCC United Nations Framework Convention

on Climate Change

UN United Nations

US United States

WCO World Customs Organization

WMO World Meteorological Organization

WTO World Trade Organization

ABBREVIATIONS

WORLD TRADE REPORT 2022

Climate change is an existential threat to people’s

lives and is dramatically reshaping economic activity

and trade. This year alone, from the Horn of Africa to

China, from Europe to the Americas, we have seen

increasing heat and prolonged drought damage crops

and reduce electricity production, while low water

levels in major rivers have made it difficult to transport

industrial and agricultural goods. Severe flooding left

a third of Pakistan under water, devastating key export

crops and putting the country’s food and economic

security at risk.

The climate crisis is a problem of the global

commons, and one that demands a collective and

effective multilateral response. The World Trade

Report 2022: Climate Change and International

Trade reviews the role of trade, trade policy and

international trade cooperation in addressing climate

change. It discusses how changing temperature and

weather–and the low-carbon transition required to

contain rising greenhouse gas emissions–are likely

to impact the welfare of nations’ populations and alter

their comparative advantages.

The report argues that trade is a force for good for

climate and part of the solution for achieving a low-

carbon, resilient and just transition. While trade

itself does generate emissions from production and

transport, trade and trade policies can accelerate

the dissemination of cutting-edge technologies and

best practices, and enhance incentives for further

innovation while creating the jobs of tomorrow. Trade

is instrumental for investments in clean energy to

have the greatest reach and impacts, at lowest cost

and where they are needed the most. These are

returns we would be unwise to forego, especially

now that the big green investment push we need will

coincide with rising real costs of capital and looming

uncertainty about energy security due to geopolitical

tensions and war.

Trade and trade policies are also part of any sound

strategy for climate change adaptation, helping

individual countries, especially vulnerable developing

ones such as small-island developing states, least-

developed countries and land-locked developing

countries, better respond to and protect themselves

from extreme weather events, and, in the longer term,

to adjust to shifts in agricultural productivity and

changes in wider international competitiveness. At the

global level, what we call “re-globalization” – more

diversified and deconcentrated goods and services

production, drawing in formerly marginalized countries

and communities with the right business environment

– would promote supply resilience and inclusion in a

world of ever more frequent climate induced shocks.

This would provide better risk management than

reshoring, nearshoring or friend-shoring.

In tandem with other public policies, trade has

already been playing an important role in the global

climate response. For example, the cost of solar panel

systems has plummeted in the last three decades,

and about 40 per cent of the cost decline has been

attributed to scale economies made possible in part

by international trade and value chains. The capacity

of solar panels traded across borders in 2017

reached almost 80GW, equivalent to over 9percent

of global electricity generation.

Further opening up trade in environmental goods and

services could do more. The WTO estimates that

reducing tariffs and non-tariff measures on energy-

related environmental goods could increase total

exports of these products by 5 per cent by 2030 and,

at the same time, lead to a net reduction in carbon

emissions. There are employment benefits, too: the

International Energy Agency estimates that the shift

to clean energy could generate 14 million new jobs

in clean energy sectors and 16 million jobs in related

sectors globally by 2030.

Foreword

by the WTO

Director-General

FOREWORD BY THE WTO DIRECTOR-GENERAL

Beyond amplifying the impact of climate policies and

financing, greater international trade cooperation is

key to manage and minimize potential trade frictions

associated with climate action. For instance, close to

70 carbon pricing schemes are presently in operation

worldwide. Without common approaches for prices

and comparing equivalence, there is a significant risk

that unilateral measures aiming to prevent carbon

leakage and loss of competitiveness could stoke

trade tensions and create high administrative costs

for firms and governments. Uncoordinated climate

actions could also hamper decarbonization efforts by

raising uncertainty and discouraging much-needed

investment.

The ongoing proliferation of decarbonization

initiatives and standards – there are more than 20

different decarbonization standards in the steel

sector alone – creates confusion for producers and

could potentially lead to trade frictions. In line with

its longstanding role of promoting transparency vis-à-

vis policy measures affecting trade and encouraging

cooperation in the direction of comparability,

compatibility and harmonization, the WTO could play

a similar role for carbon pricing and standards. The

WTO is working with other multilateral agencies –

the International Monetary Fund, the Organisation

for Economic Co-operation and Development and

the World Bank – on bringing in a trade perspective

to discussions and research on carbon mitigation

approaches.

Clear, predictable and shared understandings about

trade-related climate measures would serve the

needs and development opportunities of businesses

and consumers in developing countries far more

effectively than the high transaction costs that

would come with a mess of varying rules for different

markets. But a just transition to a low-carbon

economy demands additional measures, including

financial support, to help low-income regions address

and overcome the potential adverse effects of carbon

pricing. The case for delivering on the US$100 billion

climate financing pledge remains strong, and a robust

response on loss and damage is urgently needed.

The Aid for Trade initiative – which is increasingly

about investment for trade – can and should help

developing and least-developed countries build

climate-friendly critical trade infrastructure. This

would support a resilient and inclusive low-carbon

transition.

This report is being launched at the same time as

the 27

United Nations Climate Change Conference

(COP27). What I hope to see emerge there and

elsewhere is a trade and investment facilitation

pathway in support of a just transition to a low-carbon

economy. Finance is one part of the equation – but

it is not the only part. A good trade policy framework

is necessary to turn climate investment into climate

transformation. We must start to talk about trade not

as a threat but as a solution to the climate crisis.

Achieving better trade and climate outcomes

is possible – but we will need strong political

leadership. Our success at the WTO’s 12

Ministerial

Conference in June 2022 – where members

unanimously agreed that trade must be part of the

solution to climate change and struck an accord on

curbing harmful fisheries subsidies that is the WTO’s

first agreement with environmental sustainability at its

core–shows that this is possible.

Looking ahead, the WTO has an opportunity to

use the present moment to strengthen its role as a

forum for coordination on trade and climate change,

to address trade policy barriers holding back the

dissemination and use of low-carbon technologies,

and to support structural changes needed to

decarbonize the global economy. I hope we will make

the most of this opportunity.

Dr Ngozi Okonjo-Iweala

Director-General

WORLD TRADE REPORT 2022

Key messages

•

Climate change is reshaping countries’ economic and trade prospects, and is a

major threat to future growth and prosperity. Higher temperatures, rising sea levels and

more frequent extreme weather events bring the prospect of productivity losses, production

shortages, damaged transport infrastructure, and supply disruptions. Without significant

reductions in global greenhouse gas (GHG) emissions, many countries are likely to find their

comparative advantages changing, with agriculture, tourism and some manufacturing sectors

particularly vulnerable to climate impacts.

•

Trade is a force multiplier for countries’ adaptation efforts, reducing costs and

increasing impact. Climate shocks will remain costly and disruptive, but trade can help

countries better prepare and respond, through access to technologies and critical goods

and services, such as food and healthcare products. This is particularly relevant for the

most vulnerable economies – least-developed countries, small-island developing states,

and landlocked developing countries. In the longer-run, open international markets would

help countries smooth necessary economic adjustment and resource reallocation, and more

diversified sources of supply for key goods and services would translate into greater resilience

against localized weather events.

•

Trade can reduce the cost of mitigation and speed up the low-carbon transition and

the creation of green jobs. Though trade, like most current economic activity, generates

GHG emissions, it also contributes to reducing them, by enabling access to cutting-edge

climate technologies; incentivizing innovation in low-carbon technologies by expanding market

size; and fostering competition and scale economies that help drive down costs. Trade and

value chains have been major factors in the dramatic fall in the cost of generating solar and

wind energy. With renewable energy now cheaper than fossil alternatives in some places, the

adoption of renewables has accelerated. But there is scope to do more: WTO simulations

suggest that eliminating tariffs and reducing non-tariff measures on a subset of energy-related

environmental goods could boost exports by 5 per cent by 2030, while the resulting increases

in energy efficiency and renewable uptake would reduce global emissions by 0.6 per cent. To

the extent trade helps speed up the low-carbon transition, it would contribute to job creation:

one estimate suggests the global shift to clean energy will generate as many as 30 million new

jobs in clean energy and related sectors by 2030.

•

International trade cooperation can make climate actions more effective, and

the low-carbon transition more just, by minimizing trade frictions and investor

uncertainty. As governments ramp up climate action towards nationally determined

contributions, there is a risk that unilateral measures aiming to prevent carbon leakage and the

loss of competitiveness of domestic industry could stoke trade tensions, create investment-

discouraging uncertainty, and impose disproportionate costs on firms and governments in

developing countries. International cooperation on trade-related aspects of climate policy,

such as carbon pricing and decarbonization standards, would reduce these risks. The WTO

could play a more valuable role as a venue for transparency, comparability and potential

harmonization of such measures. Aid for Trade, as well as trade-oriented private investment,

can help developing and least-developed countries build climate-resilient trade infrastructure,

contributing to making the low-carbon transition more just and fair.

EXECUTIVE SUMMARY

Executive summary

Climate change represents a severe, pervasive and

potentially irreversible threat to people, ecosystems,

public health, infrastructure and the global economy.

Left unabated, it could undo much of the progress

made over recent decades in development, poverty

reduction and prosperity creation. Developing

countries – in particular small-island developing

states and least-developed countries (LDCs) – are

likely to suffer the most, due to their greater

exposure and vulnerability to climate risks and natural

disasters, and their more limited capacity to adapt to

climate change. Leveraging trade to tackle climate

change presents several development and growth

opportunities and will require significant policy

actions to advance a just transition towards a low-

carbon, inclusive and resilient future.

In the face of this existential threat, the 2022 World

Trade Report explores the multifaceted relationship

between international trade and climate change. It

looks at how international trade might exacerbate

climate change, how the consequences of climate

change might alter trading patterns and relationships,

and how trade could be a force multiplier for the global

response to the climate crisis. The report spells out

various ways international trade cooperation, fostered

by the WTO, could support and lower the cost of

implementing the Paris Agreement and fulfilling the

Glasgow Climate Pact’s goal of net-zero greenhouse

gas (GHG) emissions by mid-century (IPCC, 2022a).

The report’s core message is clear: trade is a critical

point of leverage for transforming the global economy

and putting the planet on a sustainable trajectory.

Climate change is a problem of the global commons.

Markets do not suffice to address the threats from

GHG accumulation in the atmosphere because

firms and consumers often do not directly face

the costs of the emissions they cause. To correct

these market failures, carefully constructed climate

change mitigation policies are needed to incentivize

behavioural change and increased investment in

energy efficiency and climate-friendly technologies.

Ambitious GHG mitigation policies face a wide range

of challenges, including conflicting economic and

development priorities, divergent energy strategies

and geopolitical competition. Fragile economic

recovery from the COVID-19 pandemic, rising

inflationary pressures, increasing food security

challenges and the war in Ukraine have added further

uncertainties. While the transition to a low-carbon

economy entails substantial short-term investment

and adjustment costs, it will yield major economic

dividends and create wide-ranging opportunities

for more sustainable and fair development. A well-

managed low-carbon transition can limit climate

risks, promote biodiversity and improve food security.

Investments in clean energy also promise better air

quality, public health and quality of life for people

across the world. Bold climate actions could yield a

cumulated economic gain of US$ 26 trillion between

2018 and 2030 (Garrido et al., 2019). The low-carbon

transition could also create millions of new jobs in

clean energy and energy-related sectors and support

a more inclusive economy, not least because more

women work in the renewable energy sector than in

the fossil fuels sector (IRENA, 2021).

Because the existing build-up of GHGs in the

atmosphere makes some degree of climate change

unavoidable, adaptation strategies are also required

to make communities more resilient in the face of

sea level rise, more intense storms and changed

rainfall patterns leading to more floods, droughts and

wildfires as well as significant effects on agricultural

productivity. These consequences will profoundly

impact international trade and coping with them

requires adaptation efforts to identify, prevent and

reduce climate risks, and minimize unavoidable losses

and damages (IPCC, 2022b).

The report makes clear that trade and climate change

are deeply intertwined, and that more effective

responses to mitigate and adapt to climate change

will require stronger and better international trade

cooperation.

The report makes three key points. First, while

climate change can have profound negative impacts

on international trade, trade and trade policies

are essential elements of sound climate change

adaptation strategies. Second, although trade

generates GHG emissions, trade and trade policies

can foster the transition to a low-carbon economy by

providing access to and spurring innovation in low-

carbon technologies, disseminating best practices

and helping clean energy investments achieve the

greatest reach at the lowest cost. Third, improving the

ambition and effectiveness of climate action requires

greater international trade cooperation at the WTO.

WORLD TRADE REPORT 2022

Even though climate change can have profound

negative impacts on international trade, trade

and well-designed trade policies are essential

elements of sound climate change adaptation

strategies.

Climate change can cause productivity losses,

supply shortages and transport disruptions, severely

impacting trade. Because these impacts will differ

across regions, some economies will be at a

disadvantage. Export growth of agricultural products

and light manufacturing from LDCs have been found

to decrease, on average, by between 2 and 5.7 per

cent in response to a rise in the country’s temperature

by 1°C (Jones and Olken, 2010).

Extreme weather events can also affect key transport

corridors and infrastructure, potentially creating

vulnerabilities in the global trade network. Maritime

transport – which accounts for 80 per cent of world

trade by volume – is particularly exposed to climate

change, while other modes of transport can also

be impacted. Small economies and landlocked

countries, which trade through a limited number of

ports and routes, can suffer major trade bottlenecks

from climate-related disruptions. For instance, the

Paraná River transports 90 per cent of Paraguay’s

international trade of agricultural goods, but recurrent

droughts have in recent years frequently lowered

water levels, diminishing the weight barges can carry,

causing congestion and delays.

Climate-induced disruptions tend to be more severe

in heavily concentrated global value chains (GVCs)

where intermediate inputs are difficult to replace

in the short run. For example, in 2011, flooding

in Thailand disrupted the global electronic and

automotive industries, causing an estimated 2.5

percentage point decline in the rate of growth of

global industrial production (Kasman, Lupton and

Hensley, 2011). Climate-induced supply chain risks

are often exacerbated by firms’ limited capabilities to

assess climate risks and implement risk management

strategies.

Without significant reduction in GHGs, climate

change is likely to alter countries’ comparative

advantage and trade patterns by changing

endowments in natural resources or altering the

efficiency with which land, labour, capital and other

production factors can be deployed to produce

goods and services. Commodity dependence and

lack of diversification can exacerbate vulnerabilities

to climate change, underscoring the need to support

efforts to accelerate economic diversification.

Agriculture, tourism and some manufacturing

sectors are particularly vulnerable to climate change.

Agriculture is the most exposed and vulnerable

sector to changes in temperature and precipitation,

raising serious concerns about future food security.

Sub-Saharan Africa and South Asia are expected to

experience larger adverse agricultural yield shocks

than other regions; and given their high share of

agricultural employment, they may face more severe

labour market disruptions. Changes in climate might

also reduce the touristic appeal of long-favoured

destinations, while sea level rise and extreme

weather events could permanently damage tourism

infrastructure. Manufacturing sectors dependent on

climate-sensitive inputs, such as food processing,

could suffer from reduced access to raw materials.

Labour-intensive production could also be adversely

affected as rising temperatures diminish capacity to

work and raise risks of accidents and heat exhaustion.

Adapting to climate change is a sustainable

development imperative. Without understating how

costly and disruptive adaptation will continue to be,

trade can make an important contribution to climate

risk prevention, reduction and preparedness.

Trade can facilitate the development and deployment

of pro-adaptation technologies, such as climate-

resistant crop varieties, early warning systems and

water conservation and storage systems. By fostering

higher economic growth, trade can generate

additional financial resources to invest in adaptation

strategies such as climate-resilient infrastructure.

Trade openness also allows for wider access to

services that help prepare for climate-related

shocks, such as weather forecasting, insurance,

telecommunications, transportation, logistics and

health services.

Access to imported essential goods and services,

such as food and medical supplies, can help

economies cope and recover after an extreme

weather event hits. Facilitating imports of

construction materials can contribute to post-disaster

reconstruction. Allowing trade to resume faster after

climate-induced shocks can also support economic

recovery. Even in the absence of extreme weather

events, long-term shifts in weather patterns can still

cause crop yields to fall, and trade can help alleviate

food insecurity by allowing regions to import food

to fill demand gaps. Overall, countries more open

to trade tend to have a greater capacity to adapt to

climate change (see Figure 1).

The role of trade in coping with climate change

underlines that trade policies must be an integral

EXECUTIVE SUMMARY

Figure 1: Greater capacity to adjust to climate change tends to be associated with greater

openness to trade

urces: Authors’ calculations based on ND-GAIN Climate Readiness Index and the trade openness index for 2020 from the World

Development Indicators.

Note: The climate change readiness index measures a country’s ability to leverage investments and convert them to adaptation actions.

The trade openness measures the sum of a country’s exports and imports as a share of that country’s GDP in percentage.

part of climate change adaptation strategies. A small

but increasing number of trade measures notified by

WTO members between 2009 and 2020 are related

to climate change adaptation, though these measures

– which mostly take the form of support in the

agricultural sector – account for less than 4per cent

of all notified climate-related trade measures (161 out

of 4,629).

Trade and trade policy are, however, not a panacea

to adapt to the highly disruptive consequences

of climate change. Addressing the factors and

conditions underpinning the vulnerabilities and

exposures to climate risks is essential. In addition,

well-functioning markets, including in the areas of

infrastructure, finance, food and labour, are important

to facilitate adjustment.

Although trade generates GHG emissions, trade

and trade policies can be part of the solutions

to support a low-carbon transition.

Trade, like most economic activities, emits GHGs.

The world share of carbon dioxide (CO

) emissions

embodied in world goods and services exports

peaked in 2011 and was estimated to account for

around 30 per cent of global carbon emissions in

2018. This share indicates the close relationship

between production, trade, consumption and the

consequent emissions under current technologies

and production processes.

International trade has complex effects, both positive

and negative, on GHG emissions, going well beyond

the emissions released during the production and

0.1

0.5

0.7

1 1.4 21.2 1.6 2.2

Trade openess index (in logarithm)

1.8 2.4 2.6

0.2

0.3

0.6

0.8

0.4

Climate change adaptation readiness index

Low-income Middle-income High-income

WORLD TRADE REPORT 2022

transportation of the exported goods and services.

The overall impact of trade on carbon emissions

depends, among others, on the sector and countries

involved as well as the energy sources, production

methods and modes of transport.

On the positive side of the ledger, international trade

increases the worldwide diffusion and deployment of

lower-emission goods, services, capital equipment

and know-how. It also reduces the costs of these

products through efficiency improvements, economies

of scale and learning-by-doing. For instance, the cost

of solar electricity has plunged by 97 per cent since

1990. A significant part of the cost decline of solar

panel systems has been attributed to GVCs, which

have enabled producers to lower production costs

and reap economies of scale by locating different

production stages in different countries (WTO and

IRENA, 2021). Market opportunities for low-carbon

exports can also spur more investment and innovation

in new low-carbon technologies and encourage

efforts to better adapt these technologies to local

conditions.

In addition, trade opening can reduce the carbon

intensity of economic output by shifting resources to

more productive and cleaner firms, as firms engaged

in international trade tend to be more competitive

and energy efficient than purely domestic firms. The

higher incomes typically associated with greater

integration into global trade also give individuals the

space to demand higher environmental quality and

to pressure governments to adopt more stringent

climate regulations and provide additional financial

resources for environmental protection.

International trade in renewable energy and electricity

has also the potential to help compensate for the

uneven geographical distribution of usable sunlight

and wind, though this will hinge on important

technological breakthroughs – notably in energy

storage. More developing countries are already

moving to harness their abundant renewable energy

potential. For instance, Morocco hosts the world’s

largest solar power station, while Egypt is building a

solar photovoltaic park touted to become the world’s

largest.

On the negative side of the ledger, trade opening

raises GHG emissions by increasing the production,

transportation, consumption and disposal of

products. The fragmentation of production

represented by GVCs involves more transport and

therefore more emissions. Trade may–in the absence

of relevant policies – incentivize emissions-boosting

deforestation.

Changes in the sectoral composition of

production–a standard result of trade opening–can

also increase or reduce GHG emissions, depending

on whether the country in question has a comparative

advantage in carbon-intensive industries, which

in turn depends on factors including resource

endowments, technological level and environmental

and energy policies (WTO, 2021a).

Rising concern about trade-related GHG emissions

has led to calls to limit imports in favour of producing

and consuming local goods and services. But if

countries close their borders to trade, meeting

demand for previously imported goods and services

would cause domestic production and associated

GHG emissions to rise; while foregoing the broader

gains from trade would cause living standards to fall.

Instead of re-shoring, the low-carbon transition

would be better supported – and accelerated – by

cleaner trade, which would involve reducing the

carbon intensity of production, transportation and

GVCs, developing and deploying climate-friendly

technologies and promoting trade in climate-friendly

goods and services. Major decarbonization pathways

for international transport include switching to

lower-carbon fuels, improving vehicle efficiency and

phasing-out carbon-intensive vehicles.

Well-designed trade policies must support the role

of trade in deploying and disseminating climate

mitigation technologies. Trade and trade policies are

an integral part of a limited but increasing number

of countries’ plans to achieve carbon emission-

reduction targets under the Paris Agreement’s

nationally determined contributions. Complemented

by other policies, trade policies can help countries

diversify away from reliance on carbon-intensive

sectors, create new jobs and increase the ambition

of mitigation efforts. Between 2009 and 2020,

WTO members notified 3,460 trade-related climate

change mitigation measures explicitly addressing

climate change mitigation, energy conservation and

efficiency, and alternative and renewable energy.

Support measures and technical regulations are the

main types of notified trade-related climate change

mitigation measures (see Figure 2).

Despite the benefits of opening trade in the

environmental industry, barriers to trade in

environmental goods and services remain significant.

In addition, tariff and non-tariff barriers tend to be

lower in carbon-intensive industries than in clean

industries (Shapiro, 2021).

Removing barriers to trade in environmental products

can contribute to addressing climate change. WTO

EXECUTIVE SUMMARY

simulation analysis suggests that eliminating tariffs

and reducing non-tariff measures on some energy-

related environmental goods and environmentally

preferable products could increase global exports

in these products by US$ 109 billion (5 per cent)

and US$ 10.3 billion (14 per cent), respectively,

by 2030. The resulting improvements in energy

efficiency and renewable energy adoption are

estimated to reduce net carbon emissions by 0.6 per

cent, while the knock-on effects of accelerating the

spread of environmental innovation would do much

more, including increasing the demand for ancillary

services relating to the sale, delivery, installation and

maintenance of environmental technologies.

That said, harnessing the full potential of international

trade in renewable energy and other environmental

goods and services also requires ambitious climate

policies and actions to upgrade power-generation,

transmission and distribution infrastructure as well as

to build a well-functioning quality infrastructure.

Improving the ambition and effectiveness

of climate change action requires greater

international trade cooperation.

Addressing climate change requires global

cooperation on all fronts, and international trade

cooperation, at the WTO and elsewhere, is an integral

part of the efforts.

The bottom-up international climate regime, with

nationally determined contributions and mitigation

actions, encourages broad-based participation and

underlines the urgency of climate action. But it also

results in widely varying levels of climate ambition

across jurisdictions, with the attendant risks of carbon

leakage and competitiveness loss, especially in

carbon-intensive and trade-exposed sectors. These

risks have prompted some countries to consider

border carbon adjustment measures. Uncoordinated

trade-related climate policies, however, could give

rise to trade tensions and heighten marketplace

uncertainty in ways that discourage much-needed

Figure 2: Support measures and technical regulations are the most common trade-related

climate change mitigation measures

Sources: Authors’ calculation, based on the WTO Environmental Database.

Note: The category “technical regulations” includes conformity assessment procedures. One notified measure can cover more than one

type of policy.

Support measures Technical regulations Other measures

Notiﬁed climate change mitigation measures

2017 2018 2019 202020152014 2016201320112009 2010 2012

338

304

444

139

415

312

233

324

360

231

160

187

WORLD TRADE REPORT 2022

low-carbon investment. Avoiding such outcomes

calls for leveraging every opportunity at the WTO and

elsewhere for improving cooperation on the trade-

related aspects of climate change policies.

At the regional level, a limited but increasing number

of trade agreements, namely 64 out of 349 notified

regional trade agreements (RTAs), explicitly contain

climate change-related provisions. Some of these

RTAs commit parties to effectively implement the

Paris Agreement and adopt climate change policies,

including carbon pricing, while a few others remove

some trade and investment barriers to climate-friendly

goods, services and technologies.

At the global level, as noted above, the open and

predictable international markets underpinned by the

multilateral trading system already facilitate access to

environmental technologies, food and other critical

supplies. WTO members notify climate-related

measures and discuss potential concerns, as well

as the underlying environmental rationale, in various

WTO bodies such as the Committee on Trade and

Environment. These discussions are also a venue for

exchanging national experiences and practices.

The WTO agreements expressly recognize the

rights of members to adopt measures to protect

the environment, so long as they are not applied

arbitrarily and are not more restrictive than necessary

to meet the objective in question. Climate objectives,

rather than the protection of domestic producers,

must be the central rationale for the development

and implementation of trade-related climate policies.

Trade-related climate policies should also consider

their impact on other nations’ climate efforts. The

protection and enforcement of intellectual property

rights, as provided by WTO rules, is also essential

to support innovation in environmental technologies

while promoting the transfer of technology.

But WTO members can do much more to enhance

the contribution of trade and trade policy to their

climate objectives.

First, with the increasing number of trade-related

climate measures being taken nationally, there

is a strong case for strengthening the role of the

WTO as a forum for coordination and dialogue,

and for identifying potential action on trade and

climate change. The committee process could be

used to identify transparency and knowledge gaps,

opportunities for coordination, capacity needs and

perspectives of developing countries, and areas

for further work, including potential negotiations. At

the 12

Ministerial Conference in June 2022, WTO

members concluded an agreement that prohibits

certain types of fisheries subsidies. Continuing

work on additional provisions for a comprehensive

agreement on fisheries subsidies would further

contribute to sustainable management of marine

resources and biodiversity.

Second, members are already beginning to pursue

a new generation of sustainability driven initiatives

aimed more at using trade as a means to help achieve

global public goods than at correcting a particular

trade distortion. These initiatives include the

Trade and Environmental Sustainability Structured

Discussions, the Informal Dialogue on Plastics

Pollution and Environmentally Sustainable Plastics

Trade, and the Fossil Fuel Subsidy Reform initiative.

Some of these discussions focus on traditional fare

for trade negotiators, namely tariff and non-tariff

policies. For instance, removing trade barriers on

environmental goods and services would lower costs,

expand markets and boost the deployment of climate-

friendly technologies. Pursuing greater alignment on

low-carbon standards would lower compliance costs

and encourage greater scale and investment.

Other initiatives focus instead on generating new

knowledge that can inform and improve governments’

efforts to integrate trade into their environmental

and climate change strategies. This could involve a

better understanding of the environmentally harmful

impacts of subsidies or of trade-related linkages with

the circular economy. Finding a balance between

support incentives for low-carbon technologies

while minimizing negative spillovers on trading

partners would also provide more predictable and

credible market signals for low-carbon investment

and consumption. The dialogue on plastics seeks to

generate knowledge on plastic trade flows in order

to support negotiations on an international plastics

treaty under the auspices of the United Nations

Environment Programme.

Third, WTO members could work on supply side

factors to enhance the climate resilience of their

supply chains. Deepening and diversifying supply

and transport networks would not just help reduce

vulnerability to the kinds of supply chain disruptions

seen since the start of the pandemic; it would also

enhance resilience in the face of localized climate

events. Stronger information sharing and monitoring

would help food and energy security for all members,

while helping them manage risks related to supply

chain bottlenecks. An example of how this might

work in practice is the Agricultural Market Information

System, which is a platform of international agencies,

including the WTO, which tracks the supply of key

agricultural commodities and provides a forum for

coordinated policy responses when needed to

prevent markets from seizing up. At the 12

Ministerial

Conference, WTO members vowed to address the

global food security challenges by exempting from

export restrictions food bought by the World Food

Programme for humanitarian purposes and pledging

to facilitate trade in food, fertilizers and other

agricultural inputs. Implementing these decisions

could contribute to managing the knock-on effects of

surging food prices during a crisis, thus increasing

food security.

Fourth, improving the ability to understand and

manage climate-related risks and investment

opportunities would improve the synergies between

climate finance and Aid for Trade. Climate finance

to developing countries continues to fall short

of the US$ 100 billion goal for 2020 (OECD,

2022a) and has not achieved the balance between

adaptation and mitigation finance set out in the Paris

Agreement (UNEP, 2021a, 2021b). However, the

Aid for Trade initiative, supported by the WTO and

other organizations, can help developing countries,

particularly LDCs, to build climate-resilient trade

capacity and infrastructure, and support trade

policies to foster a low-carbon transition. Between

2013 to 2020, Aid for Trade disbursements related

to climate action totalled US$ 96 billion, with a

larger share of the disbursements directed at climate

mitigation (see Figure 3).

Finally, reinforcing the WTO’s existing cooperation

with international and regional organizations, including

in the areas of climate risk prevention, climate-

induced disaster relief, transport decarbonization

and climate finance, is important to advance trade

cooperation on climate change. Over the past few

years, WTO members have started to address some

of these issues. However, the scale and urgency of

the climate crisis demand additional efforts in support

of a more inclusive and just transition to a low-carbon

economy and a more resilient future.

Figure 3: Aid for Trade disbursements related to climate change have increased over

the past decade

Sources: Authors’ calculations, based on Organisation for Economic Co-operation and Development DAC-CRS (Development Assistance

Committee Creditor Reporting System) Aid Activities Database.

Note: Only projects with an explicit objective of adapting to or mitigating climate change and projects identifying climate change as

important but secondary objective are considered as climate change-related official development assistance. Projects can be cross-

cutting and have both adaptation and mitigation objectives.

Energy Transport and storage Agriculture, forestry and ﬁshing Others

Climate change adaptation

Aid for Trade disbursements related to climate change

(current US$ billion)

Climate change mitigation

2013

2014

2015

2016

2017

2018

2019

2020

6.5

6.6

7.9

9.5

12.0

12.2

13.4

12.3

2.9

3.4

4.1

4.6

4.9

5.7

EXECUTIVE SUMMARY

Introduction

Tackling climate change requires a transformation of the global

economy. While limiting consumption and changing lifestyles

would help, reducing greenhouse gas emissions to net zero will be

impossible without technological and structural change on a global

scale. This transformation will involve costs, but also opportunities

– not just to head off an environmental catastrophe, but to reinvent

the way the world generates energy, manufactures products and

grows food. Just as trade helped to drive economic progress in

the past – by incentivizing innovation, leveraging comparative

advantages and expanding access to resources and technologies

– trade can play a central role in driving progress towards a low-

carbon global economy. But harnessing the potential of trade will

demand new policies and more cooperation.

Contents

1. The next great transformation 18

2. Harnessing the transformative power of trade 20

3. Overview of the report 23

WORLD TRADE REPORT 2022

1. The next great transformation

Paradoxically, economic progress is both the cause

of and the solution to the climate crisis. To head off

dangerous climate change, the Paris Agreement aims

to limit the global warming to 1.5°C this century. This

means that greenhouse gas (GHG) emissions need

to be cut by roughly 50 per cent by 2030 and reach

net zero by 2050.

The most realistic way modern

economies can achieve this goal – without cutting

back living standards in richer countries and cutting

short development in poorer ones – is by modernizing

even more, harnessing human innovation, ingenuity

and entrepreneurship to advance low-carbon

technologies and to use the planet’s resources more

sustainably.

Dramatic advances in automation, transportation

and industrialization – all powered by fossil fuels –

have driven the exponential growth of the global

economy over the past two and half centuries,

resulting in rising living standards, increased mobility,

and improved material well-being for a fast-growing

global population. In important ways, the industrial

revolution was also an energy revolution (Wrigley,

2010). By discovering how to convert fossil fuels into

mechanical energy, starting with the steam engine,

humanity unlocked seemingly limitless supplies of

energy to power seemingly limitless economic growth

and development.

But ever-expanding growth has also released ever-

greater amounts of heat-trapping GHG emissions

into the atmosphere – from electricity generation,

transportation, industry, agriculture and deforestation

– which in turn has contributed to the warming of the

planet and its negative climactic and environmental

knock-on effects. Almost three-quarters of global

GHG emissions come from energy consumption;

another 18.4 per cent from agriculture, forestry and

land use; 5.2 per cent from industrial processes; and

3.2 per cent from waste (Ritchie, Roser and Rosado,

2020). As long as the world remains dependent on

high-carbon technologies, increasing economic

production will almost inevitably lead to increasing

GHG emissions.

Yet, while technological and economic progress has

“fuelled” the climate crisis, it is also indispensable

to mitigating and overcoming it. Replacing fossil

fuels with renewable energies – solar, wind and

geothermal power, and others – is essential to

avoid and reduce GHG emissions, as are steps to

decarbonize transportation, steel production, cement

manufacturing and agriculture, and to make economic

ecosystems less wasteful and more resource-

efficient overall.

Adapting to the adverse effects of climate change

will also require technological solutions – from

developing drought-resistant crops and resilient

water supplies, to building flood defences, improving

weather forecasting and setting up early warning

systems (UNFCCC, 2016a).

Given that many lower carbon technologies – from

solar panels and electric cars to vertical farms and

electric arc furnaces – already exist, the challenge

is to scale up their production and deployment. One

influential study argues that two-thirds of economies,

including major emitters like the United States, the

European Union and China, could reduce their GHG

emissions by 80 per cent by 2030, and achieve

carbon neutrality by 2050, through the mass adoption

of electrification based on existing wind, hydro and

solar technologies (Jacobson et al., 2017).

Even more cutting-edge technologies, such as green

hydrogen or direct air carbon capture and storage,

are also advancing rapidly. Then there are the

myriad “soft” climate technologies – data-crunching,

information-sharing, training and education – which

are easier to adopt, and which will be just as critical

to shift economies towards low-carbon alternatives.

It is also important to focus not just on what

technologies are needed, but on how they are used. It

has long been recognized that it is only by using new

technologies that we learn how to optimize and exploit

their full potential (Arrow, 1962). This “learning-by-

doing” dynamic can take time (David, 2002). In the

same way that it took decades for the invention of the

dynamo to translate into mass electrification, it could

take years to realize the full potential of solar power or

carbon farming. Thus, it makes sense to scale up new,

clean, low-carbon technologies now, even if the initial

investment costs are high, as expanding capacity

early on can encourage usage, improve performance,

drive down prices, and ultimately make renewable

technologies more attractive and competitive.

Realizing the potential of one innovation also often

hinges on marrying it to another innovation (Harford,

2017). Just as the explosion of the internet after

the mid-1980s depended on parallel innovations in

satellite and fibre optic telecommunications, electric

vehicles are now poised to revolutionize clean-energy

transportation because they are benefitting from

other technological breakthroughs, including the

mass production of affordable lithium-ion batteries,

the roll-out of electric vehicle charging networks and

more readily available renewable energy.

Conversely, the absence of synergistic technologies

can significantly slow or block economic progress.

CLIMATE CHANGE AND INTERNATIONAL TRADE

A. INTRODUCTION

For example, the lack of affordable and efficient

technological solutions to the challenge of long-term,

large-scale energy storage – a challenge arising from

the intermittent nature of some lower carbon energy

technologies such as solar and wind power – is a key

missing piece of the renewable puzzle which urgently

needs to be “discovered” if renewables are to become

a reliable replacement for fossil fuels worldwide.

This positive process of technological interaction,

cross-fertilization and mutually reinforcing innovation

takes place at the global, not just the firm, level. The

fact that photovoltaic (PV) cells, which convert solar

energy into electricity, are increasingly affordable and

available is the result of mutually supportive back-and-

forth innovations across several continents, including

US investments in PV cell research and development

(R&D) in the 1960s and 70s; European policies to

accelerate domestic solar panel installation in the

1990s and 2000s; and Chinese efforts to improve

and scale production after 2011 (IEA, 2022a).

Technological cooperation, competition and cross-

fertilization do not just spur innovation; they also

encourages needed technological diffusion. Many

developing countries have abundant renewable energy

potential that access to low-carbon technologies and

infrastructure could unleash (IRENA, 2022). This is

starting to happen. Kenya is already a world leader in

the number of solar panel systems installed per person,

while 90 per cent of Nepal’s electricity comes from

hydro-electric power. Locally generated renewable

energy allows developing and least-developed

countries to bypass many of the logistical difficulties

and high costs involved in the transmission and

distribution of fossil-fuel energy, improving their energy

access and self-sufficiency. Bringing clean energy to

the 759 million people in the developing world who

still lack access to electricity would not only stimulate

economic growth and job creation and reduce poverty,

but would significantly improve essential services,

such as healthcare, education and the internet.

The shift to low-carbon farming – especially

climate-smart agriculture techniques that focus

on intercropping, crop rotation, agroforestry, and

improved water management – can bring similar

benefits to developing-country farmers in terms

of improved productivity, greater resilience, less

deforestation, and reduced reliance on fertilizers and

fuels (Brakarz, 2020). In short, the diffusion of low-

carbon technologies can provide poorer countries

with the essential tools they need both to limit GHG

emissions and to accelerate their development.

Achieving a shared and “just” transition to a low-

carbon global economy is not just the right thing to

do; it is also in everyone’s interests. Climate change

will not be stopped if only wealthy economies have

access to low-carbon technologies while poor

economies continue to have to rely on fossil fuel-fired

power plants and internal combustion engines. Since

everyone is impacted by climate change, everyone

has an interest in ensuring that the technological

tools and resources to reduce emissions are as

widely available as possible.

Wealthy economies can also benefit in more direct

ways from technological development in poorer

countries. A striking example of North-South

technological collaboration is the ambitious plan to

deliver Moroccan solar and wind farm electricity to

UK consumers via an underwater cable stretching

3,800 km – the world’s longest cable of this kind.

When completed in 2030, it is hoped that the Xlinks

Morocco-UK Power Project will deliver low-cost, clean

power to over 7 million UK homes, representing 8 per

cent of current UK electricity needs (Hook, 2021).

Indeed, the transition to a low-carbon global economy

will create enormous investment, employment and

growth opportunities – not just adjustment costs –

for developed and developing countries alike. For

example, global investment in the low-carbon energy

transition – across sectors ranging from power

generation, energy storage and electric vehicles, to

sustainable materials, electrical efficiency and carbon

capture – already totalled US$ 1.3 trillion in 2021,

doubling the investment of US$ 655 billion in 2017

(IEA, 2022b). In order to reduce GHG emissions to

net zero by 2050, cumulative investment in renewable

energy would need to reach US$ 131 trillion over the

next 30 years (McKinsey & Company, 2022).

Similarly, massive investment opportunities are

opening up in the steel, cement, farming, forestry

and waste management industries as they shift to

low-carbon technologies and processes. Building

low-carbon industries and infrastructure will not

only require new investment and equipment; it will

also require new workers and skills. Shifting to clean

energy, for instance, could generate 14 million new

jobs in clean energy sectors and 16 million additional

jobs in energy-related sectors globally by 2030 (IEA,

2021). In short, the transition to a low-carbon economy

will entail the construction of a new economy.

The good news is that low-carbon technologies are

expanding – and at a faster pace than many predicted

(Naam, 2020).

For example, renewables accounted

for roughly 11 per cent of global primary energy and

30 per cent of electricity generation in 2021 (IEA,

2022b). Despite supply chain bottlenecks, rising raw

material prices and growing geopolitical tensions,

WORLD TRADE REPORT 2022

the International Energy Agency (IEA) projects that

renewables are on track to account for almost 95 per

cent of the increase in global power capacity through

2026, with solar power alone providing more than

half of that increase. The IEA expects the amount

of renewable capacity added between 2021 and

2026 to be 50 per cent higher than between 2015

and 2020 – and even these optimistic forecasts may

underestimate the speed and scale of the transition.

The bad news is that although global renewable

energy capacity is growing rapidly, overall global

energy demand is growing almost as fast, so fossil

fuel consumption continues to rise (see Figure A.1).

Nearly 80 per cent of the world’s energy is still

generated by burning fossil fuels, notably oil, coal

and gas, partly because supplies of renewable

energy need to be scaled up, and partly because

fossil fuel consumption is still subject to strong path

dependence due to technological, infastructural,

institutional and behavioural lock-ins. Global energy-

related carbon emissions rose by 6 per cent in 2021

to 36.3 billion tonnes – their highest level ever, and

65 per cent higher than they were in 1990 (IEA,

2022c). The IEA estimates that the current pace of

renewable power capacity growth will need to double

over the next decade if the global economy is to stay

on a pathway to net zero emissions by mid-century.

Other sectors also face the challenge of accelerating

the shift to low-carbon technologies and practices.

The challenge is especially daunting in agriculture

– compared to power generation or transportation,

for example – because the emissions-reduction

technologies are more amorphous and the sector

is more diffuse, requiring changes to how over

two billion people farm and how billions more eat

(McKinsey & Company, 2020). At the same time,

the challenge is intensified because of agriculture’s

unique vulnerability to climate change – including

extreme weather events, frequent droughts, and

invasive species and pests – and because of an

expanding global population’s growing need for food.

2. Harnessing the transformative

power of trade

What role will trade play in the transition to a low-

carbon global economy? In the past, trade has been

part of the problem, contributing to climate change

both directly, by generating increasing transport

emissions (shipping, air freight, trucking and rail), and

indirectly, by helping to drive carbon-intensive global

growth. But in the future, with the right policies in

place, trade can be a major part of the solution.

Figure A.1: Fossil fuels remain the dominant energy source despite increasing use

of renewables

Source: Authors’ calculations, based on Smil (2017) and BP Statistical Review of World Energy (2017).

Traditional biomass Coal Oil Nuclear RenewableGas

160,000

140,000

120000

100,000

80,000

60,000

40,000

20,000

1800

1806

1812

1818

1824

1830

1836

1842

1848

1854

1860

1866

1872

1878

1884

1890

1896

1902

1908

1914

1920

1926

1932

1938

1944

1950

1956

1962

1974

1968

1980

1992

1983

1998

2010

2016

2004

Terawatt-hours

A. INTRODUCTION

CLIMATE CHANGE AND INTERNATIONAL TRADE

Trade can increase counties’ access to lower-

emissions goods, services and capital equipment,

and can help to diffuse critical technologies

and know-how. It can drive down the costs of

environmental products by encouraging efficiency,

economies of scale and learning-by-doing. Perhaps

most importantly, it can spur innovation by opening

up new market opportunities for low-carbon exports

and investments and by incentivizing entrepreneurs

and industries to compete to fill them.

If low-carbon production reaches the point where

it beats high-carbon production on price and

performance – because environmental costs are

internalized in high-carbon production through taxes

and other policies or because technological advances

alone make low-carbon alternatives cheaper and

better – then market forces will increasingly drive the

transition and progress will accelerate.

This is already happening. Scientific advances,

more efficient production processes, and rising

global demand – all supported by open world trade

– have driven an astonishing reduction in price

and improvement in performance of low-carbon

technologies (see Figure A.2). The price of solar

power, for example, has fallen by almost 90 per cent

since 2010, while the efficiency of solar panels has

doubled since 1980. Last year alone, the cost of

electricity from onshore wind fell by 15 per cent,

and from offshore wind by 13 per cent. The price of

lithium-ion batteries has plunged by 97 per cent since

1990, while their energy density has nearly tripled in

just 10 years.

Even more challenging sectors, such as steel

production, managed to cut energy use in half

between 1975 and 2015 – with reductions continuing

– because of technological advances and a shift from

traditional blast furnaces toward electric arc furnaces

(IEA, 2020). As a result of these dramatic price and

performance improvements, low-carbon technologies

are becoming more economically competitive, not just

more environmentally sustainable, alternatives. For

example, almost two-thirds of the world’s new wind

and solar power plants are able to generate electricity

more cheaply than the world’s cheapest new coal

plants (IEA, 2022a; WTO and IRENA, 2021).

The fundamental driver of this change is

improvements in technology and production, which

are in turn being driven by strong learning-by-doing

effects. As the world gets better at building, installing

and using solar panels, for example, the price falls

and the technology improves. It has been estimated

that every time the number of solar panels installed

doubles, their price drops another 30 to 40 per cent

(Naam, 2020). By helping to create a competitive,

dynamic and integrated a global marketplace for solar

and other clean technologies, trade plays a central

Figure A.2: The price of renewables has plunged in the last 10 years

Source: Authors’ calculations, based on Lazard’s Levelized Cost of Energy Analysis (2019).

Solar

photovoltaic

Onshore wind

Gas peaker

Solar thermal

tower

Gas

(combined cycle)

Nuclear

Electricity price from new power plants

(US$ per megawatts)

359

135

275

175

168

141

111

109

123

155

2009 2019

WORLD TRADE REPORT 2022

role in underpinning and accelerating this process. It

is significant that between 2010 and 2020, exports

of solar panels increased and their prices fell sharply

(see Figure A.3).

But the contribution of trade and trade policy to a

just low-carbon transition could be strengthened

and improved. One positive step would be to reduce

trade-distorting measures on climate-friendly

goods, services and technologies and to strengthen

supply chains. Opening up trade across a range of

low-carbon products and services would expand

global access, increase competition and lower

prices, making it easier and cheaper for economies

to transition to low-carbon energy, mobility and

production alternatives, and thus reducing overall

emissions. Conversely, by making it more difficult

to import key environmental technologies, e.g., by

raising tariffs or imposing restrictions, the shift from

a high- to a low-carbon economy will only be slowed

and impeded.

Another key issue is the interface between trade and

environmental subsidies and other support measures.

A growing number of countries use subsidies either

to encourage producers to invent, adopt and deploy

low-carbon technologies, or to encourage consumers

to purchase environmentally sustainable products

and services. If they are well-targeted and non-

discriminatory, environmental subsidies can play

a positive role in scaling up new technologies and

making climate-friendly products more affordable.

Government incentives to insulate homes, install

solar panels or buy electric vehicles are increasingly

common examples.

But subsidies can also be used to support carbon-

intensive production and consumption, making

the climate crisis even worse. In the case of fossil

fuel subsidies – which amounted to US$ 440

billion in 2021 (IEA, 2022d) – many governments

find themselves in the contradictory position of

encouraging oil, gas and coal industries even as

they are discouraging them with carbon taxes and

regulations. Moreover, subsidies can negatively

impact other trade partners by distorting markets

or unfairly boosting exports. The challenge is to

find an optimal balance between maximizing

positive spillovers from environmental support

measures – both nationally and globally – and

minimizing negative ones.

One of the most challenging issues is the relationship

between trade and carbon pricing. Environmental

Figure A.3: As the use of solar panel exports increases, their price falls

Source: Authors’ calculations, based on data on solar PV module costs from Kavlak, McNerney and Trancik (2018) and Bloomberg

Terminal and trade figures from the UN Comtrade database.

Note: The trade data covers the Harmonized System (HS) code 85414.03, which does not distinguish between solar PV cells and modules

and other products such as light-emitting diodes.

Imports of solar PV panels (cells and modules) Average solar PV module price

1990 1995 2000 2005 2010 2015 2020

900

800

700

600

500

400

300

200

100

Trade in solar PV panels in real US$ million (2015)

Solar PV module price in real US$ (2015) per watt

CLIMATE CHANGE AND INTERNATIONAL TRADE

A. INTRODUCTION

subsidies and carbon prices are essentially the

opposite sides of the same coin. The former makes

environmentally friendly purchases cheaper, while

the latter makes environmentally damaging ones

more expensive, all with the aim of persuading firms

and consumers to switch to less carbon-intensive

alternatives.

Ideally there would be a global agreement on

carbon prices. Instead, close to 70 separate carbon

pricing initiatives have been adopted in 46 national

jurisdictions worldwide – which risks creating a

patchwork of different systems, tax rates, covered

products and certification procedures. As a result,

countries with high carbon taxes worry that their

industries will shift to low- or no-carbon tax countries

– i.e., “carbon leakage” concerns. Conversely,

countries with no carbon taxes worry that their

exports will be unfairly shut out of carbon-taxing

countries – i.e., “hidden protectionism” concerns.

Although WTO rules – especially those concerning

national treatment – allow tax adjustments at the

border, adjusting taxes for carbon could prove far

more complex than adjusting them for alcohol, for

example. The challenge is to find a policy mix that

balances the need to discourage carbon emissions

with the need to encourage trade to support a low-

carbon transition.

Arguably the most important way trade can

contribute to a “just” transition to a low-carbon

global economy is by helping to expand, diffuse

and share technological progress. Today’s world

economy is an increasingly interdependent system,

and climate change is the most challenging collective

action problem it has ever faced. It is unrealistic,

not to mention unfair, to expect poorer countries to

take the same steps to curb carbon emissions as

advanced ones if they lack the technological and

financial resources to do so. Indeed, this is explicitly

recognized in the core concept of “common but

differentiated responsibilities” set out in the Paris

Agreement. The developed world has a direct stake

in helping the developing world to manufacture,

deploy and maintain low-carbon technologies, if only

because no one country can solve the climate crisis

on its own. Trade cooperation is key to driving this

global transformation; trade fragmentation would

invariably set it back.

3. Overview of the report

This year’s World Trade Report looks at the

relationship between climate change and trade,

examines why trade is an indispensable part of the

solution to tackling climate change, and discusses

areas where policies need to improve. A core

message of the report is that solving the climate

crisis depends on a far-reaching transformation of

the global economy, and that trade will be critical to

driving the needed technological and economic shift

to a low-carbon future.

The other core message is that this unprecedented

global shift will require unprecedented international

cooperation – and that there is no alternative to

achieving a just transition where the costs and

benefits are more evenly and equitably shared.

Thirty years after the adoption of the United

Nations Framework Convention on Climate Change

(UNFCCC), this report underscores how the goals

of environmental sustainability and economic

development are not only compatible, but inextricably

and mutually dependent.

Although the issue of trade and climate change

is by no means new, the relationship is complex,

multifaceted and fast-evolving. This is partly due

to the fact that the relationship not only involves

the interplay between international trade and

climate change, but also covers linkages with trade

policies and climate policies (see Figure A.4). Their

interactions occur in several directions, with both

direct and indirect mechanisms which are in part

determined by geographical, institutional, socio-

economic and technological conditions. The global

nature of climate change further amplifies this

complexity (WTO and UNEP, 2009).

The report opens with a chapter on adapting to the

consequences of climate change. While reducing

GHG emissions to limit the rise in global temperature

to well below 2°C – and preferably to below 1.5°C

– is essential to limit the consequences of climate

change, past GHG emissions have already caused,

and continue to cause, global temperatures and sea

levels to rise, and have increased extreme weather

events. Many consequences of climate change are

already hard to reverse. Adapting to the changing

climate and its cascading impacts is therefore a

sustainable development imperative. Chapter B

explores how the geophysical effects of climate

change will affect international trade, and identifies

the effects of such changes on trade costs, supply

chains and the most vulnerable regions and sectors.

