#climatesummit

"What ended up coming out of this COP was a kind of kitchen sink approach where developed countries said, 'we will take the lead in trying to get together around 300 billion a year and not starting right now but starting a decade from now.' And the additional trillion will be made up by a huge variety of sources in the private sector, in multilateral development banks, carbon markets, you name it, basically everything else."

Experts from academia, non-governmental organizations, and the private sector gathered Thursday (Nov. 14) for a side event, “Industrial Policy, Trade, and the Political Economy of Decarbonization,” at the Twenty-Ninth Conference of the Parties (COP-29) of the United Nations Framework Convention on Climate Change (UNFCCC) in Baku, Azerbaijan. The event was co-sponsored by the Harvard Project on Climate Agreements (HPCA) and moderated by HPCA Director Robert Stavins, the A.J. Meyer Professor of Energy & Economic Development at Harvard Kennedy School. (Watch the video of the event here.)

The other panelists were Daniele Agostini, Head of Energy and Climate Policies, Enel; Chantal Line Carpentier, Head of the Trade, Environment, Climate Change, and Sustainable Development Branch at the United Nations Conference on Trade and Development (UNCTAD); Michael Mehling, Professor of Law at Strathclyde University and Deputy Director, Center for Energy and Environmental Policy Research, MIT; and Joyashree Roy, Distinguished Professor at the Asian Institute of Technology.

Mehling launched the discussion with an overview of an HPCA Discussion Paper he wrote titled “Good Spillover, Bad Spillover? Industrial Policy, Trade, and the Political Economy of Decarbonization,” which examines the myriad ways in which spillovers can impede or advance climate actions in both intended and unintended ways.

“There's protectionist bias in trade policy that favors with tariffs, [that is] lower tariffs, upstream commodities to help keep domestic higher added value industries more competitive that further stimulates these emission transfers,” he said. “And if you consider the global carbon budgets report released yesterday that [in] each year still consistently adding to the annual emissions into the atmosphere, this is a problem that needs to be addressed.”

Mehling argued that we are beginning to see a “fundamental change in the paradigm of climate policy in major economies,” which could create some serious problems in the decades ahead.

“There's been this surge of industrial policy, especially in advanced economies just since 2021. I think there's been like 2,500 new industrial policies, many, if not the vast majority are trade distortive.  The reason is because they contain trade-related climate measures like conditional subsidies with localization requirements, local content requirements, export controls, domestic and export subsidies, and so on and so forth,” he remarked. “This interferes with the trade system and…part of my argument in this paper is that the positive spillovers of learning by doing of technology transfer, knowledge transfer, and eventually technology diffusion may be inhibited by the kind of policies that we now see emerging in reaction to many, many different drivers, many of which are absolutely justified and need to be dealt with.”

Mehling mentioned that the European Union’s Carbon Border Adjustment Mechanism (CBAM) can have harmful spillover effects on trade policy through carbon leakage which can offset emissions reductions in one country with higher emissions in another. He also spoke of the so-called “green paradox” in which the anticipation of more restrictive climate policies in the future can provide incentives to oil and gas companies to boost their extraction of fossil fuels over the short term.

Roy spoke of decarbonization efforts in India through market-based policies that reward companies for reducing emissions. These voluntary efforts, she remarked, were spawned by the nation’s Energy Conversation Act, first introduced in 1991 and revised in subsequent years. Among other things, she explained, the Act created a “perform, achieve, and trade” platform, analogous to emissions trading policies elsewhere, in which companies were rewarded with certificates when they reduced their CO₂ emissions.

“They had to consistently reduce the fossil fuel intensity of their output to get the energy certificate, and the price of the energy certificate was related to the oil price so they always wanted to compare the fossil fuel price, how it is moving in the international market, and what price they have to pay and then what was the energy fossil fuel cost of their output,” she said.

Agostini, affiliated with Italy’s largest energy company, spoke of the ways in which Mehling’s paper stimulates the debate over how a wide range of climate policies intersect and sometimes intervene with global trade and economic efficiencies.

“As a company, we often look at what happens, and of course we espouse the cause of global trade economic efficiency, and we think everything should work accordingly. But then our scenario is [often] wrong because things don't [always] go that way,” he remarked. “We've seen that especially with carbon markets lately in this arena. So, papers and research that try to better understand why that doesn't happen and what we can do to optimize the process [are helpful]. But most of all for the private sector who needs to do the investments, [we want to] make the entire outlook more predictable because we need predictability.”

Agostini also argued that the private sector has an important role to play in ensuring that climate policy best practices are promulgated.

“The faster we spread good practices among policymakers, the faster the world is going to be more predictable. [Having a more] predictable investment context for the private sector will allow the private sector to upscale its investment. And in terms of spreading good practices, again the policy toolbox is key. More and more governments are starting to realize that it's not about constraining versus supportive, but it's getting the two to work together,” he stated.

Finally, Carpentier spoke of recent UNCTAD research conducted in collaboration with the International Monetary Fund (IMF), the World Bank, and the Organization of Economic Cooperation and Development (OECD), focusing on developing a deeper understanding of the different carbon pricing metrics and climate change mitigation policies to inform policymakers and policymaking.

“What we find is that developed countries, the OECD countries, have moved from regulation to standards to subsidies and then to carbon pricing,” she remarked. “They have not [immediately] jumped into carbon pricing... The price would be so outrageous, it would be politically unacceptable. So, you kind of start and then the policy mix [will] be different country by country depending on the environment, depending on the institutional capacity, and several other facts.”

Carpentier argued that better coordination is needed amongst countries and regions seeking effective CBAMs, and greater technical assistance is necessary to enhance the pace of global emission reductions.

“There is an effort within… the G-20 Plus [countries], the 35 largest greenhouse gas emitters that represent 85 percent of all the greenhouse gas emission. And the idea is probably for those larger countries and larger emitters, perhaps they should have a carbon price and if they're going to have a carbon price, they will have a border adjustment most likely. How do we work with them?,” she asked.  “Some of them, like Indonesia, have already asked the UN to help them because if you're going to put a carbon price, how do you go about it? What are the best practices? And we have several requests from several countries on that.”

Following their remarks, the panelists responded to questions from audience members, ranging from how to create larger markets where lower carbon products are more profitable to how to ensure that CBAM revenues can be more fairly distributed to impacted countries.

Stavins, reflecting on the session, commented that “climate change policy and trade policy can complement or conflict, and attempts to minimize conflicts can have unintended consequences, which is at the heart of current controversy regarding the new CBAM in Europe.  Whereas many of the more wealthy countries see the CBAM as a positive step possibly leading eventually to a carbon-pricing club, people from developing countries tend to see the CBAM as little more than environmental protectionism.”