Why is it so hard to encourage the spread of climate-friendly goods? A rapidly warming planet requires economic changes to reduce the levels of carbon released into the atmosphere.
As the first Policy Brief in this trade and climate series has indicated, trade policies can clearly help or hinder efforts to achieve climate targets. Governments are increasingly adding environmental language to ongoing trade and economic arrangements in Asia.
Yet progress has been relatively slow. Early momentum, for example, in drafting a list of 54 environmental goods within the Asia Pacific Economic Cooperation (APEC) in 2012 was not followed up with similar outcomes in either the multilateral setting at the World Trade Organization (WTO) or with further progress in APEC by adding additional goods to the original list. Trade barriers that may impede the flows of environmental services have not been addressed.
What explains this apparent paradox of accelerating focus on taking steps to tackle climate change with limited forward progress in crafting trade policies that are responsive to climate-friendly objectives? The Asian Trade Centre’s newest Policy Brief looks in detail at the difficulties of defining environmental goods. [This Talking Trade post merely highlights some of the issues explored in the Brief—be sure to read the whole thing!]
Policymakers in search of answers zeroed in on challenges in moving environmentally-friendly products across borders. They were able to identify one specific issue: potentially high levels of tariffs applied to certain goods at the borders. These tariffs were acting as a brake, impeding the flow of goods and driving up costs.
Hence, one early and sensible idea was to consider how to reduce tariffs on environmentally friendly goods. If tariffs are leading to lower utilization of climate-friendly products, the reduction or elimination of tariffs on these products should lead to their greater use.
APEC members intended to have signatories agree to reduce tariffs on listed products to less than five percent within three years. There would be “real world” consequences to inclusion/exclusion from APEC’s list of environmental goods (EGs). Items on the list would have tariffs reduced or eliminated while those not included would not.
Getting to the final set of 54 EG products, released in 2012, was not an easy process. Understanding why it was so hard highlights the difficulties that are likely to affect a range of policy responses ahead.
There are some products that have obvious environmental connections and limited alternative purposes, such as wind turbines. Adding wind turbines to a list of presumptive EG products was fairly straightforward.
However, after a handful of goods, the decision process gets much messier. To see why, consider a wooden chair. In general, a chair made of wood is likely to be more environmentally sustainable than one made of plastic resins on a steel frame. We might suggest that wood chairs be added to a list of EGs.
Except that not all wooden chairs are the same. And now we are quickly headed down a rabbit hole of EG classification issues. If we define categories too broadly, we could quickly have a list of potential EGs that spanned nearly every single good. If we said that every good was an EG, we are right back to where we started. We have also thrown open trade lanes for all goods to flow between members at zero duties or tariffs at less than five percent. It is necessary to narrow the criteria in some way.
There are two basic approaches to classification—by having criteria that must be met for inclusion on the list or by having criteria that exclude products from a list.
Start with the inclusion approach. There are two basic elements that might be fruitful for consideration: 1) products that are supportive of good environmental outcomes (like wind turbines or pollution control devices such as catalytic converters for automobiles) and 2) products that are themselves environmentally friendly. The former are often called Goods for Environmental Management (GEM) while the latter are called Environmentally Preferable Products (EPPs).
A wooden chair could fit into the second EPP criteria. However, EPP products are environmentally preferable compared to some other product. In other words, EPP requires an answer to the question, “EPP relative to what product or good?”
For instance, there are wooden chairs that are made from sawdust, glues, and laminates as well as wooden chairs that are made using hand tools from trees that were felled during a storm put together with wooden dowels alone. The first chair may not make our inclusion criteria because it does not exhibit the same environmentally-friendly manufacturing process as the second chair. In technical terms, this is called the Process and Production Methods (PPMs). Again, if we fail to take into account PPMs, we might create overly broad criteria, leaving all “wooden” chairs in our potential EG list.
Even the criteria of goods for environmental outcomes could be problematic. What makes a “good environmental outcome”? Measured against what? Are we focused on low emissions? Or reducing water usage? Or improving wastewater management? Improving biodiversity? All of the above? Some of the above?
In short, what initially seems like a good idea—to provide better benefits for environmental goods than for non-environmental goods—quickly devolves into a complicated set of arguments about which products meet or fail to meet which criteria. When there are direct economic consequences attached to these decisions (and not just academic or abstract outcomes), the process of picking products is more fraught.
At the same time APEC economies were grappling with the creation of an agreement for environmental goods, members of the World Trade Organization (WTO) were also in search of a solution to obstacles to trade in environmental goods and services. In 2014, 46 WTO members agreed to start talks in an Environmental Goods Agreement (EGA). After 18 rounds of talks, however, momentum collapsed in late 2016. As with the APEC process, it was hard to get members to agree on the appropriate scope.
One product encapsulates the difficulties in getting agreement on EGs: the bicycle. Bicycles are not included on APEC’s original list. They were added to the discussion in the WTO’s EGA and encountered fierce arguments both for and against inclusion. Clearly, a bicycle as an alternative transportation method supports environmental objectives (with an added bonus of improved health). However, bicycles can also be seen as a potential “slippery slope,” as the inclusion of bicycles might lead others to make similar arguments for skateboards or even running shoes. In addition, in the WTO context, some members had ongoing disputes over valuation of bicycles and even anti-dumping duties imposed on the product at the time of the negotiations.
Increasingly, the action on trade and climate is moving to the plurilateral and bilateral arenas. For example, Singapore and Australia have just agreed to a new list of covered goods in their Green Economy Agreement. Some included goods are similar to the APEC list but the new list also goes significantly beyond to include such items as plants for use in the restoration and recovery of landscapes; a variety of minerals and chemicals; bamboo flooring; and even bicycles (plus tires, bicycle lights, and wheels).
It may be that a ground-up approach, perhaps modeled on the agreement struck between Australia and Singapore, will ultimately yield better results. Certainly, governments may see fewer risks and more opportunities in developing bilateral or regional commitments than to tackle challenges in bigger groupings with more diverse desired outcomes.
The efforts of some Asian governments to take action are a bright spark on an otherwise dispiriting path for anyone keen to see the world reduce the amount of greenhouse gases in the environment. It is clearly not possible to continue with “business as usual” and expect any sort of different outcomes. Yet grappling with economic changes that are required to meet climate targets means that trade officials also need to reconsider past practices.
As the climate continues to warm and governments are increasingly at risk of missing their greenhouse gas emission targets, it looks like time will not support endless discussions on the “ideal” lists of goods for inclusion or exclusion or for further talks about the overall wisdom of working on environmental services rules.
These are not easy decisions but that does not mean that they can simply be put into a “too hard” bucket and ignored. It is time for the trade community to roll up sleeves and get stuck into figuring out how to navigate trade-related challenges that are impeding the spread of climate-supportive goods, services and investments and better facilitate solutions for the future.
***This Talking Trade is a shorter version of our new Policy Brief. The series examines how trade policy does—and does not—support climate-friendly outcomes. If you would like to discuss this further, please contact us today at info@asiantradecentre.org***