It discusses ways in which international trade and

trade policy can help with climate change adaptation

strategies, and outlines how international cooperation,

and the WTO in particular, can contribute to helping

countries, and in particular developing and least-

developed countries, adapt to some of the disruptive

consequences of climate change.

WORLD TRADE REPORT 2022

Mitigating climate change by reducing GHG emissions

is essential but requires a large-scale transition to a

low-carbon economy. Chapter C examines the role

of ambitious climate change mitigation policies and

well-functioning financial markets in supporting and

accelerating the transition to a low-carbon economy.

It discusses how the transition to a low-carbon

economy could change trade patterns and provide

new economic opportunities, as well as certain initial

disadvantages for some economies. Such changes

require enhanced international cooperation, and

the WTO can play an important role in supporting

climate-change mitigation efforts.

Among the many policies to mitigate climate change,

carbon pricing has attracted increasing attention as

it puts a price on carbon emissions as a means of

reducing emissions and supporting investment into

lower-carbon alternatives. Chapter D explores the

role of carbon pricing in reducing GHG emissions

and the relationship between carbon pricing, trade

and trade policies. The necessity of developing a

solution to the current patchwork of uncoordinated

carbon pricing policies, which could lead to tensions

in the global trading system, is discussed, as well as

the importance of international cooperation to achieve

convergence on global carbon pricing approaches.

While international trade separates production and

consumption across space, the emissions generated

in one country to produce goods and services are

not necessarily the same as the ones required for its

consumption. Chapter E analyses how the emissions

originating from international trade can be measured,

and examines how trade both contributes to GHG

emissions and diffuses the technology and know-

how needed to make production processes cleaner.

The necessity for greater international cooperation

to establish adequate carbon measurement

and verification, improve carbon efficiency in

transportation, and ensure the environmental

sustainability of global value chains, is reviewed.

The development and diffusion of climate-friendly

technologies, including renewable energy and

energy efficient technologies, are key to tackle

climate change. Chapter F discusses how trade

in environmental goods and services can enable

access, deployment and diffusion of environmental

technologies, which are instrumental in mitigating

carbon emissions and developing ways in which

people and trade can adapt to climate change.

While the WTO agreements ensure that trade in

environmental technologies flows as smoothly and

predictably as possible, the WTO could make an

even greater contribution to promoting trade in

environmental goods and services.

Figure A.4: The relationship between climate change and trade is complex and multifaceted

Source: Authors’ elaboration.

+ / -

Trade

policies

Climate

policies

Trade Climate change

+ / -+ / -

+ / -

Geography Institution Socio-economy Technology

A. INTRODUCTION

CLIMATE CHANGE AND INTERNATIONAL TRADE

Endnotes

1 “Net Zero” involves reducing greenhouse gases (GHGs)

to as close to zero as possible, so that any GHGs that

are produced can be absorbed from the atmosphere.

GHGs are gases in the atmosphere such as water vapour,

carbon dioxide (CO

), methane (CH

) and nitrous oxide

O) that can absorb infrared radiation, trapping heat

in the atmosphere. This greenhouse effect means that

emissions of GHGs due to human activity cause global

warming. The species of gases reported under the

common reporting format of the United Nations Framework

Convention on Climate Change (UNFCCC) are: CO

from

fossil fuel combustion and industrial processes (CO

FFI); net CO

emissions from land use, land-use change

and forestry (CO

-LULUCF); methane (CH

); nitrous

oxide (N

O); and fluorinated gases (F-gases), comprising

hydrofluorocarbons (HFCs), perfluorocarbons (PFCs),

sulphur hexafluoride (SF

) and nitrogen trifluoride (NF

)

(IPCC, 2022a). Although carbon dioxide is the primary

GHG emitted through human activities, methane has

become an emerging GHG given its more potent heat-

trapping ability.

2 It has been pointed out that economic authorities have

dramatically underestimated the rapid expansion and

declining costs of renewables every year since 2000

(Beinhocker, Farmer and Hepburn, 2021).

The role of trade

in adapting to

climate change

While reducing greenhouse gas emissions is essential to limit

the consequences of climate change, climate change is already

having a major impact on the environment, people and, as a result,

the global economy. This chapter explores the impacts of climate

change on international trade and discusses the role that trade,

trade policy and international cooperation can play in supporting

climate change adaptation strategies. Climate change increases

trade costs and disrupts production and supply chains. However,

trade and trade policies, in conjunction with relevant policies and

international cooperation, can help to alleviate some of the impacts

of climate change, including on food security, by contributing to

enhancing economic resilience.

Contents

1. Introduction 28

2. Why does climate change adaptation matter? 28

3. International trade and trade policy can support

climate change adaptation strategies 34

4. International cooperation is essential to assist countries

in adapting to climate change 39

5. Conclusion 47

Key facts and findings

• Climate change can impact international trade by affecting trade costs, altering

comparative advantages, and disrupting global value chains. A rise of 1°C has

been found to reduce the annual growth of developing countries’ exports by

between 2.0 and 5.7 percentage points.

• Climate change adaptation encompasses actions that reduce the negative

impacts of climate change, while taking advantage of potential new opportunities.

• International trade can help support climate change strategies, such as

prevention and reduction of, and preparedness for, climate risk, as well as

recovery and rehabilitation from climate disasters. Trade can also contribute

to strengthening food security during climate-induced supply-side disruptions.

• Although climate change adaptation initiatives are mostly locally-led,

international cooperation is essential to enhance the resilience of international

trade with regard to climate-induced shocks and to improve economies’

capacity to adapt to climate change.

WORLD TRADE REPORT 2022

1. Introduction

The consequences of climate change, including

global warming, rising sea levels and extreme weather

events (EWEs), are already tangible and are affecting

lives, livelihoods and ecosystems around the world.

The future holds higher global temperature, a faster

sea level rise, more frequent and intense EWEs,

and other short- and longer-term climate hazards

(IPCC, 2021). Although reducing greenhouse gas

(GHG) emissions is necessary to mitigate climate

change and limit the most severe consequences of

climate change, finding ways of adapting to climate

change and its current and future consequences is a

sustainable development imperative.

This chapter discusses how climate change can affect

international trade through productivity alteration,

supply chain disruptions, changes in trade costs and

modified comparative advantages. It then reviews

how international trade and trade policy can support

climate change adaptation strategies. The chapter

concludes by examining the role of international

cooperation, and in particular that of the WTO, in

helping with climate change adaptation.

2. Why does climate change

adaptation matter?

Climate change is not only an environmental problem,

but also a systemic risk affecting people and the

economy. Its effects on international trade can

already be seen. Global warming reduces capital and

labour productivity, and EWEs can disrupt transport

infrastructure. Without adaptation and mitigation,

these effects will continue to increase in the future,

impacting trade costs and factors of comparative

advantage.

(a) Climate change has severe effects

on people and the economy

Climate change affects almost all aspects of human

life. Between 2030 and 2050, climate change could

cause 250,000 additional deaths per annum as a

result of malnutrition, malaria, diarrhoea and heat

stress alone (WHO, 2018). It may also have severe

social and political implications, including domestic

or communal violence, resulting, for example, from

forced migrations from one region to another due to

rising sea levels or drought, especially in countries

with weak property rights (see Box B.1) (Burke,

Hsiang and Miguel, 2014).

Climate change poses a severe threat to the global

economy. Projections by the OECD suggest that

a warming of between 1.6°C and 3.6°C above pre-

industrial levels by 2060 could cause global annual

GDP losses of between 1 and 3.3 per cent relative

to a hypothetical reference scenario in which climate

change damages do not occur (Dellink, Lanzi and

Box B.1: Climate change impacts on security in the Sahel

The Sahel is a semi-arid transition zone dividing the Sahara Desert to the North and tropical Africa to the

South. Agriculture and cattle-herding remain the main economic pillar of the region. Food, water and energy

availability, and ultimately security in the region, are at risk as a consequence of climate change (Rose, 2015).

Successive years of poor rainfall and frequent droughts have pushed pastoralist populations to migrate

to more humid regions for longer periods of time (Brottem, 2016; Nyong, 2007). Migrations of herders to

land occupied by sedentary farmers can lead to conflicts over land use and other resources (Nyong, 2007).

Confrontations tend to occur periodically, particularly around water resources and fodder, and in areas with a

lower level of agricultural productivity (Nyong, Fiki and McLeman, 2006).

Climate change is expected to exacerbate these issues by extending the annual dry season and, thus, the

period during which the same land is used both for maturing crops and for roaming cattle, further increasing

the risk of conflict. A 1°C rise in temperature has been found to increase the probability of conflict between

farmers and herders by 54 per cent in the Sahel, compared to a 17 per cent increase in the probability of

conflict in places where farmers and herders do not have to compete over access to limited land and water

resources (Eberle, Rohner and Thoening, 2020). Such conflicts limit the ability of local communities to adapt

to climate change, potentially creating a “climate-conflict trap” (Granguillhome et al., 2021).

Climate change-induced instability can also affect trade, including small scale cross-border trade.

Conflicts destroy food supply and the production capacity of farms, and ultimately deter investment across

the agricultural value chain (Kimenyi et al., 2014). Such instability in agricultural markets often translates

into increased food prices, which affect the poorest households disproportionately. In this context, risk

management strategies, including climate-resistant agricultural investment, crop diversification, insurance

and safety nets, can help farmers adapt to climate change, while mitigating conflict risks.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

Chateau, 2019). Although the range of projected

GDP losses at the global level is broadly consistent

in the literature,

such projections are necessarily

speculative, due to the uncertainty of how climate

change will progress and how economies will

adapt. Projections also vary based on modelling and

calibration approaches. There is also considerable

heterogeneity in projections across regions. For

example, GDP losses are expected to be much higher

in regions highly exposed and vulnerable to weather-

related hazards and with lower resilience to losses,

such as the Middle East and North Africa, South and

Southeast Asia, and Sub-Saharan Africa (Dellink,

Hwang, et al., 2017). The most vulnerable populations,

in particular those in developing countries and in

small-island developing states (SIDS), are likely to

bear a disproportionate share of the burden due to

their higher exposure and lesser capacity to adapt to

climate change.

(b) The impacts of climate change

on trade are heterogenous across

regions and sectors

Climate change, both in terms of gradual changes –

such as temperature and sea level rise or changes in

precipitation regimes – and in terms of the increasing

frequency and intensity of EWEs, can have severe

effects on trade. In the short term, the damage caused

by EWEs can reduce productivity, increase trade

costs and disrupt supply chains. In the long term,

climate change can affect trade through its impact

on factor endowments and comparative advantage.

As discussed by Danae Kyriakopoulou in her opinion

piece, the risk of inaction in climate change has

profound implications on international trade.

(i) Climate change will alter patterns of

comparative advantage, leaving some

economies at a disadvantage

The availability and productivity of arable land, water,

capital and labour are being affected by climate

change, and the effect differs across regions. Higher

temperatures and the increased frequency and

intensity of droughts, floods and rain are degrading

land quality in some regions and reducing crop yields

(Sleeter et al., 2018). Rising temperatures and sea

levels and melting glaciers are altering the hydrological

cycle (i.e., the circulation of water between the

ground and the atmosphere), leading to flooding and

loss of land. Meanwhile, groundwater reservoirs are

declining in regions with low water runoff. Overall, the

distribution of water is expected to become even more

uneven (Lall et al., 2018; World Bank, 2016).

Human exposure to increased temperatures reduces

labour productivity by diminishing capacity for

physical work and mental tasks and by increasing the

risks of accidents and of heat exhaustion or stroke

(Kjellstrom, Holmer and Lemke, 2009; Somanathan

et al., 2021; UNDP, 2016). Empirical evidence

suggests that for every 1°C temperature rise

above 25°C, labour productivity falls by 2 per cent

(Seppanen, Fisk and Faulkner, 2003). One measure

of adaptation to counteract the impact of increasing

temperatures on human capital productivity is an

increased use of energy-efficient air conditioning in

workplaces. But this would entail higher costs both

in terms of acquiring air conditioning systems and of

energy costs to run them, with a consequent loss of

competitiveness for firms.

Rising temperatures may also reduce capital

productivity. For example, higher temperatures can

cause heavy machinery to overheat more often,

requiring more frequent and longer cool-down

periods. Outdoor infrastructure may depreciate

faster, which would reduce its lifespan (IPCC,

2014a). Overall, the impact of climate change on

trade through changes in productivity channels

depends on the geographical localization of countries

and on what they produce, and this is likely to alter

comparative advantages.

Changes in the patterns of demand, beyond changes

in production specialization, will also matter to shape

the impact of climate change on trade. In this respect,

a country’s reliance on trade with climate-vulnerable

countries and communities, and its levels of global

integration more broadly, will also matter, as they

determine the exposure of that country to climate

impacts from abroad. In this regard, trade can be a

channel through which climate change damages can

spread across countries (Schenker, 2013; Schenker

and Stephan, 2014; WTO, 2021c).

The impact of climate change is expected to be

stronger on countries in lower-latitude regions, many of

which are developing economies whose comparative

advantage stems from climatic or geophysical

factors. Based on projections, an increase in global

temperatures of 2.5°C by 2060 could decrease export

volumes by as much as 5 to 6 per cent for countries in

South Asia and Sub-Saharan Africa, 3 to 4 per cent

for the Middle East, North Africa, and South-East

Asia, and 2 per cent in Latin America, compared with

less than 1 per cent in Europe and North America

(Dellink, Hwang, et al., 2017). However, the complex

set of linkages that exist within and across economies

makes it particularly difficult to predict to what extent

an economy will gain or lose competitiveness in a

given sector in response to a climate-related shock. At

WORLD TRADE REPORT 2022

OPINION PIECE

By Danae Kyriakopoulou

Senior Policy Fellow at the Grantham Research Institute on Climate

Change and the Environment at the London School of Economics and

Political Science, Advisory Council member at the Official Monetary

and Financial Institutions Forum Sustainable Policy Institute, and

Young Global Leader of the World Economic Forum

Climate inaction: implications

for international trade

The pandemic-related disruption

of supply chains and the political

imperative to reorient partnerships

following the outbreak of the

Ukraine war have exposed the

vulnerability of global trade to

risks originating outside of the

economy. Climate-related risks

are increasing in frequency,

intensity and geographic spread.

Unlike the pandemic and the war,

we can anticipate and manage

them, albeit against a diminishing

window of opportunity.

Policies aimed at mitigating climate

change and adapting to its effects

are occasionally dismissed as

“too costly”. In a post-pandemic

environment of stressed finances

for governments, businesses and

households, an “expensive and

unaffordable green transition” makes

an easy target. Such narratives are

dangerously short-sighted: delaying

climate action bears the much

greater opportunity cost of inaction.

Continuing with “business as usual”

is becoming visibly more costly,

not only in terms of the natural

environment, but also in the global

economic, financial and trade

system. The trade implications of

more frequent and intense extreme

weather events (EWEs), of gradual

climatic changes and of policy

adjustments, such as climate-

driven taxes and regulation, are

already manifesting through multiple

channels.

EWEs, such as hurricanes and

floods, are directly damaging critical

infrastructure, including roads,

bridges, ports, railway tracks and

airports. More frequent disruptions

hurt both goods and services

trade, such as tourism. Food and

agriculture trade is particularly

exposed to heatwaves and droughts

that can affect crop yields and

tempt countries to restrict exports.

In May 2022, India – a major wheat

producer – banned exports on the

grounds of national food security

amid a heatwave.

But there doesn’t have to be a

natural disaster for there to be an

economic one: gradual changes

in temperature that expose capital

equipment and labour to heat

stress, or increase cooling costs

in storage facilities, can also hurt

productivity and disrupt global

value chains (GVCs). Economies

whose comparative advantage

is tied to climatic processes are

highly exposed: degraded land and

water stress will impact agriculture,

while ecosystem damage and

shifts in weather conditions will

affect tourism in sea or ski resorts.

Such processes can shift patterns

of comparative advantage and

structurally change global trade.

While some risks can be partly

managed by diversifying supply

chains and building buffer stocks,

these strategies have limits and

would involve compromising on

the fundamental building blocks

of the modern trade system:

specialization according to

comparative advantage, economies

of scale, and optimizing of global

value chains (GVCs).

And it is not just the physical

climatic disruptions that threaten

global trade, but also the so-called

“transition risks” inherent in the

changing strategies, policies or

investments needed in the green

transition. The uneven pace of

climate action across countries

has led some governments to

consider border carbon adjustment

measures involving charges on

imports and/or export rebates,

to level the playing field among

firms subject to different climate-

related regulations and taxes. Such

measures, while addressing carbon

leakage, can unravel trade patterns

by incentivizing re-shoring or short-

circuiting supply chains.

The risks of inaction highlight

the urgent need to redesign our

economies in a way that works

for the planet and its people, now

and for the future. But this is not

only a negative story about risks.

It is a growth, investment and

trade story of change towards a

future that is enormously attractive,

with more productive economies,

healthier societies and more fruitful

ecosystems.

WORLD TRADE REPORT 2022

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

the same time, understanding the mechanism through

which this happens provides insights as to which

economies are most at risk.

Whether an economy gains or loses comparative

advantage in a given sector depends broadly on

its initial productivity, and how its productivity and

prices respond to a climatic change relative to other

competing economies. It also depends on the linkages

between different economic sectors, both within and

across regions. For example, an analysis of the relative

ability of a country to produce food products vis-à-

vis its trading partners, commonly known as revealed

comparative advantage (RCA),

shows that, in the

case of an increase in global temperatures of 2.5°C

by 2060, RCA could increase for some economies.

However, it could also decrease for other economies

faced with a similar agricultural yield shock if the latter

depend more on domestic agricultural output for

exports of manufactured food products. These impacts

could be further amplified by the negative effect of

climate change on income and, thus, on final demand

(Dellink, Hwang, et al., 2017).

Geography-related temperature levels are a driving

force behind the disproportionate impacts of climate

change on developing economies and least developed

countries (LDCs). Since the current temperatures in

many developing economies and LDCs are already

higher than in developed ones, the marginal negative

impact of increasing temperatures on the former is

also higher (while some developed countries in colder

northern regions may even experience productivity

gains in some sectors). A given temperature increase is

likely to cause productivity to decline more in developing

economies and LDCs, as their productivity in non-

agriculture sectors is often lower than in developed

economies, meaning these economies would lose

not only their existing comparative advantages, but

would also find it particularly challenging to develop

comparative advantage in other sectors (Conte et al.,

2021; Schenker, 2013). Since productivity losses and

gains tend to be geographically concentrated, and

neighbouring economies tend to trade more with each

other than with more distant economies, losses and

gains in trade are likely to be shaped by geographical

patterns of productivity changes, which could increase

international inequalities (Dingel, Meng and Hsiang,

2019).

These impacts can be amplified by economic

factors such as commodity dependence or a lack

of diversification (UNCTAD, 2019). Countries that

have less diversified exports tend to be generally

more vulnerable to climate change (see Figure B.1).

For instance, Sub-Saharan Africa, in which most

countries’ exports are dominated by the agriculture,

energy or mineral sectors, is one of the regions most

exposed to climate change.

(ii) Climate change is likely to increase

trade costs unevenly across regions

Transport infrastructure is dangerously at risk of

damage both from gradual climatic changes and from

EWEs (Koks et al., 2019; WTO, 2019). Increasing

temperatures can cause roads, bridges, runways

and railway tracks to depreciate faster. Transport

infrastructure and inland waterways can become

partially or completely inoperable due to EWEs and

sea level rises in coastal regions (EEA, 2017; IPCC,

2014b). Climate change will increase infrastructure

maintenance and repair costs, indirectly adding to

trade costs. The unpredictability of damages related to

EWEs is a source of uncertainties and high operational

risks that can increase disruptions and delays, and in

turn create additional costs, such as requirements for

freight insurance (Barrot and Sauvagnat, 2016; Boehm,

Flaaen and Pandalai-Nayar, 2019; WTO, 2021c). In

particular, climate change can affect strategically

important junctures on transport routes through which

exceptional volumes of trade pass in the global trade

network,

and this can create vulnerabilities for the

trade system (Bailey and Wellesley, 2017).

While all modes of transport are likely to be negatively

affected by EWEs, maritime transport – which

accounts for 80 per cent of world trade by volume

– is particularly vulnerable and exposed to climate

change. In a worst-case “high emission” scenario

where GHG emissions continue to rise unchecked

and global temperatures rise by around 4°C by 2100,

the number of ports at extremely high, very high or

high risk from multiple climate hazards could almost

double, from 385 to 691 key ports globally (out of

2,013 examined) (Izaguirre et al., 2021).

Greater heat stress and increased coastal flooding

and overtopping due to sea level rise, can have a

strong impact on waterways and port capacity, and

negatively impact trade by exacerbating bottlenecks,

capacity constraints, congestion and delays, thereby

increasing trade costs. For example, in the three

months following Hurricane Katrina in 2005, Gulfport

and the Port of New Orleans saw a direct reduction

of between 71 per cent and 86 per cent of both

exports and imports due to the destruction of their

port facilities, although there was no overall impact

on aggregate US trade because other ports took up

the slack (Friedt, 2021).

However, while developed and larger economies

tend to have a more diversified and resilient transport

infrastructure, small or landlocked countries, whose

WORLD TRADE REPORT 2022

trade flows through a limited number of ports and

trade routes, are especially vulnerable in this regard

(Bahagia, Sandee and Meeuws, 2013; Izaguirre et

al., 2021). For instance, the Paraná River, which

transports 90 per cent of Paraguay’s international

trade of agricultural goods, 85 per cent of Argentina’s

and 50 per cent of Bolivia’s, now frequently reaches

very low levels due to recurrent severe droughts.

Shallow water forces cargo ships to operate at half

or lower capacity in order to navigate and transport

agricultural commodities and other goods, causing

significant congestion and delays around the

waterways and ports (Batista and Gilbert, 2021).

Other rivers, including the Danube and the Rhine, are

experiencing similar situations with low water levels,

making it impossible for many vessels to operate.

Although climate impact on transportation is expected

to be largely negative, climate change could positively

affect some regional transportation networks (WTO,

2019). For instance, a reduction in sea-ice may lead

to the availability of new and shorter shipping routes.

In the Arctic, the ice cap loss caused by warmer

temperatures could open up the possibility of a

northwest passage during portions of the year, which

would reduce maritime shipping times and distances

between parts of Asia and Europe by up to 40 per

cent (Rojas-Romagosa, Bekkers and Francois, 2015).

However, the benefits of these new routes remain

uncertain because of factors such as underdeveloped

communication and transportation infrastructure

in the region and reduced speeds and potential

damage to ships due to hazardous sailing conditions.

Increased shipping activity in the region could also

have adverse consequences for ecosystems.

(iii) Trade in agriculture and tourism are

particularly vulnerable to climate

change

If temperatures continue to rise in the absence of

robust adaptation measures, climate change will

have profound effects on trade in agriculture. Existing

models emphasize two potential effects.

First, the effects of climate change on trade in

agriculture are heterogenous across regions. For

countries that would experience a loss in agricultural

productivity, or negative yield shock, all else being

equal, the impact on trade could depend on the

magnitude of the shock relative to that experienced

in other countries. Sub-Saharan Africa and South

Figure B.1: Economies with less diversified exports tend to be more exposed to climate change

Source: Authors’ calculations, based on ND-GAIN Climate Vulnerability Index and IMF Export Diversification Index for 2014.

Note: The climate change exposure index measures how much societies and economies will be stressed by the physical impacts of climate

change. The size of the dots represents each country’s vulnerability to climate change. The climate change vulnerability index considers

countries’ exposure to climate change, their sensitivity to related impacts, and their adaptive capacity.

The export diversification index

ranges from zero (no diversification) to one (complete diversification).

0.1

0.4

0.5

0.7

0.25 0.35 0.45

Climate change exposure index

0.55 0.65 0.75

East Asia and the Paciﬁc Europe and Central Asia Latin America the Caribbean

North America Sub-Saharan Africa South Asia

Middle East and North Africa

0.6

0.2

0.3

Export diversiﬁcation index

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

Asia are the regions often projected as the most

vulnerable to climate change effects. Economies in

these regions are reliant on exports of agriculture, but

are also major importers of agricultural commodities

for domestic consumption. They are expected to

suffer larger negative yield shocks compared to other

regions (IPCC, 2022a; Jägermeyr et al., 2021). This

means that as their production suffers, their exports

could decline, forcing them to import more to meet

domestic demand (Dellink, Chateau, et al., 2017;

Gouel and Laborde, 2021; Hertel, 2018).

Second, under more severe climate damages, only a

few economies in colder regions would experience

productivity gains in agriculture. In such a scenario,

international markets for agriculture could become

concentrated, with few dominant exporters (FAO,

2018a).

Climate change is also likely to increase agricultural

trade volatility. By increasing the risk of simultaneous

failure of crop systems in multiple grain- or food-

producing economies, climate change increases

concerns about food security (Adams et al., 2021). For

instance, the possibility of simultaneous production

losses greater than 10 per cent happening in the four

largest maize-exporting economies in any given year

could increase from 0 per cent to 7 per cent as a

result of global warming of 2°C, and to 86 per cent

as a result of global warming of 4°C (Tigchelaar et al.,

2018). Such an occurrence would cause widespread

shortages and a surge in world prices of these

commodities. This is especially worrisome in view of

the evidence that governments often react to rising

food prices by imposing export restrictions, which

would exacerbate these effects (Giordani, Rocha and

Ruta, 2012). Such higher global prices can make it

even more difficult for net food-importing developing

countries to purchase food (Welton, 2011).

Since climate is an important factor in the choice

of tourist destinations, tourism is also expected to

be affected by moving towards higher altitudes and

latitudes as climactic zones shift northward (Biango,

Hamilton and Tol, 2007; Hamilton, Maddison and Tol,

2005). Due to increasing temperatures, traditional

summer destinations may lose their appeal in summer

months but become more suitable in other seasons.

More favourable climates in northern regions may also

divert tourist flows, further increasing competition

between tourist destinations. For instance, as the

Atlantic and Northern European coasts become

warmer, they could gain tourists at the expense

of Mediterranean beach destinations which are

becoming too hot (EEA, 2017). Similarly, warmer

winters are a risk to winter and mountain destinations

(WTO, 2019).

Low-lying island nations whose economies are highly

dependent on tourism are particularly vulnerable

to climate change. Sea level rise and EWEs could

make these destinations permanently unattractive to

visitors by causing damages to tourism infrastructure

and sites. For example, in Pacific island countries,

such as the Marshall Islands, Kiribati and Tuvalu,

over 95 per cent of the built infrastructure is located

in coastal regions vulnerable to risks caused by sea

level rise and EWEs (Kumar and Taylor, 2015; Wolf

et al., 2021).

(iv) Manufacturing sectors are exposed

to climate-induced global value chain

disruptions

Manufacturing sectors tend to be less vulnerable

to climate change, partially because of a lower

sensitivity and higher adaptive capacity to climatic

variability. However, industrial sectors dependent on

climate-sensitive inputs (such as food processing),

labour-intensive sectors and sectors highly integrated

into global value chains (GVCs) are likely to be

affected. For example, export growth of agriculture

products (e.g., cereals, dairy and eggs, leather,

animal feed) and light manufacturing (e.g., clothes,

shoes, furniture, consumer electronics and home

appliances) from low-income economies to the United

States have been found to decrease by between 2

and 5.7 per cent in response to a 1°C temperature

increase (Jones and Olken, 2010). While the impact

of temperature increase on agriculture-related

exports is generally a result of climate-induced

damage to agricultural productivity, the impact on

light manufacturing trade is likely a result of reduced

labour productivity at higher temperatures.

Climate change will also affect the manufacturing

sectors through disruptions in supply chains. For

instance, the 2022 floods in Pakistan destroyed

approximately 40 per cent of the country’s cotton crop,

severely impacting the textile industry – Pakistan’s

largest export – which relies heavily on domestic

cotton production for raw materials. Adverse effects

of local weather events can, under certain conditions,

propagate along supply chains and across countries

(WTO, 2021c). For example, in 2011, flooding

in Thailand disrupted the global electronic and

automotive industries, causing an 80 per cent decline

in year-on-year global production in November 2011

(McKinsey Global Institute, 2020) and an estimated

2.5 per cent decline in global industrial production

growth (Kasman, Lupton and Hensley, 2011). Japanese

manufacturers, heavily dependent on intermediate

inputs from Thailand, produced at least 423,000 fewer

cars in 2011 because of the floods (Haraguchi and

Lall, 2015).

WORLD TRADE REPORT 2022

Among GVC-intensive sectors, the potential impacts

of climate-induced GVC disruptions are more severe,

with effects lasting up to many months, for relation-

specific supply chains than for other types of supply

chains

because each supplier manufactures a

unique and highly differentiated input that is difficult

to replace in the short term. For instance, the supply

chain of advanced semiconductors is relation-

specific, with many components manufactured in

the Asia-Pacific region. The probability of disruptive

hurricanes in these manufacturing hubs is expected to

increase two to three times by 2040. Any disruption

could have cascading effects. For a five-month

supply disruption, downstream industries could

lose between 5 and 30 per cent of their revenue,

depending on their level of preparation (McKinsey

Global Institute, 2020).

Climate-induced supply chain risks can be further

exacerbated by firms’ limited capabilities to assess

emerging risks from climate change and adopt risk

management strategies. Firms, including in developed

economies, do not always prioritize climate change as

an operational risk (Tenggren et al., 2020). In addition,

the complex structure of many supply chains makes

comprehensive climate-related risk assessment and

management particularly challenging.

3. International trade and trade

policy can support climate

change adaptation strategies

Even if the Paris Agreement’s long-term goal of

limiting the rise in global temperature to well below

2°C – and preferably to below 1.5°C – is met, past

GHG emissions have already caused, and continue

to cause, global temperatures and sea levels to rise,

and more frequent and intense EWEs, making climate

change adaptation an imperative. Climate change

adaptation strategies encompass actions that reduce

the negative impact of climate change, while taking

advantage of potential new opportunities that climate

change might create. Reducing the consequences

of climate change can be achieved by identifying,

preventing and reducing actual or expected climate

risks, exposure and vulnerabilities, and by being

prepared to cope with the effects of climate change

and to minimize unavoidable losses and damages

from climate change by adjusting existing systems

(IPCC, 2007a, 2022b).

In practice, adjusting existing systems means

adapting the behaviours of people, firms and

governments, and modifying infrastructure to deal

with the current and future changing climate.

Common examples of adaptation strategies include

early warning and information-sharing systems, flood

risk control, insurance, the introduction of new crop

varieties, livelihood diversification, soil and water

conservation, and sustainable forest management.

Although climate change adaptation and mitigation are

often considered separately, they can be considered

as two sides of the same coin. For instance, well-

managed afforestation and reforestation can increase

carbon storage capacity, while at the same time

reducing exposure and vulnerability to weather-

related risks, such as landslides.

Given the urgency

to scale-up climate change actions, synergies

between climate change adaptation and mitigation

can help achieve climate resilience more effectively.

While international trade affects climate change

(see Chapter E), it can also play an important role in

climate risk prevention, reduction and preparedness,

and in climate disaster recovery and rehabilitation,

even though the consequences of climate change

will remain disruptive and costly. Trade can help

strengthen food security, and facilitate access to

essential goods and services after EWEs hit.

In that

context, trade policies can also be integrated into

climate change adaptation strategies. However, other

coordinated policies and actions are important to

mitigate the costly adjustment to changes caused by

climate change.

(a) Trade can support climate change

adaptation actions through economic

growth

Adapting to climate change requires important

investment in infrastructure to increase resilience and

reduce vulnerability at the community, local, regional,

sectoral and national level. Investing in improved

climate resilience offers a significant cost-benefit

ratio, ranging from 2:1 to 10:1, and in some cases

even higher, since it can avoid far worse damage later

on (GCA, 2019). Yet, efforts to adapt to the impacts

of climate change are still lagging.

Although developing countries are considered to be

those most vulnerable to a rapidly changing climate,

progress in climate change adaptation strategies

tends to be more frequently and rapidly achieved in

advanced economies. For many developing countries,

lack of finance remains an obstacle to invest in

climate change adaptation.

In this context, international trade, as a driving force

for sustained economic prosperity,

can indirectly

help economies steer some of their financial

resources towards climate change adaptation

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

strategies. Developing economies that opened up to

trade have, on average, enjoyed a 1 to 1.5 per cent

higher rate of growth, culminating in 10 to 20 per cent

higher growth after a decade (Irwin, 2019). Higher

economic growth can, in turn, provide financial

support and material preparation for essential climate

change adaptation, such as investment in climate-

resilient infrastructure.

(b) Trade can enhance economic

resilience to climate change shocks

International trade can help countries prepare for,

cope with and recover from climate-related shocks

more effectively. Risk prevention and reduction can be

achieved by explicitly integrating risk management into

decision-making, including financial appraisal of risks

and early warning systems. Climate risk screening,

resilience performance rating or sustainability

standard can be used to identify climate risks and

evaluate and reward resilience attributes of public and

private investments (World Bank, 2021). In parallel,

preparedness encompasses strategies and actions

effectively designed to anticipate, respond to and

enable recovery from the impacts of likely, imminent

or current climate-related shocks. Some of these

strategies can include developing disaster responses

and contingency plans, identifying priorities and

reviewing insurance coverage. In that context, trade

in services, including weather forecasting, insurance,

telecommunications, transportation, logistics and

health services, can play a key role in the preparation

of firms, citizens and governments for climate-related

shocks (WTO, 2021c).

When an extreme weather-related shock hits,

international trade can, under certain conditions,

spread its effects across countries, but at the

same time it can contribute to making economies

more resilient by ensuring the timely availability of

essential goods and services. Imports provide a vital

channel for increasing the availability of goods and

services that may be in short supply in a disaster-

struck country. Such goods and services include

food, medical supplies, emergency equipment and

expertise to aid relief and recovery efforts. Efficient

customs clearance, transit procedures and public

procurement processes are essential for trade to play

this role effectively.

Allowing trade to resume faster in the aftermath of

climate-induced shocks and disruptions can be an

important economic stimulus that supports economic

recovery (WTO, 2021c). For instance, facilitating

imports of construction materials can contribute

to sustaining infrastructure and post-disaster

reconstruction.

food security arising from changing

comparative advantages

Open trade can help countries to adapt to changes in

comparative advantages caused by climate change,

and to benefit from potential new opportunities,

although systemic cascading risks from climate

change will remain. Extreme heat has been found to

reduce productivity in manufacturing and services

less than in agriculture, which could ultimately

change countries’ comparative advantages (Conte

et al., 2021; Nath, 2022), as warmer countries could

be forced to adapt to climate change by shifting

domestic production toward manufacturing and

services, while increasing food imports from relatively

more temperate regions. Some developing countries

have already started to shift away from agriculture

and manufacturing towards services. High trade

costs could, however, prevent such trade-related

adjustments (Conte et al., 2021), as countries more

exposed to the direct impacts of climate change tend

to bear higher trade costs (see Figure B.2).

Policies aimed at reducing trade costs can support

part of the adjustment caused by changes in

comparative advantages due to climate change,

while minimizing changes in patterns of consumption

through imports, and thus potentially minimizing

welfare losses. Simulations suggest that reducing

trade costs in lower-income economies would, all

things being equal, reduce their welfare losses

caused by climate change by up to 68 per cent

(Nath, 2022). Promoting trade could also reduce the

incidence of climate-induced migrations, as trade and

international labour mobility tend to be substitutes

rather than complements (Conte et al., 2021).

Trade and well-functioning markets can contribute to

improving food security across multiple dimensions,

including food availability, nutrition, access and

utilization (FAO, 1996; 2018b, 2018c). Trade can

directly contribute to improving the availability of food

by easing its movement between surplus and deficit

economies. However, low levels of purchasing power

among vulnerable population groups are likely to be

further exacerbated by climate change and continue

to compromise people’s access to food.

(d) Trade can facilitate the acquisition

and deployment of technologies that

can contribute to climate change

adaptation

Adapting to climate change can require adopting

specific technologies to adjust existing systems

WORLD TRADE REPORT 2022

to deal with current and future consequences of

climate change. For instance, technologies that can

offset negative agricultural yield shocks include crop

varieties with higher heat or salinity tolerance, early

warning system for biopesticide use, fertilizers and

machinery, as well as irrigation, water conservation

and storage systems (Kuhl, 2020). Trade and trade

policies can increase access to these technologies,

especially in countries most vulnerable to climate

shocks. The removal of unnecessary barriers to trade

could improve farmers’ access to new technologies

and reduce their exposure to climate-induced

shocks. For example, barriers to trade in seeds,

such as inconsistent or unnecessarily strict control

procedures, can cause delays that reduce seed yield

and productivity (Brenton and Chemutai, 2021).

Another potential mechanism for technology transfer

is participation in GVCs (Sampson, 2022). GVC

integration can facilitate access to foreign non-

codified knowledge and technology transfers for

firms to optimize production processes, help boost

domestic innovation through international knowledge

spillovers, and enhance absorptive capacity for

new technologies (Branstetter and Maskus, 2022;

Piermartini and Rubínová, 2022). For instance,

some large retailers are collaborating with their food

suppliers on resilient strategies to better manage

growing conditions, improve yields and reduce the

need for fertilizers.

(e) Trade policies can be integrated into

climate change adaptation strategies

By their very nature, climate change adaptation policies

are varied. Although there is no comprehensive

typology of climate change policies, they can be

broadly classified into three types: structural, social

and institutional (IPCC, 2014a). Structural and

physical measures include, among other things,

the application of technologies and the use of

ecosystems and their services to serve adaptation

needs (e.g., reforestation). Social measures target

the specific vulnerabilities of disadvantaged groups

and propose solutions (e.g., increasing investment in

education and improving labour mobility). Institutional

measures relate to specific economic and regulatory

policies, which foster investments in adaptation to

climate change. In that context, trade policy can also

support climate change adaptation actions.

A review of all explicitly environment-related trade

measures notified by members to the WTO between

2009 and 2020 shows that, while a large majority

of notified climate change-related trade measures

relate to mitigation, only 3 per cent of all notified

climate-related trade measures (161 out of 4,629)

can be explicitly linked to climate change adaption.

Trade-related climate change adaptation measures

predominantly take the form of support measures,

with more than three-quarters of notified measures

Figure B.2: Countries more exposed to climate change tend to face higher trade costs

Source: Authors’ calculations, based on ND-GAIN Climate Vulnerability Index and WTO Trade Cost Index for 2017.

Note: The climate change exposure index measures how much societies and economies will be stressed by the physical impacts

of climate change. The trade cost index measures the cost of trading internationally relative to trading domestically.

2.5 3.5 4.5

Climate change exposure index

5.5

Trade cost index

Low-income Middle-income High-income

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

covering grants and direct payments, non-monetary

support and/or loans and financing. Technical

regulations and conformity assessment measures

are other common types of adaptation measures (see

Figure B.3). More than half of the notified climate

change adaptation measures cover the agricultural

sector, illustrating its vulnerability to climate change

and its need to adapt.

While international trade can be an important

component of climate change adaptation strategies,

trade policies alone cannot reduce the negative

impact of climate change and help take advantage

of potential new opportunities. Other policies and

actions are essential to adjust to current or expected

effects of climate change. Macro-fiscal policy

planning is important to address climate adaptation,

such as identifying contingent liabilities from natural

disasters and environmental shocks, developing a

financial strategy to manage contingent liabilities and

evaluating climate and disaster risks of the financial

system (Hallegatte, Rentschler and Rozenberg,

2020).

In that context, ensuring mutual supportiveness

between economic policies, including trade policies,

and climate change adaptation policies is essential

to strengthen the role of trade while addressing

broader challenges of adaptation (see Box B.2). For

instance, the role of international trade in improving

food security can be strengthened by improving

the functioning of markets for food and agriculture,

including by reducing distortions,

improving

competition, and ensuring that the true costs of

food and farmed goods are reflected when traded

internationally. The resilience of vulnerable economic

actors can be enhanced by redressing the under-

provision of public goods, for example, by improving

the availability of advisory services or investing in

research into new crop varieties and livestock breeds

that are more resistant to climate impacts (FAO,

UNDP and UNEP, 2021; Gadhok et al., 2020).

Policies that support social inclusion, such as

access to basic services, digital technologies,

financial inclusion, and social protection are

essential to attenuate some of the consequences

of climate change. While the disruptions caused

by climate change are unlikely to be fully avoided,

well-functioning labour markets are important to

help economies both maintain existing comparative

advantages and build comparative advantages in new

sectors. For example, while trade can provide access

to new technologies such as high-yield climate-

Figure B.3: Financial support and technical regulations are the most common trade-related

climate change adaptation measures

Source: Authors’ calculations, based on the WTO Environmental Database.

Note: The figure reports climate change adaptation measures notified to the WTO between 2009 and 2020 by types of policies. One

notified measure can cover more than one type of policy.

Notiﬁed trade-related climate change adaptation measures

Grants and direct payments

Loans and ﬁnancing

Tax concessions

Income or price supports

Others

Non-monetary supports

Support measures

Technical regulation

Countervailing measures/investigation

Public procurement

Import tariff

Ban

Conformity assessment procedure

Other measures

WORLD TRADE REPORT 2022

resistant crops, the lack of technical skills of some

farmers can slow down their uptake and ultimately

negatively impact agricultural productivity further

exacerbating the impacts of climate change. Labour

mobility obstacles or frictions can also slow down

or prevent shifts to new comparative advantages.

Individuals working in sectors that are contracting

due to climate change may lose their jobs, and

may only be able to find new job opportunities in

expanding sectors if they possess the relevant

skills and have the financial resources to relocate

to a different region if necessary. Labour market

adjustment policies, including skills development

programmes, are important to reduce labour mobility

frictions (WTO, 2017).

Certain vulnerable groups, such as micro, small and

medium-sized enterprises (MSMEs) and women in

certain socio-economic groups, face even greater

difficulties in adjusting due to social, economic and

cultural reasons (IPCC, 2014a; Nellemann, Verma

and Hislop, 2011) (see Box B.3). For example, in

low- and lower-middle-income countries, 52 per cent

of the female workforce is employed in agriculture

(World Bank and WTO, 2020), and as climate change

puts a strain on agricultural sectors, social norms or

Box B.2: Making the “blue economy” last in Mauritius by leveraging trade and sustainability

Mauritius is one of the most vulnerable countries to climate change and EWEs. Over the coming 35 years,

7 per cent of its GDP could be lost to cyclones alone (Beejadhur et al., 2017). What the island will produce

and trade in the future could depend on the decisions it takes today in terms of the adaptation, resilience,

restoration and sustainable development of its natural “blue”, or ocean, capital and its pathways for a just

transition to a low-carbon economy.

To build back better from the COVID-19 recession, the Mauritian Government’s “Vision 2030” aims to

promote the blue economy as one of its main pillars of development (WTO, 2021e). The goal is to increase

the contribution of the blue economy, which constituted nearly 12 per cent of the country’s GDP before the

pandemic, to 25 per cent by 2025, by strengthening traditional economic ocean activities such as tourism,

fisheries and seaport activities, and by developing emerging industries such as aquaculture, maritime

services, ship-building and repairs, marine biotechnology, and mineral exploration. A set of incentives under

new premium investment certificates for aquaculture, industrial fishing and seafood processing have been

launched to promote innovative and sustainable solutions, but challenges remain.

The fact that Mauritius is an island increases the pressure on the sustainability of its ecosystem. Recent shocks

with concomitant impacts on health or food and energy security have exposed the country’s vulnerabilities.

Building a sustainable blue economy requires a robust plan that takes into account several conflicting

objectives within and across sectors. This process has started in sectors such as port infrastructure,

shipping, tourism, seafood, aquaculture and energy. For instance, for economic diversification and to better

meet its energy needs, Mauritius recently evaluated its offshore hydrocarbon potential. Economic gains from

hydrocarbon exploitation for Mauritius could outweigh the costs of less effective climate actions (Moolna,

2021). However, climate policies to deal with, for example, ocean acidification or sea-level rise are not an

either/or option for Mauritius.

Mauritius can also, through international trade, better leverage the benefits of the ocean economy.

Strategically located at the crossroads of Asian and African sea routes, Mauritius’ seaport has the potential

to become a hub of global trade flows, including container transhipment. However, it is urgent that trade and

environmental policies, which have often evolved independently, be integrated to support the blue economy

(de Melo, 2020).

Steps are already being taken to align the blue economy with the Sustainable Development Goals (SDGs).

A new Ministry of Blue Economy, Marine Resources, Fisheries and Shipping was created in 2019 to improve

coordination and management of ocean-related matters. Mauritius is a party to a number of fisheries

management arrangements and multilateral environment agreements. The island has adopted legislation on

coastal zone protection as part of its Integrated Coastal Zone Management framework. The Environment

Protection Act and Climate Change Act also provide for the protection of the coastal environment. More

capacity-building and technical assistance are needed, and economic, including trade, and climate

policies need to support one another in order to address the short- and long-term costs and opportunities

accompanying the expansion of the blue economy.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

household responsibilities may prevent these women

from seeking employment in other sectors – especially

if this means having to move to a different area –

and this can negatively affect both households and

economies at large. In addition, the consequences

of climate change may cause some individuals to

lose their means of livelihood permanently. However,

social policies, such as education and compensation

policies, like lump sum payments, can support the

groups most exposed to the economic consequences

of climate change.

4. International cooperation

is essential to assist countries

in adapting to climate change

Although climate change adaptation initiatives are

often locally led, international cooperation in climate

change adaptation is key to leverage synergies and

help limit and manage the risk of losses and damages

from climate change. This is because unilateral

national policies aimed at tackling the effect of

climate change can produce negative spillovers

on other countries. It is important to coordinate

responses to climate shocks and to assist countries,

particularly the developing economies that are the

most affected, in their adaptation efforts. Although

climate change will remain highly disruptive,

cooperation on international trade is essential to

enhance the resilience of global trade to climate-

related shocks and crises and to improve economies’

capacity to adapt to climate change, while minimizing

negative cross-country spillovers. International trade

cooperation toward adaptation to climate change

can, however, be challenging in situations where

climate change issues intersect with national security

priorities (see Box B.4).

(a) International cooperation on climate

change adaptation is cross-cutting

The need for the widest possible international

cooperation on climate change has been recognized

in the UN 2030 Sustainable Development Agenda,

in keeping with which the international community

has committed to take urgent action to combat

climate change and its impacts under Sustainable

Development Goal 13 (“Climate Action”). Climate

change adaptation is addressed through several

extensive international cooperation initiatives. Parties

to the United Nations Framework Convention on

Climate Change (UNFCCC) and the Paris Agreement

Box B.3: Climate change impacts on MSMEs

MSMEs are the most vulnerable of all types of firms to EWEs, and are set increasingly to experience trade-

and climate-related disruptions (Skouloudis et al., 2020). For example, trade in tourism, a sector in which

many MSMEs are active, will continue to be challenged as EWEs interrupt travel and impact destinations

(Badoc-Gonzales, Mandigma and Tan, 2022). Yet, when it comes to adaptation, only 38 per cent of small

businesses have made investments to reduce climate-related risks, compared to 60 per cent of large firms

(ITC, 2021). MSMEs tend to be “reactive” rather than “proactive” when it comes to adaptation, and respond

to regulation or market requirements (Burch et al., 2016). Some reasons for this lag are that their access

to information, financial resources, expertise and time is more limited (Burch et al., 2016; ITC, 2021; WTO,

2022a). MSMEs led by women and young people tend to struggle even more with adaptation, and may have

less capacity and fewer skills to take advantage of new opportunities (ITC, 2021).

On the flip side, efforts to adapt to climate change can create opportunities and benefits for those MSMEs

that have re-focused on environmental themes, such as “ecopreneurs” who develop new products and

services. In addition, MSMEs that succeed in increasing production efficiency and lowering business

costs may thereby discover new opportunities. According to a recent survey, more than half of African firms

reported that improving their companies’ environmental performance had led to improvements in the output

and quality of their products, access to new markets, reduced input costs and a better ability to access

green finance (ITC, 2021).

Even though MSMEs are slow to initiate change, and international trade can spread climate-related business

disruptions, trade can also drive MSME climate adaptation, especially through consumer demand and

exposure to “external actors” (ITC, 2021; Klewitz and Hansen, 2014). Although MSMEs may not be able to

take the most drastic changes, they are generally more nimble than larger firms and can better identify new

market opportunities to fill the related gaps (Burch et al., 2016). However, further research is required to

better understand the interlinkages between climate change adaptation and MSMEs’ trade challenges and

opportunities.

WORLD TRADE REPORT 2022

recognize that adaptation is a global challenge and

a key component of the long-term global response

to climate change. The UNFCCC Nairobi work

programme (NWP) assists countries, in particular

developing countries, in improving their understanding

and assessment of impacts, vulnerability and

adaptation, and in making informed decisions on

practical adaptation actions and measures. The Least

Developed Countries Expert Group (LEG) further

provides technical guidance and support to the

LDCs to formulate and implement national adaptation

plans and programmes of actions. Climate change

adaptation is recognized by UNFCCC as having the

same importance as mitigation, and is supported by

financial mechanisms such as the Green Climate

Fund (GCF) and dedicated funds such as the

Special Climate Change Fund (SCCF), the UNFCCC

Least Developed Countries Fund (LDCF), and the

Adaptation Fund.

In addition, many international organizations

and regional development banks are engaged in

different aspects of climate change adaptation. For

instance, the United Nations Office for Disaster Risk

Reduction (UNDRR) supports the implementation

of the intergovernmental Sendai Framework on

Disaster Risk Reduction to strengthen resilience to

climate change-related, and other natural and man-

made, disasters (WTO, 2021f). Similarly, the World

Meteorological Organization (WMO) tracks weather

records and disseminates weather information that

can facilitate better preparation and forewarning of

EWEs.

Box B.4: Climate change and the emerging “geoeconomic order”

A growing suspicion towards globalization has led to the emergence of “geoeconomics”, a macro-level

change in the relationship between economics and security in the regime governing international trade and

investment (Roberts, Choer Moraes and Ferguson, 2019). The development of geoeconomics may lead to the

expansion of economic isolationism, leading to a technological and trade decoupling of national economies,

eventually lowering welfare and increasing geopolitical frictions.

Climate change could impede the pursuit of geoeconomic policies by countries heavily dependent on

imports of environmental technologies or of agricultural products, the domestic production of which is

negatively affected by climate change. Likewise, countries applying ambitious climate change policies could

limit their vulnerability to geoeconomic measures from countries producing carbon-intensive products by

reducing their dependence on fossil fuels and, in the case of other raw materials, by boosting recycling and

the use of secondary materials. They would thus reduce risks of geopolitical frictions without undermining

the multilateral trading system. However, countries may also adopt restrictive trade measures impacting

environment-friendly goods and services in an attempt to preserve the strategic resources, foreign supplies

or trade routes put at risk by climate change, and which they deem essential for their survival.

The extent to which geoeconomics can threaten climate change adaptation is already visible from the

consequences of the conflict in Ukraine, such as blocking the planting, harvesting and transportation of

grains. In a geopolitically volatile context, geoeconomic strategies pursued aggressively with “beggar-thy-

neighbour” intents could lead to a carbon “race to the bottom” as countries in crisis lower their environmental

standards and “self-sufficiency” policies lead to the opening or re-opening of domestic carbon-intensive

industries.

Ideally, the response to such risks should be to increase international cooperation, both on climate change

and on related trade policies. However, should geoeconomic policies become prevalent as the impact of

climate change on trade worsens, countries may eventually equate the protection of their essential economic

interests with national security. Given that such measures may not be amenable to justification under the

WTO “General Exceptions”, such as those found in Article XX of the General Agreement on Tariffs and Trade

(GATT) and Article XIV of the General Agreement on Trade in Services (GATS) because of their strategic

or geopolitical dimension, WTO members may invoke the “Security Exceptions” of Article XXI of the GATT,

XIV bis of the GATS or Article 73 of the WTO Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS). These exceptions on national security would nonetheless continue to provide a multilateral

legal framework with which unilateral geoeconomic measures would have to comply. Improved transparency

and monitoring of these measures could also contribute to limiting their impact on the multilateral trading

system.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

(b) International cooperation on trade can

help increase the ambition and viability

of climate adaptation strategies

International cooperation on trade and trade-related

policies can help support different dimensions

of climate change adaptation, from climate risk

prevention, reduction and preparedness to climate

disaster response and recovery. International

cooperation on trade policies can assist governments

in reducing climate risks and vulnerabilities and in

coping with and recovering from the consequences

of climate-induced shocks.

Regional trade agreements (RTAs) are increasingly

considered as laboratories for negotiating new types

of provisions to address recent trade-related issues.

A limited number of RTAs incorporate provisions

explicitly addressing climate change adaptation.

These provisions cover various commitments, from

adopting measures for evaluating the vulnerability

and adaptation to climate change

to facilitating the

removal of trade and investment barriers to goods,

services and technologies that can contribute to

adaptation.

Other most common explicit provisions

promote cooperation activities, including vulnerability

and adaptation assessments.

These provisions on climate change adaptation are

complemented by other explicit provisions addressing

natural disasters (WTO, 2021f). Although the

inclusion of provisions explicitly addressing natural

disasters in RTAs is not a recent phenomenon, the

number of these provisions in any given agreement

has increased over the years (Figure B.4). These

provisions cover a broad range of issues. Several

RTAs require the adoption of natural disaster

management measures.

Some RTAs lay down

exemptions in case of natural disasters, such as full

rebate of customs duties on imports for rescue and

relief assistance.

Cooperation provisions remain

the most common explicit provisions on natural

disasters, covering various issues, including disaster

prevention, mitigation and response; early warning

systems, and recovery and rehabilitation.

While the new Agreement on Fisheries Subsidies

is the first WTO agreement to put a primarily

environmental objective at its core (see Box B.5),

Figure B.4: The number of provisions related to natural disasters in RTAs has increased

in recent years

Source: Monteiro (2022a).

Note: Analysis based on RTAs notified to the WTO. “North” is defined as high-income countries, whereas “South” is defined as middle-

and low-income countries according to the World Bank’s country classification.

1990 1995 2000 2005

Year of signature

2010 2015 2020

South-South RTA

North-South RTA North-North RTA

Number of provisions related to natural disasters

COMESA

EAC

CHL-ECU

CHN-CRI

CACM-EU

EAC-EU

EU-XKX

EU-UKR

PACER+

CPTPP

GEO-GBR

GBR-MDA

EU-MDA

EU-GEO ARM-EU

BRA-CHL

EU-OCT

BLR-RUS

EEA

NAFTA

WORLD TRADE REPORT 2022

the WTO also contributes to climate adaptation

efforts by providing a framework that minimizes trade-

related negative spillovers effects and maximizes

positive spillovers effects. This framework comprises

the following elements.

First, WTO members have the right to adopt trade-

related measures aimed at protecting human,

animal or plant life or health in the context of

climate adaptation. At the same time, WTO rules

ensure trade-related climate change adaptation

measures are not disguised protection. These rules

are monitored in WTO committees and councils,

which allow members to exchange views and

address specific trade concerns arising from certain

measures. WTO rules are further enforced through

the dispute settlement mechanism, which formally

deals with trade conflicts among members.

Second, the WTO Agreements promote transparency

by requiring formal, publicly available notifications

of relevant laws and regulations affecting trade,

including those related to climate change adaptation.

The collective assessments of each member’s trade

policies and practices, under the WTO Trade Policy

Review Mechanism, promote greater transparency

in, and understanding of, members’ trade policies

and practices, including those that relate to climate

change adaptation.

Third, the WTO, through its committees, councils

and other bodies, serves as a platform for members

to exchange views on important trade-related issues

and address trade concerns, including those related

to climate change adaptation. Some of these WTO

bodies cover specific areas of trade measures, such

as technical regulations and subsidies, or specific

Box B.5: Marine resources, climate change adaptation and the role of the WTO

Vulnerability to climate change is exacerbated by the loss of biodiversity, which occurs when natural

resources, including marine resources, are not sustainably managed (World Bank, 2008). For example,

overfishing and illegal fishing are serious global problems that threaten the ocean ecosystem, as well as

livelihoods and food security. Although many factors are responsible for unsustainable fisheries management,

certain fisheries subsidies are an important driver. Subsidies directed to the fisheries sector may be worth

in excess of US$ 30 billion every year, out of which more than 60 per cent could have a capacity-enhancing

effect leading to unsustainable overfishing (Sumaila et al., 2019). Climate change adds to the burden on

fish stocks, because many marine fish stocks are diminished by ocean warming, and overfishing further

exacerbates the vulnerability of these stocks (Free et al., 2019).

A major complication in tackling fisheries subsidies comes from the fact that marine resources do not stop

at national borders. Unilateral action by a single country is not sufficient to preserve fisheries resources,

and any subsidy or government intervention is likely to have international repercussions. For example, if a

country institutes quotas on fish catches or increases monitoring of fishing activities, all countries benefit.

Nevertheless, if other countries sharing the same fisheries resources do not commit to similar measures, the

restrictions will likely be compensated by an increase in catches by other nations (Pintassilgo, 2003).

International cooperation is, therefore, the most effective means to address these externalities. In this

context, the WTO is in a unique position to address fisheries subsidies, given its existing framework of

binding multilateral subsidies disciplines and the multilateral nature of WTO negotiations, along with the

economic and trade implications of such subsidies.

At the WTO’s 12th Ministerial Conference in June 2022, WTO members concluded the WTO Agreement on

Fisheries Subsidies that prohibits (i)subsidies contributing to illegal, unreported, and unregulated fishing

or fishing-related activities in support of such fishing; (ii) subsidies regarding overfished stocks (except

subsidies implemented to rebuild the stock to a biologically sustainable level); and (iii)subsidies provided to

fishing or fishing-related activities in the unregulated high seas.

WTO members also resolved to continue work on additional provisions that would achieve a comprehensive

agreement on fisheries subsidies, including through further disciplines on certain forms of fisheries subsidies

that contribute to overcapacity and overfishing. Equally importantly, the WTO Agreement on Fisheries

Subsidies sets out a mechanism to enhance notification and transparency on fisheries subsidies. This new

agreement also contributes to achieve target 14.6 of the Sustainable Development Goals calling for the

prohibition of certain forms of fisheries subsidies.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

sectors, such as agriculture and services. Others deal

specifically with trade-related environmental issues.

For instance, the WTO Committee on Trade and

Environment (CTE) provides a forum to support policy

dialogue and share knowledge and best experiences

in trade-related climate change adaptation strategies.

Finally, the WTO also provides trade-related technical

assistance and capacity building to developing

countries and LDCs, which can help to build climate-

resilient trade capacity. Current initiatives include

Aid for Trade, the Enhanced Integrated Framework

(EIF), and the Standards and Trade Development

Facility (STDF).

coordination are key to increasing

climate resilience of supply chains

Although GVCs have been very effective in lowering

global production costs allowing countries to engage

in international trade and maximize their comparative

advantage, they can be, as discussed above,

particularly exposed to the effects of climate change.

International cooperation supporting preventive action

against climate-related risks can help improve the

adaptation and resilience of GVCs to climate change.

An open and predictable trading system can foster

foreign direct investment, provide options for

production diversification, and allow firms to organize

their supply chains by prioritizing resilience over other

concerns like fiscal considerations. WTO provisions

allow and sometimes even encourage countries to

take trade-related measures that may prove beneficial

in responding to and building resilience against

EWEs (see Table B.1).

Trade facilitation plays a key role in supporting the

resilience in the face of climate-related shocks. It

smooths the functioning of supply chains during

normal times, and, as the COVID-19 pandemic

demonstrated, it is also vital for speeding imports

of essential goods such as food, medical supplies

and emergency equipment in response to a disaster.

The WTO TFA seeks to minimize the incidence and

complexity of import and export formalities in order

to facilitate trade, including for goods in transit. The

TFA simplifies customs processes for both regular

trade and for post-disaster assistance. In this regard,

the TFA requires members to take “additional trade

facilitation measures” for the benefit of traders,

commonly known as “authorized operators”, who

have been approved by or on behalf of the national

customs administration as complying with specific

supply chain security standards. Such measures

include lighter documentary and data requirements,

a reduced rate of physical inspections, elimination of

fees and unnecessary delays or restrictions on goods

in transit, pre-arrival filling and processing of transit

documentation, rapid release time, deferred payment

of duties and other charges.

Climate-related shocks and associated fears of

shortages or inflation can provoke governments into

taking trade-restrictive measures such as export

restrictions, thus disrupting value chains. The WTO’s

trade policy monitoring and other transparency

mechanisms play a role in enhancing information and

fostering coordination among members to ensure

restraint regarding restrictive trade policies. In this

regard, more can be done by engaging a discussion

on how to improve cooperation to avoid the imposition

of restrictive uncoordinated export measures.

Further strengthening the WTO’s trade policy

monitoring and coordination functions could also

help to identify challenges and opportunities for

building supply chain resilience to climate change.

The WTO’s work with vaccine manufacturers during

the COVID-19 pandemic could serve as a blueprint

for dialogue among governments, businesses and

other stakeholders to address potential climate

change-induced bottlenecks in supply chains.

International cooperation can further strengthen the

resilience of supply chains, including by disciplining

reshoring policies, information-sharing, cooperating

on standards, and managing risks of supply chain

bottlenecks (WTO, 2021c).

(d) Well-functioning markets are important

to address climate-related food

security challenges

In order to maximize the opportunities that trade

offers to enhance food security, it is important to have

well-functioning food markets. Imports of essential

commodities in countries that lack water or fertile

soil, or that are subject to EWEs, need to move easily

across borders. Disciplines in agriculture that foster

an open, predictable and transparent environment

are, thus, important, and complement rules that shape

trade and markets in a number of other areas, such

as trade facilitation, transport, telecommunications,

financial services, competition and public

procurement. Volumes of food imported or exported

can be significantly reduced by port disruptions, as

well as by high domestic transportation costs and

lack of competition in the distribution sector, the

latter particularly affecting poor people in rural areas,

WORLD TRADE REPORT 2022

who thereby face more obstacles to benefitting from

open markets.

The AoA recognises the need to take food security

into account, both in existing commitments on market

access and agricultural support and in ongoing

negotiations.

In particular, WTO disciplines on

agriculture promote open, fair and predictable trade

in food, thus contributing to providing the necessary

regulatory environment for food security.

For example, surging food prices often trigger export

restrictions in key foodstuffs, which can ultimately

exacerbate price increases (Giordani, Rocha and

Ruta, 2012). Under the GATT, export prohibitions or

restrictions temporarily applied to prevent or relieve

critical shortages of foodstuffs or other essential

products are allowed. However, the AoA requires

WTO members to give due consideration to the

effects of export restrictions on importing members’

food security, as well as to consult importing

Table B.1: Selected examples of resilience policies under WTO agreements and decisions

General Agreement on Tariffs and Trade (GATT) and Trade Facilitation Agreement (TFA)

• Define in advance domestic customs disciplines to be implemented during an emergency.

• Temporarily suspend regular customs charges on the entry of imported goods.

• Facilitate customs processes and procedures to speed up imports of relief goods and other necessities.

Technical Barriers to Trade (TBT) Agreement and WTO Agreement on the Application of Sanitary and

Phytosanitary Measures (SPS)

• Ensure quality and safety of imported relief goods, including foodstuffs.

• Adapt technical standards for construction and building materials to local environmental constraints.

Agreement on Agriculture (AoA)

• Ensure access to goods of primary necessity, including food supplies.

• Provide financial support and government services for relief from natural disasters.

Agreement on Subsidies and Countervailing Measures (SCM)

• Provide financial support to enterprises to recover from climate-related natural disasters.

Enabling Clause, Decisions on waivers for preferential treatment for LDCs, Waivers under the Marrakesh

Agreement

• Grant non-reciprocal preferences to support export diversification and, following EWEs, to promote the recovery of

exports.

General Agreement on Trade in Services (GATS)

• Automatically recognize the professional qualification of foreign service providers for relief services and

reconstruction.

• Improve access for the population and for businesses to cash aid resources.

• Improve the supply of weather-related services to build capacity to anticipate EWEs.

WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

• Ensure balanced framework for innovation and diffusion of climate adaptation technologies.

• Support technology transfer to LDCs.

Agreement on Government Procurement 2012 (GPA 2012) (Plurilateral)

• Use emergency government procurement flexibilities to accelerate procurement processes for goods and services

needed for recovery.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

members, and to notify the Committee on Agriculture

before instituting such measures.

At the WTO’s 12

Ministerial Conference (MC12)

in June 2022, WTO members agreed to exempt from

export restrictions food bought by the World Food

Programme for humanitarian purposes. Ministers

also adopted a Declaration pledging to facilitate

trade in food, fertilizer and other agricultural inputs.

They stressed the importance of not imposing export

restrictions, and encouraged members with surplus

stocks to release them on international markets.

Importantly, they vowed to cooperate on enhancing

agricultural productivity. Implementing this decision

could contribute to enhancing food production

and help to manage the knock-on effects of

surging food prices during a crisis, thus increasing

food security.

For over a decade, the Agricultural Market Information

System (AMIS) (set up by the G20 in response to

the global food price hikes of 2007-08 and 2010)

has been helping to share information about food

supply and stockpiles, promoting policy dialogue

and contributing to strengthening resilience to

shocks, including those associated with climate

change. While AMIS currently focuses on four major

crops (wheat, maize, rice and soybeans), enlarging

its product coverage could help further improve

transparency on agricultural markets.

The WTO’s monitoring and transparency functions

also contribute to helping markets to operate

efficiently. The WTO Committee on Agriculture

provides a forum for members to exchange views

about compliance with existing rules and to address

disagreements.

Although rules on agriculture and related negotiations

aim to discipline and further reduce trade-distorting

domestic support, the AoA exempts from reduction

commitments programmes which cause only minimal

trade distortions. These “Green Box” support

measures include general services, such as research,

pest and disease control, and extension and advisory

services for farmers. The latter are particularly

important in enabling producers in low-income

countries to improve productivity sustainably, thereby

strengthening climate resilience in agriculture.

WTO “Green Box” disciplines also cover public

stockholding programmes that are used by some

governments to purchase, stockpile and distribute

food to people in need. While food security is a

legitimate policy objective under the AoA, some

stockholding programmes are considered trade-

distorting when they involve purchases from farmers

at prices fixed by governments.

Currently, pending

the negotiation of a permanent solution, WTO

members have agreed to refrain from challenging

developing countries that exceed their agreed

limits for trade-distorting domestic support through

public stockholding programmes, subject to certain

conditions.

The SPS Agreement, which sets out basic rules

on food safety and on animal and plant health

standards, helps ensure food security by facilitating

safe trade. This is important because the increase in

temperatures, rainfall, humidity and drought caused

by climate change can facilitate the establishment

and spread of invasive species and can contribute

to increased and new SPS risks, which in turn could

affect agricultural production, consumption and

trade. International collaboration, for instance through

the STDF (see section B.4(d)), is important to help

developing countries with such issues. The SPS

Agreement also allows for the speeding-up of control,

inspection and approval procedures for foreign relief

goods, such as in the case of food shortages.

WTO members could do more to ensure that trade

contributes to more sustainable, resilient and

equitable markets for food and agriculture products,

and to put in place disciplines more supportive of

policies promoting climate change mitigation and

adaptation practices in agricultural production. For

example, governments could consider updating

existing rules and disciplines to transition away

from price and production-linked subsidies, and

to increase support for programmes improving the

delivery of public goods. Such adjustments could

ensure that subsidy programmes do not harm the

competitiveness of producers elsewhere, while also

sustainably increasing farm yields, raising incomes,

and supporting job creation in ways that can

strengthen adaptation to climate change.

Reducing trade barriers could also increase food

availability in global markets and support efforts to

overcome poverty. It could complement efforts to

boost domestic farm productivity and help ensure

that trade enables producers to respond to future

demand growth. Estimates suggest that phasing

out agricultural tariffs and implementing other trade

facilitating measures could reduce the climate

change impact on undernourishment by up to 64 per

cent in 2050, meaning that as many as 35 million

fewer people would suffer from hunger (Janssens et

al., 2020).

WORLD TRADE REPORT 2022

(e) More trade-related technical

assistance and capacity building for

climate change adaptation is needed

To adapt to climate change, low-income and

vulnerable countries need to enhance the resilience

of their infrastructure and upgrade their productive

capacities in agriculture and other sectors. Annual

adaptation costs in developing countries are

estimated at US$ 70 billion and are expected to

reach US$ 140 to US$ 300 billion in 2030, and

US$ 280 to US$ 500 billion in 2050 (UNEP, 2021b).

Climate finance has, however, fallen short of its

US$100 billion goal for 2020 and has not achieved

the balance between adaptation and mitigation

finance called for in the Paris Agreement. Climate

adaptation finance only represented a quarter of

total climate finance in 2019, while climate mitigation

finance and cross-cutting climate adaptation and

mitigation finance constituted 64 per cent and 11 per

cent, respectively. Adaptation finance is particularly

important for the poorest and most vulnerable

countries, which represents more than 40 per cent of

climate finance provided and mobilized to LDCs and

SIDS, almost double the share of adaptation finance

in total climate finance for all developing countries

(OECD, 2021) (see also Chapter C).

The Aid for Trade initiative helps developing countries,

in particular LDCs, to build the trade capacity and

infrastructure they need to increase their participation

in and benefit from international trade. A limited but

increasing number of Aid for Trade projects integrate

environmental considerations (OECD and WTO,

2022). In 2020, Aid for Trade disbursements with a

climate objective (adaptation, mitigation or cross-

cutting) amounted to US$ 15 billion, representing

31 per cent of total Aid for Trade. Around US$ 5.75

billion, or 12 per cent of total Aid for Trade, were

allocated to projects with adaptation as a single or

cross-cutting climate objective.

More than half (54 per cent) of adaptation-related Aid

for Trade went to agriculture in 2020, reflecting the

degree to which climate change is disproportionally

affecting this sector (Figure B.5). Besides agriculture,

adaptation-related Aid for Trade targeted projects

in the energy (11 per cent of adaptation-related Aid

for Trade in 2020), transport and storage (10 per

cent), banking and financial services (8 per cent) and

forestry (7 per cent) sectors.

Although Aid for Trade disbursements related to

climate change adaptation are limited, many projects

show how investing in adaptation to transboundary

climate risks represents an opportunity to build

and increase the resilience to climate impacts

(Benzie and Harris, 2021). For instance, when, in

2015, Cyclone Pam destroyed much of the seafront

infrastructure of Port Vila, Vanuatu, the Enhanced

Integrated Framework (EIF), together with Fairtrade

Australia and New Zealand, helped Vanuatu rebuild

and improve the waterfront with more climate-resilient

materials, and in an economically inclusive way aimed

to foster interaction between tourists and local small

businesses. The EIF has been active in other Aid

for Trade projects targeted at adaptation, such as

providing greenhouses and hail nets to small farmers

in Lesotho to promote resilience to changing weather

patterns, and mapping landslide risk and promoting

sustainable soil and water management as a way to

enhance coffee-growing communities’ adaptation

and preparedness in Timor-Leste (EIF, 2022; Ramsay,

2021).

The WTO can also help countries mobilize support

and build trade-related capacities for adaptation.

For example, the WTO surveys LDCs’ evolving

technology needs and priorities and supports them

by monitoring developed countries’ programmes for

transferring relevant technologies to LDCs in line with

their obligations under the WTO TRIPS Agreement.

Between 2018 and 2020, climate change adaptation,

including disaster prevention and water management,

was an important element in 25 per cent of the 152

environmental technology transfer programmes

reported by developed members to the WTO (see

also Figure C.7 in Chapter C).

The capacity-building needs of developing countries

and LDCs relating to trade and climate change

adaptation intersect with the work of several WTO

committees, including the Committee on Trade and

Environment (CTE), the Committee for Trade and

Development, and the TRIPS Council.

Climate change adaptation is also increasingly

incorporated into the work of the STDF, a global

partnership providing a funding mechanism for

innovative and collaborative SPS projects in

developing countries to facilitate safe trade. The

STDF also identifies and disseminates good practice

on topics that cut across the areas of food safety,

animal and plant health, and trade.

Although trade-related technical assistance and

capacity-building for adaptation have increased

in recent years, more can be done to better exploit

synergies between climate finance and Aid for Trade.

The Aid for Trade initiative could help to mobilize

additional funding for climate change adaptation by

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

better integrating the trade dimension into countries’

national adaptation strategies and by including

climate considerations in Aid for Trade projects.

Strengthening the discussions on the trade-related

adaptation needs of developing countries and LDCs

in the WTO could also contribute to a higher degree

of alignment and coherence between Aid for Trade

and climate finance programmes.

5. Conclusion

Climate change is a current reality. In the short term,

EWEs will continue to cause disruptions to supply

chains and transport networks, shortages of key

commodities, and international price fluctuations.

Over the long term, further gradual climate changes

and more frequent and intense EWEs will alter

regional patterns of specialization. Left unchecked,

climate change will lead to a humanitarian crisis

characterized by increasing poverty, food insecurity,

disease and unnecessary additional deaths. It may

also contribute to geopolitical instability, as countries

compete for access to dwindling resources and

seek to protect their industries and markets through

economic decoupling and the building of zones of

economic and political influence.

Trade – with the multilateral trading system at its core

– can help countries attenuate some of the effects of

climate change by protecting themselves against, and

responding to, short-term shocks like EWEs and by

ensuring the timely availability of critical goods and

services, such as food, healthcare, transportation and

communication. Although adapting to climate change

will continue to remain costly, trade may help countries

adapt to climate-related changes in comparative

advantages, for example by importing what they may no

longer be able to produce and exporting what they may

produce in excess. Trade can also facilitate access to

technologies that minimize some of the costs and the

economic effects of climate change.

WTO rules, supported by policy dialogue and

cooperation, provide the open, non-discriminatory

and predictable trading environment necessary

for trade to be a means of adapting to some of the

consequences of climate change. Some trade

measures, such as suspending custom duties,

opening markets to foreign service providers, and

simplifying import procedures, can enhance the

response to, recovery from and resilience to short-

term climate-induced shocks, as well as support

more long-term adaptation to climate change.

Figure B.5: Most Aid for Trade disbursements related to climate change adaptation cover

agriculture

Source: Authors’ calculations, based on Organisation for Economic Co-operation and Development (OECD) DAC-CRS (Development

Assistance Committee Creditor Reporting System) Aid Activities Database.

Note: Only projects with an explicit objective of adapting to climate change and projects identifying climate change adaptation as

important but secondary objective are considered as adaptation-related official development assistance.

Agriculture Energy Transport and storage Forestry Industry OtherBanking and ﬁnancial services

Aid for Trade disbursements related

to climate change adaptation (current US$ billion)

2020

5.75

2019

4.87

2018

4.90

2017

4.88

2016

4.59

2015

4.11

2014

3.39

2013

2.86

WORLD TRADE REPORT 2022

At the same time, a lot more can be done to help

low-income and vulnerable countries to meet the

challenges of climate change adaptation. Platforms

for policy dialogues, like the WTO Committee on

Trade and Environment, can be used by members

to share knowledge and expertise necessary to

develop successful climate adaptation policies. Aid

for Trade and related initiatives such as EIF and STDF

can also help to mobilize funding and build trade-

related capacities for climate change adaptation in

developing countries and LDCs.

Although international trade and trade policy can

contribute to climate adaptation strategies, trade

policy alone cannot automatically foster adaptation

to climate change. While adapting to climate change

will only get more expensive if GHG emissions are

left unchecked, countries must adopt and implement

comprehensive and coherent climate adaptation

actions, such as strengthening transport networks,

diversifying production, suppliers and customers,

and making long-term investments in human capital,

in order to avoid, to the extent possible, and minimize

losses and damages caused by climate change.

CLIMATE CHANGE AND INTERNATIONAL TRADE

B. THE ROLE OF TRADE

IN ADAPTING TO

CLIMATE CHANGE

Endnotes

1 See Bosello, Eboli and Pierfederici (2012), Bosello

and Parrado (2022), Eboli, Parrado and Roson (2010),

IPCC (2014a), Nordhaus (2014), and Roson and van der

Mensbrugghe (2012). Larger losses have been estimated

by the Swiss Re Institute (2021).

2 Some climate change adaptation actions, such as air-

conditioning, can, in the absence of complementary

actions, increase electricity demand and generate GHG

emissions. Complementary actions include improving

energy efficiency in air conditioning technology, supporting

renewable energy sources and enhancing building thermal

insulation.

3 Revealed comparative advantage is defined as the share

of an economy’s exports of given commodities in that

economy’s total exports, relative to the share of the world’s

exports of these commodities in total world exports.

4 For food trade, for example, these can be straits and canals,

coastal infrastructure in major crop-exporting regions, and

inland transport infrastructure in major crop-exporting

regions.

5 For details on how the climate change exposure and

vulnerability indexes are calculated, see Chen et al. (2015),

and for the methodology of the export diversification

index, see Henn et al. (2020), Loungani et al. (2017), and

Papageorgiou, Spatafora and Wang (2015).

6 For example, a 1°C increase in temperature has been

found to lower industrial output in low-income countries by

2.02 per cent (Dell, Jones and Olken, 2012).

7 For animals and plants, climate change adaptation implies

either adjusting to the changing climate and its effects by

spending more time and energy on life-sustaining measures

(e.g., body temperature regulation) or moving, to the

extent possible, to regions with less hostile environmental

conditions.

8 Afforestation refers to the process of planting new

trees in an area where there were no trees before, while

reforestation refers to the process of planting trees in a

forest where the number of trees has been decreasing.

9 See Alcalá and Ciccone (2004); Amiti et al. (2017); Amiti

and Konings (2007); Frankel and Romer (1999); Wacziarg

and Welch (2008); Gries and Redlin (2020); and Cerdeiro

and Komaromi (2021).

10 For instance, an increase in international trade creates new

employment opportunities and improves welfare outcomes,

which tend to reduce the incentive to move abroad for job

opportunities.

11 See for instance https://corporate.walmart.com/esgreport

2019/environmental#climate-change.

12 Notified trade measures with the following objectives

are considered to be related to climate change, namely:

afforestation or reforestation; air pollution reduction;

alternative and renewable energy; climate change mitigation

and adaptation; energy conservation and efficiency; and

ozone layer protection. For more information, see WTO

(2021d).

13 In agricultural and food markets, governments tend to

create price-altering trade policies when global agricultural

and food prices rise substantially.

14 For example, Korea-Peru RTA.

15 For example, Colombia-Ecuador-European Union-Peru

RTA.

16 For example, Canada-Chile RTA.

17 For example, Southern African Customs Union (SACU).

18 Paragraph 14 in the Outcome Document (WTO official

document number WT/MIN(22)/W/16/Rev.1, which can

be consulted at https://docs.wto.org/) of the 12th WTO

Ministerial Conference (June 2022) recognizes the

contribution of the multilateral trading system with regard to

the 2030 Agenda.

19 Some RTAs replicate or build on existing WTO disciplines

relevant to build climate resilience, while others establish

new commitments (WTO, 2021c).

20 For example, a “Trade 4 Climate” dialogue among

businesses, members and stakeholders organized by the

WTO and the International Chamber of Commerce (ICC)

in October 2021 (https://www.wto.org/english/tratop_e/

envir_e/trade4climate_e.htm) highlighted the links between

climate change and natural disasters, and their impact on

trade.

21 The important role of trade and the WTO in contributing

to food security is also reflected in the international

community’s commitment in Sustainable Development Goal

2b to correct and prevent trade restrictions and distortions

in world agricultural markets (https://sdgs.un.org/goals/

goal2).

22 For more information, see https://www.wto.org/english/

tratop_e/agric_e/food_security_e.htm.

The trade implications

of a low-carbon economy

The global economy needs to effect wide-ranging and immediate

changes to reduce its greenhouse gas emissions sufficiently

to limit climate change. This chapter explores how the transition

to a low-carbon economy could impact international trade patterns,

and outlines the role that trade, trade policy and international

cooperation can play in supporting a just low-carbon transition.

Although a low-carbon transition entails short-term investment

and adjustment costs, it can also provide important economic

benefits and opportunities. The WTO has an important role to

play in increasing the ambition and viability of climate change

mitigation actions.

Contents

1. Introduction 52

2. Achieving a low-carbon economy is an imperative

but faces challenges 52

3. A low-carbon economy would change trade patterns

and provide new trading opportunities 57

4. International cooperation is essential to achieve

a low-carbon economy 65

5. Conclusion 74

Key facts and findings

• Although the COVID-19 pandemic temporarily reduced greenhouse gas

emissions, overall emissions have increased by more than 85 per cent since

1990. This highlights the urgency of transitioning to a low-carbon economy.

• Some of the available options to support a low-carbon transition include

shifting the energy mix away from fossil fuels, promoting alternative

and renewable energy, improving energy efficiency, and reducing production

and consumption.

• A net-zero carbon economy could modify trade patterns by altering comparative

advantages. While some economies could export more renewable electricity,

others could benefit from opportunities to produce and export goods and

services using clean energy.

• Unilateral and uncoordinated trade-related climate policies can, depending

on their design and implementation, create trade tensions that can ultimately

undermine climate change mitigation efforts.

• The fight against climate change calls for greater multilateral cooperation

and coherent actions to support a just low-carbon transition. The WTO

contributes to supporting climate change actions by helping to prevent

unproductive trade frictions and promoting efficient trade-related climate

policies.

WORLD TRADE REPORT 2022

1. Introduction

Although the COVID-19 pandemic caused a

temporary reduction in greenhouse gas (GHG)

emissions, levels of atmospheric carbon dioxide

(CO

), methane (CH

) and nitrous oxide (N

O) have

increased by more than 85 per cent since 1990.

GHG emissions from human activities are already

responsible for approximately 1.1°C of global warming

since the pre-industrial period.

The 2015 Paris Agreement commits countries to limit

the global average temperature from rising to well

below 2°C above pre-industrial levels, and to pursue

efforts to limit the temperature rise to 1.5°C. GHG

emissions need to be cut by roughly 50 per cent by

2030 and reach net zero by 2050 in order to stay

below 1.5 °C of global warming (IPCC, 2022b).

Reaching net zero emissions requires reducing

GHG emissions to as close to zero as possible and

offsetting any remaining emissions by removing an

equivalent amount of GHG from the atmosphere and

storing it permanently in soil, plants, or materials. For

this to occur, important changes would have to be

made in the structure of production and consumption,

including specialization patterns and international

trade. This raises the question of how trade, trade

policy and international trade cooperation, as well as

the WTO, can support the transition to a low-carbon

economy.

This chapter discusses how ambitious climate change

mitigation policies and well-functioning financial

markets are essential to support and accelerate the

transition to a low-carbon economy. It then discusses

how a low-carbon economy could change trade

patterns and provide new economic opportunities.

The chapter concludes with a discussion of the role

of international cooperation, and in particular that of

the WTO, in supporting climate-change mitigation

efforts.

2. Achieving a low-carbon economy

is an imperative but faces

challenges

Tackling climate change requires major climate policy

actions to steer the economy towards a low-carbon

emission path, yet there is no single strategy that

can support the transition to a low-carbon economy.

In addition, various challenges face the adoption

and implementation of carbon mitigation policies,

including conflicting economic, energy and political

priorities (see Box C.1).

For instance, only 6 per cent of the US$ 13 trillion

in COVID-19-related stimulus packages adopted

by G20 economies in 2020 and 2021 has been

allocated to areas that could also reduce global GHG

emissions, including installing renewable energy

systems, improving energy efficiency in buildings

and electrifying transportation systems. Another

3 per cent of the stimulus packages has been

directed at areas that are likely to increase emissions

by supporting carbon-intensive activities (Nahm,

Miller and Urpelainen, 2022). In comparison, 16 per

cent of total global fiscal stimulus spending adopted

during the 2008-09 global financial crisis was

targeted at activities contributing to environmental

protection, including climate change mitigation

(Jaeger, Westphal and Park, 2020).

Addressing the distributional consequences of

climate change policies is also important to ensure a

fair and inclusive transition to a low-carbon economy.

Well-functioning financial markets are also essential

to support a low-carbon economy.

(a) Different strategies can support the

transition to a low-carbon economy

Efforts to reduce and prevent GHG emissions into

the atmosphere, commonly referred to as climate

change mitigation, are essential to limit global

warming and substantially reduce the future effects of

climate change (IPCC, 2022b). The urgency to move

towards a low-carbon economy requires a significant

transformation of the way energy, goods and services

are produced, delivered and consumed.

There is, however, no one-size-fits-all strategy to

support a low-carbon transition. A low-carbon

economy can be achieved in a number of ways, for

example by shifting the energy mix away from fossil

fuels; promoting alternative sustainable renewable

energy sources, such as geothermal, hydro and solar

power; improving energy efficiency in buildings,

transport, industry and consumption; and reducing

production and consumption.

Inducing consumers to make behavioural changes

could significantly support a transition to a low-carbon

economy if these changes curb energy demand (IEA,

2021). This could involve encouraging consumers

to purchase and adopt low-carbon products and

technologies, such as solar water heaters and electric

vehicles, and encouraging behaviour that is more

conscious of the consequences of consumption,

such as economical energy use, switching transport

modes and consuming less carbon-intensive food

(Lonergan and Sawers, 2022).

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

(b) Ambitious climate change mitigation

policies are essential

Every five years, signatories to the Paris Agreement

submit roadmaps to the United Nations Framework

Convention on Climate Change (UNFCCC)

Secretariat, known as Nationally Determined

Contributions (NDCs), which detail how they plan to

achieve their carbon emission-reduction targets.

review of the 164 latest available NDCs reveals that

the most frequently listed measures in NDCs are

related to the energy sector, including electric power

generation from renewable energy and low- or zero-

carbon fuels (UNFCCC, 2021). Many NDCs also

report measures for enhancing carbon sequestration,

the most frequently indicated being afforestation,

reforestation and sustainable forest management.

While positive, the level of ambition of these policies

is not currently enough to achieve a low-carbon

economy consistent with the Paris Agreement’s

timeline, namely cutting by half GHG emissions by

2030 and reach net zero by 2050 (UNEP, 2021a).

The lack of progress stems in part from the fact

that climate change is a market failure because it

Box C.1: Implications of the war in Ukraine on climate change

The war in Ukraine is having a devastating impact on the Ukrainian people, infrastructure and economy. It

is also having a disastrous impact on the environment, for example through the destruction of forest and

marine ecosystems, air and water pollution, and waste. Given the important roles of both Russia and Ukraine

in the global commodities and energy markets, cascading impacts of the conflict are being felt worldwide,

including through higher food and energy prices and the reduced availability of certain Russian and Ukrainian

exports (WTO, 2022b).

The war and its consequences highlight the importance of devising climate change strategies that balance

energy and food security with environmental imperatives. It is, however, unclear at this stage, whether the

war and its geopolitical consequences will slow down or accelerate the transition to a low-carbon economy.

In response to rising oil and gas prices consequent to the war in Ukraine and as a result of sanctions on many

Russian exports, some countries have opted to diversify their energy suppliers, signing contracts for liquefied

natural gas (LNG) from Africa, the Middle East and the United States (Dvorak and Hirtenstein, 2022). Some

countries are also considering increasing natural gas and oil production, building new natural gas pipelines,

and reopening or extending the operation of coal-fired power plants (Tollefson, 2022).

Although these new commercial energy contracts and projects may address the current urgent energy

security problems, they could also slow down the transition to a low-carbon economy if, for example, new

providers of coal, gas and oil demand long-term supply commitments. The race to secure LNG supplies by

some countries could further exacerbate price spikes in LNG, which could drive some developing and least-

developed economies to increase or switch their energy consumption to high carbon-intensive fossil fuels,

such as coal and oil.

The war could also lead some governments to redirect public spending, initially allocated to tackling climate

change, to other priorities, some of which may be carbon-intensive, such as military equipment. More

generally, geopolitical tensions could imperil international cooperation on climate change, which is essential

to make significant progress in tackling climate change.

At the same time, energy security concerns, in particular energy independence, stemming from the

consequences of the war in Ukraine, could also accelerate the transition to a low-carbon economy. In

response to the war, some countries have adopted plans to accelerate their clean energy transition by

increasing energy efficiency and renewable energy production capacities. Energy price hikes could also lead

some consumers to buy more energy-efficient products and smaller or electric vehicles.

An accelerated low-carbon transition would require a diversified and affordable supply of the metals and

minerals required to produce renewable energy equipment and energy-efficient products, the availability of

which is not currently guaranteed as a result of the war. However, international trade may help to ensure a

more diversified and resilient supply of critical materials, and further contribute to the transition to a low-

carbon economy.

WORLD TRADE REPORT 2022

has been caused by actors who are not necessarily

experiencing the consequences of their acts. For

example, firms and consumers may not directly

face the climate change-related consequences of

the GHG they emit, and, as a result, they continue

to emit excessive quantities of GHGs. Measures to

tackle climate change can also be characterized by

positive externalities, for example all economic actors

benefit from increased climate change mitigation

efforts, even if they did not contribute to these efforts.

However, this can create incentives to free-ride on

climate efforts made by others, limiting the global

level of climate change mitigation efforts. Climate

change mitigation policies are essential to tackle

these market failures.

Other market failures may also call for policy

interventions. For example, climate-friendly

innovations in one country can benefit the innovation

activity of all other countries since they increase

the global stock of knowledge and support the

decarbonization process of the economy. In the

presence of such knowledge spillovers, companies

that invest in research and development (R&D) into

low-carbon technologies are often unable to capture

the entire return of their investment. Economies of

scale, sunk costs and costs of reorienting research

and switching technology also give established,

higher-carbon technologies an advantage (Acemoglu

et al., 2012).

In addition, the capital required to transition to low-

carbon alternatives is often subject to uncertainties,

political risks and a lack of short-term return on

investment which can often impede the funding of

innovative or large-infrastructure projects. Low-

carbon infrastructures often require substantive

upfront investment in networks, such as electronic

grids or charging stations for electric vehicles,

which can also be difficult to establish without

policy interventions. Finally, information about the

energy efficiency or carbon content of a product or

production process may not be available, making

it difficult for economic agents to make informed

decisions (Stern and Stiglitz, 2022).

are multifaceted

Climate change mitigation policies can support the

transition to a low-carbon economy by establishing

incentives and requirements to deploy climate-

friendly technologies and to facilitate the withdrawal

or improve the energy efficiency of carbon-intensive

assets.

The effectiveness of climate change

mitigation policies depends on their design and on the

responses of firms and consumers. Firms generally

only change their behaviours if they are legally

required to do so or it is economically profitable,

while people generally only change their behaviours

if they are legally obliged to do so, if the alternative is

cheaper or better, or if they want to imitate or conform

with social norms (Lonergan and Sawers, 2022).

Policy instruments for a low-carbon transition can be

grouped according to their underlying mechanisms

that aim to achieve climate change mitigation (IPCC,

2007b), namely (i)command-and-control instruments;

(ii) market-based instruments; (iii) information

instruments; and (iv)voluntary agreements.

(i) Command-and-control instruments

Command-and-control instruments are the most

common form of climate mitigation policies (IPCC,

2007b). Command-and-control measures fall

broadly into two categories: (1) regulatory measures

on processes and production methods and

(2) prohibition mandates of certain products and

practices.

Reducing the environmental impact of production

activities may sometimes involve setting standards

and regulation for the way products are produced.

These regulatory measures commonly take two

forms: (1) performance standards, which dictate

specific environmental outcomes to be achieved

per unit of production (e.g. number of grammes of

per kilowatt-hour of electricity generated) and

(2) technical standards, which specify various

pollution abatement technologies or production

methods to be used by producers (WTO and UNEP,

2009).

Prohibition, or phase-out mandates, as well as bans

on sales and imports of high-emission equipment and

energy-inefficient products, are increasingly common.

Such mandates are introduced to eliminate existing

fossil-fuel assets, such as coal-fired power plants,

and to prevent new investment in high-emissions

equipment (Finon, 2019).

(ii) Market-based instruments

In recent years, market-based instruments have

become an alternative to traditional command-

and-control policies (Peace and Ye, 2020). These

instruments have the advantage of providing greater

flexibility in how economic agents wish to reduce

GHG emissions. Market-based instruments can

be categorized into four broad groups: (1) carbon

pricing, (2) support measures, (3) fossil fuel subsidy

reform and (4) green government procurement.

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

Carbon pricing, including carbon taxes and emission

trading schemes, is often highlighted by economists

as an efficient way to reduce emissions (Aldy

and Stavins, 2012; Metcalf and Weisbach, 2009;

Stavins, 2022) (see Chapter D). Carbon pricing is

associated with the idea that polluters should pay for

the damage they cause. By putting a price on carbon

emissions, the costs of economic agents’ GHG-

emitting activities are made explicit, thereby giving

agents incentives to find ways to reduce emissions.

Moreover, by giving agents the flexibility to choose

the appropriate course of action to reduce emissions,

carbon pricing can also stimulate innovation for new,

low-carbon products and production processes.

Governments can also support a low-carbon

transition by incentivizing the development,

production and adoption of low-carbon products and

technologies. R&D subsidies can lower costs and

improve the performance of low-carbon technologies,

as well as foster innovation in environmental

technologies (Acemoglu et al., 2012; Bosetti et

al., 2013; Verdolini et al., 2015). Subsidies can

also be given to producers of renewable energy.

Feed-in tariffs, for instance, allow renewable energy

producers to receive a guaranteed price for each unit

of electricity generated, guaranteed grid access and

long-term contracts with electric grid utilities (Fell

and Linn, 2013; Wilke, 2011). Subsidies can also be

provided to consumers to encourage the adoption of

low-carbon products and technologies, for example

LED lighting or electric vehicles (Finon, 2019).

The phasing-out of fossil fuel subsidies also affects

the carbon price. Because fossil fuel subsidies

essentially function as a negative carbon price,

removing these subsidies results in an increase

in the price of carbon-based fuels (Jenkins, 2014;

van Asselt and Skovgaard, 2021). Subsidy reform

therefore enables the incorporation of costs of

environmental externalities that were not reflected

under the subsidized prices and thereby incentivizes

a decreased use of fossil fuels. More generally,

reforming support measures targeted at carbon-

intensive products and activities, such as some

agricultural subsidies, can lead to reduction in GHG

emissions (OECD, 2022b; Springmann and Freund,

2022).

Through green government procurement (GGP)

policies, governments can influence private sector

producers through their purchases of low-carbon

goods and services, create markets for new entrants,

and stimulate innovative solutions to climate change

problems by awarding public R&D contracts. Given

the sheer volume of demand for goods and services

that government procurement can represent,

GPP

can create a large and stable demand for new low-

carbon solutions before a commercial market is

viable.

(iii) Information instruments

Firms and consumers may act inefficiently when

they lack the necessary information about the

environmental consequences of their actions.

Information instruments provide environment- and

energy-related information on specific products

and activities to allow investors and consumers to

make climate-informed choices. The disclosure of

environmentally related information includes labelling

programmes, rating and certification systems, public

awareness campaigns and environmental self-

declaration claims.

Eco-labels, including carbon labels, are increasingly

being adopted (OECD, 2016). The carbon-

related information intended to consumers can be

communicated in different ways.

A low-carbon label

shows that the product’s carbon footprint has been

reduced without necessarily specifying by how much.

A carbon neutral label indicates that the product’s

carbon footprint has been reduced but any remaining

carbon emissions have been compensated via carbon

offset projects. A carbon score lists the amount of

carbon emitted across the product’s lifecycle. A

carbon rating shows how the product performs in

terms of energy use and efficiency relative to others

similar products in its category.

While information-enhancing initiatives can be

owned or managed by governments,

environmental

information instruments are increasingly adopted

by the private sector and non-profit organizations.

An increasing number of firms use eco-labelling to

establish or foster niche markets for environmentally

friendly products. Some firms also voluntarily disclose

information about their environmental performance.

Recently, collaborations between public and private

sectors on environmental information schemes have

become common, such as roundtable certification

schemes.

(iv) Voluntary agreements

Voluntary agreements are customized contracts

between a government authority and one or

more private sector parties, that aim to improve

environmental performance and resource utilization

beyond compliance to regulated obligations

(Cornelis, 2019; IPCC, 2007b).

There is no legal

obligation to participate, and, in most cases, there are

no penalties for terminating participation (Karamanos,

2001). Voluntary agreements can, in some cases,

WORLD TRADE REPORT 2022

obviate the need to use legislative action. They can

also encourage a proactive, cooperative approach

between public and private sectors. In addition, they

can lead other firms to imitate the environmentally

friendlier practices of voluntary agreements-signatory

firms.

(d) Addressing the distributional

and political implications of ambitious

climate change mitigation policies

is essential

The adoption and implementation of ambitious carbon

mitigation policies can face challenges in some

segments of the population and some sectors. This

is because the distributional consequences of carbon

mitigation policies can include replacing existing

sectors, activities and technologies with alternatives

that are more efficient or that use low-carbon energy

sources, and this can provoke opposition, which may

impede implementation (Jenkins, 2014; Nemet et

al., 2017; Stern, 2017a). In addition, as discussed in

Section C.3., the trade implications of some climate

mitigation policies, can affect governments’ mitigation

policy strategies and level of ambition, such as the

risk of relocation of carbon intensive activities to

countries with less stringent climate policies.

Carbon mitigation policies which aim to increase

fossil fuel prices can, at least in the short term,

increase energy prices generally, and negatively

impact consumers and producers. Pressures from

those who lose out, or who may lose out, because

of decarbonization can slow down the transition to

a low-carbon economy by hindering the use of more

efficient, low-emission technologies. The climate

change mitigation policies necessary to establish the

transition to a low-carbon economy therefore require

public support to ensure they are credible, effective

and long-lasting.

For instance, carbon pricing policies often face

significant political economy hurdles (Jenkins and

Karplus, 2017) and raise concerns about the burden

that carbon price increases may impose on low-

income groups.

At the same time, however, the

potential of these policies to raise revenue that can

then be redistributed for various purposes (known as

“revenue recycling”) has been proposed as a possible

remedy to distributional concerns (Jakob et al., 2016;

Rausch and Yonezawa, 2021).

Similarly, fossil fuel subsidy reforms have been

known to incur significant distributional and

political implications with, in some cases, extensive

strikes and violent public protests that have

prompted governments to reverse their reforms.

Other structural factors, such as insufficient

institutional or governance capacity, may also make it

difficult to remove fossil fuel subsidies once they are

in place (Lockwood, 2015; Skovgaard and van Asselt,

2019).

Some climate change mitigation policies can benefit

certain groups more than others, and can thereby

garner greater political support (Jenkins, 2014).

For instance, subsidies encouraging households

to purchase electric vehicles have been found

particularly to favour high-income earners (Sherlock,

2019; Sovacool et al., 2019), while developing

and expanding an affordable electrified public

transportation network, through GPP, can particularly

benefit lower-income and/or minority groups who

may not own cars and who rely on public transport

to commute to work and to school (Slastanova et al.,

2021).

The distributional effects of some climate change

mitigation policies may be more salient for

producers than consumers, if the former face the

direct impacts of the policies and cannot reflect

the increased costs that result from these policies

in the prices of goods and services (Johnstone and

Serret, 2006). For instance, the compliance costs

of regulations, including environmental ones, tend to

impact micro, small and medium-sized enterprises

(MSMEs) disproportionately (Crain and Crain, 2010).

Nevertheless, climate change mitigation policies can

be designed in such a way as to lessen the burden

faced by vulnerable groups, which could help to

support and lead a more fair and inclusive transition

to a low-carbon economy.

(e) Well-functioning financial markets

are essential to support the transition

to a low-carbon economy

The transformation across all energy and land-use

systems that a low-carbon transition could entail

would require a significant expansion in investment

(IEA, 2021). McKinsey (2022) estimates that a total

investment of US$ 275 trillion would be required

in capital spending on physical assets over the

period 2021-50 in order to limit global warming to

less than 1.5°C; this would represent an average of

US$ 9.2 trillion per year. As discussed in Section

C.4.1, achieving a low-carbon economy on a global

scale also requires offering financial support to

developing and least-developed countries (LDCs)

to mitigate the adverse impacts of the transition and

enable them to invest and take advantage of new

opportunities.

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

Global funding for the energy transition alone is

estimated to amount to US$ 131 trillion over the next

30 years (McKinsey, 2022), and annual clean energy

investment worldwide would need to more than triple

by 2030 to around US$ 5 trillion to reach net zero

emissions by 2050. This investment could add an

extra 0.4 percentage points to annual global GDP

growth (IEA, 2021). The magnitude of the investment

requirements implies that contributions from financial

institutions and the private sector will be crucial.

Firms finance their activities, such as investing in

climate-friendly technology, by using the profits they

generate, raising their debt or issuing bonds. The

interest rate on debt and the equity cost of capital –

two components of the cost of capital – can influence

a firm's decision to invest in low-carbon-emission

projects. For instance, high interest rates make

investment more expensive, and less attractive, for

firms and reduces their investment. Conversely, a high

ratio of the firm’s price to profits (also known as the

price/earnings ratio) typically signals that the market

considers that the firm in question is high quality and

low risk or growing fast, and investors, typically, make

money by acquiring equity shares in firms with high

profits or high price/earnings ratios.

Financial markets, including central banks, can

support the transition to a low-carbon economy by

adopting strategies to reduce funding in carbon-

intensive projects, enhancing risk management

capabilities to identify new low-carbon opportunities,

and developing new financial products to support

investors in winding down carbon-intensive legacy

assets. Total climate finance, comprising funds from

corporations, commercial financial institutions and

household consumption, has steadily increased

over the last decade, reaching an annual average of

US$ 632 billion in 2019 and 2020 (Climate Policy

Initiative, 2021). Private-sector-led climate-related

activities are most common in renewable energy

investment, in particular on-shore wind and solar

photovoltaic (PV) energy projects, and in energy

efficiency investment and waste management.

Other climate-related projects include land-fill gas

capture and projects in agriculture and forestry and

IT applications for process monitoring and control, to

support resource efficiency such has smart irrigation

and smart cold chain management.

Privately financed climate projects are typically the

result of the combined effects of a range of public

interventions and of broader enabling conditions

(OECD, 2017). Innovative financial instruments such

as carbon finance, green stock indices and green

bonds raise money from investors to exclusively

finance environmental projects. For instance, green

bond markets have grown quickly in size and market

coverage since the first green bond was issued in

2007 by the European Investment Bank. At the end

of 2021, the global green bond market reached a

total volume of US$ 517.4 billion, marking a market

expansion trend of 10 consecutive years (Climate

Policy Initiative, 2021).

Environmental, social and governance (ESG) criteria

are increasingly incorporated into investors’ analysis

processes to identify material risks and growth

opportunities in low-carbon investment, among

others. While ESG is a promising approach, ESG

ratings are not standardized, and unfortunately the

ESG approach is also associated with free-riding,

greenwashing and mis-selling risks (Lonergan

and Sawers, 2022). Free-riding arises when firms

are willing to undervalue high-carbon-emission

assets and sell them to obtain a higher ESG score.

Greenwashing arises when firms with a high ESG

continue to hold high carbon emission assets. The

risk of mis-selling comes from the investors’ high

expectation that ESG investment will necessarily

deliver high returns, although many ESG investment

remain risky.

Harmonizing ESG criteria and measurement tools

and improving information disclosure and regulatory

control can improve the effectiveness of ESG finance

in contributing to a low-carbon economy by reducing

the cost of capital of low-carbon projects.

3. A low-carbon economy would

change trade patterns and

provide new trading opportunities

History has shown that the dramatic opening of the

world economy, combined with the rapid pace of

technological change, have improved the welfare

and living standards of billions of people around the

world, including its poorest citizens. This process was

necessarily accompanied by economic changes and

some disruptions in the jobs market, as economies

shifted from lower to higher productivity and from

declining industries to rising ones (WTO, 2017).

The transition to a low-carbon economy should be

no different, with economies shifting from fossil fuels

to renewable energy sources and from high-carbon-

intensive activities to low-carbon-intensive ones.

This transformation is likely to affect international

trade flows by altering comparative advantages.

New trading opportunities for renewable energy and

low-carbon-intensive products are likely to emerge,

although addressing any climate-related trade

tensions is essential.

WORLD TRADE REPORT 2022

(a) The transition to a low-carbon

economy provides opportunities

to support a more sustainable

and equitable development

A low-carbon economy brings considerable

environmental benefits that can contribute to a more

sustainable development path. The transition to a

low-carbon economy averts and minimizes the severe

consequences of climate change, including a rise in

global temperatures, sea levels and frequency, duration

and intensity of extreme weather-related events, such

as floods, cyclones, and droughts. The low-carbon

transition also improves air quality, which in turn

improves health and living conditions. Decarbonization

through sustainable land management, climate-smart

agricultural practices and forest protection can also

promote biodiversity, improve food security and

enhance climate resilience (see Chapter B).

While the transition to a low-carbon economy would

entail short-term investment and adjustment costs,

it could also provide important economic benefits

and opportunities to support a more sustainable and

fair development. It is estimated that bold actions in

climate mitigation could yield a cumulated economic

gain of US$ 26 trillion between 2018 and 2030

(Garrido et al., 2019). This transition would also limit

the risks of a changing climate. As noted in Chapter

B, without ambitious mitigation measures, climate

change could cause 250,000 additional deaths per

annum (WHO, 2018) and up to 18 per cent of global

GDP loss by 2050 (Swiss Re Institute, 2021).

While the transition to a low-carbon economy

is expected to change the way agricultural and

manufacturing goods are produced, services are

delivered and buildings are heated and cooled,

the labour market is also likely to go through a

transformation, with job opportunities moving

between occupations and sectors. Workers in

carbon-intensive industries, such as cement and

steel, are likely to be disproportionately affected.

The low-carbon transition could also, however, bring

about employment opportunities since the renewable

energy sector is more labour-intensive than the fossil

fuel sector (Garrett-Peltier, 2017). The renewable

energy sector already provided 12.7 million jobs

globally in 2021 (IRENA and ILO, 2022), and it is

projected that 14 million jobs could be created in

clean energy and 16 million additional jobs in energy-

related sectors by 2030 (IEA, 2021).

Jobs in the

renewable energy sector are also more gender-

inclusive than jobs in fossil fuels, with women holding

32 per cent of total renewables jobs but only 21 per

cent in fossil fuels jobs. The overall magnitude of the

labour shift associated with a low-carbon transition

could still be relatively limited, given that most jobs

are likely to be neither high-carbon-intensive nor low-

carbon-intensive (IMF, 2022).

The obstacles and labour mobility frictions

experienced by workers who wish to move into sectors

with rising employment (e.g., solar panel installation)

and out of declining ones (e.g., coal mining) can be

high. Mismatches between skills offered and wanted

in the labour market impede workers’ transition

between jobs (ILO and WTO, 2017). In addition,

geographical frictions, or barriers, account for a

substantial share of the total mobility costs affecting

the reallocation of workers between regions, and may

be related to physical geography, social networks,

family ties, cultural barriers, language and housing.

Labour mobility costs tend to be higher in developing

countries (WTO, 2017).

Supporting the labour market adjustment for workers

displaced by the closure of carbon-intensive

industries is essential to ensure a fair transition to

a low-carbon-emission economy. Labour market

adjustment policies can take different forms, including

job-search assistance, skills development and

training programmes (Bacchetta, Milet and Monteiro,

2019; WTO, 2017). Environmental and low-carbon-

intensive jobs tend to be higher-skilled and better-

paid jobs (ILO, 2018), which could attract some

workers, including displaced workers, to these job

opportunities. The wage premium in environmental

jobs could thus also contribute to facilitating the

labour market adjustment (IMF, 2022).

(b) International trade in low-carbon

technologies and in renewable energy

can support a low-carbon transition

Although international trade emits GHG, it can

play an essential role in supporting and promoting

the development, access and deployment of low-

carbon technologies. Trade in renewable energy

and electricity can also help to make production

processes cleaner by providing access to affordable

sustainable and renewable energy sources.

International trade can support a low-carbon

transition by helping to share out the fixed and sunk

investment costs of new environmental technologies,

as high investment costs are often associated with

the development of new technologies, including

environmental ones. This can come about in supply

chains when coordination between upstream and

downstream firms can lead to cost allocation, shared

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

decision-making and long-term commitment (Ghosh

and Shah, 2015; Mattingly, 2017; Qin et al., 2021;

Xu and Xie, 2016). Often, only a small number of

countries have specific technological expertise

in the manufacturing of specific environmental

technology, such as renewable energy components

and equipment, trade in environmental products

thus provides access to technologies with a level of

efficiency that cannot be replicated domestically in

importing countries (Garsous and Worack, 2021).

International trade can also contribute to a low-carbon

transition by promoting the diffusion of environmental

technologies, as it increases the dissemination of

knowledge across borders (see Chapter F). The

diffusion of knowledge and ideas can also improve

productivity. An increase in innovation in cleaner

energy technologies, often measured by the number

of relevant patents, has been found to reduce energy

intensity and improve environmental performance

(Chakraborty and Mazzanti, 2020; Ghisetti and

Quatraro, 2017; Wurlod and Noailly, 2018). In

addition, knowledge diffusion across countries and

sectors can enable economies to exploit differences

in comparative advantages more effectively, thanks to

differences between countries in their access to and

absorptive capacity of knowledge in environmental

technologies (Bretschger et al., 2017).

International trade in renewable energy and electricity

could also help to compensate for the uneven

geographical distribution of clean energy sources,

such as solar irradiation and wind power density. For

example, the potential for solar energy production

is particularly high in many countries in Africa, Asia,

Latin America and the Middle East, while the potential

for wind power tends to be very high along coastlines

above the northern tropic and below the southern

tropic. For instance, the world’s largest solar power

station was built in Morocco, while the largest

offshore wind farm is located in the United Kingdom.

Trade and investment in goods and services related

to sustainable renewable energy can contribute to

increasing the global production of renewable energy

at low cost. For instance, the capacity of solar panels

globally traded in 2017 was estimated at almost

80 gigawatts, the equivalent of more than 9 per cent

of the global electricity generation in 2017 (Wang et

al., 2021).

However, the full potential of international trade in

renewable energy and electricity requires addressing

the structural challenges on existing power-generation,

transmission, and distribution infrastructure created

by new renewable electricity flows as well as the

inherent variability of renewables, including potential

imbalances in supply and demand and limited storage

capacity (McKinsey & Company, 2021). Despite rapid

and significant advances in high-voltage direct current

power transmission (Patel, 2022), cross-border

electricity transmission via high-voltage lines over

long distances remains relatively costly. Renewable

energy could alternatively be exported via pipeline or

ship by using energy carriers, namely gases or liquids

produced using renewable energy (van der Zwaan,

Lamboo and Dalla Longa, 2021).

In recent years,

the potential of green hydrogen as a versatile carbon-

free energy carrier is being increasingly recognized, as

discussed by Gauri Singh in her opinion piece.

The transfer of environmental technologies could also

help to overcome the mismatch between the regional

location of renewable energy resources and the

availability of low-carbon technology. Recent analysis

of patenting activity suggests that the trajectory of the

climate change mitigation knowledge flow increased

(especially from developed to developing countries)

after the Kyoto Protocol and especially the Paris

Agreement (Torrance, West and Friedman, 2022).

Developing countries frequently lack significant

legacy, carbon-heavy energy systems; which, with

the relevant energy and environmental policies, could

enable them to leapfrog directly to low-cost and

reliable renewable energy technologies that are well-

suited to serving dispersed rural populations with

limited or no access to electricity or other sources of

energy (Arndt et al., 2019).

The transition to a low-carbon economy is likely

to take place in a world of increasing geopolitical

tensions and supply chain disruptions (see Chapter

B). In this context, it is essential that the supply of

energy and key mineral resources needed to produce

some low-carbon technologies, such as renewable

energy equipment and energy efficient products, is

diversified and resilient. In order to assemble a risk-

based supply strategy, future energy needs need to

be evaluated in light of energy security concerns,

and transparency and coordination among trading

partners must be supported (WTO, 2021c).

trade patterns

While climate change may alter countries’

comparative advantages (see Chapter B), a low-

carbon transition is also likely to lead to shifts in trade

patterns. The impact of the low-carbon transition

is likely to be stronger on those countries whose

comparative advantage stems from fossil fuel energy

and high-carbon intensive activities. While a growing

literature on climate change and trade looks at the

future consequences of climate change, in particular

WORLD TRADE REPORT 2022

OPINION PIECE

By Gauri Singh

Deputy Director-General,

International Renewable Energy Agency (IRENA)

Green hydrogen requires

an appetite for action

The International Renewable

Energy Agency (IRENA)’s World

Energy Transitions Outlook 2022,

which sets out in precise detail the

route to achieving 1.5°C by 2030,

argues in favour of using hydrogen

to achieve full decarbonization

(IRENA, 2022). This means raising

global production to five times

the current production, or 614

megatonnes of hydrogen per year,

to reach 12 per cent of the final

energy demand by 2050. Green

hydrogen is expected to make up

the vast bulk of this production.

Discussion of green hydrogen

arrives at the right time.

Renewable power generation

costs have plunged over the

past decade, driven by rapidly

improving technologies,

economies of scale, competitive

supply chains and an ever-

improving developer experience.

To use just one example,

electricity costs from utility-scale

solar photovoltaics fell by 85 per

cent between 2010 and 2020.

Unlike fossil fuels, renewable

energy can potentially be produced

by every nation. It is energy-fair.

The same can be said of green

hydrogen, which is a process

of conversion, using water and

electrolysis technology powered

by renewable energy. The method

could radically transform the way

global energy is traded.

Green hydrogen can also be

economical in locations with the

optimal combination of abundant

renewable resources, space for

solar or wind farms, and access to

water, matched with the capability

to export to large demand centres.

New power centres could be built

in places that exploit these factors

to become hydrogen hubs for its

production and use.

Until recently, however, there

has been no cost-effective

way of transporting renewable

electricity over long distances to

link low-cost production sites with

demand. Suitable transmission

lines are rare and extremely

expensive to construct. The

use of hydrogen as an energy

carrier could provide the answer,

enabling renewable energy to be

traded across borders in the form

of molecules or commodities such

as ammonia.

To make trade cost-effective,

production of green hydrogen

must be sufficiently less expensive

in the exporting region than in the

importing region to compensate

for transport costs. This cost

differential will loom large as the

scale of projects increases and

technology develops to reduce

transport costs. Hydrogen trade

can lower energy supply cost

energy since cheaper energy is

tapped into. It can also lead to a

more robust energy system with

more alternatives to cope with

exploding crises.

We still have much to do. For the

hydrogen trade to truly flourish

globally, a market needs to be

created to generate demand,

promote transparency, and

connect suppliers and end

users. Underpinning the market,

nations need to produce a

market regulatory framework

containing the flexibility to

promote growth. And there must

be an internationally accepted

certification scheme accepted

by all. Finally, innovation must

dramatically improve the available

technologies that reinforce the

integrated value chain.

Green hydrogen is not going to

leap on to the world’s energy

stage fully formed and ready

to salvage efforts to achieve

1.5°C by 2030. It is going to

require decisive action and

dynamic innovation to create new

production centres and stimulate

demand. Above everything else,

it will take ambition and clear-

sightedness about our future

prospects. The world must be

prepared to extend its reach to

grasp every opportunity for energy

transition. Taking the first step is

simple: we just have to reach out.

WORLD TRADE REPORT 2022

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

global warming, on some trade patterns, the trade

implications of the transition to a low-carbon economy

have been less discussed.

The WTO Global Trade Model (WTO GTM) was

used to fill part of this gap and analyse how moving

towards a low-carbon economy by 2050 could impact

the economy and trade patterns.

It is important,

however, to emphasize that the simulation scenarios

are not forecasts or predictions for the future but

representations of what could happen in the future

under a set of assumptions. In this analysis, the low-

carbon transition is assumed to be achieved thanks to

international cooperation and the adoption of global

carbon pricing, which is based on a combination of

global emissions reductions with announced NDCs

until 2030. Under this scenario, fossil fuels extraction

and use are phased out by 2050, while electrification

and renewable energy use increase to achieve low-

carbon emissions by 2050.

(i) A low-carbon economy could spur

regional trade in renewable electricity

Assuming a successful transition to a low-carbon

economy, this transition is likely to change the

structure of domestic energy production and the

composition of energy trade. The simulation results

suggest that the global share of fossil fuel exports

in total energy exports would decrease, while the

global share of trade in renewable energy in total

energy trade is projected to increase with the level of

decarbonization ambition (right panel of Figure C.1).

However, a low-carbon transition would lead to a 38

per cent reduction in energy trade from 2022 to 2050

(left panel of Figure C.1). Two forces may explain

this result: a reduction in fossil fuel exports and an

increase in trade in renewable energy. The latter

is, however, not large enough to offset the former

because fossil fuel energy (i.e., natural gas, coal,

oil) is assumed to remain much more tradeable than

trade in electricity, including from renewable energy

sources, due to high costs to transport electricity.

(ii) The low-carbon transition would

shift production and trade patterns,

affecting regions differently

The economic impacts of a low-carbon transition are

likely to be unevenly distributed, with those highly

dependent on fossil fuel energy exports more severely

impacted. In addition, a broad range of policies and

a well-functioning financial and labour markets can

contribute to mitigating the adjustment costs to a

low-carbon economy and opening up new economic

opportunities.

The simulation results suggest that a low-carbon

economy would necessarily lead to a substantial

Figure C.1: Trade in electricity could increase in a low-carbon economy

Source:

Bekkers et al. (2022).

Note:

Simulation results based on the WTO GTM. The “low-carbon 2050” scenario assumes countries cooperate to achieve almost net

zero emissions by 2050.

Low-income

Lower-middle

income

Higher-middle

income

High-income

Fossil fuel

export-dependent

Low-income

Lower-middle

income

Higher-middle

income

High-income

Fossil fuel

export-dependent

Percentage share

Energy export share in total energy production Electricity export share in total energy export

0.5

0.6

2022 Low-carbon 2050

WORLD TRADE REPORT 2022

reduction in the real output of coal, oil, gas and

refined petroleum products in all regions, ranging from

between 50 per cent in fossil fuel export-dependent

countries (FFEDCs)

to more than 60 per cent

and 70 per cent in low- and higher middle-income

countries. At the same time, capital and labour would

likely be reallocated to different activities to ensure a

low-carbon transition. Countries could thus shift their

production and comparative advantages from fossil

fuels sectors to energy-intensive industrial sectors,

such as iron and steel, and to knowledge-based

sophisticated sectors, such as computer electronic

equipment and motor vehicles.

The change in trade patterns as a result of

decarbonization is reflected in the relative ability

of a country to produce a good vis-à-vis its trading

partners, commonly known as revealed comparative

advantage (RCA). The increase in the RCA of

FFEDCs in energy-intensive sectors could be larger

than in sophisticated sectors, because a reduction

of fossil fuel prices as a result of decarbonization

makes regions with large reserves of fossil fuels more

competitive in energy-intensive sectors (see Figure

C.2). This trend, though smaller in magnitude, could

also be observed in low-income countries. Due to the

shift of energy-intensive sectors and sophisticated

sectors to other regions, high-income countries

could experience a small reduction of their RCA in

sophisticated sectors and energy-intensive sectors,

although they would maintain their comparative

advantage in sophisticated sectors.

At the same time, FFEDCs and low-income regions

could benefit from a low-carbon transition. As

mentioned in the previous section, decarbonization

could help FFEDCs and low-income regions to

diversify their economies away from volatile fossil

fuel sectors towards more sophisticated sectors

with more growth potential, offering new economic

opportunities. Furthermore, FFEDCs and low-income

countries with significant renewable energy source

potentials could also shift towards production and

exports of renewable energies. However, the current

export revenues from fossil fuels would not be fully

replaced with revenues from exporting renewable

electricity, because unlike fossil energy, electricity,

including from renewable sources, is less tradeable

over long distances.

Production and export

opportunities may also be explored in goods and

services produced with renewable energy.

The materialization of these new economic

opportunities hinges to a large extent on the adoption

of complementary policies to facilitate access to and

diffusion of environmental technologies, and shift

Figure C.2: A low-carbon economy could lead economies to shift their comparative advantages

Source:

Bekkers et al. (2022).

Note:

Results based on the WTO GTM. Revealed comparative advantage (RCA) is an index defined as the share of an economy’s exports

in that economy’s total exports, relative to the share of the world’s exports in that sector in total world exports. A RCA higher than one

indicates a country has a revealed comparative advantage for a given sector. The higher the value of a country’s RCA for a sector, the

higher its export strength.

Fossil fuel

Energy-intensive

Sophisticated

Revealed comparative advantage index

Low-income Lower-middle income Higher-middle income High income

Fossil fuel export-dependent

Fossil fuel

Energy-intensive

Sophisticated

Fossil fuel

Energy-intensive

Sophisticated

Fossil fuel

Energy-intensive

Sophisticated

Fossil fuel

Energy-intensive

Sophisticated

2022 Low-carbon 2050

2.7

3.0

1.6

0.1

0.2

1.8

1.77

1.2

1.7

0.4

0.6

0.5

0.4

0.8

0.5

1.3

1.4

0.5

0.7

1.1

0.7

1.1

1.0

4.3

3.3

1.1

3.2

0.2

0.3

0.9

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

investment from fossil fuel-based physical capital

to human capital (Peszko et al., 2020). Policies

to tackle climate change, promote education and

energy infrastructure are also essential to ensure that

countries have the appropriate enabling conditions to

support the environmental industry (see Chapter F).

As discussed in Section C.4, financial and technical

support are also important to mitigate the adverse

impacts of the transition and enable countries, in

particular low-income economies, to take advantage

of new low-carbon economic opportunities.

(d) Some climate change mitigation

policies may have trade implications

The transition to a low-carbon economy requires

ambitious climate change mitigation policies. Some of

these policies can have trade impacts and generate

cross-border spillovers, which may affect governments’

mitigation policy strategies and levels of ambition.

One key problem is that the effectiveness of certain

mitigation policies, when adopted unilaterally, may be

undermined by the lack of ambition in other countries

and a loss of competitiveness (see also Chapter D).

While not all climate change mitigation policies have

trade implications, trade-related climate change

mitigation measures are often notified to the WTO.

Between 2009 and 2020, WTO members notified

3,460 measures explicitly addressing climate

change mitigation, but also energy conservation and

efficiency, and alternative and renewable energy.

Most of these notified trade-related climate change

mitigation measures are support measures and

technical regulations and conformity assessment

procedures (see Figure C.3). For example, notified

measures include new regulatory requirements

to reduce the use of fluorocarbons and promote

alternative chemicals with low global warming

potential,

preferential tax treatment for energy-

saving and new energy vehicles and vessels,

and

the use of import licences to regulate lighting with

minimum energy performance standards.

Depending on their design and implementation, trade-

related climate change mitigation policies can raise

concerns among trading partners on the grounds that

these measures can discriminate among different

trading partners or between imports and similar

domestic goods, or can unnecessarily restrict trade.

For instance, prohibition and phase-out mandates

can have negative impacts on trade by forcing foreign

suppliers that previously served a given market to

redirect their exports or terminate them entirely.

Figure C.3: Support measures and technical regulations are the most common trade-related

climate change mitigation measures

Source:

Authors’ calculations, based on the WTO Environmental Database.

Note:

The figure reports climate change mitigation measures notified to the WTO between 2009 and 2020 by types of policies. One

notified measure can cover more than one type of policy.

Notiﬁed trade-related climate change adaptation measures

Grants and direct payments

Loan and ﬁnancing

Non-monetary support

Income or price support

Others

Tax concession

Support measures

Technical regulation

Countervailing measures/investigation

Import licence

Ban

Public procurement

Conformity assessment procedure

998

242

539

1,242

199

Export licence

Investment measure

Others

519

Other measures

WORLD TRADE REPORT 2022

Carbon pricing can also have trade implications, as

discussed in detail in Chapter D.

Some types of

support measures can also create trade tensions,

such as support measures that attribute exclusive

rights to the use of research output by domestic

firms (WTO, 2020a) or that are provided to shield

domestic producers from foreign competition, or

strategically for industrial policy purposes (UNEP and

DIE, 2017). For instance, subsidies with local content

requirements can spur investment in homegrown

climate-friendly infrastructure and technology, but at

the same time be trade-restricting.

Fossil fuel subsidy reform can also affect trade

competitiveness by increasing the prices of

intermediates for energy-intensive industries

(Burniaux, Château and Sauvage, 2011), thus

increasing the production costs and reduce the

competitiveness of carbon-intensive industries

such as steelmaking, petrochemicals and aluminium

(Cockburn, Robichaud and Tiberti, 2018; Ellis, 2010;

Jensen and Tarr, 2003). The removal of support for

fossil fuel consumption and production worldwide

also impacts FFEDCs. However, ultimately, the

trade impacts of fossil fuel subsidy reform depend

on firms’ response measures (Moerenhout and

Irschlinger, 2020). Firms can, for example, substitute

certain energy inputs for alternative sources, improve

resource efficiency or pass directly the compliance

costs on to consumers, although if firms decide

to respond by increasing prices, this can harm

their competitiveness in the international market

(Rentschler, Kornejew and Bazilian, 2017).

The use and proliferation of informational instruments,

such as environmental labels, has important trade

implications. Few mandatory labelling requirements

are currently in place, but prominent voluntary

labels can ultimately become a market entry

requirement (OECD, 2016). The multiplication

of informational schemes may negatively impact

the international competitiveness of producers by

increasing compliance costs, including the costs of

information-seeking, of switching to more expensive

environmentally-friendly production methods, and of

adopting complex certification and audit procedures.

The latter are particularly burdensome for producers in

developing countries and MSMEs, who often lack the

infrastructure required for certification and traceability

requirements (UNEP, 2005) (see Box C.2).

At the same time, some trade policies can incentivize

higher levels of environmental protection. For instance,

government support, such as R&D investments, can

propagate knowledge diffusion across borders (Fadly

and Fontes, 2019; Shahnazi and Shabani, 2019),

and trade can play an important role in enhancing

this effect. Similarly, GGP policies can be combined

with more open government procurement markets

to increase the number of suppliers participating in

Box C.2: The role of MSMEs in a low-carbon transition

MSMEs account for roughly 90 per cent of global businesses and an estimated 50 and 35 per cent of GDP in

developed and developing economies, respectively (WTO, 2016). Many MSMEs are owned and led by women

(World Bank and WTO, 2020).

Although MSMEs can play a large role in achieving global decarbonization targets, only a fraction of them have

plans to decarbonize their activities (BCG-HSBC, 2021), despite the fact that the transition to a low-carbon

economy offers them a number of opportunities and benefits, from new environmental products and services,

to increased production efficiency and lower business costs (ITC, 2021). For instance, 25 per cent of total

expected investment across 15 clean energy sectors in developing countries could be accessible to MSMEs

(World Bank, 2014). Internationalization can further drive MSME sustainability practices, through exposure to

new technologies, new compliance requirements in foreign markets, and demand for sustainability by foreign

consumers (Hojnik, Ruzzier and Manolova, 2018).

Nevertheless, significant challenges inhibit further carbon mitigation initiatives by MSMEs. Capital-constrained

businesses may be unable to invest without support in more sustainable production and energy-efficient

techniques, despite their long-term payoffs (IEA, 2021). MSMEs may also struggle to comply with, or benefit

from, climate change mitigation policies, particularly when national and international standards diverge (WTO,

2022c).

Often designed in developed economies, environmental standards and other non-tariff measures to support

environmental products, including testing and conformity assessments, can be especially challenging for

MSMEs from developing economies to comply with (Pesko et al., 2020). Clear climate change mitigation policies

designed with MSME considerations in mind can both promote inclusivity and provide new environmentally

sustainable business opportunities for all enterprises.

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

tenders, and potentially give government purchasers

access to more climate-friendly goods, services and

technological solutions.

Trade can also raise ambitions with regard to

environmental standards and regulations, since firms

that wish to export to highly regulated countries have

an incentive to develop or adopt higher standards.

Analyses of the car industry, for instance, have found

that markets that have high emission standards for

vehicles tend to put pressure on countries that do

not, thereby inducing a ratcheting-up of regulations

in these countries (Crippa et al., 2016; Perkins and

Neumayer, 2012). As discussed in the next section,

international cooperation plays an important role in

mitigating potential negative trade impacts and in

leveraging synergies through concerted, coordinated

and transparent actions.

4. International cooperation is

essential to achieve a low-carbon

economy

Climate change is a problem of the global commons.

In the absence of global coordination, the adoption

of individual climate change mitigation strategies

is likely to be less than optimal (Akimoto, Sano and

Tehrani, 2017; Thube, Delzeit and Henning, 2022). In

addition, economic agents may avoid reducing their

GHG emission by free-riding on the mitigation efforts

of others, while governments’ concerns over losing

competitiveness could lead to “race to the bottom”

or “regulatory chill” situations in which they lower or

fail to implement their climate policies, or refrain from

adopting ambitious climate policies (Copeland and

Taylor, 2004; Dechezleprêtre and Sato, 2017).

International cooperation can help to overcome these

challenges and to scale up action on climate change

mitigation. It helps to avoid unproductive frictions or

obstacles and to address cross-border spillovers,

both negative and positive, generated by unilateral

climate policies (Kruse-Andersen and Sørensen,

2022). International cooperation ultimately can help

allow for the reduction of GHG emissions at the

lowest possible cost for growth and is essential for a

just transition to a global low-carbon economy.

(a) Greater international cooperation

is needed to support a just low-carbon

transition

Despite the UNFCCC’s 30-year history, progress

on climate action has been too slow and uneven to

fully contain global temperature increase. The current

GHG emission reduction pledges that countries

made under the Paris Agreement and other climate

mitigation measures adopted would only reduce

global carbon emissions by 7.5 per cent by 2030,

more than six times less than what would be necessary

to keep the global temperature increase below 1.5°C

by 2100. In the absence of more ambitious climate

change policies and initiatives, the world is projected

to hit global warming of about 2.7°C by the end of the

century (UNEP, 2021a).

To keep the increase in global temperatures below

1.5°C, the aspirational goal of the Paris Agreement,

the world needs to halve annual GHG emissions in the

next eight years. This requires additional cooperation

among countries. To illustrate the importance of

international cooperation, the WTO GTM was used

to assess the CO

emission and global temperature

trajectories of three scenarios (Bekkers et al., 2022).

The baseline “business-as-usual“ scenario assumes

countries continue to implement their climate change

mitigation policies at their respective 2021 levels,

without taking further action to implement their NDC

pledges. The simulation results suggest that, in the

absence of more ambitious global climate change

mitigation actions, global annual carbon emissions

could reach over 50 gigatonnes of CO

(Gt CO

) in

2050, while the average global temperature could

rise by 2°C warming and by over 3°C by the end of

the century (see Figure C.4).

Under the “divided world” scenario, countries are

assumed to take unilateral climate change mitigation

policies, including national carbon pricing, in line with

their NDC pledges until 2030.

After 2030, carbon

prices are assumed to follow a linear growth pattern,

resulting in a wide gap between unilaterally imposed

carbon prices, which lead countries with high

carbon prices to impose border carbon adjustments

on imports from countries with less stringent

mitigation policies (see Chapter D). Electrification

and renewable shares would keep increasing in an

uneven manner until 2050, while coal phase-out

would be achieved only by countries which have

pledged to do so by 2050. The lack of international

cooperation could lead to relatively constant global

carbon emissions and an average global temperature

rise of 1.9°C by 2050 and 2.6°C by the end of the

century, well above the Paris Agreement’s objective

to mitigate climate change.

The “low-carbon cooperation” scenario, described

in Section C.3, assumes countries cooperate

to tackle climate change by adopting ambitious

climate changes policies, including a global carbon

pricing system. In contrast to a situation marked by

WORLD TRADE REPORT 2022

unilateral and uncoordinated climate change policies,

international cooperation and coordinated actions

could lead to annual global carbon emissions to fall to

14.4 Gt CO

and the global average temperature to

rise by approximately 1.7°C by 2050, below the Paris

Agreement’s objective to limit global warming to well

below 2°C above pre-industrial levels.

In addition to achieving carbon mitigation objectives,

greater international cooperation is also needed to

ensure a just low-carbon transition. As discussed

in Section C.3, the impacts of decarbonization are

unevenly distributed between high-income and

low-income regions. Low-income economies could

experience a slow-down in economic growth in the

absence of complementary and adjustment policies

because their economy is less diversified and

relatively more reliant on fossil fuel than middle- and

high-income economies (except FFEDCs). In addition,

low-income economies tend to face a relatively high

cost of capital and a limited access to international

financial markets which hinder governments and firms

in those countries to finance the transition towards a

low-carbon economy.

Several options, including additional financial

mechanisms, have been discussed in the literature

to enable developing countries, and in particular

LDCs, to offset the economic costs associated with

the transition from an economy based on relatively

cheap fossil fuels to an economy based on low-

carbon technologies. For example, the so-called

Global Carbon Incentive (GCI) would establish a

global fund into which regions emitting more than the

global average would contribute to the fund, while

regions emitting less than the average would receive

revenues from the fund (Cramton et al., 2017; Rajan,

2021).

The WTO GTM was used to explore how such a

global fund could contribute to a just low-carbon

transition. The simulations suggest that implementing

an additional financing mechanism to distribute the

low-carbon transition burden between high- and

low-income countries could increase low and lower-

middle income countries’ real income by 4.5 per cent

and 3.2 per cent, respectively, thus turning the initial

negative impact of decarbonization for low-income

countries into a positive impact on economic growth

(see Figure C.5). Additional financing mechanisms

can therefore play an important role in rebalancing

the decarbonization impacts with a relatively minimal

cost and contribute to a just low-carbon transition.

Figure C.4: International cooperation is needed to reduce carbon emissions and limit global

warming to less than 2°C

Source:

Bekkers et al. (2022).

Note:

Results based on the WTO GTM. The “business as usual” scenario assumes countries continue to apply their climate change

policies at their 2021 levels. The “divided world” scenario assumes countries adopt unilaterally climate change policies. The “low-carbon

cooperation 2050” scenario assumes countries cooperate by adopting a global carbon pricing system.

emissions

(billiontons)

Global surface temperature

(degrees Celsius)

Business as usual

Divided world Low-carbon cooperation 2050

2022

2030

2040

2050

2100

2030

2040

2050

3.2

3.0

2.7

2.5

2.2

2.0

1.7

1.5

60,000

50,000

40,000

30,000

20,000

10,000

2022

2070

2080

2090

2060

1.2

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

(b) International cooperation on climate

adaptation is broad and diverse

International cooperation on climate change mitigation

is cross-cutting and involves a broad range of actors

at the national, regional, plurilateral and multilateral

level. The UNFCCC is the central multilateral

framework for tackling climate change, providing an

international forum for global negotiations on climate

change, while also coordinating the implementation

of climate policies. Such coordination can play an

important role in the development of national GHG

reduction policies, as it can provide assurance to

domestic policymakers that commensurate efforts are

being taken internationally by key trading partners. A

number of countries also pursue bilateral and regional

agreements on climate change mitigation in parallel

to and in support of the commitments established

under the UNFCCC (OECD, 2015).

Other international cooperation efforts, including

through other multilateral environmental agreements,

have also increasingly looked at how enhanced

coordination under their own frameworks could support

climate action. For example, the parties to the Montreal

Protocol on Substances that Deplete the Ozone

Layer adopted the Kigali Amendment to reduce the

production and trade of hydrofluorocarbons (HFCs),

a refrigerant with high global-warming potential. Its

full implementation is expected to prevent up to 0.4°C

of global warming by the end of the century. Some

sectoral cooperation efforts are directly related to

climate mitigation, such as sustainable forestry efforts

under the International Tropical Timber Organization

(ITTO), support for low-carbon energy transition at the

International Energy Agency (IEA) and the International

Renewable Energy Agency (IRENA), and efforts to

decarbonize transportation under the International

Maritime Organization (IMO) and the International Civil

Aviation Organization (ICAO) (see also Chapter E).

Cooperation and coordination among non-

governmental organizations (NGOs), and between

them and governments, are also on the rise.

The

private sector has also intensified its engagement

in international cooperation on climate change

mitigation.

Figure C.5: Greater cooperation with additional financing mechanism would support a just

low-carbon transition

Source:

Bekkers et al. (2022).

Note:

Results based on the WTO GTM. The figure displays the change in real income in 2050 relative to “business as usual” scenario.

The “business as usual” scenario assumes countries continue to apply their climate change policies at their 2021 levels. The “low-carbon

cooperation 2050” scenario assumes countries cooperate by adopting a global carbon pricing system. The “low-carbon cooperation 2050

with global fund” scenario assumes that countries cooperation by adopting a global fund to compensate adversely affected countries.

Each country’s net payment to the global fund is calculated on the basis of the difference between the country’s per capita carbon

emissions and the global average per capita emissions, multiplied by its population and a reference global price for carbon emissions.

Low-income

-4.2

-1.8

-1.5

4.5

0.7

3.2

0.05

0.7

1.4

0.4

Lower-middle income Higher-middle income High-income Fossil fuel

export-dependent

Change in real income in 2050

-5

-4

-3

-2

-1

Low-carbon cooperation 2050 Low-carbon cooperation with a global fund 2050

WORLD TRADE REPORT 2022

support and enhance climate change

mitigation actions

Although the term “international trade” does not

feature in the Paris Agreement, its parties have

discussed numerous trade-related elements to

support climate efforts as part of their cooperation

under several technical bodies, including the Forum

on Response Measures, the Katowice Committee

of Experts (KCI) and the Koronivia Joint Work on

Agriculture. In such discussions, the potential role of

trade to support parties in their climate efforts has

often been highlighted, including the role of trade in

helping countries to diversify economically away from

their reliance on carbon-intensive sectors and with

the just transition of workforces to new low-carbon

sectors (UNFCCC, 2016b).

International trade is also an integral part of a

limited but increasing number of countries’ NDCs to

achieve their climate mitigation goals (WTO, 2021f).

A review of the NDCs announced in the run-up to

the 21

Conference of the Parties or Paris Climate

Conference (COP21) of 2015 reveals that, while

45 per cent of NDCs included a direct reference to

trade, only around 22 per cent of all NDCs referred

to specific trade-related measures geared towards

fostering emission mitigation (Brandi, 2017). The

trade implication of some of these explicit measures

listed in NDCs may, however, not necessarily

materialize depending on the instruments and

measures ultimately adopted at the domestic level to

implement them.

The last 30 years have seen a rapid proliferation

of regional trade agreements (RTAs). While RTAs

traditionally aimed at lowering tariff and non-tariff

trade barriers, an increasing number of RTAs explicitly

address sustainable development and environmental

issues. The number and level of detail of

environmental provisions in RTAs has also increased

significantly over the years (see Figure C.6), with the

most detailed provisions often found within chapters

dedicated to environment or sustainable development

or within environmental cooperation agreements

(Monteiro, 2016).

Provisions that explicitly address climate change in

RTAs have similarly increased over the years, although

these tend to be less frequent (namely, 64 RTAs

notified to the WTO) and detailed than other types of

environmental provisions (WTO, 2021b).

Figure C.6: Environmental provisions in RTAs continue to expand

Source:

Authors’ calculations, based on updated data from Monteiro (2016).

Note:

Analysis based on RTAs notified to the WTO. “North” is defined as high-income countries, whereas “South” is defined as middle-

and low-income countries according to the World Bank’s country classification.

1980 1985 1990 1996 2001 2007

Year of signature

2012 2018

South-South RTA

North-South RTA North-North RTA

Number of types of environmental provisions

NAFTA

USA-PER

EU-CA

USA-COL

CAN-PER

CAN-CHL

CAN-HND

USA-CHL

EU-PE-CO

EU-CAN

USA-SGP

USA-MOR

USA-KOR

EU-MDA

EU-GEO

EAC

EU-UKR

CAN-COL

EU-KOR

EU-GBR

CPTPP

USMCA

CAN-GBR

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

Provisions on climate change can take many forms.

Some provisions underscore the importance of

addressing climate change, including through trade

in environmental goods and services and reducing

subsidies for fossil fuels, while others require

the parties to effectively implementing the Paris

Agreement and adopt climate change policies.

The most common type of provisions identifies

climate change mitigation as a cooperation area,

covering different issues including alternative energy

and energy conservation, sustainable forestry

management, and activities related to aspects of the

international climate change regime with relevance for

trade.

Explicit provisions on climate change are often

complemented by other environmental provisions.

For instance, provisions establishing level-playing-

field commitments to ensure environmental policies

are effectively applied. RTAs may also establish

institutional arrangements as tools for ensuring

implementation. These can entail, for example, setting

up committees to ensure dialogue on implementation,

implementing public accountability mechanisms,

and carrying out ex post reviews of commitment

implementation (Monteiro, 2016; Monteiro and

Trachtman, 2020).

In addition to regional trade initiatives, the multilateral

trading system provides an enabling framework that

contributes to can support climate mitigation efforts.

As discussed below in greater detail, WTO rules, the

WTO monitoring and transparency functions, and the

Aid for Trade initiative provide important mechanisms

to foster a coherent linkage between trade and

climate policies.

(d) WTO rules help to prevent

protectionism and to promote efficient

and effective trade-related climate

policies

Measures adopted by WTO members in pursuit of

climate goals may, by their very nature, restrict trade

and thereby affect the rights, under WTO rules, of

other members. The WTO Agreements expressly

recognize the rights of WTO members to adopt

measures to protect the environment so long as they

are not applied arbitrarily and are not more restrictive

than necessary. WTO members have also reaffirmed,

at the political level, that WTO rules do not override

environmental protection (WTO and UNEP, 2009,

2018).

The preamble of the Marrakesh Agreement

Establishing the World Trade Organization (WTO

Agreement)

states that sustainable development

and the protection of the environment are central

objectives of the multilateral trading system.

According to WTO jurisprudence, the preamble to

the WTO Agreement “informs” the reading of all WTO

covered agreements and “shows that the signatories

to that Agreement were, in 1994, fully aware of

the importance and legitimacy of environmental

protection as a goal of national and international

policy.”

The common understanding on the urgent need

to act on climate, as enshrined, for example, in the

Paris Agreement, is important since WTO law

should not “be read in clinical isolation from public

international law.”

A deeper understanding by

the trade community of the content and rationale

of the multilateral climate framework can be key

to enhancing the mutual supportiveness between

the two systems. This requires enhanced domestic

coordination between ministries and domestic

agencies involved in trade and climate policies and

diplomacy, but it is also carried out by the regular

work of the Committee on Trade and Environment

(CTE), as discussed below.

While WTO rules do not prevent members from

adopting a wide range of ambitious climate measures,

they do impose a series of requirements to ensure

that measures are tailored to their objectives.

In particular, members seeking to adopt trade-

related climate measures must respect a series of

key WTO principles, such as non-discrimination

between domestic and foreign products (national

treatment) and among trading partners (most-

favoured nation treatment), transparency in designing

and implementing the measure, avoiding creating

unnecessary barriers to trade, and the prohibition on

quantitative restrictions to trade.

However, even if certain climate measures might,

at first, appear to be contrary to one or more of

such principles as defined in WTO Agreements

(e.g., because they impose restrictions on trade in

certain particularly carbon-intensive goods), WTO

rules contain important flexibilities that allow for the

accommodation of legitimate policies. Article XX of

the General Agreement on Tariffs and Trade (GATT)

introduces the “general exceptions” to obligations

under this agreement, one of the main examples

of such flexibility. However, several other WTO

Agreements contain similar flexibilities, such as the

General Agreement on Trade in Services (GATS),

the Technical Barriers to Trade (TBT) Agreements,

and the Agreement on Trade-Related Investment

Measures (TRIMs Agreement). WTO adjudicators

have reaffirmed time and again the rights of WTO

WORLD TRADE REPORT 2022

members to determine their own environmental and

climate policies, as well as the degree of protection

they choose, even if that significantly restricts trade.

Environment-related disputes at the WTO have

helped to clarify that there are several useful checks

to ensure that trade-related measures to fight climate

change are not misused for protectionist purposes.

These checks include:

• Coherence: The trade restriction or difference

in treatment between domestic and imported

products can be explained by the legitimate

objective pursued rather than by the granting of

protection to domestic sectors.

• Fit-for-purpose: The measure can efficiently

contribute to the legitimate objective in a balanced

way or is part of a domestic conservation

policy also restricting domestic production or

consumption.

• Mindful and holistic: The measure forms part of a

holistic climate policy and considers the impact

on other countries, as well as on other national,

regional and international efforts on the same

topic.

• Flexible: The measure is result-oriented and takes

into account alternative measures to address the

same challenge as effectively.

Environmental measures modified in light of these

principles following WTO disputes have resulted

in more coherent and effective measures to protect

the environment, even if they have also led to more

significant trade effects. That is because once the

unjustifiable or arbitrary discriminatory elements of

these measures were corrected or eliminated, the

environmental policies were often applied to a wider

and more coherent number of goods, more effectively,

and more in line with the legitimate objective (WTO,

2020b).

Several other WTO disciplines also seek the same

objective of ensuring better, more effective and

less distorting trade policies aimed at legitimate

objectives. A number of WTO agreements address

specific types of trade-related measures, which can

be applied to address climate change, as discussed

in Section C.2.

The TBT Agreement covers mandatory technical

regulations, voluntary standards and conformity

assessment procedures in respect of all products

(including industrial and agricultural products). It

recommends that technical regulations should,

to the extent possible, be based on performance,

rather than on design and descriptive features.

This principle helps to ensure that producers and

innovators anywhere — including from developing

countries and LDCs — can find the most effective

and efficient way of fulfilling the requirements of the

technical regulation. It can also avoid “locking-in”

certain technological solutions that might no longer

be the most environmentally efficient in the future.

The TBT Agreement also recognizes the need to

support developing-country producers to comply

with such requirements.

The WTO Agreement on Trade-Related Aspects

of Intellectual Property Rights (TRIPS Agreement)

establishes a balanced framework for the innovation

and dissemination of climate technologies for

the mutual benefit of innovators and technology

users, in particular through a range of tailored

domestic measures concerning the governance of

the intellectual property (IP) system for social and

economic welfare. The IP system works in conjunction

with international trade to facilitate knowledge

transfers and diffusion of critical mitigation

technologies, including through the effect of GVCs

and knowledge spillovers, and trade in knowledge-

intensive goods (Delgado and Kyle, 2022).

Under Article 66.2 of the TRIPS Agreement

developed-country members are required to provide

incentives for enterprises and institutions in their

territories to encourage technology transfer to LDCs.

Since 2003, developed-country members have been

required to submit annual reports on actions taken or

planned in this area. A review of the annual reports

submitted by nine developed-country members

between 2018-20 reveals that some 754 technology

transfer programmes, of which 152 covered

environmental and climate change technologies

transferred to 41 LDC recipients.

Around 82

per cent of these programmes focused on various

climate-related issues, including renewable energy,

energy efficiency, climate adaptation and sustainable

water and forest management (see Figure C.7).

The Agreement on Subsidies and Countervailing

Measures (SCM Agreement) disciplines the use of

subsidies, and regulates the actions WTO members

can take to counter the effects of subsidies. While not

all climate support measures are covered by the SCM

Agreement (as it only covers financial contributions,

income or price supports that confer a benefit),

subsidies that are specific to certain enterprises and

cause adverse effects can be “actioned” by affected

WTO members by applying domestic measures

(countervailing duties) or through the WTO Dispute

Settlement System (WTO, 2020b). In addition,

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

subsidies contingent upon the use of domestic

goods or export performance are considered to be

particularly harmful to trade and prohibited.

The SCM Agreement used to include a list of certain

“non-actionable” subsidies, including those for R&D,

regional development and the adaptation of existing

facilities to new environmental requirements. However,

this provision applied only during the first five years

that the SCM Agreement was in force. A revival of

the category of non-actionable subsidies is often

discussed within the context of government support

for climate change mitigation (Howse, 2010).

In recent years, a few disputes concerning support

provided for renewable energy generation and

conditioned upon the use of domestic content (i.e.,

local content requirement) were brought before

the WTO Dispute Settlement System.

In none of

these disputes was the goal of promoting renewable

energy put into question. However, the aspects that

were found to be contrary to WTO disciplines were

the requirements for energy producers to use local

components and products. In addition, the Appellate

Body indicated that, when assessing the benefit

from a support measure for renewable energy, due

consideration of a country’s sustainable energy

production objectives should be given, and that an

appropriate benchmark should be used that could

take into consideration the differences in costs and

environmental externalities involved in fossil fuel-

based energy and renewable energy production.

In effect, these trade disputes raise the question of

whether local content requirements are effective

and appropriate means of promoting renewable

energy production. Some evidence suggests that

local content requirements have hindered global

international investment flows in solar PV and

wind energy, reducing the potential benefits from

international trade and investment (OECD, 2015;

Stephenson, 2013) and ultimately can hamper or slow

down climate change mitigation efforts (WTO and

IRENA, 2021).

The increasing use of trade defence measures, namely

antidumping, countervailing duties and safeguards,

against imports of renewable energy goods and

other products required for the low-carbon energy

transition has also raised concerns about their impact

on climate mitigation efforts (see Chapter F) (Horlick,

2014; Kampel, 2017; Kasteng, 2014; UNCTAD, 2014).

Figure C.7: Most environmental technology transfer programmes reported under TRIPS Article 66.2

relate to climate change

Source:

Authors’ calculations, based on the reports submitted by developed-country members under TRIPS Article 66.2

Note:

The numbers in parenthesis report the number of environmental technology transfer programmes by type of environmental objective

reported under TRIPS Article 66.2 between 2018 and 2020.

Renewable energy (57)

Water management (26)

Ecosystem (9)

Wildlife (3)

Waste

manage-

ment (7)

Forests (9)

Climate adaptation

(13)

Disaster prevention

(6)

Energy efﬁciency (22)

WORLD TRADE REPORT 2022

While WTO members have the right to decide

whether to initiate investigations and apply trade

defence measures (including based on public interest

considerations, such as climate change), WTO rules

seek to ensure that such measures and processes

are not abused.

The Agreement on Agriculture (AoA) aims to reduce

trade restrictions on agricultural products caused

by barriers to market access, exports subsidies

and subsidies that directly stimulate production

and distort agricultural trade. The AoA contains,

however, a category of permissible subsidies, known

as "Green Box" support measures, which include

certain flexibilities for domestic support afforded

for environmental purposes. This, together with

certain conditions and other flexibilities for limited

distortive programmes, can provide members with

opportunities to pursue climate-related measures in

the area of agriculture (see Chapter B).

The plurilateral WTO Agreement on Government

Procurement (GPA 2012) commits its signatories

to opening their government procurement markets

to each other’s suppliers in a reciprocal manner.

The GPA 2012 can help governments to obtain

better value for money for climate-friendly goods

and services through GPP (See Section C.2).

The agreement notably allows parties to apply

technical specifications aimed at promoting natural

resource conservation or protecting the environment,

as well as to use the environmental characteristics of

a good or service as an award criterion in evaluating

tenders.

As the low-carbon transition entails a change

in the composition of energy trade as well as

trade in manufactured inputs and complementary

products necessary to generate renewable energy,

governments may increasingly resort to trade

policies to adjust to and support this transition.

Greater cooperation on trade policies, such as trade

remedies, subsidies, IP protection and local content

requirements, would be necessary to discuss further,

and potentially clarify, strengthen and update WTO

rules to ensure the low-carbon transition can be

achieved as smoothly as possible.

(d) Transparency and dialogue support

coherent and fit-for-purpose climate

change policies

Transparency is an important feature of decision-

making and regulatory action to address

transboundary problems, such as climate change

(Gupta and Mason, 2014). It contributes to build

trust, enhance accountability, and potentially improve

the effectiveness of climate change policies.

Several WTO agreements require WTO members to

inform each other about new or forthcoming trade-

related measures, including those related to climate

change. The notification process is an essential tool

to facilitate access to information about trade-related

climate measures contemplated by members.

Under the Trade Policy Review Mechanism,

WTO members also carry out periodic collective

assessments of each member’s trade policies

and practices. These exercises promote greater

transparency in, and understanding of, members’

trade policies, including those that relate directly to

climate change.

The WTO Environmental Database (EDB) compiles

in one single interface the environment-related

measures notified by members, as well as the

environment-related information contained in

members’ trade policy review reports.

For transparency to be effective, it is essential to

go beyond the simple exchange of trade-related

information, and understand what is being notified

and their implications on other members. Through

its committees and other bodies, the WTO provides

a forum that give members the opportunity to share

experiences and best practices and address trade

concerns and avoid trade disputes.

Climate-related trade measures are discussed in most

WTO bodies. For instance, the Council for Trade in

Goods has recently discussed the European Union’s

plans for a carbon border adjustment mechanism.

Market access issues related to environmental services

were addressed in the Council for Trade in Services.

The TRIPS Council discussed a wide array of policies

and initiatives addressing the interplay of IP, climate

change and development.

The TBT Committee

considered several specific trade concerns related

to technical regulations and conformity assessment

procedures related to energy efficiency.

A more focused discussion on trade and climate

policies takes place in the CTE, where members

specifically meet to discuss how trade and

environmental measures could work better together to

promote sustainable development. These discussions

and information exchange also cover issues related

to the low-carbon transition, such as environmental

taxes and labelling schemes, sustainable natural

resource management, environmental goods and

services, and the environmental footprint of products

and organizations. The CTE also serves as a forum

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

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ECONOMY

where the secretariats of multilateral environmental

agreements, such as the UNFCCC, and other

institutions, such as the International Civil Aviation

Organization, regularly brief WTO members on their

trade-related environmental work.

At the same time, more could be done to ensure that

the work in the WTO leads to solutions and concrete

actions supporting the transition to a low-carbon

economy. Three new environmental initiatives – the

Trade and Environmental Sustainability Structured

Discussions (TESSD) and the Informal Dialogue on

Plastics Pollution and Environmentally Sustainable

Plastics Trade (IDP) (both launched in November

2020), and the Fossil Fuel Subsidy Reform initiative

(FFSR) (launched in December 2021), share the

common goal of ensuring that trade and the WTO

form part of the solution to climate change and

environmental degradation.

These initiatives, which

are open to all WTO members, also actively involve

external stakeholders, such as NGOs, businesses,

academia and other international organizations, each

of which provide technical expertise and experience.

Climate change is one of the main themes of the

TESSD, which aim to complement discussions in the

CTE. Participants in the TESSD have been discussing

how trade-related climate change measures can best

contribute to climate and environmental goals and

commitments, while remaining consistent with WTO

rules. They are working towards identifying solutions

and concrete actions to contribute to the transition

to a low-carbon economy, including environmental

goods and services, the circular economy, sustainable

supply chains and the trade and environmental effects

of subsidies.

The IDP is concerned with the rising environmental,

health and economic costs of plastics pollution, since

99 per cent of plastics are fossil fuel-based, and can

release emissions throughout their lifecycle (CIEL,

2019). Plastics currently generate 1.8 gigatonnes

of CO

-equivalent, and this could more than

double by 2060 in the absence of significantly more

stringent and coordinated action (OECD, 2022c).

Participants in the IDP have been discussing how

the WTO can contribute to strengthening policy

coherence, exploring collective approaches among

WTO members, and improving technical assistance

to developing countries in support of global efforts

to reduce plastic waste and move towards a circular

plastics economy.

The FFSR initiative encourages the rationalization

and phasing-out of inefficient fossil fuel subsidies

that lead to wasteful consumption. Globally, countries

subsidized fossil fuel production and consumption to

the tune of over US$440 billion in 2021 (IEA, 2022d).

The initiative foresees exploring the trade relevance

of discussing FFSR in the multilateral trading system,

including by taking stock of international efforts and

members’ priorities, discussing the development and

social aspects of FFSR, and providing updates on

members’ actions with regard to transparency and

reforms.

In addition to dedicated environmental initiatives,

the WTO could further strengthen its role as a

forum for coordination and dialogue on trade

and climate change, as well as for cooperation

with other international organizations to develop

recommendations regarding the trade-related

policies and instruments needed for the transition to

a low-carbon economy (see, for example, Chapter D

on carbon pricing). In addition, the WTO could also

advance dialogue with the private sector to address

trade-related challenges for decarbonizing supply

chains (see also Chapter E).

(e) Aid for Trade can play an important

role in supporting a just transition to a

low-carbon economy

As discussed in Section C.2, climate finance is vital

for a just transition to a low-carbon economy. Yet,

climate finance levels remain far below what is needed

to prevent global temperature from rising above

1.5°C. Available estimates suggest that although total

climate finance has increased, on average, by almost

15 per cent between 2011 and 2020, the increase

in annual climate finance flows has slowed in recent

years. Projections suggest that annual climate

finance flows would need to increase by 590 per cent

in order to reduce GHG emissions by 45 per cent by

2030 and avoid the most dangerous consequences

of climate change (Climate Policy Initiative, 2021).

The Aid for Trade initiative can help to assist

developing countries and LDCs in mobilizing some

of the financial support required to meet their trade

integration objectives while pursuing the transition to

a low-carbon economy.

While Aid for Trade mainly tracks concessional

financing (official development assistance flows),

climate finance also includes non-concessional

financing (other official flows), export credits and

private finance mobilized through public climate

finance. In 2020, climate-related Aid for Trade

represented more than 50 per cent of climate-related

official development assistance flows, illustrating the

rising complementarities in trade, development and

climate agendas (OECD and WTO, 2022).

WORLD TRADE REPORT 2022

7474

Over the period 2013 to 2020, US$ 80 billion were

disbursed to Aid for Trade projects with a climate-

mitigation objective; disbursements almost doubled

between 2013 (US$ 6.5 billion) and 2020 (US$ 12.3

billion) (see Figure C.8). In 2020, 43 per cent of

mitigation-related Aid for Trade targeted renewable

power generation, distribution and energy

conservation, while 23 per cent went to climate-

friendly infrastructure, and 17 per cent went to

agriculture, forestry and fishing.

With more developing countries and their financing

partners prioritizing climate mitigation in their

development programming, the share of Aid for Trade

dedicated to the transition to a low-carbon economy

is set to grow. However, more could be done to

exploit the synergies between climate finance and Aid

for Trade by mainstreaming trade considerations into

climate strategies – and climate considerations into

trade cooperation strategies.

5. Conclusion

The transition to a low-carbon economy would require

a substantial transformation of energy, production,

transport and land-use systems. This transformation

is unlikely to be achieved without ambitious climate

change policies that may comprise a broad range of

different measures, including market-based measures,

command-and-control regulations, information-based

instruments and voluntary agreements.

Trade can contribute to supporting the low-carbon

transition by incentivizing environmental innovation,

leveraging comparative advantages in the production

of low-carbon technologies and renewable energy,

and expanding access to and deployment of critical

low-carbon goods and services. A transition towards

a low-carbon economy is also likely to change what,

with whom and how trade is conducted. Trade in

renewable energy and electricity and trade in goods

and services produced and delivered with clean

energy could expand significantly.

While decarbonization offers new trading opportunities

for many economies, including developing countries, a

just low-carbon transition may require complementary

policies to help affected regions and vulnerable

groups, including MSMEs, to decarbonize and adjust

production and consumption patterns more smoothly.

Well-functioning labour and financial markets are

Figure C.8: Most Aid for Trade disbursement related to climate change mitigation covers

energy and transport

Source:

Authors’ calculations, based on Organisation for Economic Co-operation and Development (OECD) DAC-CRS (Development

Assistance Committee Creditor Reporting System) Aid Activities Database.

Note:

Only projects with an explicit objective of mitigating climate change and projects identifying climate change mitigation as important

but secondary objective are considered as adaptation-related official development assistance.

Agriculture, forestry and ﬁshing Energy Transport and storage Industry OtherBanking and ﬁnancial services

Aid for Trade disbursements related to climate change mitigation

(current US$ billion)

2013

6.49

2014

6.58

2015

7.93

2016

9.49

2017

11.10

2018

12.23

2019

13.39

2020

12.32

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

essential to support the economic changes needed to

move to a low-carbon future.

International cooperation is essential to achieve

a low-carbon economy. The WTO contributes

to supporting climate change mitigation actions

in several ways. WTO rules support members in

pursuing their climate objectives by helping to prevent

unproductive frictions and obstacles, and ensuring

efficient and effective trade-related climate policies.

By fostering transparency and providing a forum for

policy dialogue, the WTO can contribute to coherent

and fit-for-purpose climate policies. In addition, the

Aid for Trade initiative can support a just transition to

a low-carbon economy.

The progress on global climate actions, however, has

been insufficient to fully contain global temperature

increase. Greater international cooperation on climate

change mitigation is essential to promote a just low-

carbon transition. The WTO can further contribute to

strengthening the interlinkages between trade and

climate objectives by advancing solutions for trade-

related climate action.

WORLD TRADE REPORT 2022

Endnotes

1 GHGs comprise carbon dioxide (CO

), methane (CH

nitrous oxide (N

O) and fluorinated gases, including

hydrofluorocarbons (HFCs), perfluorocarbons (PFCs)

and sulphurhexafluoride (SF

). Although discussions on

climate change tend to focus on CO

because it is the main

contributor to climate change, accounting for about three-

quarters (74.1 per cent) of total emissions, it is estimated

that methane contributes 17.3 per cent, nitrous oxide 6.2

per cent, and other emissions 2.4 per cent (WRI, 2022).

2 Reducing production and consumption to mitigate GHG

emissions is commonly known as “degrowth”. Although

controversial, this strategy has been proposed by some

scholars as an alternative means of achieving a low-carbon

economy which would allow to minimize unfeasibility and

unsustainability risks associated with strategies aimed at

decoupling GDP and GHG emissions (Keysser and Lenzen,

2021; Lenzen, Keysser and Hickel, 2022).

3 Unlike the previous framework for climate action under

the UNFCCC – the Kyoto Protocol – the Paris Agreement

requires all parties, whether developed or developing

countries, to take action and contribute to climate change

mitigation and adaptation.

4 Nevertheless, several challenges to the transition to a low-

carbon economy have been identified in the literature. For

instance, the so-called “green paradox” could arise if fossil

fuel owners chose to extract and monetize fossil fuel more

quickly in reaction to an anticipated phase-out of fossil

fuel assets, thereby causing more carbon emissions to be

released more quickly (Sinn, 2012).

5 For instance, 87 per cent of global annual farm support

(approximately US$ 470 billion) are estimated to be price-

distorting, as well as being environmentally and socially

harmful, with the vast majority of support provided for the

most emission-intensive products. The removal of fiscal

subsidies could decrease global GHG emissions from

agricultural production in 2030 by 11.3 million tonnes of

-equivalent (CO

e), while the removal of all border

measures could further reduce GHG emissions by 67.1

million tonnes CO

e (FAO, UNDP and UNEP, 2021).

6 Government procurement amounts to approximatively

US$ 11 trillion per year, accounting for about 12 per cent of

world GDP (Bosio and Djankov, 2020).

7 So-called food miles labels indicate that the product

is locally grown. As discussed in chapter E, although

international transportation, especially by air and road,

releases GHGs, it is not always the main contributor to a

product’s carbon footprint.

8 Eco-labels mandated by government agencies may also be

considered as environmental regulations.

9 Like GGP, voluntary agreements are voluntary in nature.

However, whereas GPP requires commitments on the part

of the government to use environmentally friendly goods

and services in the public procurement process, voluntary

agreements require commitments and action from private-

sector firms, with a view to reducing emissions.

10 In high-income countries, carbon pricing has a larger

percentage impact on the cost of living for poorer

households since they tend to spend a larger proportion of

their income on fuels (Goulder et al., 2019). Conversely, in

developing countries carbon pricing policies tend to have

a larger negative impact on the cost of living of the rich

households compared to the poor (Dorband et al., 2019).

11 The distributional impacts of removing fossil fuel subsidies

tends to be more progressive in developing countries than in

developed ones (Goulder et al., 2019). The removal of fossil

fuel subsidies impacts equity through several channels. It

impacts the cost of consumption directly, by raising the price

of fuels, and indirectly, by raising the prices of fuel intensive

products. Raising the price of fuels tends also to cause an

increase in the labour intensity of production. This in turn

raises employment opportunities and the greater scarcity of

labour raises the wage rate in relation to the rental rate on

capital (Malerba and Wiebe, 2021).

12 An accelerated delivery of international public finance will

be critical to a low-carbon transition, and the private sector

will need to finance most of the extra investment required.

Indeed, of the amount required for the energy transition

pathway aligned with the ambition to limit global warming to

less than 1.5°C, around US$ 3.4 trillion (59 per cent) and

US$ 2.2 trillion (60 per cent) are expected to come from

private-sector equity and lending, in the periods from 2021

to 2030 and from 2031 to 2050, respectively (IRENA,

2021).

13 Learning effects, economies of scale and technological

innovations, such as drones and artificial intelligence, could

reduce the labour intensity of the renewable energy sectors

in the long run (IRENA, 2021).

14 However, energy carriers are a less efficient mode of

energy transport compared to fossil fuel energy because

of the energy required for their production and potential

reconversion processes (Brändle, Schönfisch and Schulte,

2021).

15 The WTO GTM is a computable general equilibrium model,

focused on the real side of the global economy, modelling

global trade relations See Aguiar et al. (2019) for a

technical description of the WTO GTM.

16 For modelling purposes, renewable energy includes solar

and wind power. It does not include hydrogen, which is

included, for the purpose of the simulation, in the non-

electricity nest of the production structure. Switching to

renewable energy could lead to higher trade in that energy,

but also to higher trade in other minerals.

17 In these simulations, fossil fuel export-dependent countries

and regions are Russia, the Middle East and Northern Africa.

18 Although green hydrogen offers an opportunity for energy

trade, the scale of trade in hydrogen is projected to be

smaller than the current scale of fossil fuels. The share of

trade in green hydrogen is projected to reach 17.6 per cent

of total energy trade by 2050 compared to 72.9 per cent for

fossil fuels exports in 2021.

19 Notified trade measures with the following objectives

are considered to be related to climate change, namely:

afforestation or reforestation; air pollution reduction;

alternative and renewable energy; climate change mitigation

and adaptation; energy conservation and efficiency; and

ozone layer protection. For more information, see WTO

(2021d).

20 See TBT Notification – Japan G/TBT/N/JPN/628.

21 See SCM Notification – China G/SCM/N/343/CHN.

CLIMATE CHANGE AND INTERNATIONAL TRADE

C. THE TRADE IMPLICATIONS

OF A LOW-CARBON

ECONOMY

22 See LIC Notification – Australia G/LIC/N/3/AUS/12.

23 See CMA Meeting, Japan-India, G/MA/M/74.

24 See also CMA Meeting Minutes G/MA/M/74; G/MA/M/73;

G/MA/M/72.

25 The average global temperature levels implied by different

paths of carbon emissions are obtained using the Model

for the Assessment of Greenhouse Gas Induced Climate

Change (MAGICC) based on the projected CO

emissions

by the WTO GTM Model. For the “business-as-usual”

and “divided world” scenarios, it is assumed that CO

emissions post-2050 remain constant at 2050 levels.

Non-CO

emissions follow the Shared Socioeconomic

Pathway (SSP) 2-4.5 scenario of the IPCC, which assumes

a “middle of the road” world where trends broadly follow

their historical patterns resulting in a global warming of

2.5-2.7°C by 2100. For the “cooperation towards net zero”

scenario, it is assumed that CO

emissions will reach net

zero after 2050 and remain this way until 2100. Non-CO

emissions follow the SSP1-2.6 scenario of the IPCC, which

assumes a world of sustainability-focused growth and

equality resulting in a global warming of 1.7-1.8°C by 2100.

26 For modelling purposes, the different climate change

policy instruments are not distinguished. These policies

are implemented in the simulations as cost-neutral shifts in

production methods.

27 Examples of initiatives include the “We Mean Business

Coalition”, the Science Based Targets initiative, the UN

Alliance for Sustainable Fashion, the Global Cement and

Concrete Association (GCCA) 2050 Net Zero Global

Industry Roadmap, and the COP26 declaration on

accelerating the transition to 100 per cent zero emission

cars and vans.

28 Trade will also play a role in the implementation of Article6

of the Paris Agreement, which establishes rules for

internationally transferred mitigation outcomes (ITMOs),

i.e., cooperative approaches to facilitate the exchange of

emissions reductions above those pledged under NDCs.

It has been estimated that, by 2030, carbon trading (i.e.,

the government-authorized buying and selling of credits

corresponding to emissions of a certain amount of GHGs)

under ITMOs could save US$ 250 billion a year in climate

mitigation costs in the energy sector alone (Edmonds et al.,

2019).

29 See for instance Colombia-Ecuador-European Union-Peru

RTA and European Union-United Kingdom RTA.

30 Although there is limited empirical evidence on the

effectiveness of provisions on climate change in RTAs,

environmental provisions in RTAs have been found to

reduce the emissions of certain pollutants, including CO

emissions (Martinez-Zarzoso and Oueslati, 2018) and

deforestation (Abman, Lundberg and Ruta, 2021).

31 At the Doha Ministerial Conference, in 2001, WTO

members recognized that, under WTO rules, no WTO

member should be prevented from taking measures for

the protection of the environment at the levels it considers

appropriate, as long as these measures are not applied

in a manner which would constitute a means of arbitrary

or unjustifiable discrimination between countries where

the same conditions prevail, or a disguised restriction

on international trade. See ttps://www.wto.org/english/

thewto_e/minist_e/min01_e/mindecl_e.htm.

32 See https://www.wto.org/english/docs_e/legal_e/04-

wto_e.htm.

33 Appellate Body Report, US – Shrimp (1998), para. 129.

34 Appellate Body Report, US – Gasoline (1996), p. 17.

35 Appellate Body Report, US – Gasoline (1996), p. 25.

36 Appellate Body Reports, US – Gasoline, US – Shrimp;

EC – Asbestos, Brazil – Retreated Tyres; and US – Tuna II

(Mexico).

37 The nine developed-country members are the European Union

(with 55 technology transfer programmes), the United States

(35), Norway (24), Japan (10), Switzerland (10), the United

Kingdom (8), Australia (6), Canada (3) and New Zealand

(1). The main LDC beneficiaries of the technology transfer

programmes are Bangladesh, Cambodia, Mozambique,

Rwanda, Senegal, Tanzania, Uganda and Zambia.

38 Although not directly focused on climate mitigation, the

Agreement on Fisheries Subsidies adopted at the 12th

WTO Ministerial Conference in June 2022 could also

help to contribute to climate mitigation strategies by

improving the energy efficiency of vessels (Kristofersson,

Gunnlaugsson and Valtysson, 2021) and supporting more

sustainable diets (Gephart et al., 2021) (see Box B.5).

39 Some WTO members have, in the past, formally proposed

the reintroduction of the non-actionable subsidies category,

including that adopted for environmental purposes,

specifically in favour of developing-country members. No

decision on this matter has been adopted so far. See WTO

official documents number WT/MIN(01)/17, TN/RL/W/41

and WT/GC/W/773, which can be accessed at https://

docs.wto.org/.

40 See, for example, Canada – Feed in Tariff; India – Solar

Cells; and US — Renewable Energy.

41 See Canada – Feed in Tariff, at paragraphs 5.174-190.

42 The GPA 2012 has 21 parties covering 48 WTO members.

More information is available at: https://www.wto.org/

english/tratop_e/gproc_e/gproc_e.htm.

43 It has been estimated, for instance, that through the work of

the TBT Committee on specific trade concerns, € 80 billion

worth of unnecessary trade costs affecting EU exports

were avoided over a 10-year period (Cernat and Boucher,

2021).

44 See https://www.wto.org/english/news_e/news20_e/

good_11jun20_e.htm

45 See https://www.wto.org/english/news_e/news20_e/

serv_23oct20_e.htm

46 See https://www.wto.org/english/news_e/news21_e/

trip_11mar21_e.htm

47 See, for instance, https://www.wto.org/english/news_e/

news22_e/tbt_15jul22_e.htm

48 Three separate ministerial statements were launched at

a joint event on 15 December 2021: TESSD Ministerial

Statement (WT/MIN(21)/6/Rev.2); IDP Ministerial

Statement (WT/MIN(21)/8/Rev.2); and FFSR Ministerial

Statement (WT/MIN(21)/9/Rev.1).

49 For example, a virtual “Trade 4 Climate” Dialogue was

hosted by the WTO and the International Chamber of

Commerce (ICC) on 26 October 2021: https://www.wto.

org/english/tratop_e/envir_e/trade4climate_e.htm

Carbon pricing and

international trade

Although different instruments can be used to mitigate climate

change, carbon pricing has attracted increasing attention. This

chapter explores the role of carbon pricing in reducing greenhouse

gas emissions and its implication on international trade and trade

policies. Carbon pricing puts a price on carbon emissions, which

can motivate firms and individuals to make more climate-friendly

investing and purchasing decisions. While the proliferation of

carbon pricing schemes highlights the urgency to tackle climate

change, they may lead to an unnecessary complex patchwork of

domestic and regional schemes. Greater international cooperation

is essential to find common solutions to carbon pricing, and the

WTO remains an appropriate forum to contribute to these efforts.

Contents

1. Introduction 80

2. Carbon pricing policies can be an important strategy

to reduce carbon emissions 80

3. Uncoordinated carbon pricing policies may undermine

climate action and lead to trade tensions 85

4. Greater international cooperation is required to advance

ambitious carbon pricing policies 90

5. Conclusion 94

Key facts and findings

• Almost 70 carbon pricing initiatives, covering 23 per cent of global greenhouse gas

emissions, have been adopted in 46 national jurisdictions worldwide. A proliferation

of different carbon pricing initiatives increases the risk of creating a complex

patchwork of different systems.

• A uniform global carbon price would be more efficient to reach emission reduction

targets than regional carbon prices because it would allow emissions to be reduced

in places where it costs less to do so.

• Carbon pricing policies in the absence of adjustment policies can adversely affect

low-income regions and exporters of fossil fuels and of emission-intensive products.

However, carbon pricing policies can also help countries to diversify their economies

away from fossil fuel energy.

• Uncoordinated carbon pricing policies increase the risk of carbon leakage,

competitiveness losses in regions implementing ambitious climate policies,

and additional administrative costs.

• Although border carbon adjustment can, to some degree, help address carbon

leakage and limit competitiveness loss, it can also generate trade conflicts and

economic losses for countries affected.

WORLD TRADE REPORT 2022

1. Introduction

Achieving large greenhouse gas (GHG) emission cuts

at the pace necessary to avoid the worst consequences

of climate change has become a pressing challenge

for policymakers and has reignited the debate about

appropriate climate policy responses. Carbon pricing

is often seen as an important instrument to accelerate

a low-carbon transition by incentivizing firms and

individuals to reduce their carbon emissions or pay for

their carbon emissions.

This chapter explores the features, challenges and

trade implications of carbon pricing. It reviews the

trade relevance of a global carbon pricing scheme as

a means of preventing a patchwork of uncoordinated

carbon pricing policies. A proliferation of different

carbon pricing policies could lead to high transaction

costs and the introduction of border carbon adjustment

(BCA) mechanisms, which could, in turn, lead to trade

tensions. The chapter concludes by discussing the

importance of international cooperation to address the

fragmentation of carbon pricing schemes and support

ambitious climate mitigation actions.

2. Carbon pricing can be an

important instrument to reduce

carbon emissions

GHG emissions create social and market costs, also

known as externalities, which are not reflected in the

value of products, services or financial assets (see

Chapter C). To correct this market failure, carbon

pricing is often presented, by many economists, as

the most efficient approach to cut GHG emissions.

Carbon pricing is a market-based instrument that sets

a price on carbon dioxide (CO

) or equivalent GHG

emissions. The carbon price reflects the additional

cost on the environment and the society of emitting

an extra unit of GHG (e.g., ton of CO

or equivalent

GHG). Carbon prices encourage producers to

decrease the carbon intensity of the production and

transportation processes, and consumers to buy less

carbon-intensive goods and services.

While a large part of the current debate about

climate change policy relates to carbon pricing, the

implementation of carbon pricing schemes faces

important political challenges given its potentially

major domestic and international distributional

consequences. A well-designed carbon pricing policy

needs to be complemented with additional policies

to address distributional concerns and other market

failures associated with a low-carbon transition (see

Chapter C).

(a) Carbon pricing schemes proliferate but

cover only a modest share of emissions

Carbon pricing can be imposed implicitly through the

compliance costs of price-based regulations (e.g.,

fossil fuel prices or renewable energy subsidies) or

explicitly by specifying a price directly on carbon

emissions. Explicit carbon pricing can take two main

forms: carbon tax and emissions trading scheme

(Fischer and Fox, 2007; Goulder and Schein, 2013;

WTO and UNEP, 2009).

The carbon tax is determined by the regulator

who sets a price on carbon through a tax or fee

on GHG emissions or on the carbon content of

fossil fuels. While the price of carbon is fixed, the

quantity of emissions released into the atmosphere

is initially unknown and will depend on the firms’

and consumers’ reaction to the carbon tax. Some

might choose to pay the carbon tax and emit GHG

emissions, while others might opt to reduce their

carbon emissions so as to avoid paying the carbon

tax. As a result, carbon tax makes the realization of

carbon reduction targets more uncertain.

Under an emission trading system (sometimes

referred to as “cap and trade” or “allowance trading”),

the regulator sets a maximum quantity of GHG

allowed to be emitted in a given year (i.e., cap)

and issues allowances (or permits) to emit GHG to

match the cap on total emissions. Operators must

hold allowances for every ton of GHG they emit. An

allowance market is created to allow operators to buy

or sell allowances. Operators who emit more GHG

than they have allowances for have to buy allowances.

Conversely, operators that reduce their carbon

emissions can sell their unused allowances. The

interaction between the demand and supply in the

market determines the price of an allowance, i.e., the

carbon price. Unlike a carbon tax, the carbon price

in an emission trading scheme is less certain but the

quantity of GHG emitted is more predictable.

The number of jurisdictions with carbon pricing

schemes has accelerated in recent years. As of 2022,

close to 70 carbon pricing initiatives are implemented

in 46 national jurisdictions (World Bank, 2022). Most

carbon pricing schemes have been adopted in high-

and upper middle-income economies, while a couple

of lower middle-income economies, such as Côte

d’Ivoire and Pakistan, are considering introducing a

carbon pricing scheme.

Carbon taxes are more common than emission trading

schemes, in part because they are relatively easier to

manage and involve lower administrative costs than

emission trading schemes. Some jurisdictions have

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

implemented both a carbon tax and an emission

trading scheme to address emissions from different

sources.

Existing carbon prices vary widely across jurisdictions,

ranging from less than US$1 to more than US$130

per ton of CO

(see Figure D.1). Carbon prices tend

to be higher in high income-economies and have hit

record levels in many jurisdictions in 2021.

Although the number of countries with carbon pricing

is increasing, existing carbon pricing schemes

cover only 23 per cent of total carbon emissions. In

addition, less than 4 per cent of global emissions

is currently covered by a carbon price in the range

needed by 2030 to prevent the average global

temperature from increasing by 2°C (World Bank,

2022). The High-Level Commission on Carbon

Prices concludes, based on a review of literature and

policy experiences, that a price between US$50 and

US$100 per ton of CO

would be required to meet

the Paris Agreement temperature objective (High-

Level Commission on Carbon Prices, 2017).

(b) Pricing carbon globally could

contribute significantly to the

low-carbon transition

In adopting the Paris Agreement, countries committed

collectively to limit the average global temperature

rise to well below 2°C and to pursue efforts to

limit warming to 1.5°C by the end of the century.

To achieve that objective, each government chose

its own national determined contribution (NDC) to

limit and reduce GHG emissions (see Chapter C).

However, while the international climate change

regime encourages broad-based participation, it

also causes heterogeneous climate change policies

across countries, with some countries implementing

more stringent climate policies than others.

Every five years, countries are required to revise and

update their NDCs. Recent analysis shows that the

current NDCs and other climate mitigation measures

adopted would only reduce global carbon emissions

by 7.5 per cent by 2030, well below the 50 per

cent reduction by 2030 necessary to limit global

temperature rise to less than 1.5°C (UNEP, 2021a).

Given the limited progress made towards a low-

carbon transition, a number of economists,

governments, international organizations and non-

governmental organizations (NGOs) have called for a

global carbon pricing mechanism, on the basis that

a common approach would raise the price and thus

decrease demand for carbon-intensive goods and

services, leading to a reduction in GHG emissions.

A relatively recent strand of economic literature

analyses the features, challenges and trade

Figure D.1: Carbon prices vary widely but their GHG emission coverage remains low

Source:

Authors’ calculation, based on data on carbon pricing schemes from the World Bank Carbon Pricing Dashboard.

Note:

The figures display national and regional carbon prices in 2022. Each bubble represents the GHG coverage by a country’s carbon

pricing scheme(s) relative to global GHG emissions. The average carbon price is calculated for countries with more than one regional,

national and subnational carbon price schemes.

GDP per capita in 2021

Carbon price in 2022 (US$/tCO

0 50,000 100,000 150,000

Global GHG

coverage (%)

Global GHG

coverage (%)

140

120

100

Carbon tax Emission trading scheme (ETS)

Carbon tax and ETS

Country's carbon pricing GHG coverage in 2022

Carbon price in 2022 (US$/tCO

0 20 6040 80 100

140

120

100

Lower middle-income Upper middle-income

High-income

WORLD TRADE REPORT 2022

implications of global carbon pricing schemes

(Böhringer et al., 2021; Nordhaus, 2015; Stiglitz,

2015). Different types of global carbon pricing

mechanisms have been proposed in the literature.

Under an international emission trading scheme,

country-specific GHG emission reduction targets

are set and countries would sell or buy the surplus or

deficit of emission rights. In contrast, an international

carbon taxation scheme requires countries to apply

a tax on GHG emissions or policies realizing an

equivalent reduction in GHG emissions (Cramton et

al., 2017; Nordhaus, 2013).

The WTO Global Trade Model (GTM)

was used

to simulate carbon emission paths under various

scenarios and infer the carbon prices required to

achieve by 2030 specific emission cut targets. The

carbon prices are analysed under a uniform global

carbon pricing scheme and under uncoordinated

region-specific carbon pricing schemes. For the

purpose of the simulations, two targets for cutting

global emissions are considered: (i) the global

emission reduction necessary to achieve the

initial NDCs submitted in 2015;

and (ii) the global

emission reduction that would limit the average global

temperature rise to 2°C.

The simulation results suggest that the implementation

of the initial NDCs would correspond to a 10 per

cent reduction in global carbon emissions in 2030

compared to a baseline scenario in which countries

do not take climate action. A reduction in carbon

emissions of 27per cent in 2030 would, however, be

required to prevent the average global temperature

from rising above 2°C (IPCC, 2022b).

The simulation results further confirm that a uniform

global carbon pricing mechanism is more efficient

than uncoordinated regional carbon pricing schemes.

In particular, under uncoordinated carbon pricing

schemes, an average international carbon price of

US$73 per ton of carbon

would be needed to cut

emissions to prevent the average global temperature

from rising above 2°C. The same climate objective

could, however, be achieved with a lower uniform

global carbon price of US$ 56 (see Figure D.2).

Unlike uncoordinated carbon pricing schemes, a

uniform carbon price incentivizes economic operators

to seek the lowest cost abatement options worldwide,

allowing the GHG emission abatement to take place

in the least costly place. In addition, a global carbon

price establishes a transparent price signal that can

spur even greater low-carbon innovation.

Carbon pricing would, however, also incur losses

in output because it generates distortions to the

economy. Following the introduction of a carbon

price, the price of fossil fuel energy and other carbon-

intensive goods and services increase, which makes

production more expensive and reduces the demand

and production. In order to prevent the global

temperature from rising above 2°C, the projected

reduction in output would correspond to 0.46 per

cent of global GDP if a uniform carbon price is set

globally. In contrast, uncoordinated regional carbon

pricing would result in a 0.68 per cent reduction in

global GDP (see Figure D.2).

However, it is important to note that these reported

GDP effects do not reflect the global and regional

benefits of climate change mitigation. Carbon pricing

corrects market failures and thus contributes to a

higher welfare, since it helps to limit and avoid the

consequences of climate change at the global level

and induces environmental and health co-benefits at

the domestic level (see also Chapter C). In addition,

carbon pricing can help countries to become less

dependent on fossil fuels and support the transition

to a more diversified low-carbon economy by

mobilising public funding, and future-proofing long-

term investments into assets aligned with low-carbon

development objectives.

faces major challenges

While a well-designed global carbon pricing scheme

could support a low-carbon transition, its adoption

and implementation at a global scale face a number

of important challenges. In particular, two main

challenges are associated with promoting a global

agreement on carbon pricing: (i) free-riding and (ii)

fair burden-sharing.

(i) Free-rider problem

In the absence of coordination, individual countries

may have an economic incentive to hold off on

adopting carbon pricing until they observe how other

countries act, in order to benefit from the efforts

of those other countries. If the benefits of climate

mitigation accrue to all countries but the cost of

carbon pricing is only borne by the countries that

adopt carbon pricing, individual countries may not

have sufficient incentives to introduce carbon pricing.

The simulation results based on the WTO GTM

confirm that most countries and regions would not

have enough incentive to introduce a carbon pricing

scheme once a coalition of countries with more

ambitious climate targets decided to adopt carbon

pricing.

This is because, as discussed above,

carbon pricing generates distortions and raises the

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

price of energy and the production costs, which can

depress the production. The output loss as a result

of introducing carbon pricing would deter most

countries from adopting carbon pricing policies.

Various approaches to overcome free-riding have

been proposed in the literature on carbon pricing.

For instance, carbon tariffs could be imposed on

non-participant countries to encourage them to

join the coalition of countries that have adopted a

common carbon pricing scheme (i.e., “tariff climate

club”) (Böhringer, Carbone and Rutherford, 2016;

Nordhaus, 2015). Different types of carbon tariffs

have been proposed, including a uniform import tariff

duty on imports from countries outside of the climate

club, regardless of the carbon content of the imported

products (Nordhaus, 2015) and import tariff duties

determined by the carbon content of imports (i.e.,

BCA). As discussed below, such options can have

important trade implications. Alternatively, a global

agreement on carbon pricing could be complemented

with financial or cooperation mechanisms to

incentivize non-participant countries to join the

coalition by providing them with financial or technical

support. For instance, as discussed in Chapter C, a

global carbon fund could redistribute the revenues of

carbon pricing between regions.

The WTO GTM was used to simulate potential,

hypothetical scenarios to illustrate the challenges

of promoting carbon pricing. The simulation results

suggest that a coalition of ambitious regions

adopting a carbon pricing scheme and imposing

on non-participant countries import tariff duties

determined by the carbon content of imports would

not be effective to encourage the adoption of carbon

pricing schemes. This is because the incentive to

avoid facing carbon tariffs would not be sufficient to

offset the adverse impact of introducing domestic

carbon policies in non-participant countries. Similarly,

a global carbon fund redistributing the revenues

of carbon pricing between regions according to

their emission level per capita (Rajan, 2021) would

not provide enough incentive for non-participant

countries to adopt a domestic carbon pricing

mechanism.

Conversely, the simulation results suggest that a

uniform import tariff duty applied by a coalition of

ambitious regions on non-participants’ imports

regardless of the carbon content of the imported

products imposed, would provide sufficient

incentives for non-participating regions to join the

carbon pricing coalition (Nordhaus, 2015). Similarly,

an emission trading scheme with relatively larger

Figure D.2: Global carbon pricing is more efficient than uncoordinated carbon pricing

Source:

Bekkers and Cariola (2022).

Note:

Simulation results based on the WTO GTM. The right panel displays the (weighted) average carbon price (in dollars per ton of

emission) that is needed to achieve the respective carbon emission cut target. The left panel indicates the projected global GDP

loss in per cent in 2030 following the implementation of carbon pricing relative to a hypothetical reference scenario in which countries

do not take climate action. The “initial NDCs” scenario assumes CO

emission cut targets set out in countries’ 2015 NDCs are achieved

by 2030. The “2°C target” assumes CO

emission cuts by 2030 consistent with limiting the average global temperature rise to less than

2°C.

Uncoordinated carbon pricing Uniform global carbon pricing

Relative change in global GDP by 2030 (%) Required carbon price (US$ per ton of CO

emission)

Initial NDCs target

2°C target

-0.22 22.6

-0.10 13.7

-0.68 73.2

-0.46 56.5

WORLD TRADE REPORT 2022

emission reduction targets for developed economies

than for developing ones could incentivize developing

economies to participate in a global emission trading

scheme.

However, introducing a global emission trading

scheme might involve a number of design challenges.

Individual countries could be reluctant to make

commitments on emission targets far into the future

given the risk that the emission reduction targets

set initially might ultimately be too high if economic

growth were to turn out higher than expected.

Furthermore, if global targets were negotiated first

and country-level emissions targets subsequently,

each individual country could have an incentive to set

low targets and let other countries make ambitious

commitments. In contrast, reaching an agreement

on a global carbon tax scheme would require all

countries to take responsibility at the same time

(Cramton et al., 2017).

(ii) Fair burden-sharing

The economic costs resulting from the implementation

of carbon pricing schemes need to be shared in

a fair way, in line with the principle of common but

differentiated responsibilities (CBDR) established

under the Paris Agreement. According to the CBDR

principle, all governments are responsible for

addressing global environmental destruction, but are

not equally responsible, in recognition of the fact that

economies that industrialized earlier have historically

contributed more to environmental degradation

than those economies of recent or ongoing

industrialization. The CBDR principle also reflects the

differences in economic capacities to contribute to

climate mitigation and adaptation efforts.

As discussed above, adopting a carbon pricing

scheme in the absence of complementary policies

and financial mechanisms could negatively impact

non-participant countries, including LDCs and fossil

fuel export dependent countries. To address fair

burden-sharing considerations and incentivize more

countries to introduce carbon pricing schemes,

several proposals have been put forward in the

literature. For example, an international carbon price

floor (ICPF) system sets differentiated minimum

international carbon prices according to countries’

economic development, with a higher international

carbon price floor for high-income economies and a

lower one for low-income economies (Parry, Black

and Roaf, 2021).

The simulation results based on the WTO GTM

suggest that differential carbon price floors of

US$25, US$50 and US$75 for low-income, middle-

income, and high-income regions, respectively, would

be insufficient to insulate low-income regions from

the adverse effects of carbon pricing and a reduction

in real income (see Figure D.3). For many developing

regions, the real income decline would be nearly as

large as under a uniform carbon price of US$ 48 that

would produce equivalent reductions in global carbon

emissions. The benefit of differential carbon prices

for developing countries is limited because even a

low carbon price would impact production decisions

and thus reduce real income.

Furthermore, when

high-income regions introduce higher carbon prices,

there can be adverse spill-over effects on low-income

regions. For example, fossil fuels exported from low-

income countries will face higher taxes when they are

exported to high-income regions.

According to the WTO GTM simulation analysis,

other types of carbon pricing schemes, such as a

carbon pricing scheme implemented by a coalition

of countries, combined with a uniform import tariff

duty or a BCA, would also impact negatively on

low-income economies in the absence of support

measures (Bekkers and Cariola, 2022). In fact, the

simulation results suggest that a carbon pricing

scheme with a global carbon fund (Rajan, 2021) or

an emission trading scheme with relatively larger

emission reduction targets for developed economies

than for developing ones would enable to rebalance

some of the carbon pricing’s economic burden between

low- and high-income countries.

(iii) Technical challenges in global carbon

pricing

In addition to the two main challenges, promoting

carbon pricing globally also involves a number of

design and implementation issues.

A key choice is between an international carbon

tax scheme or an international emissions trading

scheme. Carbon tax is often considered to be

easier to implement than emission trading scheme.

Other advantages of a carbon tax over an emission

trading scheme include stable carbon prices that

can facilitate investment decisions without fear of

fluctuating costs and the possibility to generate large

tax revenues (Avi-Yonah and Uhlmann, 2009).

On the other hand, negotiations over a global carbon

tax also face challenges. Setting the international

carbon price(s) and calculating the carbon content of

products and services require relevant detailed and

up to date information, including on carbon emissions,

that might be missing for some countries or sectors.

The credibility and effectiveness of a global carbon

pricing system also depend on well-functioning

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

institutions and a high level of regulatory competence

and monitoring system (Rosenbloom et al., 2020).

A global carbon pricing mechanism also requires

a high level of coordination across jurisdictions.

Cross-country financial and technology transfers

might also be warranted, which could involve difficult

negotiations.

In addition, in the absence of affordable alternative

low-carbon technologies and solutions, carbon

pricing might fail to modify the behaviour of firms and

consumers, especially when the demand for carbon-

intensive goods and services is not very sensitive to

price changes. Other climate policies might have to

be implemented first to remove certain economic and

political barriers hindering the adoption of stringent

climate policy (Lonergan and Sawers, 2022). More

generally, effective carbon pricing policies need to

be complemented by other policies, including on

innovation, energy and infrastructure, to ensure the

availability of alternative, low-carbon technologies

and to address economic and political roadblocks

that may arise during the low-carbon transition.

3. Uncoordinated carbon pricing

policies could undermine climate

action and lead to trade tensions

Beyond the risk of free-riding, unilateral and

uncoordinated carbon pricing policies can raise

concerns about their environmental effectiveness

and impact on international competitiveness. Large

disparities in carbon pricing between countries can

lead to calls for the introduction of BCA mechanisms,

which risk generating trade tensions. BCA raises a

number of issues, both in terms of its design and of

its relevance to WTO rules.

(a) Uncoordinated mitigation policies

can lead to carbon leakage, loss of

competitiveness and burdensome costs

Uneven and uncoordinated climate change mitigation

efforts can displace carbon emissions from regions

with stricter climate policies to those with laxer ones;

this is known as carbon leakage (Mehling et al.,

2019). It can also lead to competitiveness losses in

industries and regions with more ambitious climate

Figure D.3: Low-income regions would be adversely affected by a global carbon price without

complementary mechanisms

Source:

Bekkers and Cariola (2022).

Note:

Simulation results based on the WTO GTM. The figure displays the change in real income relative to a hypothetical reference

scenario in which countries do not take climate action. The scenario “differential international carbon pricing floor” considers carbon price

floors of US$ 25, US$ 50 and US$ 75 for low-, middle- and high-income countries, respectively. The scenario “uniform global carbon

pricing” considers a uniform carbon price of US$ 48 with equivalent aggregate carbon emission reduction. The abbreviations read as

follows: European Free Trade Association (EFTA), European Union (EU-27) and Middle East and North Africa (MENA).

0.5

0.0

-0.5

-1.0

-1.5

-2.0

MENA

Russia

Sub-Saharan Africa LDC

Sub-Saharan Africa other

South Africa

Canada

Mexico

EFTA

China

Indonesia

Australia

United Kingdom

United States

Latin America

Brazil

Southeast Asia

Asia LDC

EU-27

Japan

Türkiye

Asia other

Korea, Republic of

India

Relative change in real income by 2030 (%)

Differentialinternationalcarbon price ﬂoor Uniform global carbon price

WORLD TRADE REPORT 2022

change mitigation goals, and can generate substantial

compliance costs for companies complying with

policies in different jurisdictions.

(i) Differences in carbon prices are likely

to lead to limited carbon leakage

Carbon leakage occurs when the unilateral

implementation of a climate policy, like carbon pricing,

in one jurisdiction leads to higher emissions in other

jurisdictions. Carbon leakage can materialize through

different channels: (i)competitiveness, (ii)the energy

market, and (iii)income (Dröge et al., 2009).

Leakage through the competitiveness channel

happens when a unilateral carbon policy raises

production costs in one jurisdiction, causing domestic

firms to lose market share relative to foreign firms.

Leakage through loss of competitiveness rises with

the emissions differential between trading partners,

and the emission intensity and trade exposure of

products (Böhringer et al., 2022). Sectors particularly

exposed to carbon leakage include, among others,

cement, steel and aluminium.

Leakage through the energy market channel arises

when demand for fossil fuels in jurisdictions with

unilateral carbon policies is reduced, and this

depresses the world price of fossil fuels, thereby

increasing fuel consumption and carbon emissions

in jurisdictions without carbon policies. Leakage

through the income channel occurs when unilateral

carbon policies lead to changes in terms-of-trade,

which in turn affects the global distribution of income,

consumption and emissions (Cosbey et al., 2020).

Different factors can mitigate the risk of carbon

leakages. For instance, carbon leakage can decrease,

if environmental innovations resulting from unilateral

carbon pricing policies are adopted, through

technology spillovers, in jurisdictions without carbon

policies (Barker et al., 2007).

Carbon leakage can be measured in different ways,

including with leakage rates, defined as the change

in foreign emissions relative to domestic emissions

reductions as a direct consequence of unilateral

emissions pricing. For example, a leakage rate of x

per cent in a given jurisdiction indicates that x per

cent of the domestic emissions reduction resulting

from emissions pricing is offset by an increase in

emissions abroad.

The empirical evidence on the extent of carbon

leakage is mixed. For instance, numerous empirical

studies find little evidence that the European Union’s

Emission Trading System has led to carbon leakage

to jurisdictions outside Europe and attribute this

situation to the high number of allowances freely

allocated to emission-intensive trade-exposed (EITE)

industries to avoid leakage (Dechezleprêtre et al.,

2022; Naegele and Zaklan, 2019).

On the other hand, some empirical evidence also

suggests that that carbon leakage differs across

countries and can be substantial in some cases,

mostly for small open economies (Misch and

Wingender, 2021). The average leakage rate is found

to be 25 per cent, implying that a reduction of 100

tons of carbon emissions domestically would be

accompanied by an increase of 25 tons of carbon

emissions abroad.

In addition to empirical studies, simulation studies

have also assessed the risk of carbon leakage

associated with carbon pricing. An analytical

literature review of studies consisting mainly of

computable general equilibrium analysis reports an

average carbon leakage ratio estimated at around 14

percent (Branger and Quirion, 2014). More recently,

carbon leakage rates for industrialized countries have

been estimated to range between 5 per cent and 30

per cent (Böhringer et al., 2022).

According to the WTO GTM simulation analysis,

the estimated aggregate carbon leakage rates seem

to be relatively limited and do not exceed 13 per

cent (Bekkers and Cariola, 2022).

However, the

magnitude of the estimated carbon leakage rates

differs significantly by sector, with the chemical and

EITE sectors particularly exposed to carbon leakage

(see Figure D.4).

(ii) Competitiveness losses in emission-

intensive trade-exposed sectors could

be substantial

Firms in regions with more ambitious carbon policies

can face a loss in competitiveness, because a higher

carbon price increases the abatement costs and the

production costs as firms have to divert financial and

technical resources away from production and toward

reducing GHG emissions.

The empirical evidence on the competitiveness

consequences of environmental policy is mixed,

partly reflecting differences in types of pollutants

considered (i.e., local, regional and global pollutants)

as well as the use of different conceptual frameworks,

data sources and proxies, and econometric

methodologies (WTO, 2013). Carbon pricing has

been found to have only small effects on short-term

competitiveness (Venmans, Ellis and Nachtigall,

2020).

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

More generally, the empirical literature suggests

that differences in the degree of stringency of

environmental policies tend to influence the

distribution of pollution-intensive production

across countries, suggesting that more stringent

environmental policy can have a deterrent effect

on the production of pollution-intensive goods.

For instance, in Canada, more stringent air quality

standards have been found to have reduced export

revenues by about 20 per cent (Cherniwchan and

Najjar, 2022), and in the United States, changes

in environmental compliance costs have been

estimated to account for 10 per cent of the change

in US trade flows to Canada and Mexico (Levinson

and Taylor, 2008). Nonetheless, there is no robust

empirical evidence that the potential deterrent effect

of stringent environmental policy is strong enough to

be the primary determinant of the direction of trade

or investment flows (Copeland, Shapiro and Taylor,

2022) (see also Chapter E).

In addition to empirical analysis, simulation studies

have been used to analyse the risk of competitiveness

loss associated with carbon pricing. For instance,

unilateral carbon pricing has been found to lead to

competitiveness losses in EITE industries (Carbone

and Rivers, 2020). The WTO GTM simulation results

suggest that, although the overall loss of production

in EITE sectors in regions with more ambitious climate

targets would be modest, the loss of competitiveness

could be more substantial for some carbon-intensive

sectors, such as cement and aluminium (see Figure

D.5) (Bekkers and Cariola, 2022).

(iii) Uncoordinated carbon pricing

schemes increase administrative

and compliance costs

In addition to concerns of carbon leakage and

competitiveness loss, differences in carbon pricing

policies can impose additional administrative and

compliance costs.

Administrative costs correspond to the costs incurred

by the government to implement, monitor, and enforce

the carbon pricing scheme. Administrative costs of

a carbon tax include taxpayer registration, returns

filing and payments, inspection, audit, investigation

of fraud and dispute resolution mechanisms.

Administrative costs of an emission trading scheme

Figure D.4: Estimated carbon leakage could be large in some sectors but would remain limited

at the aggregate level

Source:

Bekkers and Cariola (2022).

Note:

Simulation results based on the WTO GTM. Leakage rate is defined as the increase in emissions in regions with less ambitious

climate policies divided by the reduction in emissions in regions with more ambitious climate policies. Sectoral leakage rates also cover

the indirect emissions from electricity use. The scenario “initial NDCs” assumes a set of high-income countries adopt a regional carbon

pricing scheme to reduce emissions from zero reduction target to their initial NDC target levels, while the other countries do not have any

targets. The scenario “carbon pricing floor” assumes that the group of high-income countries increases their carbon price from US$ 50

to US$ 75, while the other regions set carbon prices of US$ 25 (low-income regions) and US$ 50 (middle-income regions).

Carbon leakage rate in 2030

Total

0.4

0.1

Selected sectors

Machinery

Electronics

Electrical equipment

Cars

Transport

Emission-intensive

trade-exposed

Chemicals

Initial NDCs US$ 50 to US$ 75 carbon pricing ﬂoor

WORLD TRADE REPORT 2022

include establishing a registry for carbon emission

allowances, keeping track of the trade in allowances,

determining the allocation of free allowances, and

ensuring the integrity of auctions of allowances,

among other things (Avi-Yonah and Uhlmann, 2009;

Goulder and Schein, 2013). The administrative

costs associated with coordinating emission trading

schemes across jurisdictions can be lower than

coordinating heterogenous carbon taxes, because

the allowances establish a natural unit of exchange

(e.g., US$ X for Y tons of carbon) that links different

emission trading systems (Stavins, 2022).

Compliance costs are the costs borne by firms and

consumers in order to comply (or sometimes not to

comply) with the obligations set out in the carbon

pricing mechanism. The proliferation of different

carbon pricing schemes with different requirements

can make it difficult for exporters, in particular

MSMEs, to meet the many different criteria on which

carbon pricing schemes are based, particularly

when they target the same sectors or products

(Tietenberg, 2010).

(b) The absence of coordinated climate

actions could lead to the adoption of

border carbon adjustment mechanisms

In the absence of coordinated climate actions,

countries with more ambitious climate targets may

have an incentive to adopt some BCA mechanisms

to mitigate the risk of carbon leakage and

competitiveness loss that large differences in carbon

prices between countries might cause. Different

types of BCA mechanisms have been discussed in

the literature (WTO and UNEP, 2009).

BCA entails the introduction of a charge on the

carbon embodied in imported products from a

jurisdiction with a lower level of carbon pricing than

in the importing country or on imported products

whose embodied carbon was not otherwise priced.

BCA could also be applied by rebating the domestic

carbon price paid by firms when exporting their goods

to compensate for the higher carbon price faced

domestically compared with firms in the country to

which they are exporting. Because of the adjustment

at the border, final consumers in a jurisdiction would

Figure D.5: Estimated overall losses of competitiveness of emission-intensive trade-exposed

sectors would remain relatively limited

Source:

Bekkers and Cariola (2022).

Note:

Simulation results based on the WTO GTM. The figure displays the change in exports and output in EITE sectors relative to a

hypothetical reference scenario in which countries do not take climate action. The scenario “initial NDCs” assumes a set of high-income

countries adopt a regional carbon pricing scheme to reduce emissions from zero reduction target to their initial NDC target levels,

while the other countries do not have any targets. The scenario “carbon pricing floor” assumes that the group of high-income countries

increases their carbon price from US$ 50 to US$ 75, while the other regions set carbon prices of US$ 25 (low-income regions) and US$

50 (middle-income regions).

Relative change in emission-intensive

trade-exposed sectors by 2030 (%)

Region with ambitious

climate targets

Other regions

Region with ambitious

climate targets

Other regions

Real outputReal exports

Initial NDCs US$ 50 to US$ 75 carbon pricing ﬂoor

-1.8

-0.6

0.8

0.4

-1.1

-0.4

0.2

0.1

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

in principle face the same carbon tax rate on domestic

and imported goods (Elliott et al., 2013).

While the basic idea of BCA measures is relatively

straightforward, it remains a controversial tool.

A growing literature discusses the features, the

advantages and drawbacks of BCA, while highlighting

the various technical challenges associated with BCA.

(i) Economic arguments favouring border

carbon adjustment

BCA could reduce carbon leakage through the

competitiveness channel. By paying a BCA levy,

foreign producers would face the same effective

carbon price in an export market as domestic

producers in that market. The BCA mechanism would

remove any incentive for production to shift to regions

with a lower carbon price.

Simulation studies suggest that BCA mechanisms

could be effective in curbing carbon leakage through

the competitiveness channel (Bellora and Fontagné,

2022; Böhringer, Balistreri and Rutherford, 2012;

Branger and Quirion, 2014). The effectiveness of

BCA in reducing leakage rates is found to be higher in

studies that looked at sector-specific leakage for EITE

industries, as these sectors are the ones with highest

leakage rates (Böhringer et al., 2022). Simulations

results based on the WTO GTM show that the leakage

rate would be cut by about half when a BCA mechanism

is introduced in the simulation scenarios discussed

above. Although this reduction in carbon leakage seems

significant, this would make only a small contribution to

the reduction in global carbon emissions. Case studies

of the real-world implementation of BCA suggest that

reduction in carbon leakage will ultimately depend

on the BCA design and the sector targeted (Fowlie,

Petersen and Reguant, 2021).

Besides reducing carbon leakage, BCA could

also limit the loss of competitiveness of domestic

producers in EITE sectors. Simulation results

based on the WTO GTM show that applying a BCA

mechanism brings the levels of real exports and real

output in the regions with more ambitious climate

targets close to their levels before the introduction

of a carbon tax.

In that context, it is sometimes

argued that introducing a BCA mechanism would

reduce the domestic opposition towards domestic

carbon pricing, as BCA could level the playing field

for domestic producers (Böhringer et al., 2022).

BCA mechanisms could also offer a means to

encourage foreign jurisdictions directly affected by

the BCA to adopt more ambitious carbon pricing

to avoid border measures (Böhringer et al., 2022;

Dröge, 2011). The incentive to adopt a carbon pricing

scheme could also arise in anticipation of another

country’s intention to apply a BCA mechanism (World

Bank, 2022). However, the WTO GTM simulations

results discussed above seem to suggest that BCA

would not provide sufficient incentives to regions

without carbon pricing to join the group of ambitious

regions in introducing carbon pricing.

Finally, compliance with BCA would require firms to

report the amount of carbon emissions embodied in

the products they trade in order to calculate the tariff

associated with BCA. Meeting this requirement could

help enhance transparency of carbon footprints in

supply chains.

(ii) Economic arguments against border

carbon adjustments

Several concerns regarding BCA have been raised in

the literature. First, imposing tariffs could reduce the

global demand for imported goods, thereby driving

down prices of such goods and deteriorating the

terms-of-trade of exporters facing BCA (Bellora and

Fontagné, 2022; Böhringer, Fischer and Rosendahl,

2010; UNCTAD, 2021). The projected negative terms-

of-trade effects tend to be concentrated in countries

exporting energy-intensive products to countries

that impose BCA mechanisms (Weitzel, Hübler and

Peterson, 2012). In addition, if a BCA mechanism

is introduced by high-income economies with more

ambitious climate mitigation targets, adverse terms-

of-trade effects would be concentrated in low-income

regions, thus creating a potential tension with the

CBDR principle (Böhringer et al., 2022).

More generally, some important issues can be raised

with regard to the relationship between the CBDR

principle and efforts to address level playing field

concerns through BCA mechanisms. While the CBDR

principle recognizes the historical responsibility of

industrialized economies to adopt more ambitious

climate policies (e.g., Articles 2.2 and 4.3 of the Paris

Agreement), BCA seeks to ensure that companies

from different regions selling in the same market face

equivalent carbon prices.

Independent of the legal standing of such principles

and concepts under the applicable international

legal frameworks, several economic design options

have been discussed in the literature to try to reduce

eventual gaps between the two objectives. One

option could be to tailor the BCA to the level of

development of a given economy. However, such an

approach could raise administrative complexities and

would not necessarily contribute to a level playing

field. Another option identified in the literature could

WORLD TRADE REPORT 2022

be to allocate the revenues from the BCA to a carbon

fund used for mitigation or adaptation in low-income

regions (Falcao, 2020).

BCA would also involve considerable administrative

and compliance costs for governments and

companies. Furthermore, BCA could potentially lead

to trade conflicts between the regions imposing and

facing such levies. Simulation analysis has shown that,

for some economies, it would be optimal to impose

countermeasures to BCA to limit adverse economic

effects (Böhringer, Carbone and Rutherford, 2016).

In such a case, BCA could lead to tit-for-tat trade

conflicts and raises questions about its compatibility

with WTO rules.

(iii) Adopting BCA involves a host

of design questions

The design of BCA can influence an economy’s

competitiveness, its carbon leakage, its export

opportunities and its promotion of carbon pricing

policies. As discussed by Daniel C. Esty in his

opinion piece, design details of BCA mechanisms

are critical. Important questions on the design issues

could include (i) sectoral coverage; (ii) country

coverage; (iii) emission scope; (iv) embedded

emission benchmarks; (v) the possibility to “rebut”

a benchmark; (v) accounting for foreign carbon

policies; (vi)export rebates; and (vii)revenue use.

Sectoral coverage refers to the sectors targeted by

the BCA mechanism. There are two broad options

for this design feature: BCA can either cover only

EITE sectors, or it can cover a larger number of

manufacturing sectors. While including a larger

number of sectors can be administratively complex, it

can also lead to a larger reduction in carbon leakage

(Branger and Quirion, 2014).

Determining the country coverage of BCA requires

deciding whether the BCA-imposing country will

exclude a group of countries from the policy. For

example, the BCA-imposing country could apply a

policy uniformly to all trading partners or, alternatively,

it could exclude a group of countries based on various

criteria, such as income level, trade volume in covered

sectors, or national mitigation policies implemented.

The emission scope consists of the emissions

in the life cycle of a product that are included in

the calculation of BCA (Cosbey et al., 2020). As

discussed in Chapter E, although definitions vary,

scope 1 emissions are often referred to as the direct

emissions from a production process, while scope 2

emissions are indirect emissions from the generation

of purchased electricity, and scope 3 emissions are

all other indirect emissions (not included in scope 2)

that occur throughout the supply chain. This design

feature is important because, in some sectors, the

share of emissions stemming from the indirect use of

electricity is substantial if the electricity purchased is

generated with fossil fuels.

The reference for embedded emissions in the

importing or exporting country involves two broad

options. The first option is to use domestically-

determined benchmark emission levels for the covered

products. The second option is to use country-specific

benchmarks that are determined by each exporting

country facing BCA. Since emission intensities for the

same product may differ significantly from country to

country, this design feature may affect the effectiveness

of the BCA scheme to meet its objectives.

A country imposing BCA may provide foreign firms

with the possibility to “rebut” the imposition of border

charges based on averages or benchmarks and,

instead, ensure that the border charges ultimately

imposed are based on their own actual emission

levels. In principle, this gives these firms an incentive

to reduce emissions if their individual emissions are

lower than the benchmark emissions.

In order to take foreign mitigation measures into

account, BCA can use different options for adjusting

the price at the border, such as making an adjustment

based on different forms of carbon prices or on non-

price-based regulations in a foreign jurisdiction.

A country imposing BCA may also have to decide

whether the scheme will include export rebates. If the

BCA measure includes such rebates, exporters of

the covered goods in the country imposing the BCA

will be rebated for the additional carbon price paid

domestically vis-à-vis the carbon price imposed in

the destination market of the exports. If the measure

does not include export rebates, the BCA will only

apply to imports.

Lastly, the discussion related to revenue use revolves

around whether revenues collected from BCA should

be transferred to the general government budget of the

implementing country or used specifically to support

climate mitigation actions, for example, in developing

economies. The way such revenues are used could

change the distributional consequences of BCA.

4. Greater international cooperation

is required to advance ambitious

carbon pricing policies

Carbon pricing faces a number of challenges that

arise from the lack of coordination between countries.

Two-thirds of all submitted NDCs under the Paris

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

Agreement consider the use of carbon pricing to

achieve their emission reduction targets. This means

that more than 100 countries can potentially look

into carbon pricing as a way to reduce their GHG

emissions through emission trading schemes, carbon

taxes and other approaches (UNFCCC, 2021).

The proliferation of different local, national and

regional carbon pricing schemes highlights

governments’ ambitions to tackle climate change.

However, it also risks creating a patchwork of

different systems, tax rates, covered products

and certification procedures, which ultimately can

generate uncertainty for businesses, weaken the

effectiveness of global efforts to mitigate climate

change and impose additional transaction costs.

International cooperation can help to overcome

the challenges associated with carbon pricing.

Coordinated actions are essential to address the risks

of carbon leakage and competitiveness concerns

associated with carbon pricing, thereby avoiding

unproductive trade frictions. By facilitating exchange

of best practices and sharing administrative costs,

international cooperation can contribute to improving

the efficiency of carbon pricing schemes and

reducing their administrative costs (Mehling, Metcalf

and Stavins, 2018). Cooperation and coordination on

carbon pricing can also help to avoid fragmentation

of carbon pricing schemes and to ensure that all

countries’ views and concerns, including those

of developing countries, are taken into account in

discussions on carbon pricing approaches.

(a) International cooperation on carbon

pricing is slowly taking shape

In view of the economic, policy and legal issues that

carbon pricing raises, it is no surprise that diverging

carbon pricing approaches and possible BCA have

already elicited important discussions in a number

of international fora, including at the meetings of the

United Nations Framework Convention on Climate

Change (UNFCCC), G7, G20, Organisation for

Economic Co-operation and Development (OECD)

and the WTO.

Various regional and international initiatives aim to

promote policy coherence in carbon pricing. For

instance, the UNFCCC Collaborative Instruments

for Ambitious Climate Action (CiACA) initiative

assists parties in the development of carbon pricing

instruments for implementing their NDC and foster

cooperative climate action with other jurisdictions.

Other initiatives include the Carbon Pricing

Leadership Coalition (CPLC), which is a voluntary

partnership of national and sub-national governments,

businesses, and civil society organizations that

provides a platform to collectively share their best

practices on carbon pricing policies and disseminate

research, among other things.

The International

Carbon Action Partnership (IACP) is also an

international cooperative forum bringing together

jurisdictions that have implemented or are planning to

implement emissions trading schemes.

More recently, the G7 issued a statement on June

2022 expressing its intention to establish an open,

cooperative international climate club, consistent with

international rules, by the end of 2022 to support the

effective implementation of the Paris Agreement.

The climate club will seek to (i)advance ambitious and

transparent climate mitigation policies; (ii)transform

industries jointly to accelerate decarbonization; and

(ii)boost international ambition, through partnerships

and cooperation, to encourage and facilitate climate

action, unlock the socio-economic benefits of climate

cooperation, and promote a just energy transition.

The G7 statement further requests that the OECD,

the International Monetary Fund (IMF), the World

Bank, the International Energy Agency (IEA) and the

WTO support this process.

International organizations are actively working to

enhance transparency and promote information

sharing of carbon pricing policies. As discussed

below, several WTO bodies have been exchanging

views and experiences with respect to different

aspects of carbon pricing and carbon footprint

methodologies and schemes. Other initiatives include

the World Bank Carbon Pricing dashboard, which

provides up-to-date information on existing and

emerging carbon pricing initiatives,

and the OECD

data on the pricing of CO

emissions from energy

use, including fuel excise taxes, carbon taxes and

tradable emission permit prices.

International efforts are also deployed to provide

assistance to governments in designing and

implementing carbon pricing schemes. For instance,

the Partnership for Market Implementation, a 10-year

programme administered by the World Bank, assists

countries in designing, piloting and implementing

pricing instruments aligned with their development

priorities.

An essential step in carbon pricing is the

measurement and verification of carbon footprint

of a product. As discussed in Chapter E, several

standards and guidelines have been published to

provide overall guidance on calculating the carbon

footprint of products and economic activities, such

as the International Organization for Standardization

(ISO) standard on carbon footprint of products (ISO

WORLD TRADE REPORT 2022

OPINION PIECE

By Daniel C. Esty

Hillhouse Professor at Yale University and Director of the Yale

Center for Environmental Law and Policy and the Yale Initiative on

Sustainable Finance

Trade implications of GHG

pricing

Carbon pricing – more broadly

and appropriately called

greenhouse gas (GHG) pricing

to encompass methane and other

GHG emissions beyond CO

– is

seen by many policymakers as

a critical tool for driving down

emissions and creating incentives

for individuals and businesses

across all sectors to move toward

a clean energy future. Some 46

nations now impose a price on

GHG emissions, either through

carbon charges or emissions

allowance trading systems – and

dozens more are exploring pricing

options. But divergent GHG

prices across nations present

a strategic challenge for the

international trading system.

In light of the global commitment to

halt GHG emissions, governments

that fail to impose a price on

emissions or otherwise regulate

GHGs might well be seen to

be offering their producers an

inappropriate subsidy. To level the

playing field, eliminate any incentive

to shift production to places with

laxer climate change policies, where

operating costs might be lower, and

to protect the efficacy of emissions

reduction efforts, governments with

strong climate change policies have

begun to develop BCA strategies.

Such mechanisms are intended to

impose tariffs on imported goods

based on the difference between

the producer’s level of GHG

pricing and the carbon price in the

importing jurisdiction.

Those seeking to better align the

structure of the trading system

with the international community’s

commitment to climate change

action are urging the WTO to

authorize appropriately structured

BCA tariffs. But developing

nations have expressed concerns

about whether such tariffs will be

implemented in a discriminatory

fashion or in a manner that violates

the commitment to common

but differentiated responsibility,

a principle of equity which

undergirds the global climate

change regime. Additional

questions have been raised about

GHG accounting and whether

technical capacity limitations will

disadvantage developing nations.

I have argued that the design

details of any BCA mechanism

will be critical, and that analytic

rigour, validation, fairness and

transparency must be prioritized

(Dominioni and Esty, 2022).

I believe that border tariffs

designed to eliminate the unfair

advantage arising from GHG

externalities should be based on

differences in effective rather

than explicit GHG prices, which

would allow nations greater

flexibility in carrying out their

climate change policies. An even

more straightforward approach

would require that the tariffs be

based on the level of unabated

GHGs attributable to an imported

product multiplied by an agreed-

upon global social cost of carbon.

Domestic goods would, of course,

have to adhere to the same GHG

pricing framework.

Such a BCA methodology would

reward producers with lower

actual GHG emissions both

domestically and internationally –

and make it nearly impossible to

deploy BCA tariffs as a disguised

barrier to trade. It would require

some effort to establish emissions

accounting standards, but carbon

calculators and GHG content

databases are increasingly

available. Equity considerations

could argue that any funds

collected from exports by the

least-developed nations should

be recycled to these countries to

support their investments in the

transition to a sustainable energy

future.

The legitimacy of the trading

system would be enhanced by

a clear acknowledgement of the

sustainability imperative and

recognition of the urgency of

global success in responding to

the threat of climate change, paired

with a reiterated commitment to

sustainable development and

access to global markets for

developing nations (Lubin and Esty,

2010). Fundamental to such efforts

would be a WTO initiative to

validate carefully structured BCA

mechanisms and thus reinforce

– and not undermine – GHG

pricing and other national climate

strategies.

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

14067:2018) and the GHG Protocol Corporate

Accounting and Reporting Standard. Greater global

coherence is further needed to avoid an increasing

proliferation of different standards and verification

procedures (see Chapter E) (WTO, 2022c).

(b) International trade cooperation

can contribute to supporting carbon

pricing action

Given the important trade implications of carbon

pricing, international cooperation on trade and

trade policy can help support the adoption and

implementation of carbon pricing.

A few recent regional trade agreements (RTAs)

include provisions that explicitly address carbon

pricing (WTO, 2021b). The most detailed provisions

are currently found in a specific article on carbon

pricing included in the RTA between the European

Union and the United Kingdom. It requires the

parties to have in place an effective carbon pricing

system specifically covering GHG emissions from

electricity generation, heat generation, industry and

aviation. The article further calls on the parties to

give serious consideration to linking their respective

carbon pricing systems.

The recent RTA between

New Zealand and the United Kingdom also commits

the parties to promote carbon pricing, and support

environmental integrity in the development of

international carbon markets. A few RTAs explicitly

promote the exchange of information and experience

on designing, implementing, and operating

mechanisms for pricing carbon and promoting

domestic and international carbon markets.

Other

environment-related provisions particularly relevant to

carbon pricing include those that explicitly encourage

the parties to use and rely on economic instruments,

including market-based instruments, for the efficient

achievement of environmental goals (Monteiro,

2016).

The WTO also contributes to international trade

cooperation on carbon pricing by providing a

framework that can minimizes trade-related negative

spillovers arising from carbon pricing policies

while promoting their positive spillover effects. As

discussed in Chapter C, the WTO acts as a forum

to discuss trade-related issues and increase the

transparency of decision-making processes.

A number of WTO members have raised in various

WTO bodies their concern about BCA, arguing that

BCA could be unfair and result in protectionism.

The discussions at the WTO cover methodologies

to calculate the carbon content of imports and how

carbon mitigation policies other than emission trading

schemes (e.g., emission standards and regulations)

are taken into account.

Another concern expressed

by some developing countries is that certain carbon

measures would be contrary to the Paris Agreement’s

CBDR principle.

The WTO’s transparency mechanisms and its

function as a forum for dialogue could help to

mitigate potential trade frictions arising from the

imposition of BCA. WTO transparency disciplines

allow members to be aware of upcoming regulatory

proposals, including some relevant to carbon pricing

initiatives. Dialogue at the multilateral level also allows

interested members to provide comments on these

proposals, while the member seeking to adopt the

new measure has an opportunity to make adjustments

in response to concerns raised. Discussions in the

Committee on Trade and Environment (CTE) and

the Trade and Environmental Sustainability Structed

Discussions (TESSD) have explored regulatory

proposals pertaining to BCA and issues related to

WTO compatibility with this type of measure. Specific

carbon pricing schemes have also been discussed in

other WTO bodies, such as the Committee on Market

Access and the Council for Trade in Goods.

Continuing these discussions and others, including

on upcoming carbon pricing policies, in the WTO and

other fora serve an important transparency objective

and provides meaningful opportunities for comments

and exchanges of views. Further discussions may

focus key aspects that should be considered to

avoid trade tensions, including issues such as

methodologies to avoid double charging, principles

for equivalent taxation, carbon accounting and

revenue use, harmonization or convergence of carbon

pricing coverage (e.g. carbon life cycle, sectors and

emission scopes), emission benchmarks and sectoral

averages, burden-sharing and methodologies for

facilitated certification and verification, and guidance

on CBDR and preferential treatment.

protectionism and to promote well-

designed carbon pricing

In essence, under WTO rules, WTO members are free

to adopt environmental policies, including those related

to climate change, at the level they choose, even if

these significantly restrict trade, as long as they do

not introduce unjustifiable or arbitrary discrimination or

disguised protectionism (see Chapter C).

Several WTO disciplines could come into play if

a carbon pricing scheme or its adjustment affects

WORLD TRADE REPORT 2022

international trade. Key disciplines include the non-

discrimination obligations (i.e., the national treatment

principle and the most-favoured nation (MFN) clause)

and the prohibition of quantitative restrictions. Other

disciplines could also be relevant, such as those

applicable to technical barriers to trade (TBT) and to

subsidies and countervailing measures (SCM) (WTO

and UNEP, 2009).

The WTO legal framework provides a great deal of

guidance concerning the type of situations in which

a BCA measure could potentially have a detrimental

impact on imported goods, as well as concerning

the types of conditions that must be met to justify

this detrimental impact under WTO rules. Overall,

carbon pricing policies and BCA mechanisms must

be coherent and fit-for-purpose; they must contribute

effectively and efficiently to reducing GHG emissions;

and they must not be misused for protectionist

purposes.

In particular, carbon pricing policies need to be

carefully designed in order to account accurately

for the carbon content of the goods affected by

these policies, irrespective of where the goods

are produced, while avoiding situations in which

goods with higher carbon footprints are unjustifiably

charged lower carbon rates or otherwise bear lower

carbon tax burdens. This would inevitably involve

important issues related to differences in policy

approaches to carbon pricing, carbon accounting

methodologies, access to certification facilities and

sector- or product-specific challenges.

(d) The needs of all countries, and of

developing countries in particular, must

be part of the discussions on carbon

pricing

To foster a just low-carbon transition, carbon

pricing should be mindful of the challenges faced

by producers with limited technical and financial

resources, such as micro-, small- and medium-

sized enterprises (MSMEs) and firms in developing

countries. Facilitating access to low-carbon

technologies and services and providing support

for carbon accounting are essential to make carbon

pricing more inclusive.

In particular, governments seeking to adopt carbon

pricing measures should be cognizant of the fact that

in the absence of complementary policies and well-

designed financial mechanisms, certain countries

and groups may be negatively impacted by carbon

pricing. The literature has shown that developing

countries, in particular LDCs, are more likely to be

negatively affected by carbon pricing, as they tend to

have fewer resources to achieve carbon reductions

and thus need support to limit and adjust to the

negative effects of increasing carbon costs. The

importance of enabling countries at different levels

of economic development to protect the environment

is expressly recognized in the Marrakesh Agreement

Establishing the World Trade Organization, alongside

the objective of sustainable development.

There is not only a “just transition” argument for

providing finance to developing countries to enable

them to transition effectively to a low-carbon economy,

but also an efficiency argument. Research shows

that climate finance for developing economies can

be more efficient than for developed economies. This

is because investments supporting decarbonization

result in higher emission reductions in developing

economies, which typically rely on less efficient

techniques and have more potential to substitute high-

carbon energy with low-carbon energy.

Support must also be provided to facilitate access

to low-carbon technologies, as this could permit

developing countries, and especially MSMEs in these

countries, to produce goods and services in a less

carbon-intensive manner, thereby minimizing the need

for carbon adjustment at borders and helping them

to attain climate and sustainable development goals.

Support for carbon accounting and certification of

producers in the developing world is also indispensable

(see Chapter E). This is in the interest of all economies,

including those looking into adopting BCA.

There is scope for further support mechanisms, which

could take the form of international cooperation on

collection and distribution of carbon taxes, using the

revenues to support low-income countries in the form

of direct income support or support for environmental

innovation.

If promoting carbon pricing at a global scale is not

a feasible option in the short term, improving global

convergence around pricing policies is a process

that, over time, could reduce the trade tensions that

may arise as a result of the adoption of divergent

approaches. As discussed above, the WTO can play

a key role in this context, as it already offers various

fora for dedicated discussions on these matters, in

which all countries, and developing countries in

particular, can express their views and concerns on

carbon-pricing approaches.

5. Conclusion

Although carbon pricing is considered an important

element of climate mitigation policy, its implementation

around the world is uneven. Current carbon pricing

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

schemes cover only a modest share of global GHG

emissions and their carbon prices vary significantly

across countries and regions.

The increasing fragmentation in carbon pricing

schemes can give rise to the risk of carbon leakage

and competitiveness loss, especially in carbon-

intensive and trade-exposed sectors. Uncoordinated

carbon pricing policies can further impose additional

administrative and compliance costs for governments

and businesses.

Carbon leakage and competitiveness concerns might

lead to calls for BCA measures to ensure that foreign

competitors are subject to the same carbon costs as

domestic producers. BCA mechanisms have both

advantages and disadvantages. On the one hand,

they are expected to contribute to reducing carbon

leakage and to restoring the loss of competitiveness

stemming from differential carbon pricing, thus

contributing to a level playing field. On the other hand,

BCA could generate adverse terms-of-trade effects

for low-income regions and trigger trade conflicts.

Different BCA mechanisms across jurisdictions could

also create coordination problems and additional

administrative costs.

Greater international cooperation is essential to

common carbon pricing solutions. Simulations

studies show that a global carbon pricing mechanism

would be a more efficient approach to reducing GHG

emissions than uncoordinated regional carbon pricing

schemes. However, reaching a global agreement on

carbon pricing requires overcoming the free-rider

problem and ensuring a fair-burden sharing of the

economic costs of carbon pricing between high- and

low-income countries. Complementary measures,

such as financial support, could help low-income

regions to address and overcome the potential

adverse effects of carbon pricing and ensure a just

transition to a low-carbon economy.

International trade cooperation on carbon pricing can

further help to achieve a more coordinated approach

to global carbon pricing. The WTO, through its core

functions, remains an appropriate forum to continue

to serve as a platform for discussing and exchanging

information and experience on carbon pricing and to

collaborate with other international organizations to

foster international cooperation and promote more

integrated approaches.

WORLD TRADE REPORT 2022

Endnotes

1 While carbon pricing is a relatively recent strategy, taxes

and emission trading schemes on local and regional

pollutants have been adopted by some countries for many

decades. For instance, a wastewater tax scheme was

introduced in France in the early 1970s. The United States

adopted in 1995 an emission trading scheme on sulphur

dioxide and nitrogen oxides.

2 The WTO GTM is a computable general equilibrium model,

focused on the real side of the global economy, modelling

global trade relations. See Aguiar et al. (2019) for a

technical description of the WTO GTM.

3 Several countries have submitted two different types of

pledges in their NDCs: (i) “unconditional pledges” and

(ii)more ambitious pledges that are conditional on reduction

efforts of other regions, financial support, or other types of

assistance (Böhringer et al., 2021). This simulation scenario

is based on the unconditional pledges and excludes the

pledges that some countries are willing to pursue on

condition that other countries reduce their emissions.

4 The average global carbon price under the regional

pricing regime is computed as the weighted average of the

regional carbon prices, where the weights are regional CO

emissions.

5 The illustrative policy experiment compares two situations:

(i) the adoption of a global emission trading scheme with

the participation of all regions and (ii) the adoption of a

regional emission trading scheme by seven “ambitious”

regions (Australia, Canada, the European Union, the

European Free Trade Association (EFTA), Japan, the United

Kingdom and the United States), while the remaining

regions, which are developing regions, do not adopt any

carbon pricing mechanism (Bekkers and Cariola, 2022).

6 The illustrative policy experiment assumes that Australia,

Canada, the European Union, the European Free Trade

Association (EFTA), Japan, the United Kingdom and the

United States adopt a regional emission trading scheme

(Bekkers and Cariola, 2022).

7 The simulation results suggest that the real income of India

and of the Republic of Korea is projected to rise under the

“international carbon price floor” scenario. This is because

India and the Republic of Korea are net importers of fossil

fuels, and under the scenario the demand for fossil fuels

is reduced, thus reducing the price of fossil fuels and

improving their terms-of-trade. (Bekkers and Cariola,

2022).

8 The rate of carbon leakage depends both on the amount

of production activity shifted abroad and on the emission

intensity of that production activity. Thus, it is possible

to have high leakage rates with less significant shifts in

production (Keen, Parry and Roaf, 2021).

9 In the illustrative simulation experiments, the set of high-

income countries are Australia, Canada, the European

Union, the European Free Trade Association (EFTA),

Japan, the United Kingdom and the United States. The

first experiment assume that the high-income group adopt

a carbon pricing scheme to reduce its emissions from no

reductions (business as usual) to its NDC target levels,

while the other countries and regions have no targets. In the

second experiment, the same set of high-income countries is

assumed to set a carbon price of US$75 instead of US$50,

with the other regions setting carbon prices of US$25 (low-

income regions) and US$50 (middle-income regions).

10 A large strand of the empirical literature assesses the

competitiveness consequences of environmental policy by

testing whether the so-called “pollution haven” hypothesis

holds in practice. The pollution haven hypothesis posits

that trade openness results in the relocation of pollution-

intensive production from countries with stringent

environmental policy to countries with lax environmental

policy (see Chapter E).

11 In theory, a BCA could also be applied on products

imported from a jurisdiction with a higher carbon pricing

level if that jurisdiction also operates a BCA on their

exports, thus implementing a “carbon tax neutrality” for

traded goods.

12 As in the illustrative policy experiments described

previously, if a coalition of seven developed regions

introduces a carbon pricing scheme whereas the other

regions do not, implementing a BCA mechanism is, on

average, effective in preventing competitiveness loss.

However, the effects are heterogeneous among the regions

introducing the carbon pricing scheme and do not prevent

competitiveness losses in all regions (Bekkers and Cariola,

2022).

13 If the simulation setting is modified by assuming that

regions can impose counter-tariffs in response to a BCA

mechanism, some regions would have an incentive to

introduce a carbon pricing scheme, whereas other regions

would prefer to impose counter-tariffs (Böhringer, Carbone

and Rutherford, 2016).

14 A more detailed discussion of these choices is beyond

the scope of this report and can be found, for example, in

Cosbey et al. (2020).

15 See https://www.carbonpricingleadership.org/.

16 See https://icapcarbonaction.com/.

17 See https://www.g7germany.de/g7-en/current-information/

g7-climate-club-2058310/.

18 See https://carbonpricingdashboard.worldbank.org/.

19 See https://www.oecd.org/tax/tax-policy/tax-and-

environment.htm/.

20 Following the departure of the United Kingdom from

the European Union, the United Kingdom replaced its

participation in the European Union Emission Trading

System with a national emission trading scheme.

21 See for instance European Union-Viet Nam RTA.

22 See for instance Chile-United States RTA.

23 See, inter alia, discussions in the Committee on Trade

and Environment (WTO official document number WT/

CTE/28/Rev.1, paragraph 1.19; WT/CTE/M/71, paragraphs

1.102–122; WT/CTE/M/72, paragraphs 2.95–2.115; WT/

CTE/M/73, paragraphs 1.45–1.75), Committee on Market

Access (WTO official document number G/MA/M/74,

paragraphs 12.3–12.43) or Council on Trade in Goods

(WTO official document number G/C/M/139, paragraphs

20.3–20.59; G/C/M/140, paragraphs 28.3–28.60;

G/C/M/141, paragraphs 39.3–36.63). WTO official

documents can be accessed viahttps://docs.wto.org/.

CLIMATE CHANGE AND INTERNATIONAL TRADE

D. CARBON PRICING AND

INTERNATIONAL TRADE

24 For instance, the Committee on Trade and Environment

(CTE) discussed carbon footprint and labelling schemes on

various occasions. See Summary Report of the Information

Session on Product Carbon Footprint and Labelling

Schemes (WTO official document number WT/CTE/M/49/

Add.1); Report of the Committee on Trade and Environment

(WTO official document number WT/CTE/M/55); 2017

Annual Report of the Committee on Trade and Environment

(WTO official document number WT/CTE/M/55). WTO

official documents can be accessed viahttps://docs.wto.

org/.

25 For instance, the Council for Trade in Goods recently

discussed the European Union’s plans for a carbon border

adjustment mechanism. See https://www.wto.org/english/

news_e/news20_e/good_11jun20_e.htm.

The decarbonization

of international trade

The transition to a low-carbon economy will require the

transformation of many economic activities, including international

trade. This chapter looks at the extent to which trade contributes

to greenhouse gas emissions, but also assesses its importance

for the diffusion of the technology and know-how needed to make

production, transportation and consumption cleaner. Although

carbon emissions associated with international trade have tended

to decrease in recent years, bold steps are needed to further

reduce trade-related emissions. Greater international cooperation

is needed to support efforts to decarbonize supply chains and

modes of international transport.

Contents

1. Introduction 100

2. Accounting for carbon emissions originating from

international trade is complex 100

3. International trade affects carbon emissions in multiple ways,

both positive and negative 102

4. Reducing trade-related carbon emissions requires greater

international cooperation 106

5. Conclusion 112

Key facts and findings

• Carbon emissions embodied in world exports are estimated to account for slightly less than

30 per cent of global carbon emissions in 2018. This share has been slowly declining since 2011.

• Emissions embodied in exports derive from both domestic and foreign inputs. From 1995 to

2018, the estimated share of CO

emissions with foreign origins in total trade-related emissions

increased from 24 per cent to 31 per cent.

• Although trade increases global CO

emissions compared to a hypothetical autarky situation,

simulation analysis suggests that the cost of GHG emissions associated with international trade

would be outweighed by the benefits of international trade.

• Greater international cooperation on improving carbon content measurement, reducing emissions

from the transport sector, and improving the sustainability of global supply chains is necessary

to reduce trade-related greenhouse gas emissions.

• International support for developing countries is critical so that they can reduce their trade-related

emissions, including those connected to sustainable agricultural supply chains.

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1. Introduction

The transition to a low-carbon economy is likely to

entail a transformation of most economic activities,

including international trade. Reducing greenhouse

gas (GHG) emissions will increasingly become

a business imperative to remain competitive and

efficient. Decarbonizing trade will require reducing

carbon emissions from the production stage but also

the transportation stage.

Although measuring the overall impact of trade on

carbon emissions is complex, identifying carbon

hotspots along the supply chains, where there is an

intense generation of GHG emissions, is essential

to prioritize and implement climate change mitigation

strategies.

This chapter discusses how carbon emissions

originating from international trade can be

measured. It then reviews the channels through

which international trade can increase or decrease

emissions, and discusses how the level of

carbon emissions and welfare would change in a

counterfactual world with no international trade. The

chapter concludes with a discussion on the role of

international cooperation, including at the WTO, in

supporting strategies that aim to reduce the carbon

emission associated with international trade, such

as improving carbon efficiency in transportation and

ensuring the environmental sustainability of supply

chains.

2. Accounting for carbon emissions

originating from international

trade is complex

Conceptually, the carbon emissions embedded in a

traded product – sometimes referred to as carbon

footprint – include all direct GHG emissions from

the whole life cycle of a product, i.e., its production,

assembly, packaging, shipping to the market (to

consumers) and disposal. A more comprehensive

measurement of embedded carbon emissions

can also account for the indirect GHG emissions

generated by the production and transportation of the

inputs used to produce the final product or service,

including the GHG emissions from the generation of

the electricity used during production.

Changes in the way land is used to produce goods

and services (e.g., clearing of forests for agricultural

use) impact GHG emissions, and can be included in

the assessment of the carbon emissions embedded

in traded products. Land use change is estimated to

account for 12.5 per cent of the carbon emissions

associated with human activities between 1990

and 2010 (Houghton et al., 2012). The expansion of

agriculture and the production of traded goods have

been identified as important drivers of global land use

change (Böhringer et al., 2021).

In practice, comprehensively estimating the carbon

footprint of a product or an economic activity is

complex and data-intensive. A common approach,

known as carbon accounting, uses sectoral carbon

emission data and input-output (I-O) tables, which

track an economy’s circular flow of goods and

services, to estimate the carbon emissions associated

with international trade (WTO, 2021a).

According to the most recent available estimates,

the carbon emissions embedded in world exports

in 2018 amounted to about 10 billion tons of CO

or slightly less than 30 per cent of global carbon

emissions (OECD, 2022d). The share of CO

emissions embedded in trade in total emissions, while

increasing significantly between 1995 and 2008, has

been on a declining trend since 2011 (see Figure E.1).

Moreover, since the financial crisis of 2008, carbon

embedded in trade seems to have declined relative

to trade’s contribution to GDP or global value chain

(GVC) participation, suggesting a decoupling of

carbon emissions and trade thanks, in part, to greater

energy efficiency.

Aggregate accounting results hide important

regional differences. For instance, Canada, China,

the European Union, India, Japan, the Republic

of Korea, the Russian Federation, and the United

States are found to be the main contributors to global

carbon emissions embedded in international trade

(see Figure E.2). Over the past decade, the growth

of global carbon emissions embedded in trade has

been mainly driven by a few high- and middle-income

countries.

The amount of GHG emissions embedded in

an economy’s exports is determined by a broad

range of factors, including its economic size, the

sectoral composition of its foreign trade, its level of

participation in global value chains, the modes of

transportation used for its imports and exports and

the energy efficiency of its production system, which

depends in part on environmental and energy policies

(WTO, 2021a). For instance, a few sectors, including

energy and transportation, account for more than

75 per cent of the GHG emissions embedded in

international trade (Yamano and Guilhoto, 2020).

Given that international trade separates production

and consumption across space, carbon emission

accounting can be analysed from a production

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perspective (i.e., production of goods and services

consumed domestically and exported) or a

consumption perspective (i.e., consumption of goods

and services produced domestically and imported).

The difference between the production and

consumption determines the trade balance in carbon

emissions, namely whether economies are net

importers or exporters of carbon emissions. While

developed economies tend to be net importers of

carbon emissions, developing economies and fossil

fuel commodity dependent economies tend to be net

exporters of carbon emissions (OECD, 2022d).

Although high-income economies remain more

dependent on imported carbon-intensive activities

than middle-income economies, the net imports of

embedded carbon emissions has declined in recent

years, in part thanks to improvements in energy

efficiency (see Figure E.3) (Wood et al., 2020). Very

few economies have, however, moved from being net

importers of embedded carbon emissions to being net

exporters, or vice versa (Yamano and Guilhoto, 2020).

The rise in GVCs has increased the fragmentation

of production processes with the offshoring of some

tasks. Emissions embedded in trade, therefore, can

derive from the lifecycle of a product as well as from

the embedded emissions in domestic and foreign

inputs. Economies more integrated in GVCs have

increased the share of carbon emissions embedded

in imports of intermediate inputs, and thus the

amount of carbon emissions embedded in their

exports. From 1995 to 2018, the average share of

carbon emissions with foreign origins in total trade-

related emissions increased from 24 per cent to

31 per cent (OECD, 2022d).

While carbon emission accounting provides

interesting insights on the amount and evolution of

carbon emissions embedded in international trade, it

is a purely descriptive analysis that cannot capture all

aspects of the complex relationship between trade and

carbon emissions. For instance, it does not provide

any insights about the changes in carbon emissions

and welfare that would arise in a counterfactual world

in which trade is replaced by domestic production.

More generally, carbon accounting is silent on the

determinants of carbon emissions embedded in trade

and on the net impact of trade on carbon emissions.

Figure E.1: The share of emissions embedded in international trade in total carbon emissions

has been slowly decreasing in recent years

Source: Authors’ calculation, based on the OECD Trade in embedded CO

(TeCO

) database for carbon emissions embedded in trade,

the World Bank’s World Development Indicators for the trade-to-GDP ratio, and the OECD Trade in Value-Added (TiVA) database

for GVC participation.

Note: Data have been normalized to 100 for the year 2000 to depict differences in trends. GVC participation is measured as share of

foreign value-added in exports.

Index 1995 = 100

Share of carbon embedded in trade in global carbon emissions GVC participation Trade-to-GDP ratio

120

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2001

2003

2005

2007

2009

2011

2013

2015

2017

110

100

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3. International trade affects carbon

emissions in multiple ways, both

positive and negative

The effect of trade on the environment is theoretically

undetermined, because different mechanisms pulling

in opposite directions are at play, and different factors

determine the importance of the role of each of these

mechanisms (WTO, 2013). The overall impact of trade

on GHG emissions is therefore an empirical question.

(a) International trade can raise emissions

through different channels

Trade-opening increases the level of production,

transportation and consumption of goods and

services, thus increasing carbon emissions. This is

commonly referred to as the “scale effect” of trade

(Antweiler, Copeland and Taylor, 2001).

Expansion of trade by GVCs, which accounts for

almost half of global trade today (World Bank,

2020), also contributes to more carbon emissions

from international transportation, i.e., an additional

contributor to the scale effect.

Different modes of transport have different impacts

on carbon emissions, which are in large part

determined by the source of energy used (WTO,

2013). Air transport is the most carbon-intensive

mode of transportation, followed by road transport

(e.g., trucks). Rail and maritime transport are relatively

less carbon-intensive.

The international transport sector is estimated to

account for over 10.2 per cent of global carbon

emissions in 2018 (OECD, 2022d). Although carbon

emissions from the international transport sector

fell by over 10 per cent in 2020 during the COVID-

19 pandemic, they have been growing steadily at an

average annual rate of 1.9 per cent since 1990 (ITF,

2021a).

While passenger transportation accounts for more

than two-thirds of international transport emissions,

Figure E.2: The increase in carbon emissions embedded in international trade is mostly driven

by a few economies

Source: Authors’ calculation, based on OECD TeCO

database.

Note: The horizontal axis indicates the logarithm of carbon emissions embedded in exports in 2000, and the vertical axis indicates the

logarithm of carbon emissions embedded in exports in 2018. The dashed line indicates the 45-degree line. Countries below the line have

reduced the carbon emissions embedded in their exports between 2000 and 2018.

Brazil

1,400

1,600

2,000

0 200100 300

Carbon emissions embodied in exports in 2000 (in tonnes)

400 500

800

700600

Lower-middle income Upper-middle income High-income

1,800

1,000

800

600

400

200

1,200

Carbon emissions embodied in exports in 2018 (in tonnes)

Indonesia

India

Viet Nam

China

Mexico

Malaysia

Russia

South Africa

Australia

Canada

EU27

United Kingdom

Japan

Rep. of Korea

Singapore

Turkmenistan

United States

45°

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CLIMATE CHANGE AND INTERNATIONAL TRADE

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the remaining transport emissions are associated

with international freight transport. International

freight transport is also estimated to represent,

on average, 33 per cent of the carbon emissions

generated by international trade during the production

and transport of goods traded internationally, the

remaining 67 per cent of trade-related emissions

are associated with the production of traded goods

(Cristea et al., 2013).

Although the bulk of international trade continues

to be transported by sea, trade-related transport

activities and carbon emissions are projected to

increase sharply due to the increase in air transport

to deliver time-sensitive products, such as fruits and

vegetables and consumer electronics.

Changes in the sectoral composition of production

resulting from trade-opening can increase or reduce

emissions, depending on whether or not the country

has a comparative advantage in carbon-intensive

industries (McLaren, 2012). This is commonly referred

to as the “composition effect” (Antweiler, Copeland

and Taylor, 2001).

According to the so-called “factor endowments

hypothesis”, trade opening will cause capital-

abundant countries, typically developed economies,

to specialize in the production of capital-intensive

products, while developing countries specialize in

labour-intensive production. The “factor endowment

hypothesis” assumes that the pollution intensity of an

economic sector tends to go hand in hand with its

capital intensity. Accordingly, developed economies

are assumed to specialize in carbon-intensive

industries.

An alternative hypothesis, known as the “pollution

haven hypothesis”, assumes that climate policy, and

implicitly the cost for firms to reduce or prevent

carbon emissions, are the main source of comparative

advantage. The hypothesis posits that trade opening

will lead to the relocation of carbon-intensive

production from countries with stringent climate

policy to countries with relatively lax climate policy

(Copeland and Taylor, 2004). Similarly, when firms

slice up production along value chains, the carbon-

intensive parts of production might be shifted from

Figure E.3: Carbon emissions embedded in net imports of high-income countries have peaked

in 2006

Source: Authors’ calculation, based on OECD TeCO

database.

Note: Net exports of carbon emissions are the difference between carbon embedded in exports and carbon emissions embedded in gross

imports. A negative net exports correspond to net imports of carbon emissions.

Net exports of carbon emissions (in gigatonnes)

Lower middle-income Upper middle-income High-income

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2001

2003

2005

2007

2009

2011

2013

2015

2017

-1

-2

-3

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WORLD TRADE REPORT 2022

countries with stringent climate change regulations

to those with weaker regulations, a phenomenon

called “pollution outsourcing” (Cherniwchan, 2017;

Cherniwchan, Copeland and Taylor, 2017; Cole,

Elliott and Zhang, 2017).

Additional scale and composition effects may arise if

trade encourages or reallocates activities that lead to

higher emissions, such as deforestation. Theoretically,

the impact of trade-opening on deforestation can

either be positive or negative (WTO, 2021c). Recent

empirical studies find, however, a significant increase

in deforestation in response to trade-opening (Abman

and Lundberg, 2019; Faria and Almeida, 2016). It

is estimated that around one-third of deforestation-

related emissions were driven by international trade

(Henders, Persson and Kastner, 2015; Pendrill

et al., 2019).

(b) International trade can lower emissions

through different channels

Trade can lower emissions by facilitating changes

in production methods that reduce emissions

per units of output, generally referred to as the

“technique effect” (Antweiler, Copeland and Taylor,

2001). International trade facilitates the access

and deployment of cleaner technologies, including

carbon-friendly technologies that are not necessarily

available in the importing countries. The increase in

economic growth and per capita income associated

with open trade can give rise to greater demand by

the public for a cleaner environment.

The demand for more climate-friendly solutions

can result in more stringent climate policies that

incentivize producers to reduce the carbon intensity

of output, provided that policies are not influenced

by industry lobbyists or otherwise compromised

(Magnani, 2000; Nordström and Vaughan, 1999).

At the sector level, trade-opening may shift output

shares to more productive and cleaner firms because

firms engaged in trade tend to be more energy efficient

than firms only servicing domestic markets.

This has

been called the “pollution reduction by rationalization”

hypothesis (Copeland, Shapiro and Taylor,

2022). Improved access to foreign intermediates

due to input tariff liberalization can also trigger

reductions in within-industry emission intensities.

The so-called “pollution halo hypothesis” further

posits that multinational companies through foreign

direct investment can transfer their environmental

technology, such as pollution abatement, renewable

energy and energy efficient technologies, to the host

country (Eskeland and Harrison, 2003).

Trade openness can also stimulate innovation,

including environmental innovation, through different

channels (WTO, 2020a). Innovation and the adoption

of energy efficient technologies can increase in

response to increased competition from imports.

For instance, increased import competition due to

tariff reductions has been found to cause Mexican

production facilities to increase their energy efficiency

(Gutiérrez and Teshima, 2018).

Similarly, export

expansion due to trade liberalization in export markets

can increase innovation (Bustos, 2011). For example,

Indian firms exporting manufactures have been found

to undergo technological upgrading in response to

increased foreign demand (Barrows and Ollivier,

2021).

Finally, trade policy changes also have the potential to

affect emissions. Tariff and non-tariff barriers tend to

be lower in carbon-intensive industries than in clean

industries (see Figure E.4). Indeed, high carbon-

intensive goods tend to be traded more than low

carbon-intensive (Le Moigne and Ossa, 2021). This

is mainly because trade barriers tend to be lower on

upstream products (which are mainly used as inputs

into production) than on downstream products (which

are closest to the final consumption goods), and

upstream products tend to be more carbon-intensive

than downstream products. A recent counterfactual

analysis shows that, if trade policy reform eliminated

the environmental bias in trade policy by imposing

the same tariff and non-tariff barrier structure in all

industries, this would yield a win-win outcome: global

real income would slightly increase (by 0.65 per

cent), while global carbon emissions would fall by

3.6 per cent (Shapiro, 2021).

welfare losses would outweigh the

welfare gains due to lower carbon

emissions

Several studies have empirically investigated the

extent to which trade has an impact on carbon

emissions through its impact on production and

transport, on industry composition and on industry

emission intensities (respectively, scale, composition

and technique effects). Overall, the empirical literature

suggests that trade-related reductions in emissions

are mostly due to the technique effect, while the

composition effect tends to be quite small (Copeland,

Shapiro and Taylor, 2022).

The evidence that the

composition effect is relatively small suggests that

international trade driven by comparative advantage

has not been responsible for a systematic relocation

of pollution-intensive production out of countries with

stringent environmental regulations, as would have

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CLIMATE CHANGE AND INTERNATIONAL TRADE

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been predicted by the “pollution haven hypothesis”

(Cherniwchan and Taylor, 2022). This is because

costs of abating emissions tend to represent only a

small part of a firm’s total operating costs, and other

factors such as costs of capital, labour and proximity

to the market are more important determinants of a

firm’s location decision.

With a relatively small composition effect, open trade

may decrease or increase total carbon emissions

depending on whether the technique effect overrides

the scale effect. The empirical evidence on the net

impact of trade on carbon emissions is mixed. The

impact is sector- and country-specific and depends

on a broad range of factors, including the type

of pollutants, the country’s level of development,

energy intensity, types of energy sources used,

types of products traded, modes of international

transport, trading partners’ location and energy and

environmental policies in force.

For a global pollutant, such as carbon dioxide (CO

the scale effect tends to dominate, implying that trade

increases emissions. However, for some local and

regional pollutants such as particulate matter (PM)

and sulphur dioxide (SO

), the technique effect is

likely to exceed the scale effect because governments

have a greater incentive to reduce emissions of

local pollutants given that the benefits of pollution

abatement accrue more directly to their citizens.

In developed economies, the technique effect tends

to dominate the scale effect, while the reverse is

observed in developing economies because of

relatively less stringent environmental regulations and

limited access to pollution abatement technologies

(Managi, 2006). As a result, open trade is associated

with less carbon emissions in high-income economies

but more carbon emissions in developing economies.

This finding corroborates the carbon accounting

analysis discussed in the previous section and

suggests that high income countries tend to be net

importer of carbon emissions, with large amounts of

carbon emissions emitted in developing countries to

produce goods and services exported to high-income

countries.

Several mechanisms contribute to the reduction of

pollution emissions intensity underlying the technique

effect. For instance, the reduction of nitrogen oxides

(NOx) emissions in the manufacturing sector in the

Figure E.4: Trade costs tend to be lower in carbon-intensive manufacturing industries

Source: Authors’ calculation, based on Shapiro (2021) for carbon emission intensities in manufacturing industries and WTO Import Trade

Cost Index for 2011.

Note: Each dot is an importer-industry (ISIC rev. 3.1 two-digit) combination. The trade cost index measures the cost of trading

internationally relative to trading domestically.

0 1

Carbon intensity (carbon tons per output in logarithm)

2 3

High-income Lower-middle income Upper-middle income

Trade cost index

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WORLD TRADE REPORT 2022

United States has been found to be almost entirely

driven by more stringent environmental regulations

(Shapiro and Walker, 2018).

At the same time, trade

can also affect emission intensity by reallocating

market shares to exporting firms. Exporters in

Indonesia have been found to be more energy-

efficient and less reliant on fossil fuels compared with

non-exporters (Roy and Yasar, 2015). In India, within-

industry reallocation of market share as a result of

trade produced large savings in GHG emissions

(Martin, 2011).

Trade has also been found to induce a change in

industry emission intensities of particulate matter

(PM) and sulphur dioxide (SO

) due to changes

in the relative sizes of firms or to the entry of more

productive firms and exit of less competitive firms

(Holladay and LaPlue, 2021). Finally, changes in

innovation activities and improved access to foreign

intermediates induced by trade-opening can also

contribute to reductions in industry emission intensity

(Akerman, Forslid and Prane, 2021).

Given that international trade contributes to

carbon emissions, there have been calls to reduce

international trade by producing and consuming

“locally”. Such calls raise the question of what would

be the level of carbon emissions if economies only

produced and consumed locally while ensuring a high

level of welfare. Although international trade emits

GHG, it also generates trade gains and contributes

to increase society’s welfare by supporting economic

growth, lowering prices, and increasing consumer

choice and product variety, including with respect to

climate-friendly goods, services and technologies.

While a situation of autarky is not observable,

economists have used economic models to examine

the question as a thought experiment. In a scenario

where countries closed their borders to trade,

domestic production of intermediate and final goods

would need to rise to meet the demand for products

that were previously imported. Compared with a

hypothetical situation involving autarky (i.e., economic

self-sufficiency) international trade would increase

global CO

emissions by approximately 5 per cent,

corresponding to 1.7 gigatons of CO

annually

(Shapiro, 2016). This effect would be almost equally

driven by production and transportation (scale effect),

as, in the absence of trade, the resources used to

produce goods and services for international markets

would be employed in satisfying domestic demand.

However, the benefits for producers and consumers

from international trade, estimated at US$ 5.5 trillion,

would exceed by two orders of magnitude the

environmental costs from carbon emissions,

estimated at US$ 34 billion.

This analysis suggests that, rather than unwinding

trade integration – for example, by re-shoring

production and promoting self-sufficiency – the better

option would be to trade in a cleaner way, for example

by reducing the carbon intensity of transportation,

as well as developing and deploying environmental

and carbon-friendly technologies and sourcing low-

carbon inputs and products.

4. Reducing trade-related carbon

emissions requires greater

international cooperation

Although international trade is not the main

contributor of GHG emissions, reducing trade-

related GHG emissions is essential to contribute to

the transition to a low-carbon economy. International

cooperation is important to scale up strategies to

decarbonize international trade and transport and to

limit any undesired impacts that can hinder and slow

down progress towards low-carbon trade.

International cooperation can contribute to a more

coherent and predictable policy environment by

providing a reference point for national climate

change mitigation policy and help signal a more

credible commitment to decarbonize international

trade. Similarly, enhancing the transparency of

measures aimed at reducing trade-related carbon

emissions through greater international cooperation

can facilitate the review and monitoring of actions and

help to overcome resistance to decarbonizing some

trade-related activities.

International cooperation can further help to mobilize

financial and technical resources to overcome

capacity constraints and facilitate access to capital

and technologies that reduce trade-related carbon

emissions. Technical assistance, capacity building

and exchanges in knowledge and experience can also

help promote a just transition to a low-carbon trade.

As discussed below, a broad range of regional and

international organisations, including multilateral

and regional financial institutions, address different

dimensions of the decarbonization of international

trade. The private sector is also active in efforts to

decrease trade-related carbon emissions.

International cooperation on trade can also support

efforts to reduce the carbon emissions embedded in

international trade. An increasing number of regional

trade agreements (RTAs) explicitly promote activities

that can contribute to lower trade-related carbon

emissions. Provisions explicitly promoting trade

in environmental goods and services, including

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renewable energy and energy efficient products, are

increasingly incorporated in RTAs (see Chapters C

and D). A few, mostly recent, agreements specifically

promote cooperation on sustainable transport,

including through information and experience

sharing.

The WTO can also support the transition to a low-

carbon trade by means of its existing framework of

rules, as well as its negotiation forum, transparency

requirements, monitoring system and capacity-

building.

(a) Deeper international cooperation

is required to facilitate carbon

measurement and verification

Reducing carbon emissions associated with

international trade requires accurately keeping track

of the carbon emitted during the production and trade

of goods and services, as well as the progress made

in reducing those emissions. Different approaches

have been developed to quantify the amount of carbon

emissions in products and economic activities.

The scope of the carbon footprint within value

chains is a particularly important criterion to define

the boundary to include the full range of relevant

emissions. As discussed in Chapter D, the carbon

content of a product can cover the direct emissions

from a production process (scope 1), the indirect

emissions from the generation of purchased energy

(scope 2), and the indirect upstream emissions and

downstream emissions (scope 3) in a company’s

value chain, including investment, transportation

and distribution. Relevant information, including

the benchmarks of measuring carbon emissions, is

essential to quantify the amount of carbon.

Several standards and guidelines have been published

to provide overall guidance on calculating the carbon

footprint of products and economic activities.

For instance, the International Organization for

Standardization (ISO) released the ISO 14067:2018,

which sets out requirements and guidelines for

quantification and reporting for the carbon footprint of

products. The private sector has launched a number

of initiatives, such as the GHG Protocol Corporate

Accounting and Reporting Standard, which provides

requirements and guidance for companies preparing

a corporate-level GHG emissions inventory.

Although there is ongoing international cooperation

on carbon measurement and verification, more global

coherence is needed in this area, given the growing

number of carbon measurement standards. At the

national level, various standards have also been

developed for carbon emissions measurement. There

are also sector-specific standards that are tailored

to calculate the carbon content in specific industry

settings (WTO, 2022c).

As efforts to decarbonize increase, a proliferation of

different standards could create unpredictability for

producers and impose burdensome costs on them,

and ultimately reduce the effectiveness of efforts

to reduce carbon emissions. Moreover, carbon

measurement methodologies should be backed by a

robust system of verification. Without convergence

or common understandings on carbon measurement

and verification approaches, countries may encounter

difficulties implementing certain trade-related climate

policies aimed at decarbonizing international trade.

One important dimension of cooperation on

carbon measurement and verification relates to the

development and international recognition of quality

infrastructure institutions. Quality infrastructure

refers to the systems (both public and private),

policies and practices that support and enhance

the quality, safety and environmental soundness of

goods that are traded. It relies on standardization,

accreditation, conformity assessment, metrology and

market surveillance.

The WTO supports efforts to promote a coherent

carbon measurement and verification approach by

providing a set of rules calling for convergence around

common standards and verification procedures, and

a forum where its members can cooperate to ensure

that countries around the world have the quality

infrastructure they need for carbon measurement and

verification.

For these reasons, the manner in which international

standards for measuring carbon are set will

have a decisive impact on their use. The WTO

supports international cooperation in this area.

The use of relevant international standards is

strongly encouraged under the Agreement on

Technical Barriers to Trade (TBT), and the TBT

Committee has developed “Six Principles for the

Development of International Standards, Guides

and Recommendations”, namely (1) transparency,

(2) openness, (3) impartiality and consensus,

(4) effectiveness and relevance, (5) coherence,

and (6) the development dimension, to address

important areas of international standard-setting.

These six principles can play a significant role in the

development of new international standards relating

to carbon emissions quantification. For instance,

observing these principles ensures that relevant

information is made available to all interested parties,

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WORLD TRADE REPORT 2022

that sufficient opportunities for written comments are

provided, that conflicting international standards are

not adopted, and, importantly, that constraints facing

developing countries are considered.

Aligning verification approaches with respect to the

information provided by producers and exports on the

carbon content of products is important to increase

trust in the verification process and in carbon

efficiency claims. Mutual recognition of the results

of verification procedures can also contribute to a

reduction in compliance costs. The TBT Agreement

encourages members to accept the results of

procedures adopted by other members, even if they

are different from their own, if those procedures offer

an equivalent assurance of conformity with applicable

technical regulations or standards.

The participation of developing countries and least-

developed countries (LDCs), as well as micro, small

and medium-sized and enterprises (MSMEs) across

the globe, in the transition to a low-emission global

economy depends on their ability to measure and

verify the carbon content of products. Deficient quality

infrastructure in many LDCs and developing countries

risks excluding them, creating bottlenecks in the

decarbonization of supply chains and preventing low-

carbon solutions from gaining access to the market.

Other issues that can impact developing countries

include the extent to which direct and indirect land

use change may have a bearing on carbon footprint

calculations, as well as challenges that developing

countries have in accessing accurate historical data on

local land use change (Gheewala and Mungkung, 2013).

International support for developing countries is

critical so that they can accurately measure and verify

the carbon content of their products and participate

in setting relevant international standards. A number

of multilateral organizations support developing

countries in improving their quality infrastructure,

including in areas related to standardization and

conformity assessment.

Further support to improve

developing countries’ capacities in the area of carbon

standards would be beneficial.

Moreover, WTO bodies, such as the TBT Committee

and the Committee on Trade and Environment (CTE)

have held discussions on trade-related aspects of

carbon footprint policies and methodologies.

addition, the WTO could serve as a forum to hold

more specific discussions at the multilateral level

on trade-related aspects of carbon measurement

methodologies and verification procedures, as well

as on possible ways to support developing countries

in this area.

(b) Reducing carbon emissions in

international transport requires more

international cooperation

Trade-related GHG emission abatement cannot be

fully achieved without reducing carbon emissions

from international transportation. As discussed

above, transportation is an important contributor to

the GHG emissions generated by international trade

for many products (Cristea et al., 2013). Transport

is also a major source of air and water pollution.

Ensuring domestic and international transport is

more sustainable and climate-friendly is essential to

achieve a low-carbon economy.

Major decarbonization pathways for international

transport include switching to lower-carbon fuels (for

example, biofuels, hydrogen or renewable electricity),

improving aircraft, vehicle and vessel efficiency,

phasing-out high-carbon intensive vehicles and

improving system-wide operational efficiency,

including through the planning of efficient routes and

the use of vehicle-sharing.

If it proves impossible

to completely eliminate carbon emissions of transport

at the source, remaining carbon emissions from

international transport could be compensated through

carbon offsets and new technologies, such as carbon

capture, utilization and storage.

Despite recent progress, the transition to a low-

carbon international transport involves several

challenges, including ensuring that the production

of alternative, lower-carbon fuels does not increase

emissions, managing the higher cost and lower

energy density of alternative and lower-carbon fuels,

and creating the necessary infrastructure such as

charging facilities for electric vehicles.

Unlike domestic aviation and shipping, emissions

from international aviation and shipping activities

are not covered by the nationally determined

contributions (NDCs) established under the Paris

Agreement, because they take place, in part, beyond

the territorial boundaries of states. The International

Marine Organization (IMO) and the International

Civil Aviation Organization (ICAO) have been tasked

to find solutions to mitigate GHG emissions from

international maritime and air transport, respectively.

(i) Maritime transport

Although maritime transport has relatively low carbon

intensity,

international shipping is nevertheless

estimated to be responsible for 2.9 per cent of global

carbon emissions in 2018 (IMO, 2020) in large part

due to the fact that it is the main mode of transport for

global trade.

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Annual emissions from shipping are forecast to grow

by 15 per cent by 2030 in the absence of ambitious

climate targets. Various commitments and initiatives

to decarbonize maritime transport have been adopted

and launched by both public and private actors at the

international and regional levels.

At the international level, the IMO’s Initial GHG

Strategy, adopted in 2018, provides a policy

framework and guiding principles to reduce carbon

intensity of international shipping (CO

emissions per

transport work) by at least 40 per cent by 2030 and

pursuing efforts towards 70 per cent by 2050, and

to reduce GHG emissions from international shipping

by at least 50 per cent by 2050, compared to 2008

levels.

The IMO Initial GHG Strategy also seeks to

strengthen the energy efficiency design requirements

for ships.

The shipping industry supports the IMO’s Initial GHG

Strategy through a number of initiatives. For example,

the Getting to Zero Coalition, an alliance of more

than 150 companies across the shipping value chain

supported by governments and intergovernmental

organizations, aims to get commercially viable zero-

emission vessels operating along deep-sea trade

routes by 2030.

Regional cooperation is also active in supporting the

decarbonization of international maritime transport.

For instance, the Pacific Blue Shipping Partnership

launched by Fiji, Kiribati, the Marshall Islands, Samoa,

the Solomon Islands, Tuvalu and Vanuatu, commits to

a 40 per cent reduction in carbon emissions for Pacific

shipping by 2030 and full decarbonization of the

sector by 2050.

More recently, 22 developed and

developing countries signed in 2021 the Clydebank

Declaration with the aim of establishing six zero carbon

emission maritime routes between two or more ports

around the world by 2025.

International cooperation is also critical to secure the

large amount of financing required for decarbonizing

shipping (Christensen, 2020). In this context, the

IMO and Norway launched the Green Voyage 2050

project to support developing countries, including

small-island developing states (SIDS) and LDCs, in

meeting commitments to climate change and energy

efficiency goals in shipping (IMO, 2019b).

Similarly,

the Pacific Blue Shipping Partnership is seeking

US$ 500 million from multilateral and bilateral

development finance and the private sector to retrofit

existing cargo and passenger ferries with low-carbon

technologies and to buy zero-emission vessels.

The WTO can also support the efforts to decarbonize

international maritime transport, for example,

by facilitating reductions in barriers to trade in

goods and services involved in the production

process of low-emission fuels for shipping (see

Chapter F); by ensuring that trade-related regulatory

changes, including energy efficiency requirements,

are non-discriminatory; and by ensuring that the views

of interested parties, including developing countries,

are taken into account in discussions at the WTO on

the trade impacts of decarbonizing shipping.

Moreover, as discussed in Chapter C, WTO rules

can help to ensure that trade-related climate change

mitigation measures, such as taxes, support measures

and regulatory measures, applied in shipping for

decarbonization purposes are transparent and

do not distort the shipping market. For example,

notifications under the General Agreement on Trade

in Services (GATS) and the exchange of information

in the Council for Trade in Services could increase

regulatory transparency with respect to shipping-

related decarbonization measures (e.g., tonnage and

bunker taxes), and could contribute to further increase

the predictability of trade policy and the credibility of

policy commitments to decarbonize the sector.

(ii) Air transport

International aviation is the most carbon-intensive

mode of transport and is estimated to be responsible

for 1.3 per cent of global CO

emissions (ICAO,

2017).

Emissions from international aviation are

expected to increase through 2050 by a factor

ranging from approximately 2 to 4 times the 2015

levels, depending on the type of emissions and the

scenario used (ICAO, 2019). Although decarbonizing

aviation remains challenging, it has become an

integral part of business strategies in the sector.

Several international and regional initiatives are being

introduced or implemented by both public and private

stakeholders to support the transition to a low-carbon

aviation industry.

The International Civil Aviation Organization (ICAO)

adopted in 2016 the Carbon Offsetting and Reduction

Scheme for International Aviation (CORSIA) to allow

aircraft operators to buy emissions reduction offsets

from other sectors to compensate for any increase

in their own emissions above 2020 levels, thereby

achieving carbon neutral growth from that year.

The mandatory phase of CORSIA will start in 2027.

In addition, ICAO also promotes aircraft technology

improvements, operational improvements and

sustainable aviation fuels to contribute to the global

aspirational goals of 2 per cent annual fuel efficiency

improvement for the international aviation sector

through 2050 and carbon neutral growth from 2020

onwards.

OPINION PIECE

By Sophie Punte

Managing Director of Policy, We Mean Business Coalition,

and Founder, Smart Freight Centre

Building momentum for zero-

emissions freight movement

International trade is

indispensable. Yet the vital role

played by freight transportation

and logistics is often forgotten.

Only now are leaders waking

up to how vulnerable the supply

of essential goods is in times

of crises, whether as a result of

pandemics, international conflicts,

or climate-related disasters. A

sector that contributes around

11 per cent of both global CO

emissions and global GDP

and constitutes a reliable and

sustainable transport system can

play a critical role in the transition

to a decarbonized future as well

as in adaptation to the impacts of

climate change.

The key to delivering a zero-

emissions freight industry lies in

international cooperation based on

the Paris Agreement and the UN

Sustainable Development Goals.

First, to reduce emissions and

respond to supply chain shocks

or disruptions, we need increased

transparency in the logistics

supply chain. Carbon emissions

are an indicator that does not lie.

Price can be negotiated up or

down but you cannot negotiate

the actual CO

footprint, and that

makes it a more reliable indicator

than prices on which to base

decisions. Smart Freight Centre’s

Global Logistics Emissions

Council (GLEC) Framework – a

methodology for harmonizing

the calculation and reporting

of the logistics GHG footprint

across supply chains – and

soon the ISO 14083 standard,

allow for consistent calculation

and reporting of global logistics

emissions. If coupled with

blockchain technology, the sector

could deliver a transparency

revolution. This trend will go

even further with the upcoming

International Sustainability

Standards Board (ISSB) standard,

as well as and EU and US

regulations requiring companies to

disclose sustainability and climate

information that is relevant to

investors and stakeholders.

Second, we must go all out to

decarbonize freight transport.

Solutions range from sustainable

aviation fuel and zero-emission

ships and trucks, to fleet

efficiency, a shift to less carbon-

intensive transport modes

and reducing freight demand.

A complex but fortunately

increasingly aligned number of

initiatives is bringing stakeholders

together to deliver these solutions.

The 50+ companies of the First

Movers Coalition, supported by

initiatives such as the Mission

Possible Partnership, Smart

Freight Centre and Climate

Group, send market demand

signals for zero-emission aviation,

shipping and trucking. Carbon

offsetting and CO

removal should

be used as a last resort where

mitigation is not (yet) possible,

but not as an alternative to action.

A much-preferred service now

offered by several logistics service

providers is “carbon insetting”:

customers’ emissions are reduced

within the logistics sector, helping

to drive investment into greener

technologies and strategies.

Third, collaboration and

supportive policy is critical,

and can take various forms.

For example, the Sustainable

Trade Initiative works with

600 companies and governments

on new sustainable production

and trade models in emerging

economies across 12 sectors, all

of which involve transport. Policies

that cut across trade and climate

include carbon border adjustment

mechanisms, fossil fuel subsidy

reforms, renewable energy trading

and technology transfer. The We

Mean Business Coalition focuses

on raising policy ambition with the

backing of leading businesses that

are setting science-based targets

and taking action.

Governments, businesses and

civil society all have every reason

to work together in pursuit of

carbon neutrality and sustainability

in international transport. The

benefits for international trade

and the climate will be felt for

generations to come.

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The International Air Transport Association (IATA), the

trade association of the world’s airlines, approved in

2021 a resolution for the global air transport industry

to achieve net-zero carbon emissions by 2050.

The financial sector is also active in supporting the

decarbonization of the aviation industry. For instance,

the Aviation Climate-Aligned Finance Working Group,

launched in 2022 by several international lenders to

the aviation sector, commits the participating financial

institutions to annually disclose the degree to which

GHG emissions from aircraft, airlines, and lessors

they finance align with the 1.5°C climate targets.

The WTO can also support the transition to a low

carbon aviation industry. As noted in Chapter F,

reducing barriers to trade in climate-friendly aircraft

components, such as electric and hybrid-electric

engines, could contribute to decarbonizing the sector

and stimulate carbon-abating innovations. Improved

access to software platforms, particularly if bound

under the WTO Agreements, could help optimize

available seats or air freight capacity in aircrafts by

shifting traffic onto lower load flights by relying on

real-time data to dynamically adjust prices, which

would contribute to decarbonization (ITF, 2021b).

Moreover, carbon emissions could also be reduced

by fostering trade in digital services, such as

teleconferencing, to reduce demand for business-

related flights (Munari, 2020).

Cooperation at the WTO could also improve the

operational efficiency of the sector. Although air

transport is largely excluded from the scope of the

GATS,

the GATS does apply to measures affecting

three aviation sub-sectors: aircraft repair and

maintenance, computer reservation system services,

and the selling and marketing of air transport

services.

Further liberalization of aircraft repair and

maintenance services could enable airlines to gain

access, both domestically and in foreign destinations,

to a wider range of suppliers able to deal with climate-

friendly aircrafts. Similarly, opening up access to

foreign airport operators and the capital injections

they could potentially bring could help invest in

new and retrofitted energy-efficient infrastructures,

electrified ground-handling services, low-energy

vehicles and equipment, and zero-cargo energy and

fuel sources (ATAG, 2020; ITF, 2021b; Nieto, Alonso

and Cubas, 2019).

(iii) Road transport

Road freight transport is critical for the entire logistics

chain. International road freight transport is estimated

to account for 3.7 per cent of global carbon emissions

(OECD, 2022d). Road freight is also estimated to

account for 53 per cent of carbon emissions in global

trade-related transport, a share that could rise to 56

per cent by 2050 if current trends continue (WEF,

2021).

Decarbonizing the road freight transport sector is

particularly challenging and requires coordinated

actions. For instance, no single fuel solution can

meet operators’ needs and therefore a variety of

technologies must be pursued in parallel to achieve

a decarbonization of road freight transport (IRU,

2020). International cooperation on low-carbon road

transport remains, however, more fragmented than

other modes of international transport.

At the 2021 United Nations Climate Change

Conference (COP26), a large number of

governments, vehicle manufacturers, shippers and

financial institutions, signed the Glasgow Declaration

on Zero-Emission Cars and Vans, committing to

ensuring that new cars and vans being sold by 2035

in leading markets, and by 2040 for the rest of the

world would be zero-emission.

In addition, 15 high-

income economies signed a Global Memorandum

of Understanding on Zero-Emission Medium- and

Heavy-Duty Vehicles to work together toward

increasing sales of new zero-emission trucks and

buses to 30 per cent by 2030 and to 100 per cent

by 2040.

In 2021, the International Road Transport

Union (IRU), which represents the road transport

industry in over 80 countries, launched a Green

Compact to achieve carbon neutrality by 2050 (IRU,

2021).

These initiatives complement other projects, such

as the World Economic Forum’s (WEF) Road

Freight Zero initiative established in 2020 and

designed to help industry leaders jointly develop

solutions, including action plans for scaling up

finance mechanisms and new lending and investment

products.

Like the decarbonization of other modes of

international transport, the WTO can support

efforts to reduce carbon emissions from road freight

transport by facilitating the access and deployment

of renewable energy and energy-efficient goods,

services and technologies, including electric cars

and trucks (see Chapter F), and by promoting non-

discriminatory trade-related regulations, including

energy efficiency requirements. Trade-related

transport emissions could, to some extent, also be

reduced by minimizing delays when clearing customs

(Duval and Hardy, 2021; Reyna et al., 2016).

In this context, the implementation of the WTO’s

Trade Facilitation Agreement (TFA), especially its

provisions on single windows (i.e., single entry points

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WORLD TRADE REPORT 2022

at which traders can lodge standardized information

and documents required for trade and transport), pre-

arrival processing, electronic payment, and separation

of release from final determination of customs duties,

taxes, fees and charges, can speed up customs

clearance, possibly reducing some carbon emissions

from international trade.

to ensure that the decarbonization

of supply chains limits market

fragmentation

As discussed previously, decarbonizing supply

chains can be achieved in different ways (see

also Chapter C). However, much of the value of

decarbonizing supply chains will likely come from

the ability of economic operators to demonstrate and

communicate their emissions reduction efforts to

potential stakeholders. In that context, sustainability

certification and labelling schemes can be important

instruments to further incentivize firms to pursue the

decarbonization of their value chains.

The multiplication of sustainability certification and

labelling schemes is a visible sign of the rapidly

expanding global market for sustainable products.

In recent decades, many governments, producers,

retailers and non-governmental organizations around

the world have promoted such schemes to strengthen

the market incentives for producers to opt for more

sustainable production, while cultivating consumer

awareness of environmental and social issues. For

instance, in agriculture, the use of sustainability

certification and labelling schemes has increased

markedly. The value of the global organic food market

has more than quadrupled since 2000, exceeding

120billion Euros in 2020 (FiBL, 2022).

However, the proliferation of sustainability schemes in

recent years has raised concerns about their effect on

trade costs and possible impacts on market access

for exporters, particularly from developing countries.

Costs increase when the schemes multiply across

geographic or thematic areas, fail to converge or

recognize each other’s equivalence, or when they do

not include opportunities for collaboration in areas

such as training or inspection (WTO and UNEP, 2018).

Trade could play an important role in strengthening

the markets for sustainable products and in

expanding related economic opportunities. For trade

to do so, it must, however, be underpinned by an

open, transparent, rules-based and inclusive trading

system. As part of this, it is important to ensure that

sustainability requirements are transparent, and are

based on relevant international standards, while not

creating any unnecessary barriers to trade (WTO and

UNEP, 2018).

Thus, while vigorous action is needed to improve

the sustainability of global supply chains, it is also

important to take into account the concerns of various

stakeholders, including in developing countries.

The WTO plays an important role in contributing

to a better understanding of the trade impact of

environmental policies, sustainability certification

and labelling schemes and can help to identify best

practices. For example, the CTE has been an important

forum for members, including developing ones, to

present and comment on recent climate proposals

related to various sectors, including agriculture and

forestry.

Other aspects of sustainable supply chains

have also been discussed in the CTE, such as the need

to enhance the availability of comparable and reliable

information on the environmental impact of products.

Ongoing initiatives at the WTO could further

contribute to support the decarbonization of supply

chains. For instance, the Trade and Environmental

Sustainability Structured Discussions (TESSD),

launched in 2021, intend to identify and compile

best practices and explore opportunities to ensure

that trade and trade policies contribute to promoting

sustainable supply chains and addressing the

challenges and opportunities arising from the use of

sustainability standards, particularly for developing

members. The Informal Dialogue on Plastics Pollution

and Environmentally Sustainable Plastics Trade

could also promote low carbon supply chains by

contributing to efforts to reduce plastics pollution

and promoting the transition to more environmentally

sustainable trade in plastics.

5. Conclusion

Trade, like any economic activity, generates GHG

emissions. Carbon emissions released by the

production and transport of traded products are

estimated to represent about one-third of global

carbon emissions, a share that has been slowly

declining in recent years. While estimating the

amount of carbon emissions associated with

international trade is important to identify climate

mitigation priorities, it is also important to determine

what impacts trade actually has on GHG emissions.

International trade affects GHG emissions in several

different ways. Trade generates GHG emissions

through the production, transportation, distribution

and consumption of traded products, and it increases

emissions by stimulating economic activity through

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increased income. On the other hand, trade can

facilitate changes in production methods that

reduce emissions per units of output, and modify the

sectoral composition of the economy by allowing the

production and consumption of goods and services to

take place in different regions.

Overall, international trade has been found to lead to

a relatively limited net increase in carbon emissions

relative to a counterfactual “autarky” situation which

would be associated with a significantly lower welfare

level. Decarbonizing international trade is, however,

essential to support the transition to a low carbon

economy.

A successful decarbonization pathway for

international trade requires adequately measuring

and verifying carbon emissions resulting from

trade, improving carbon efficiency in production

and transportation, and developing environmentally

sustainable supply chains. International trade

cooperation, including through the WTO, can play

an important role in supporting and scaling up these

efforts.

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Endnotes

1 Due to a lack of data, available estimates of carbon

emissions embedded in international trade cover mostly

high- and upper-middle-income countries. Estimates are

only available for a few lower-middle income countries.

Estimates for LDCs are not available (OECD, 2022d).

2 The literature distinguishes between the "pollution haven

effect" and the "pollution haven hypothesis". The pollution

haven effect assumes that an increase in environmental

standards reduces exports (or increases imports) of

carbon-intensive goods. The "pollution haven hypothesis"

assumes a reduction in trade costs results in production

of carbon-intensive goods shifting towards countries with

lower environmental standards. The existence of "pollution

haven effects" is a necessary, but not a sufficient condition,

for the "pollution haven hypothesis" to hold. While some

studies find evidence of "pollution haven effects", there is

no empirical evidence of the "pollution haven hypothesis"

(Copeland, Shapiro and Taylor, 2022).

3 The relationship between environmental pollution and

income level might not be linear, but inverted U-shaped, as

described by the Environmental Kuznets Curve. See Stern

(2017b) for recent evidence of a decoupling of emissions

and GDP growth in many advanced economies over recent

decades, consistent with the Environmental Kuznets Curve.

4 Evidence that exporters have lower emission intensities

than other firms is provided by Richter and Schiersch

(2017) for German manufacturing firms, and by Banerjee,

Roy and Yasar (2021) for Indonesian firms.

5 Evidence that becoming an importer of foreign intermediates

boosts energy efficiency is provided by Imbruno and

Ketterer (2018) for the Indonesian manufacturing sector in

the period between 1991 and 2005. Similarly, an analysis

of the impact of China’s accession to the WTO shows that

a 1 per cent reduction in input tariffs decreased the sulphur

dioxide (SO

) emission intensity of Chinese firms by 6 to 7

per cent (Cui et al., 2020).

6 A large body of literature has shown that this mechanism is

relevant in developing countries (Gorodnichenko, Svejnar

and Terrell, 2010; Shu and Steinweider, 2019), but also in EU

countries in response to Chinese import competition (Bloom,

Draka and Van Reenen, 2016). These studies, however, do

not explicitly focus on environmental innovation.

7 Gutiérrez and Teshima (2018), however, also find evidence

of a reduction in Mexican production facilities’ investments

in pollution abatement.

8 Barrows and Ollivier (2021) find that, while foreign demand

growth increased carbon emissions growth rates for Indian

firms exporting manufactures over the period between

1998 and 2011, technological upgrading in response to

increased foreign demand mitigated roughly half of this

increase.

9 Shapiro (2021), however, also shows that eliminating the

environmental bias in trade policy would imply substantial

carbon emissions increases in Europe and very slight

increases in China, while other regions would see their

emissions decrease.

10 See Antweiler, Copeland and Taylor (2001), and

subsequent contributions including Cole and Elliott (2003),

Grether, Mathys and de Melo (2009), Levinson (2009,

2015), Managi, Hibiki and Tsurumi (2009), and Shapiro and

Walker (2018).

11 Conversely, trade liberalization following the North

American Free Trade Agreement (NAFTA) was found to

decrease particulate matter (PM) and sulphur dioxide

(SO

) intensities of production in the United States through

within-plant changes, including the adoption of new

technologies and fragmentation of production in response

to differences in environmental regulation across the United

States and Mexico (Cherniwchan, 2017).

12 For example, United States-Mexico-Canada RTA and

European Union-United Kingdom RTA.

13 See “Decisions and Recommendations Adopted by the

WTO Committee on Technical Barriers to Trade since 1

January 1995”, WTO official document number G/TBT/1/

Rev.14, pages 62-64, which can be consulted at https://

docs.wto.org/.

14 A list of the organizations operating at the international

and regional levels in promoting quality infrastructure

and that are part of the International Network on Quality

Infrastructure can be found here: https://www.inetqi.net/

about/members/.

15 See, for instance, Minutes of the Meeting of the Committee

on Trade and Environment, November 2020, WT/

CTE/M/70, para 2.24; and Minutes of the Meeting of the

Committee on Technical Barriers to Trade, November 2021,

G/TBT/M/85: paras 2.171- 2.175, which can be consulted

at https://docs.wto.org/.

16 Although not discussed in detail here, international

cooperation on international rail transport is also important

to decarbonize part of international trade.

17 Carbon offsetting allows airlines and passengers to

compensate for the carbon released by the aircraft by

investing in carbon reduction projects in other areas

(e.g., planting trees). Direct air carbon capture is a new

technology which can remove carbon emissions directly

from the ambient air.

18 Maritime transport emits other types of air pollution,

including nitrogen oxides (NOx), sulphur oxides (SOx) and

particulate matter, and contributes to marine pollution, such

as oil spills and littering.

19 See https://www.imo.org/en/MediaCentre/HotTopics/

Pages/Cutting-GHG-emissions.aspx.

20 See https://www.globalmaritimeforum.org/getting-to-zero-

coalition.

21 See https://www.councilpacificaffairs.org/news-media/

pacific-blue-shipping-partnership/.

22 See https://www.gov.uk/government/publications/cop-26-

clydebank-declaration-for-green-shipping-corridors/cop-

26-clydebank-declaration-for-green-shipping-corridors/.

23 See https://greenvoyage2050.imo.org/.

24 See https://www.mcttt.gov.fj/decarbonising-domestic-

shipping-industry-pacific-blue-shipping-partnership/.

25 According to the IEA, CO

emissions from domestic and

international aviation accounted for about 2.8 per cent of

global CO

emissions from fossil fuel combustion in 2019.

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26 Only emissions from international flights, which account

for around 65 per cent of the aviation industry’s CO

emissions, are covered by ICAO, whereas emissions

from domestic aviation are covered by national pledges

under the 2015 Paris Agreement (https://www.un.org/en/

climatechange/paris-agreement).

27 ICAO's plan is to abate CO

as much as possible from

in-sector solutions such as sustainable aviation fuels,

new aircraft technology, more efficient operations and

infrastructure, and the development of new zero-emissions

energy sources such as electric and hydrogen power. Any

remaining emissions would be addressed through carbon

capture and storage and carbon offsets.

28 See https://climatealignment.org/.

29 While digitalization acts as an important driver of

decarbonization, digital technologies contribute to between

1.4 per cent to 5.9 per cent of GHG emissions (The Royal

Society, 2020). This figure is expected to rise given the

increasing internet use. Improving energy efficiency in data

centers and data transmission network and switching to

renewable energy sources can contribute to low-carbon

digitalization.

30 For example, the GATS does not cover traffic rights (i.e.,

the right for airlines to operate and/or to carry passengers,

cargo and mail from, to, within, or over the territory of a

WTO member) and services directly related to the exercise

of traffic rights.

31 Moreover, developments in the sector are meant to be

kept under regular review, with a view to «considering the

possible further application of the Agreement» (GATS Annex

on Air Transport Services, paragraph 5, available at https://

www.wto.org/english/docs_e/legal_e/26-gats_02_e.

htm#annats).

32 Some WTO members are of the view that the coverage of

the GATS should extend to ground-handling and airport

management services. See, for instance, "Review of the

GATS Annex on Air Transport Services - Communication by

the European Union and its Member States" (WTO official

document number S/C/W/280, accessible via https://docs.

wto.org/.).

33 See https://www.gov.uk/government/publications/cop26-

declaration-zero-emission-cars-and-vans/cop26-

declaration-on-accelerating-the-transition-to-100-zero-

emission-cars-and-vans/.

34 See https://globaldrivetozero.org/mou-nations/.

35 See https://www.weforum.org/projects/decarbonizing-

road-freight-initiative/.

36 It should be emphasized, however, that reducing delays in

clearing customs could also increase trade (a scale effect)

and therefore trade-related transport emissions.

37 Other complementing trade-related initiatives include

the United Nations Economic Commission for Europe

(UNECE) Customs Convention on the International

Transport of Goods under Cover of TIR (International

Road Transport) Carnets which provides a global transit

system that streamlines procedures at borders and reduces

administrative burdens for international road transport and

logistics firms.

38 Various climate proposals have been discussed recently in

the CTE, including the Forest, Agricultural and Commodity

Trade (FACT) Initiative co-chaired by the United Kingdom

and Indonesia, which seeks to break the links between

commodity production and net deforestation globally

(see Minutes of the Meeting of the Committee on Trade

and Environment, October 2021, WT/CTE/M/73, para.

1.77); and the European Union’s new strategy to reduce

habitat loss and promote deforestation-free supply chains

(see Minutes of the Meeting of the Committee on Trade

and Environment, November 2020, WT/CTE/M/70, para

1.73). Paraguay also shared experiences on its agricultural

system of soil rotation and biotechnology, which increased

agricultural productivity without modifying land use,

thereby preserving forests (see Minutes of the Meeting of

the Committee on Trade and Environment, November 2020,

WTO official document number WT/CTE/M/70, para 1.60,

accessible via https://docs.wto.org/).

39 See, for instance, the discussion of the European Union’s

Single Market for Green Products Initiative (see Minutes of

the Meeting of the Committee on Trade and Environment,

October 2014, WTO official document number WT/

CTE/M/58, para 1.1, accessible via https://docs.wto.org/).

The contribution of trade

in environmental goods

and services

The transition to a low-carbon economy depends, among

other things, on the development, adoption and diffusion of

environmental goods, services and technologies. This chapter looks

at the extent to which trade in environmental goods and services

can contribute to the low-carbon transition. Although international

trade in environmental goods is uneven across regions, the sector

is very dynamic. While the WTO agreements ensure that trade in

environmental goods and services flows as smoothly, predictably

and freely as possible, the WTO could make an even greater

contribution to the development and deployment

of environmental technologies by addressing relevant trade

barriers and improving data quality on trade and trade policy

of environmental goods and services.

Contents

1. Introduction 118

2. There is scope for intensifying trade in environmental

goods and services 118

3. Trade in environmental goods and services can

contribute to climate change mitigation 123

4. The development and deployment of environmental goods

and services require greater international cooperation 127

5. Conclusion 131

Key facts and findings

• Environmental goods and services cover a broad range of products used to measure,

prevent, limit, minimize or correct environmental damages, including those related

to climate change.

• Although high-income countries are the main exporters and importers of

environmental goods, exports of environmental goods from middle-income countries

increased tenfold between 2000 and 2020.

• Although tariffs on environmental goods are, on average, lower than those for other

goods, they remain relatively high in low-income countries.

• The elimination of tariffs, together with the reduction in non-tariff measures,

on a subset of energy-related environmental goods and environmentally preferable

products could increase total exports by 5 and 14 per cent above the baseline,

respectively, by 2030. It could further reduce carbon emissions by 0.6 per cent

through improvements in energy efficiency.

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1. Introduction

Climate change mitigation can be enhanced by

developing, adopting and deploying environmental

technologies (ET). International trade in environmental

goods and services (EGS) can enable access to ET

embodied in environmental products, and can help

diffuse these technologies. Opening up trade in EGS

further could potentially benefit the environment.

This chapter presents available information on

the latest trend in trade in EGS and related trade

barriers, pointing to a number of data-related

issues and challenges. It then reviews the various

mechanisms through which trade in EGS can reduce

environmental harm, including mitigating carbon

emissions. Simulation results quantifying the effect

of opening up trade in environmental goods (EG) on

trade, gross domestic product (GDP) and carbon

emissions are also presented. The chapter concludes

by outlining how international cooperation and the

WTO can further boost trade in EG and access to ET.

2. There is scope for intensifying

trade in environmental goods

and services

Although the environmental industry is still emerging

in many developing countries, it is a very dynamic

and fast-growing sector providing important job

opportunities. While there is no publicly available

statistics on the size of the environmental industry,

the environmental technology market is estimated

at US$ 552.1 billion in 2021 and could reach

US$ 690.3 billion by 2026 (MarketsandMarkets,

2022). The environmental industry remains highly

segmented between well-established and new

cutting-edge environmental technologies. Despite the

fact that many new environmental technologies are

developed in high income economies, the production

of many environmental goods and services is spread

across developed and developing countries, forming

regional or global value chains (GVCs).

(a) Environmental goods and services

serve to improve environmental

outcomes

EGS have been defined as goods and services

used to measure, prevent, limit, minimize or correct

environmental damage to water, air and soil, as well

as problems related to waste, noise and eco-systems

(OECD and Eurostat, 1999). They include cleaner

technologies, products and services that reduce

environmental risks and minimize pollution and

resource use.

While the concept of EGS is rather intuitive,

defining the scope of EGS has proven to be a

complex exercise, in particular in the context of trade

negotiations (see Section F.4). The environmental

objective and the main end-use purpose of EGS are

two of the main criteria that have been considered

to delimit the scope of EGS. Over the years, various

classifications and lists of EGS have been developed

for different purposes, including statistical analysis

and trade negotiations.

For instance, the so-called “OECD list of EG” (OECD

list), stemming from joint work by the OECD and

Eurostat, illustrates the scope of the environment

industry for analytical and statistical purposes

(OECD, 1999).

The list is broad, as it was not

compiled with a view to being used for negotiations,

and distinguishes between three broad categories of

products.

(i) Pollution management technologies and

products comprise goods and services that are

clearly supplied for an environmental purpose

and have a significant impact in reducing

polluting emissions.

They include technologies

and products supplied for air pollution control;

wastewater management; solid wastewater

management; remediation and clean-up; noise

and vibration abatement; and environmental

monitoring, analysis and assessment.

(ii) Cleaner technologies and products

comprise goods and services that reduce or

eliminate negative environmental impacts, but

which are often supplied for other purposes than

environmental ones.

They are directly related to

the efficiency criteria, as well as to the reduction

of environmental impacts during their end use.

(iii) Resources management technologies and

products include the design, construction,

installation or provision of technologies and

products related to reducing the impact of

intensive natural resource extraction on various

ecosystems.

In particular, these EGS address

indoor air pollution control; water supply;

recycled materials; renewable energy plant; heat/

energy savings and management; sustainable

agriculture, fisheries and forestry; natural risk

management and eco-tourism.

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

While EGS can cover ET, whose main (and often sole)

purpose is to address or remedy an environmental

problem, they can also cover products stemming

from eco-innovation. Eco-innovation encompasses

all forms of technological and non-technological

innovation whose main purpose might be unrelated

to the environment, but which possesses certain

environmental benefits arising during the production

(e.g., organic production), consumption and use

(e.g., efficient cars) or disposal stage (e.g., jute),

compared to substitutes or like products.

Products that, over their entire life cycle, including

production, processing, consumption and disposal,

cause significantly less environmental harm than

alternatives are commonly known as environmentally

preferable products (EPP). In that context, the United

Nations Conference on Trade and Development

(UNCTAD) identified several products that are

more environment-friendly than their petroleum-

based competitors, or whose production and sales

contribute significantly to the preservation of the

environment (UNCTAD, 1995).

Environmental services (ES) often complement EG,

and in many cases, the provision and trade of ES

drive the growth of trade in EG (Steenblik, Drouet

and Stubbs, 2005). Environmental services have

been estimated to represent more than 65 per cent of

the market value of the environmental industry (EBI,

2017). Yet, ES are often overshadowed by EG despite

the documented synergies existing between EG and

ES. Measuring trade in ES and barriers to trade in

ES is particularly challenging. Indeed, both the

quality and the availability of data vary significantly,

depending on the mode through which ES are traded

(Sauvage, 2014). WTO members define ES according

to the so-called Services Sectoral Classification List

(W/120), based on the Provisional Central Product

Classification

(CPC), which distinguish between

sewage services; refuse disposal services; sanitation

services; and other ES, including cleaning services of

exhaust gases; noise abatement services, and nature

and landscape protection services.

In addition to ES, numerous ancillary services, such as

business services, research and development (R&D),

consulting, contracting and engineering, construction,

distribution, transport, and repair and maintenance are

essential to the sales, delivery, installation, functioning

and maintenance of environmental plants, equipment

and other goods (Nordås and Steenblik, 2021;

Sauvage and Timiliotis, 2017).

The Asia-Pacific Economic Cooperation (APEC)

economies recently endorsed a Reference List of

Environmental and Environmentally Related Services

that identifies both ES and relevant ancillary services

based on the CPC 2.1 classification (APEC, 2021).

(b) Trade in environmental goods

has been dynamic, but not equally

so in all regions

Measuring trade in EG can be a difficult task,

in particular when the purpose is to generate

internationally comparable statistics. Trade-flow data

on goods are collected and organized according to

Harmonized System (HS) codes,

but few of the HS’s

six-digit subheadings (HS6) specifically cover goods

that are mainly used for environmental purposes.

A large share of EG is classified under generic

subheadings, and is not separately identified, making

it difficult to measure the size and pattern of world

trade in the relevant goods. Photovoltaic (PV) cells

and modules, for example, have been lumped together

under the same HS subheading as light-emitting

diodes (LEDs), the trade of which is also large and

growing rapidly. As a result, it has been impossible

to get internationally consistent information on actual

trade in these solar energy technologies. Also,

because of the difficulty in separating EG from other

goods, and because some of these products can both

benefit and harm the environment depending on their

use (i.e., dual use), most trade data actually result in

an overestimation of trade in EG. Nevertheless, the

situation should improve, as the 2022 revisions to

the HS include several amendments that separate

EG from previous subheadings that covered other

goods as well, often not of environmental interest

(Steenblik, 2020).

Trade in EG, as defined in the OECD list and

covering 124 HS-6 tariff lines, accounted for 5 per

cent of global trade in 2020. High-income countries

accounted for the largest share of EG exports

(69.82 per cent), followed by middle-income

countries (30.16 per cent) and low-income countries

(0.02 per cent). For the period 2000-20, available

statistics suggest that both exports and imports of

EG increased relatively quickly for middle-income

countries, while for low-income countries, exports

mostly remained at the same level and imports

increased at variable speeds (see Figure F.1). As for

high-income countries, both their exports and imports

increased, but only modestly.

As regards trade in ES, the availability and quality

of data is even more limited, which prevents a

comprehensive assessment of the evolution of

international trade in ES. Preliminary WTO estimates

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WORLD TRADE REPORT 2022

suggest that some US$ 20 billion of traditional ES,

including waste disposal, recycling, sanitation and

cleaning of pollution, were traded in 2017, accounting

for just 0.2 per cent of world services trade (WTO,

2019).

However, growing environmental concerns are

boosting demand for ES worldwide. World trade

in ES has grown by 4 per cent on average annually

since 2005. Establishment of a commercial presence

abroad (e.g., locally-established affiliate, subsidiary,

or representative office of a foreign-owned and

-controlled company) is the most important mode

of supply in ES, as many traditional ES are highly

dependent on infrastructure and require a continuous

and long-term local presence. Case studies examining

certain ES, for example ecotourism, have also shown

that trade in ES can provide economic opportunities

and incentivize the conservation of natural resources

in developing countries (see Box F.1).

goods and services are still significant

On average, tariffs for EG are lower compared to

tariffs for other goods (see Figure F.2). While average

applied tariffs on EG are around 1.4 per cent in high-

income countries, they go up to 7.3 per cent in low-

income countries.

EG trade is also affected by various non-tariff

measures (NTMs). The use of technical barriers to

trade (TBT) measures is of particular relevance to

EG, as EG are often subject to technical regulations

and conformity assessment procedures. The intensity

of TBT measures tends to be higher in high-income

economies. High-income economies apply, on

average, 11 TBT measures on EG imports, middle-

income economies apply five TBT measures and low-

income economies apply two TBT measures (see left

panel of Figure F.3). The number of TBT measures

applied to EG tends to be, on average, similar to these

applied on other goods.

Accounting for the share of imported EG affected by

NTMs, 81 per cent of EG tariff lines at the six-digit

HS level imported in high-income countries are, on

average, affected by at least one TBT measure, as

opposed to an average of 45 per cent in middle-

income countries and 36 per cent in low-income

countries, respectively (see right panel of Figure F.3).

It is important to note, however, that metrics based

on the count of NTMs applied, such as the intensity

and frequency indices of NTMs, are imperfect

measures of the trade restrictiveness of NTMs, as

they only provide an indication of the prevalence of

NTMs, without accounting for the effect of different

measures on trade, which may be more or less

Figure F.1: Trade in environmental goods has grown in most regions, but at different speeds

Source: Authors’ calculation, based on trade figures from the UN Comtrade database.

Note: The coverage of EG is based on the OECD list, which covers 124 tariff lines at the six-digit HS level. Income groups follow the

World Bank classification.

EG export growth index

(2000 = 100)

EG import growth index

(2000 = 100)

Low-income

Middle-income High-income World merchandise

2000

2005

2010

2015

2020

2005

2010

2015

2020

2,000

1,500

1,000

500

2,000

1,500

1,000

500

2000

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

Figure F.2: Tariffs on environmental goods are low compared to those for other goods,

but remain significant in low-income countries

Source: Authors’ calculation, based on 2019 tariff data from the WTO Integrated Database (IDB) and 2019 trade figures from the UN

Comtrade database.

Note: The coverage of EG is based on the OECD list, which covers 124 tariff lines at the six-digit HS level. Income groups follow the

World Bank classification.

Environmental goods Other goods

Applied tariffs (%)

Low-income Middle-income High-income

7.3

11.0

4.5

7.6

1.4

2.8

Box F.1: Ecotourism as an economic incentive to preserve nature in Costa Rica

Ecotourism is a form of tourism that emphasizes the maintenance and preservation of nature and puts fauna,

flora and cultural heritage at the centre of attractions for tourists. While ecotourism is a promising industry,

its success hinges on conserving and protecting fragile natural areas while providing benefits to tourists and

contributing to community development.

Widely known for its rich biodiversity, Costa Rica has developed a diversified economy that includes

ecotourism. General tourism makes up 17-18 per cent of the country’s value of exports and contributes up

to 8 per cent of its GDP (Costa Rican Tourism Board, 2022a). Foreign tourist visits grew 43 per cent to

over 3 million between 2011 and 2019, a substantial number given that the country’s population is 5 million.

Although the COVID-19 pandemic has taken a heavy toll on the tourism industry, the number of foreign

visitors rebounded to 1.3 million in 2021 (Costa Rican Tourism Board, 2022b).

Because it can generate important revenues, ecotourism can serve as an economic incentive to preserve

natural resources. Since Costa Rica designated its first natural reserve in 1963, 26 per cent of the national

territory has been allocated to natural reserves. More than 70 per cent of tourists entering the country partake

in ecotourist activities, such as hiking or wildlife observation in national parks or biological reserves (Costa

Rican Tourism Board, 2022c).

Ecotourism can also promote the restoration of ecosystems that have been degraded, damaged or destroyed. For

example, in the 1980s, the Costa Rican government began to focus on the development of international ecotourism

and thereby took action to reverse deforestation, as in the 19th century and the first half of the 20th century, there

had been a significant decline in forest cover due to ranching and agriculture. Government incentives to increase

both forest cover and protected areas have allowed Costa Rica’s ecotourism sector to thrive (Tafoya et al., 2020).

By means of the revenues generated by natural reserves, visitors help to protect the species inhabiting these

ecosystems and to contribute to the conservation of the country’s national parks and the development of local

communities. For local residents, ecotourism often represents a better livelihood than existing alternatives

such as construction, transportation and small-scale agriculture (Hunt et al., 2015). Costa Rica’s experience

has shown that ecotourism can be a major force for promoting natural resource conservation and respect for

local communities.

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WORLD TRADE REPORT 2022

restrictive, or may even be trade-promoting (WTO,

2012).

The number of specific trade concerns (STCs)

raised and discussed by WTO members in WTO

committees also provides a useful indication of

the number of measures taken by members that

are sources of concern for exporters (WTO, 2012).

Between 2005 and 2020, some 126 STCs relating

to EG were raised in the WTO Technical Barriers to

Trade (TBT) committee, an average of eight STCs

per year. Measures underlying TBT-related STCs

on EG potentially affect a large value of trade. Over

the period 2005 to 2020, STCs covered an annual

average of US$ 42 billion in imports of EG.

In recent years, an increasing number of trade

remedies have also been applied to some EG,

such as solar panels and wind turbines. These

antidumping duties and countervailing measures can

be substantial, often over 100 per cent of the value of

the EG.

Given the limited information on applied measures

restricting trade in ES, the commitments of WTO

members in the General Agreement on Trade in

Services (GATS) give an idea of the willingness of

members to open their market for ES. ES are one

of the least-committed sectors under the GATS.

Only 59 WTO members (counting the European

Union as one member) have undertaken specific

commitments in at least one of the seven provisional

CPC sub-sectors. Several members have limited their

commitments to consulting and/or advisory services

in relation to ES, either across the entire range of

committed sectors or with respect to some sub-

sectors only.

On average, only 38 per cent of members committed

not to impose any new measures that would restrict

entry into the market or the operation of the ES (GATS

mode 1).

There is a high proportion, averaging

71 per cent, of full commitments for consumption of

ES abroad (GATS mode 2). The proportion of full

commitments for the establishment of a commercial

presence abroad to supply an ES (GATS mode 3) is,

on average, 57 per cent, with a relatively higher share

of full commitment (71 per cent) for sanitation and

similar services. Finally, 13 per cent of members have

taken full commitments for the temporary movement

of natural persons to supply ES (GATS mode 4).

The relatively modest level of binding commitments

in ES under the GATS stands in contrast with

levels of bindings on ES that have been achieved by

various WTO members in bilateral and regional trade

Figure F.3: The intensity of NTMs for environmental goods is higher for high-income countries

than for middle and low-income countries

Source: Authors’ calculation, based on 2019 TBT data from the UNCTAD TRAINS database.

Note: The coverage of EG is based on the OECD list, which covers 124 tariff lines at the six-digit HS level (HS-6). The left panel displays

the average number of TBT measures imposed by countries within an income group targeting a given EG or another good. The right panel

displays the average share of HS-6 lines that a country import subject to at least one TBT measure, among all the EG and other goods

HS-6 lines they import. The analysis covers 57 countries, encompassing 11 high-income countries (with the European Union counted as

one), 36 middle-income countries and 10 low-income countries.

Income groups follow the World Bank classification.

Environmental goods Other goods

Intensity of TBT measures in 2019

High-income

Middle-income

Low-income

Frequency of TBT measures in 2019 (%)

Low-income Middle-income High-income

82.0

81.3

44.4

45.5

52.8

36.4

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

agreements. Parties to services trade agreements

tend, on average, to go well beyond the commitments

they had undertaken in the GATS (WTO, 2019). This

is in part a reflection of the fact that most GATS

commitments date from 1995.

Trade-opening commitments on ES are, in part, limited

because the provisions of many traditional ES, like

sewage and refuse disposal, are natural monopolies

where only a single firm, typically a public operator,

supplies the ES with limited competition with other

companies. Natural monopolies tend to be prevalent

in traditional ES markets because some of these

ES, like the cleaning of roads and beaches, have the

characteristics of public goods.

Unless special

measures are taken, no single firm has an economic

incentive to provide the adequate level of service

and capture the economic returns. Some traditional

ES, like sewage services, also require high levels of

investment to build special distribution or collection

networks, which often create significant barriers

to entry. Governments are often reluctant to allow

private or foreign ownership of essential services for

fear that they would exploit consumers (WTO, 2010).

Other ancillary services, which facilitate the provision

of ES, but which are also used for other purposes are

also subject to numerous restrictions (USITC, 2013).

3. Trade in environmental goods

and services can contribute

to climate change mitigation

A broad range of EGS is particularly relevant to

climate change mitigation. For instance, energy-

related EG (EREG), including clean and renewable

energy, energy-efficiency and resource-efficiency

goods, can contribute to reducing greenhouse

(GHG) emissions.

Clean and renewable energy

goods cover all products required for the generation

of electricity, for example wind turbines, by methods

that are environmentally preferable to conventional

methods. Energy-efficiency goods help to manage

and restrain growth in energy consumption.

Resource-efficiency goods help to improve the

efficiency with which resources are used, and are,

by nature, close to energy-efficiency goods and to

clean and renewable energy goods, as they operate

through the same channels and aim to reduce energy

consumption.

Another category of environmental products

highly relevant in the fight against climate change

is goods and services essential to help to adapt

to climate change (see Chapter B). Examples

of such goods and services relevant to the

agricultural sector include stress-tolerant cultivars

(i.e., cultivated varieties of plants specifically

developed and bred for distinct traits), pesticides

for weed control, early warning weather systems,

equipment for renewable off-grid power generation,

irrigation technology and related engineering and

technical services, as well as agricultural extension

services (GCA, 2021).

(a) Trade in EGS can contribute to climate

change mitigation through three main

channels

Because EGS affect the environment in distinctive

ways, removing barriers to trade in such products

and facilitating the diffusion of ET can contribute

to climate change mitigation and adaptation and

other environmental objectives, including pollution

control, wastewater treatment, recycling, and organic

agriculture.

As with the general effects of trade on carbon

emissions (see Chapter E), the effects of trade in

EGS can be decomposed into scale, composition

and technique effects.

First, increased trade in EGS, all else being equal

(i.e., maintaining a constant mix of goods produced

and production techniques), would mean more

economic activity and more transport, and this would

increase emissions (scale effect). Opening trade

in EGS would lower their domestic price, raise real

income and increase demand for environmental

products, trade and economic activity.

Second, maintaining a constant scale of the economy

and constant carbon emissions intensities, the

lowering of tariffs and NTMs on imports of EGS would

lead to changes in countries’ allocation of resources

towards activities with either higher or lower emission

intensities depending on their respective comparative

advantages (composition effect).

Third, holding scale and composition constant,

improved access to EGS would encourage a switch

to low-carbon production techniques, and this would

reduce emissions (technique effect). This positive

trade effect on climate change mitigation captures

various channels. For instance, international trade

can accelerate the cross-country diffusion of ET,

making local production processes more efficient

and environmentally sound (Garsous and Worack,

2021). Trade provides an opportunity for developing

countries to adopt cleaner technologies and, in some

instances, to leapfrog the stage of intensive fossil

fuel energy use. Opening up trade in EGS can also

stimulate innovation spillovers through the diffusion of

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WORLD TRADE REPORT 2022

knowledge embodied in intermediate EGS. Reducing

trade barriers has been found to be associated

with a boost in environmental innovation globally

(Dechezleprêtre and Glachant, 2014).

Trade in EGS could also contribute to sustainable

development by supporting and creating additional

employment in the renewable energy sector and in

sectors implementing climate-friendly technologies,

including those promoting energy efficiency and

conservation. In particular, trade in EG can increase

demand for ES and ancillary services, including

those related to the sales, delivery, installation and

maintenance of EG and ET. Given that jobs in the

EGS industry tend to be higher-skilled, better paid and

more gender-inclusive, trade in EGS can contribute

to supporting a more just and inclusive low-carbon

economy (see Chapter C).

(b) Opening up trade in energy-related

environmental goods would reduce

emissions and raise GDP in all regions

Despite an extensive literature on trade in EGS,

the effect of trade in EGS to address specific

environmental issues has been less investigated and

is still not well understood. This is in part because

there is a lack of internationally comparable data on

trade in EG, with even fewer data available on trade

in ES, and in part because the mechanisms through

which trade in EGS affects carbon emissions and

other environmental outcomes are complex to capture

and to quantify.

Only a few empirical studies have focused on the

effect of opening up trade in EG on different types

of pollutions (de Alwis, 2015; Zugravu-Soilita, 2018,

2019) and on EG exports (He et al., 2015; Tamini

and Sorgho, 2018), and have found mixed results.

For instance, trade intensity in EG relative to GDP

has been found to reduce carbon dioxide (CO

)

emissions but to increase water pollution with no

impact on sulphur dioxide (SO

) (Zugravu-Soilita,

2018).

However, trade in EG has also been shown

to have no impact on total carbon dioxide and sulphur

dioxide emissions, although trade in EG improved

the emission efficiency of both pollutants (Zugravu-

Soilita, 2019).

Several studies also use modelling techniques to

assess the potential effects of opening up trade in EG

(Dijkstra and Anuj, 2016; Hu et al., 2020; Nimubona,

2012; Wan, Nakada and Takarada, 2018). However,

the large number of channels

through which trade in

EG can affect economic and environmental outcomes

makes the overall effect difficult to model.

The WTO Global Trade Model (GTM) was used to

fill part of the gap in the literature and analyse how

opening further trade in a subset of specific EG could

affect their trade, GDP and carbon dioxide emissions

(Bacchetta et al., 2022).

The model captures two

mechanisms through which trade in EG can affect

carbon emissions: improvements in energy efficiency

(mainly a technique effect) and the replacement of

non-renewable with renewable energy (a combination

of a technique and a composition effect). The

simulations focus on EREG, namely energy-efficiency,

resource-efficiency and clean and renewable energy

goods, that are most relevant to reducing carbon

emissions.

The set of EG is subsequently extended

to EPP because of their potential export interest for

a broad range of countries, including developing

economies and LDCs.

Four scenarios combining reductions in tariffs

and NTMs for EREG and EPP are considered:

(1) elimination of tariffs on EREG;

(2) elimination of tariffs and a 25 per cent

reduction in the ad valorem equivalent of NTMs

on EREG;

(3) elimination of tariffs on EREG and EPP and a

25 per cent reduction in the ad valorem

equivalent of NTMs on EREG; and

(4) elimination of tariffs and a 25 per cent reduction

in the ad valorem equivalent of NTMs on EREG

and EPP.

The elimination of tariffs and the reduction in NTMs

on EREG and EPP (as per scenario 4) would raise

global exports (expressed in real terms) of EREG and

EPP in 2030 by 5 per cent and 14 per cent above the

baseline, respectively. While the percentage increase

in exports would be larger for EPP than for EREG,

the value of trade in EREG would be much greater.

Total exports are projected to rise for all regions,

as the fall in trade costs of EREG and EPP and the

implied increase in energy efficiency would both raise

GDP, leading to an increase in import demand. This

positive effect would dominate the negative effect

of trade diversion for EREG in some regions.

While exports of EPP from most regions are expected

to increase, mainly due to larger decreases in trade

costs compared to current values, exports of EREG

are projected to rise only in slightly more than

half of the regions, due to trade diversion effects

(see Figure F.4). Market access would be improved

for important exporters of EREG, whereas for EPP

the gain would be rather shared among all regions,

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

Figure F.4: Opening up trade in environmentally preferable products would raise exports

in most regions

Source: Bacchetta et al. (2022).

Note: The figure displays the percentage changes in exports of EREG and exports of EPP projected with the WTO Global Trade Model

for 2030. The left panel shows the projected percentage change of real exports of EREG with only a reduction in tariffs under scenario

(1) and a reduction in both tariffs and NTMs under scenario (2). The right panel shows the projected percentage change of real exports of

EPP with only a reduction in tariffs under scenario (3) and a reduction in both tariffs and NTMs under scenario (4). The percentage change

of exports for the World corresponds to a trade weighted average over all regions.

Tariffs only Tariffs with NTMs

-20 -10 0 10 20 30 40

-15

-10 -5 0 5 10

Projected per cent change in real exports

of EREGs in 2030

Projected per cent change in real exports

of EPPs in 2030

15 20

Asia LDC

Australia

Brazil

Canada

China

European Free

Trade Association

European

Union 27

United Kingdom

India

Indonesia

Japan

Republic

of Korea

Latin America

Mexico

Middle East and

North Africa

Other Asian

countries

Russia

South Africa

Southeast Asia

Sub-Saharan

Africa LDC

Sub-Saharan

Africa other

Türkiye

United States

World

with low-income regions projected to expand trade

of EPP for which they have a comparative advantage.

Besides trade flows, the removal of tariffs and

reduction of NTMs on EREG and EPP (per scenario

4) would raise global GDP (expressed in real terms)

by 0.8 per cent relative to the baseline in 2030.

GDP would rise in all regions, including those

where exports of EREG and EPP are projected to

fall (relative to baseline) due to two effects. First,

lowering barriers to trade would reduce distortions.

Second, productivity would increase owing to lower

costs of compliance with NTMs and lower prices for

goods that facilitate the more efficient use of energy

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WORLD TRADE REPORT 2022

and materials.

Most of the projected increase in

GDP is driven by trade-opening of EREG, since the

projected change in trade in EPP is smaller than the

projected change in trade of EREG.

The elimination of tariffs and the reduction of NTMs

on EREG and EPP (scenario 4) would reduce global

emissions by 0.58 per cent in 2030, relative to

the baseline. About half of this reduction in emissions

would be the result of tariff liberalization, while

the other half could be attributed to the reduction

of NTMs. The total effect can be broken down into

three components along the lines discussed in

Section F.3(a).

First, opening trade in EREG and EPP would stimulate

trade and GDP, and thereby raise the demand for

energy, thus raising emissions by 0.034 per cent in

2030 (a form of scale effect).

Second, the scale

effect would be more than offset by increased energy

efficiency in both production and consumption due

to higher imports of energy efficiency and clean

and renewable energy goods (a form of technique

effect). Combined with the scale effect, the energy-

efficiency effect is projected to result in a reduction

of annual CO

emissions by 0.58 per cent in 2030.

The third effect achieved through the shift towards

renewable energy (a form of composition effect)

would be negligible

because, in order for an

economy to switch to sectors that produce using

clean technologies, large investments in fixed costs

are needed, so it is expected that opening up trade

in EG alone would not be enough to result in large

composition effects.

As explained previously, the simulations only

capture two mechanisms through which trade in

EG can affect carbon emissions. At least three

additional channels through which trade in EG could

reduce carbon emissions are not modelled. First,

increased trade in EG can promote the diffusion of

environmental innovation, which would likely reinforce

the energy-efficiency effect through another form of

technique effect. Second, detailed effects related to

ES, for example better environmental monitoring or

waste management, are not considered. Modelling

such channels would require extensive study of the

role of imported capital goods in the adoption and

diffusion of sustainable environmental management.

Third, opening up trade in EPP can lead to a shift in

consumption and production towards EPP and help

reduce carbon emissions as well as address other

environmental issues.

For some EG, such as solar panels, substantial

declines in price have, in the recent past, been

accompanied by large trade flows. At the same

time, installed capacity in solar panels increased

about 15-fold from 2010 to 2019, during which the

levelized cost of energy plummeted in most countries

(IEA, 2022a).

A recent study suggests that trade liberalization in

solar PV power generation technologies might bring

considerable reductions in carbon emissions by

helping to stimulate production, reduces price and

application costs, and increases solar PV power

capacity. Eliminating half of the trade barriers on solar

cells and modules could reduce global emissions by

4 to 12 gigatonnes of CO

(GtCO

) between 2017

and 2060, corresponding to a cumulative reduction

of global emissions of 0.3 to 0.9 per cent.

The contribution of trade in EGS to the transition to

a low-carbon economy could be significantly larger

if the opening of EGS markets were accompanied

by relevant complementary policies. As discussed

in Chapter C, ambitious, credible and timely climate

policy strategies are essential to signal the market,

investors and consumers to make more low-carbon

investment and consumption decisions, including

with respect to the development, adoption and

deployment of EGS.

Climate change policy can also

affect how responsive agents are to price changes in

EGS and high-carbon products (i.e., price elasticity

of demand).

A wide adoption of EGS is likely to only take place

when the price drop of EGS caused by the reduction

in trade barriers in EGS is sufficient to render them

as affordable as, or cheaper than, high-carbon

goods. When the level of trade barriers on EGS is

already relatively low, the liberalization of trade in

EGS might not necessarily lead to a price drop large

enough to make EGS price competitive. In addition,

other factors besides the price of EGS can influence

the decision to replace high-carbon technologies

with low-carbon ones. For instance, the choice of a

given energy technology can also depend, among

other things, on its life cycle and reliability, as well

as the marginal cost of the electricity generated,

installation cost, grid infrastructure, storage capacity,

and structure of the electricity market. Well-targeted

and adequately financed energy and infrastructure

policies are important to make EGS and ET investable

by reducing uncertainty and improve investment risk

management.

A well-functioning quality infrastructure system

– comprising legal and regulatory frameworks

responsible for standardization, accreditation,

metrology and conformity assessment – is also key

to guarantee the supply of high quality EGS and

keep deficient, sub-standard quality products from

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

127

entering the supply chain (WTO and IRENA, 2021).

Setting up and upgrading the quality infrastructure

can also contribute to reduce trade costs, increase

the likelihood that domestic companies participate

in the value chains of EGS and ultimately build an

EGS sector that delivers economic, social and

environmental benefits.

4. The development and

deployment of environmental

goods and services require

greater international cooperation

The transition to a low-carbon economy will not be

possible unless ET are developed, deployed and

diffused quickly. International cooperation on EGS,

and in particular on trade in EGS, can play a major

role in supporting the development and in scaling up

the adoption of EGS.

Addressing, through cooperation, the trade barriers

that hinder the adoption and diffusion of ET can

improve market access to more efficient, diverse

and cheaper EGS and stimulate innovation. This

is particularly relevant for economies that do not

necessarily possess the know-how and manufacturing

capacity to produce ETs. However, this does not

mean that these and other economies cannot

contribute to the production of EGS, given that ET are

often produced in GVCs, in which many economies

participate in the supply of parts and services.

Facilitating access to EGS through trade can also

provide economies with greater opportunities to

adapt ET to their local needs, spurring potentially

greater environmental innovation. When there is little

or no international trade cooperation on ET, the level

of development, deployment and use of EGS is likely

to be less than optimal from a global perspective,

resulting in a slower transition to a low-carbon

economy.

While trade and trade policy on EGS are particularly

relevant, other issues that hinder the development,

adoption and diffusion of EGS have to be addressed

to ensure that trade in EGS contributes to the fullest

to the transition to a low-carbon economy. Some of

these barriers include inadequate infrastructure, skills,

and environmental and energy policies. Addressing

trade barriers faced by EGS through trade agreements

could also contribute to making climate policies more

credible by signalling to the market and investors

in ET that governments are seriously committed to

improving the ET industry. Such signalling could also

increase transparency and predictability.

(a) Facilitating trade and investment

in environmental goods and services

is essential

Although international cooperation on EGS is

attracting attention, it is not a recent phenomenon.

Multilateral negotiations to reduce or eliminate tariffs

and non-tariff barriers (NTBs) on EGS were launched

in 2001 as part of the Doha Development Agenda.

The lack of progress in the Doha Development

Agenda negotiations ultimately led 46 WTO

members to launch the negotiations of a plurilateral

Environmental Goods Agreement in 2014.

The

Environmental Goods Agreement negotiations then

stopped in 2017 and have not resumed since.

Multilateral and plurilateral trade negotiations on

EGS have faced a number of challenges. While trade

negotiations do not seek to identify the full range of

EGS, negotiations on the criteria defining the scope

of EGS have faced significant hurdles. While some

products, such as wind turbines or solar panels, may

seem to be intrinsically environmental, there are many

other products that may not come across as being

environmental per se, but which are nevertheless

essential when carrying out environmental activities

or implementing ET. A product may be used

for both environmental and non-environmental

purposes. While manufacturing goods received

the most attention in trade negotiations, there has

been discussion about whether some agricultural

goods, such as organic fruits and vegetables, may

be considered as EG. The rapidly evolving nature

of ET also raises the question of how to address

obsolete EGS technologies in the future, and how to

ensure that the latest environmental innovations are

considered.

The difficulty in reaching consensus at the

multilateral and plurilateral level has led regional

trade cooperation to become the main avenue to

promote trade in EGS. The 2012 Vladivostok APEC

Leaders’ Declaration marked the first time a group of

economies agreed to a set of EG (i.e., 54 EG), with a

view to reducing their respective applied tariff rates

to 5 per cent or less by the end of 2020. The APEC

list includes solar panels, wind turbines and bamboo

flooring, as well as environmental monitoring, analysis

and assessment equipment.

In parallel to these initiatives, an increasing number

of regional trade agreements (RTAs) explicitly

address trade in EGS (see Figure F.5). Although the

inclusion of provisions on EGS in RTAs is not a recent

trend, the number of these provisions in any given

agreement has increased significantly over the years.

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WORLD TRADE REPORT 2022

Environmental provisions are known to be

heterogenous across RTAs, and provisions on EGS

are no exception (Monteiro, 2016; 2022b). They differ

in terms of structure and location in RTAs, as well as

in language and scope. While some provisions refer

to EG, ES or technologies in general, other provisions

address specific categories of EGS, such as goods

and services related to sustainable renewable energy

and energy efficiency, or goods and services subject

to eco-labelling and fair trade schemes. A few more

recent provisions explicitly refer to climate-friendly

goods, services and technologies. Provisions on

EGS complement other environmental provisions,

including those promoting voluntary environmental

performance mechanisms, such as private-public-

partnerships and voluntary environmental auditing

and reporting, found in a limited number of RTAs.

Similarly, provisions on EGS complement provisions

trade in natural resource-based products obtained

through a sustainable use of biological resources

and provisions on sustainable management of fish

and forests, and on trade in fish and timber products,

found in an increasing number of RTAs.

Provisions committing parties to endeavour to

facilitate and promote trade and, in some agreements,

foreign direct investment in EGS are the most

common type of provisions on EGS. Most other

provisions on trade in EGS are only specific to a

single or a few RTAs.

While many RTAs include different market access

and national treatment commitments for ES (mostly

related to waste management and treatment), only

a couple of agreements establish explicit tariff

reductions or eliminations for specific EG.

The

1992 Partial Cooperation and Trade Agreement

between Argentina, Brazil and Uruguay was one of

the first trade agreements to eliminate tariffs and

NTMs on an agreed list of EG (58tariff lines at the

10-digit national product classification level). More

recently, the RTAs negotiated by New Zealand with

Chinese Taipei and the United Kingdom include a list

of EG (132 and 298 tariff lines, respectively, at the

six-digit HS level), whose tariffs are to be eliminated.

An alternative market access approach, only found

in the RTA between Indonesia and Switzerland,

establishes a preferential tariff rate quota access for

palm oil produced sustainably in Indonesia.

Besides tariffs, some recent RTAs explicitly call on

the parties to address potential NTMs on EG. Many

Figure F.5: Provisions on environmental goods and services are increasingly included in RTAs

Source: Monteiro (2022b).

Note: Analysis based on RTAs notified to the WTO. “North” is defined as high-income countries, whereas “South” is defined as middle-

and low-income countries according to the World Bank’s country classification.

South-South RTA North-South RTA North-North RTA

1990 1995 2000 2005 2010 2015 2020

Number of provisions related to EGS

Year of signature

EAC

EU-UKR

EU-SGP

NZL-TPKM

EU-GEO

EEA

COL-EU-PER

CA-DOM-USA

CACM-EU

USMCA

CARIFORUM-EU

PER-USA

EU-MDA

GEO-GBR

CACM-GBR

CAN-EU

KOR-PER

EU-VNM

ARM-EU

EU-GBR

CPTPP

CAN-EFT

EU-JPN

GBR-JPN

ARG-BRA-URY

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CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

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GOODS AND SERVICES

of these provisions add clarifications or expand some

of the disciplines set out in the WTO TBT Agreement.

A few provisions promote good regulatory practices

when designing standards and technical regulations

relating to EG in general. Other provisions establish

regulatory commitments on specific categories of EG,

such as listing relevant international standard-setting

bodies for the design of domestic standards on

products related to renewable energy;

harmonizing

energy performance standards and test products;

acceptance of the other party’s technical regulations,

standards or conformity assessment procedures

related to the production, processing or labelling

of organic products;

and mutual acceptance of

conformity assessment procedures for products

related to renewable energy.

While most detailed provisions on EGS in RTAs focus

on EG, only a few detailed provisions explicitly address

trade barriers on ES, such as facilitating the movement

of businesspersons involved in the sale, delivery or

installation of EG or the supply of ES.

Provisions

on support measures related to EGS are also limited.

For instance, a recent provision commits each party

to refrain from adopting local content requirements or

any other offset affecting the other party’s products,

service suppliers or establishments related to energy

generation from renewable and sustainable non-fossil

sources.

The remaining types of provisions on EGS in

RTAs are mostly about cooperation. While some

cooperation provisions refer to cooperation on

EGS in general, other cooperation provisions focus

on specific categories of EGS or specific issues.

Some provisions encourage cooperation between

enterprises in relation to goods, services and

technologies beneficial to the environment. A few

other provisions call on the parties to cooperate in

international fora to support trade and investment

in EGS.

Although progress in trade negotiations on EGS in

the WTO has been limited, the multilateral trading

system ensures that trade in EGS flows as smoothly,

predictably and freely as possible through its

disciplines, which limit members’ discretion to adopt

policies unjustifiably, thereby causing negative cross-

border spillovers. Tariffs on manufacturing goods,

including many EG, were, on average, significantly

reduced with the conclusion of the Uruguay Round

(1986-94). The General Agreement on Tariffs and

Trade (GATT) and the GATS ensure that trade

policies, including those related to EGS, are non-

discriminatory and transparent. The TBT Agreement

also aims to ensure that technical regulations,

standards and conformity assessment procedures on

goods, including those related to EG, do not create

unnecessary obstacles to trade and are based on

relevant internationally agreed standards. The TBT

Agreement further promotes the harmonization,

equivalence and mutual recognition of technical

regulations and conformity assessment procedures.

The Agreement on Trade-Related Aspects of

Intellectual Property Rights (TRIPS Agreement)

also supports the development and dissemination

of ET by establishing a set of minimum standards

for the protection and enforcement of intellectual

property rights.

The WTO could make an even greater contribution

to promoting trade in EGS by advancing a couple

of initiatives currently being pursued by several

WTO members at the plurilateral level.

The

Trade and Environmental Sustainability Structured

Discussions (TESSD) explore opportunities and

possible approaches for promoting and facilitating

trade in EGS. The TESSD intends to broaden the

scope beyond tariff liberalization and cover NTMs,

the dissemination of technology and ES – including

those that can facilitate the uptake and use of EG

– and technical assistance. Potential outcomes of

the TESSD could include identifying and compiling

best practices, as well as exploring opportunities for

voluntary actions and partnerships to promote and

facilitate access to EGS, including new and emerging

low-emission technologies, and other climate-friendly

technologies.

Efforts to support trade in EGS could also be

reinforced by promoting sustainable trade in plastics,

including low-carbon alternatives, a topic currently

under discussion in the Informal Dialogue on Plastics

Pollution and Environmentally Sustainable Plastics

Trade at the WTO. Similarly, rationalizing and phasing

out the use of fossil fuel subsidies, under the Fossil

Fuel Subsidy Reform initiative,

could promote low-

carbon energy sources, including renewable energy

equipment.

(b) Inclusive participation in developing

and deploying environmental goods

and services is important

A just transition to a low-carbon economy requires

giving particular attention to the challenges and

opportunities faced by developing countries and

vulnerable groups when they engage or seek to

participate in trade in EGS.

Given that the ET sector

is only just emerging in most developing countries

and LDCs, reducing tariff barriers and NTMs to EGS

is only one way of reducing the costs and increasing

the availability of and access to ET. Additional efforts

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WORLD TRADE REPORT 2022

could ensure that effective transfer of ET takes

place in practice. In the context of climate change,

the Intergovernmental Panel on Climate Change

(IPCC) defines technology transfer “as a broad

set of processes covering the flows of know-how,

experience and equipment for mitigating and adapting

to climate change amongst different stakeholders

such as governments, private sector entities, financial

institutions, non-governmental organizations (NGOs)

and research/education institutions” (IPCC, 2000).

Technology transfers through cross-border

partnerships can facilitate manufacturing scale-

ups and innovation in multiple contexts. Firms can

manufacture an environmental product that was

successfully developed by an originator firm under

some form of licence or production contract that

encompasses the transfer of know-how along

with formal intellectual property and access to

the regulatory dossier. Alternatively, the transfer

of technology can help competitors to modify and

improve existing ET. A transfer of technology can also

be used, irrespective of the type of ET, to develop

and produce new ET.

Technology transfers can come from both private and

public sources. In the case of climate change, such

aid often involves international cooperation (Popp,

2011). For example, the United Nations Development

Programme (UNDP), the United Nations Environment

Programme (UNEP) and the World Bank jointly

implement the Global Environment Facility (GEF),

which provides grants for projects in developing

countries to address global environmental issues,

including those related to climate change.

Another example is the Clean Development Mechanism

(CDM),

defined in Article 12 of the Kyoto Protocol,

which offers developed countries the opportunity to

earn credits (called saleable certified emission reduction

(CER) credits, each equivalent to one tonne of CO

), in

return for financing projects in developing countries that

reduce emissions, thus enabling the transfer of climate-

friendly technologies (Dechezleprêtre, Glachant and

Ménière, 2008). The CDM’s underlying infrastructure

and remaining funds will largely be repurposed

to implement Article 6.4 of the Paris Agreement

that establishes a new mechanism for parties to

cooperate in achieving their NDCs.

Another international initiative is the Climate

Technology Initiative (CTI), operating under the

International Energy Agency (IEA), which works to

accelerate the development and diffusion of climate-

friendly and environmentally sound technologies

and practices and to strengthen the capacity of

developing countries to employ them. In addition, the

World Intellectual Property Organization (WIPO) has

established WIPO GREEN, an online database and

network that connects owners of new technologies

with individuals or companies who might be looking

to commercialize, license or otherwise distribute ET.

A very limited but increasing number of RTAs include

specific cooperation provisions aimed at facilitating

the transfer of ET. Some provisions refer, in general, to

the promotion of ET development, innovation, transfer

and application.

Other provisions specifically

cover the promotion of measures at the domestic,

regional and international levels, related to R&D,

demonstration, deployment, transfer and diffusion of

new, innovative, safe and sustainable low-carbon and

climate adaptation technologies.

As discussed in Chapter C, the TRIPS Agreement

also helps to facilitate the transfer of technology,

including of ETs, through developed-country

members’ commitments under TRIPS Article 66.2

to provide incentives for enterprises and institutions

in their territories to encourage technology transfer

to LDCs. The Aid for Trade Initiative could also

contribute to the transfer of ET by supporting

developing countries, in particular LDCs, in building

low-carbon and climate-resilient trade capacity and

infrastructure (see chapters B and C).

policy on EGS are needed

The need for more detailed data on trade and

investment in EGS is becoming pressing as

governments strive to unlock trade in ET. Different

statistical classifications or nomenclatures, including

the HS, have been used to identify EG and ES

separately. The lack of disaggregated and comparable

data on trade in EGS and related trade policies

continues to hold back research and can hinder

trade negotiations in EGS. Several international

organizations have attempted to define and classify

EGS.

As discussed above, the OECD/Eurostat Informal

Working Group has developed a list based on

the six-digit HS intended to illustrate the scope

of the “environmental industry” (Steenblik, 2005).

UNCTAD (1995) identified several EPP that are

more environment-friendly than petroleum-based

competitors, produced in an environment-friendly

way or that contribute to the preservation of the

environment. More recently, the World Customs

Organization (WCO) released the 2022 version

of the HS, which includes new commodity codes

specific to several technologies that use solar energy

and energy-efficient light-emitting diodes. These

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TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

changes should facilitate the monitoring of trade in

specific EG. The United Nations’ CPC, released in

1991, identifies several types of ES (WTO, 2010).

Several international organizations, including APEC

and the OECD Secretariat, have also worked to

update the list of ES (APEC, 2021; Sauvage and

Timiliotis, 2017).

The WTO provides access to official tariff and trade

data at the tariff-line level, which often means eight,

or sometimes even 10, digits, including in some cases

for specific EG for some countries. WTO agreements

also promote transparency in trade measures via

formal, publicly available notifications of all laws and

regulations affecting trade, including those related

to EGS. Notifications explicitly related to EGS are

reported in the WTO Environmental Database (EDB).

The WTO could further improve the quality and

availability of its data on EGS by strengthening its

collaboration with statistical agencies and other

government offices, as well as with other international

organizations, including the WCO. Ongoing

plurilateral initiatives, including TESSD, could also

play an important role in improving transparency of

relevant measures, offering an opportunity for sharing

experiences and best practices.

5. Conclusion

The transition to a low-carbon economy will require

the development, deployment and diffusion of ET

at an unprecedented pace, and trade in EGS can

contribute to this process. However, EGS trade flows

and trade policies differ across regions: exports

of EGS from middle-income countries have been

growing dynamically over the past two decades,

whereas those of low-income countries have

remained almost constant. Conversely, low-income

countries’ imports of EGS have been increasing

faster than those of other countries, suggesting a

strong demand for EGS in those countries.

Simulations using the WTO GTM suggest that the

elimination of tariffs, together with the reduction

in NTMs on a specific subset of EG, could make a

contribution to reducing carbon emissions while

contributing to an increase in exports and GDP in all

regions. These simulations, however, only account for

two of the various mechanisms through which trade in

EG can affect emissions, suggesting that the actual

effects of opening up trade in EGS could potentially

be considerably more significant with a broader set

of EGS, if all effects were taken into account and if

relevant complementary policies accompanied the

liberalization of trade in EGS.

International cooperation on trade in EGS can play

a major role in supporting the development and in

scaling up the adoption of EGS. The multilateral

trading system ensures that trade in EGS flows as

smoothly, predictably and freely as possible. The

WTO agreements can also support the transfer of

ET to developing countries, in particular to LDCs.

The difficulty in reaching consensus in multilateral

and plurilateral trade negotiations has, however,

led regional trade cooperation to become the main

avenue to promote trade in EGS.

The WTO could make a greater contribution to

promoting trade in EGS. Several plurilateral initiatives

currently being pursued by subsets of WTO members

could play an important role in promoting and

facilitating trade in EGS. The WTO could also further

improve the quality and availability of data on EGS by

strengthening its collaboration with national statistical

agencies and other international organizations.

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WORLD TRADE REPORT 2022

Endnotes

1 The OECD list of EG contains 164 tariff lines at the six-

digit Harmonized System (HS) level organized according

to three main categories and 18 sub-categories. The

list covers, however, 132 unique HS-6 tariff lines after

eliminating multiple listings across various sub-categories

of some tariff lines. The tariff classification is based on the

1992 version of the HS nomenclature.

2 According to the OECD list, pollution management

technologies and products include goods and services that

are easily identifiable statistically (OECD, 1999).

3 According to the OECD list, cleaner technologies and

products include some goods and services whose

statistical assessment remains disputed, difficult or

expensive (OECD, 1999).

4 Although environmental protection is excluded from

the coverage of resource management, inevitably some

products associated with environmental protection may be

included, although their prime purpose is not environmental

protection.

5 The CPC, prepared under the auspices of the United

Nations and other international bodies, provides a

classification structure for goods and services based

on a set of internationally agreed concepts, definitions,

principles and classification rules. The first version of the

CPC, the Provisional Central Product Classification, was

published in 1991.

6 National and regional statistical classifications of the EGS

sector (i.e., EGS sector account) have also been expanded

over the years. See for instance Eurostat (2009, 2016).

7 The specific services relevant to the environment are

identified within sub-classes of the CPC 2.1 classification

at the five-digit level through the use of “ex out” (which

indicates that the identified service is extracted from the

five-digit subclass) (Nordås and Steenblik, 2021).

8 International trade in goods is classified using the World

Customs Organization (WCO) Harmonized Commodity

Description and Coding System (HS). The HS classifies

all products using six-digit codes that are organized by

chapter (two digits), heading (four digits), and subheading

(six digits).

9 Notifications of environment-related countervailing

measures can be found in the WTO Environmental

Database (EDB), which can be consulted at https://edb.

wto.org/.

10 The TRAINS database covers 57 countries, encompassing

11 high-income countries (with the European Union

included as a country group), 36 middle-income countries

and 10 low-income countries.

11 See the Note by the WTO Secretariat on "experiences in

the promotion and facilitation of environmental goods and

services" (WTO official document number INF/TE/SSD/

W18, accessible via https://docs.wto.org/).

12 For more information about the GATS modes of supply, see

https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.

htm.

13 Public goods are a special case of positive externalities

for which the cost of extending the service to an additional

person is zero and which it is impossible to exclude

individuals from enjoying.

14 GHG comprise carbon dioxide (CO

), methane (CH

nitrous oxide (N

O), hydrofluorocarbons (HFCs),

perfluorocarbons (PFCs) and sulphurhexafluoride (SF

Although carbon dioxide is the primary GHG emitted

through human activities, methane has become an

emerging GHG given its more potent heat-trapping ability.

15 For example, using LED light instead of filament lamps

would reduce energy consumption, as the former is more

energy-efficient.

16 Some climate change adaptation solutions can

exacerbate some environmental issues in the absence

of complementary actions. For instance, artificial snow

might help keep slopes snowy at higher temperatures, but

its production can be energy- and water-intensive. The

chemicals or biological additives used to enhance artificial

snow’s quality and slow down its melting can also impact

the environment, including biodiversity (Rixen, Stoeckli and

Ammann, 2003).

17 Trade intensity is defined as the ratio of exports plus

imports over GDP.

18 See Aguiar et al., (2019) for a technical description of

the WTO GTM, a recursive dynamic computable general

equilibrium model. The energy and electricity version of the

WTO Global Trade Model was used to generate a baseline

projection until 2030 for the global economy with the path

for global CO

emissions close to the emissions projected

by the International Energy Agency (IEA) as reported in

Böhringer et al. (2021). Bilateral tariff rates are from the

Market Access Map (MAcMap) database, provided by the

International Trade Centre (ITC). Ad valorem equivalents of

NTMs are taken from Cadot, Gourdon and van Tongeren

(2018), based on count data on NTMs from the UNCTAD

TRAINS database. The elasticity of carbon emissions with

respect to trade in EG were estimated econometrically

(Bacchetta et al., 2022).

19 The list of EREG is derived from the OECD list of EG

(OECD, 1999).

20 The list of EPP is based on the list reported in Tothova

(2005).

21 NTMs are modelled as iceberg costs (i.e., some of the

product is lost between the buyer and the seller). A 25 per

cent reduction in NTMs is in line with empirical estimates of

the effect of a regional trade agreement on NTMs (Benz and

Yalcin, 2013), as well as with the literature on regulatory

convergence (Vanzetti, Knebel and Peters, 2018).

22 The higher projected global GDP level by 2030 is the result

of a higher projected GDP growth trajectory between 2021

and 2030.

23 For the products modelled, the NTMs concern mostly TBT,

which require firms to allocate extra resources to comply

with them.

24 Part of the effect is also driven by increased demand for

transportation services, which generates additional CO

emissions.

25 This is the case with or without end-use control. Under the

scenario without “end-use control”, all energy producing

sectors would benefit from the lower prices of clean and

renewable energy goods, so that the increase in electricity

133

CLIMATE CHANGE AND INTERNATIONAL TRADE

F. THE CONTRIBUTION OF

TRADE IN ENVIRONMENTAL

GOODS AND SERVICES

produced by fossil fuels would increase emissions.

Conversely, under the scenario with “end-use control”,

only sectors producing electricity with renewables would

benefit from the lower prices of clean and renewable

energy goods, which would reduce emissions.

26 The estimated effects, based on the WTO GTM, are an

order of magnitude smaller than those found by Hu (2020),

due to differences in the models used to determine the

price of clean and renewable energy goods and the impact

on emissions, and different assumptions concerning the

decline in the price of domestic clean and renewable

energy goods.

27 In particular, a lack of emissions data at the detailed

sectoral level makes it difficult to evaluate the emissions

effects of trade in EPP.

28 The estimated cumulative reduction of global emissions of

between 0.3 per cent and 0.9 per cent between 2017 and

2060 assumes that emissions remain constant at the level

of 2020 (31.5 GrCO

) until 2060 (Wang et al., 2021).

29 For instance, following a reduction in trade barriers on

EG, a government which used to extract tariff revenue with

tariffs on EG, might be tempted to respond by strategically

lowering the level of environmental protection to stimulate

domestic production. Depending on the marginal pollution

rate associated with the production of the high-carbon

product, the reduction in trade barriers on EG could lead

to an increase (or decrease) in pollution when the marginal

pollution rate is significantly high (or low) (Nimubona,

2012).

30 The price elasticity of demand itself largely depends on

the choice and implementation of environmental policy

instruments (David and Sinclair-Desgagné, 2005).

31 The WTO Special Session of the Committee on Trade

and Environment (CTESS) was established to conduct

negotiations on trade and environment. The reduction

or elimination of tariffs on EG was also discussed in the

context of the WTO’s Negotiating Group on Market

Access, but without addressing the specific issues that

were debated in the CTESS. In addition, the Special

Session of the Council for Trade in Services is in charge of

the negotiations on services, including ES.

32 The Environmental Goods Agreement discussion

initially built on the 54 EG set out in the 2012 Leaders’

Declaration of the Asia-Pacific Economic Cooperation

(https://www.apec.org/meeting-papers/leaders-

declarations/2012/2012_aelm).

33 More recently, APEC economies have been considering

updating the list of EG and advancing trade in ES, including

by identifying different types of ES (https://www.apec.org/

meeting-papers/sectoral-ministerial-meetings/trade/2021_

mrt).

34 The tariff reduction and elimination of goods covered in

the WTO and in RTAs can apply to EG without explicitly

singling out any specific EG.

35 For example, European Union-Singapore and European

Union-Viet Nam RTAs.

36 For example, United States-Mexico-Canada (USMCA).

37 For example, Comprehensive and Progressive Agreement

for Trans-Pacific Partnership (CPTPP).

38 For example, European Union-Singapore RTA.

39 For example, Chinese Taipei-New Zealand RTA.

40 For example, European Union-Singapore and European

Union-Viet Nam RTAs.

41 These WTO initiatives complement other initiatives, such

as the one led by Costa Rica, Fiji, Iceland, New Zealand,

Norway and Switzerland that seeks to negotiate tariff

elimination on EG and binding commitments for ES in an

Agreement on Climate Change, Trade and Sustainability.

42 See TESSD Ministerial Statement on Trade and

Environmental Sustainability (WTO official document

number WT/MIN(21)/6, viewable via https://docs.wto.org/).

43 See Ministerial Statement on Fossil Fuel Subsidies (WTO

official document number WT/MIN(21)/9/Rev.1, viewable

via https://docs.wto.org/).

44 A number of international initiatives support micro, small

and medium-sized enterprises (MSMEs) in introducing

innovations to their operations and scaling them for trade

across borders. For instance, the World Banks’s Climate

Technology Program (CTP) supports the private sector

in developing countries, and in particular small and

medium-sized enterprises and entrepreneurs, to use new

technologies and business models to address local climate

challenges.

45 See https://www.thegef.org/.

46 See https://cdm.unfccc.int/index.html.

47 See for instance the European Union-East African Community

(EAC) RTA.

48 See for instance the European Union-Armenia RTA.

134

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G. Conclusion

Climate change is having a damaging effect on

people, the environment and the economy globally.

Major economic investment and ambitious policy

actions will be required to steer the economy towards

a sustainable, low-carbon growth trajectory, which

is necessary to mitigate climate change and adapt

to its disruptive and costly consequences. Thus,

both climate change and climate policies will have

significant consequences for international trade and

trade policies.

Although the interlinkages between climate change

and international trade are complex and multifaceted,

much of the debate on climate change and trade is

based on oversimplifications and misconceptions.

Two basic but misleading assumptions still underlie

much of the current debate: that trade clearly

contributes to climate change; and that WTO rules

prevent governments from adopting ambitious climate

policies.

The first misleading assumption – that trade, and in

particular international transportation, is one of the

main contributors to climate change – has led to calls

to limit imports in favour of producing and consuming

goods and services locally. In reality, international

trade affects greenhouse gas (GHG) emissions in

many different ways. It is true that trade activities

emit GHG emissions through the production,

transportation, distribution and consumption of

traded products, and, in this way, trade increases

emissions by stimulating economic activity through

increased income. Trade also affects the type of

goods and services that each country produces,

and can therefore affect climate change positively

or negatively depending on whether a country has a

comparative advantage in GHG emission-intensive

sectors.

At the same time, however, trade contributes to the

reduction of GHG emissions in several important

ways. Trade provides access to low-carbon goods,

services and technologies at lower prices. The

increased income associated with trade openness

can also lead to rising environmental awareness, as

well as to more stringency in terms of environmental

regulations, which spurs the incorporation of

environmental technologies into production

processes. Trade can help to diffuse environmental

innovations, and provides firms with the opportunity to

reap higher profits from integrating those innovations

into production processes, thereby increasing

their incentives to continue creating, diffusing and

integrating environmental technologies. In addition,

trade in cleaner energy can further enable countries,

including developing ones, with large endowments in

renewable energy sources to lever their comparative

advantage in clean energy generation and contribute

to the low-carbon transition.

Trade can also help countries to protect themselves

against, and adapt to, some of the consequences

of climate change by helping to prevent, reduce and

prepare for climate risks, as well as to respond to and

recover from climate disasters. Recovery from climate

disasters via the timely availability of critical goods

and services, such as food, healthcare, transportation

and communication, is enabled by trade. By helping

countries to adjust to shifts in agricultural production

caused by long-term changes in climate conditions,

trade can also contribute to food security. Facilitated

access to technologies that minimize some of the

costs and the economic effects of climate change is

also supported by trade.

The positive contribution of trade to the fight against

climate change is, however, not necessarily automatic.

Building economic and trade resilience to climate

change requires an understanding of economic

challenges and opportunities, as well as the ability to

anticipate, evaluate and manage climate risks. Trade

policies need to be integrated into climate adaptation

strategies, including policies to enhance resilience of

supply chains to climate-related disruptions. Similarly,

giving producers and consumers incentives to factor

climate risks into their decisions, so that they choose

to limit or compensate their GHG emissions, requires

relevant and well-designed climate and energy

policies.

The second misleading assumption about trade

and climate change is that WTO rules prevent

governments from adopting ambitious climate

policies. In reality, although the term “climate

change” does not appear in WTO agreements, the

WTO supports the fight against climate change by

helping to ensure efficient and effective trade-related

climate policies. While not all climate change policies

have a trade dimension, WTO rules govern taxes,

tariffs, support measures, regulatory measures and

other trade-related instruments that are relevant for

implementing climate policies.

Climate and trade regimes do not operate in

isolation. For instance, the United Nations Framework

Convention on Climate Change (UNFCCC) provides

135

CLIMATE CHANGE AND INTERNATIONAL TRADE

that measures taken to combat climate change

should not constitute a means of arbitrary or

unjustifiable discrimination or a disguised restriction

on international trade, and should be implemented

so as to minimize adverse effects, including on

international trade, and social, environmental and

economic impacts on other parties.

At the same time, the WTO framework contributes

to the fight against climate change by supporting

policies that create or expand positive cross-border

spillover effects; for instance, climate measures

adopted in one country may facilitate the diffusion of

environmental technologies to other countries. WTO

rules also help to limit the use of policies that can

lead to trade tensions and cause income and welfare

losses for other countries, and that thereby ultimately

undermine efforts to tackle climate change.

Through its committees, the WTO provides a

unique forum for members to discuss their efforts to

mitigate and adapt to climate change, and the trade

implications of those efforts. WTO transparency

mechanisms, including the notification requirements

for trade measures and periodic trade policy reviews

for WTO members, provide information about climate-

related trade measures. WTO technical assistance

and capacity-building initiatives, including Aid for

Trade, contributes to the efforts towards mobilizing

investments in low-carbon and climate-resilient trade

infrastructure.

The international trade of critical and environmental-

friendly goods and services is enabled by the

transparent and predictable trading environment

underpinned by WTO rules, which also helps

economies to diversify so that they are less reliant

on single exporters and suppliers when an extreme

weather event hits.

Nevertheless, while trade rules play an important

role in climate mitigation and adaptation, the

WTO can certainly do more to advance work on

environmental and sustainability issues, including

greater information-sharing and transparency in the

context of trade-related climate change policies, and

by addressing trade barriers to environmental goods

and services. In that context, the ongoing WTO

initiatives on trade and environmental sustainability,

on sustainable trade in plastics and on fossil fuel

subsidies reforms could lead to both pragmatic and

creative results. The WTO could be an appropriate

forum for discussions on opening up trade in

environmental goods and services to further facilitate

access to and diffusion of climate technologies.

Strengthening cooperation between the WTO and

regional and international climate organizations would

further support understanding of the interlinkages

between climate change and trade.

This report has underlined how international trade

and trade rules can play a positive, constructive role

in adapting to climate change and supporting a just

transition to a low-carbon economy. Given the cross-

cutting nature of climate change, trade and climate

change policies need to be mutually supportive. This

requires coordination, coherence and transparency.

136

WORLD TRADE REPORT 2022

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rint ISBN 978-92-870-5395-4

Web ISBN 978-92-870-5396-1

Published by the World Trade Organization.

Note

WTO members are frequently referred to as

“countries”, although some members are not

countries in the usual sense of the word but are

ofcially “customs territories”. The denition of

geographical and other groupings in this report

does not imply an expression of opinion by the

WTO Secretariat concerning the status of any

country or territory, the delimitation of its

frontiers, nor the rights and obligations of any

WTO member in respect of WTO agreements.

There are no WTO denitions of “developed” and

“developing” economies. Members announce for

themselves whether they are “developed” or

“developing” economies. The references to

developing and developed economies, as well as

any other sub-categories of members used in

this report, are for statistical purposes only, and

do not imply an expression of opinion by the

Secretariat concerning the status of any country

or territory, the delimitation of its frontiers, nor

the rights and obligations of any WTO member in

respect of WTO agreements.

The data supplied in the

World Trade Report 2022

are valid as of 1 September 2022.

World Trade Report 2022

Climate change is having a profound impact on people’s lives across

the world. Mitigating and adapting to climate change will require

major economic investment and coordinated action to transition

to a sustainable, low-carbon economy. The

World Trade Report 2022

explores the complex interlinkages between climate change,

international trade, and climate and trade policies.

Although international trade generates greenhouse gas emissions

which contribute to climate-related natural disasters, it can also play

an essential role in helping countries reduce emissions by increasing

the availability and affordability of environmental goods, services

and technologies. International trade can also play a key role

in helping countries adapt to the impacts of climate change and build

future resilience.

The

World Trade Report 2022

shows how international trade and trade

rules can contribute to addressing climate change. Ensuring trade

and climate change policies are mutually supportive requires global

coordination and transparency about government measures. The WTO

already plays an important role in helping countries tackle climate

change by maintaining a predictable trading environment underpinned

by WTO rules that allow for international trade in critical goods and

services needed to cope with the consequences of climate change

and to reduce emissions. Further international cooperation at the

WTO could strengthen the mutual supportiveness of trade and climate

change policies so that the world is better equipped to transition

to a low-carbon economy.

ISBN 978-92-870-5395-4ISBN 978-92-870-5396-1