By Jaime de Melo
“Trade can’t sit outside of our work to tackle climate change. In fact international trade rules are uniquely placed to be part of the solution by removing trade barriers for green products and services and stopping pollution being subsidised… If trade rules can require subsidies to be removed from things like agriculture, then it is only consistent that they also require subsidies to come off polluting fossil fuels.”
Hon. Jacinta Ardern, Prime Minister of New Zealand, at the launch of an Agreement on Climate Change, Trade and Sustainability (ACCTS)
Along with many poor countries in Africa and Asia, small trade-dependent economies have contributed the least to climate change while suffering the most. They are also certain to suffer the most from climate change in the future. This means that they will have to do the most to adapt, leaving little room for mitigation policies. This prognosis applies even more strongly for islands where the effects of environmental damage propagate even faster, as noted long ago by Pierre Poivre in Mauritius.
Some countries have made efforts at mitigation. Among the very few, starting in 1990, Sweden has progressively applied a substantial carbon tax. Today, average per capita CO2 emissions in Sweden are half the average for high-income countries. This figure is below the estimated worldwide per capita average to be reached by 2050. For high-income countries, in 2010, the average per capita CO2 emissions was 11.5 tonnes. For Sweden, average per capita emissions were 5.5 tonnes (the corresponding average for Mauritius, is 3.1 tonnes). Estimates suggest that average worldwide per capita emissions should stabilise at 7-8 tonnes per capita by 2050. But almost all other countries have failed to take measures.
The tragedy – particularly for the 40 Small Islands Developing States (SIDS), including Mauritius, where past and future damages will be more pronounced than elsewhere – is that we are not on the path to meet what The Economist (21 September 2019) has called the ‘super-tanker challenge’ because governments (and the private sector) have procrastinated. For small countries that are trade-dependent, as recognised in the statement by the prime minister of New Zealand, an all-round removal of barriers to trade in ‘green goods and services’, often called Environmental Goods and Services (EGS), is important both for mitigation and adaptation. First, they will gain greater market access for their exports of green goods. Second, and equally important, by opening their markets of EGS to trade, they will be able to adapt better by having access to ‘end-of-pipe’ goods and services (e.g. services for the detection and control of losses in transmission lines or wastewater management services, recycling) to meet environmental challenges, all this at lower costs.
Agreement on Climate Change, Trade and Sustainability
Multilateral and regional negotiations to remove barriers to trade in EGS have failed even on a very limited agenda covering only tariff barriers as negotiators have continuously displayed mercantilist behaviour (open your markets to my exports while I will not open mine to yours). Against this background, this fall, Costa Rica, Fiji, Iceland, New Zealand and Norway have decided to move ahead and announced the launch of negotiations for an Agreement on Climate Change, Trade and Sustainability (ACCTS). The agreement intends to remove tariffs on Environmental Goods (EGs) and make new commitments on Environmental Services (ESs); to establish concrete commitments to eliminate fossil fuel subsidies; and to develop voluntary guidelines for eco-labelling programmes and mechanisms.
All measures relating to the elimination of tariffs and to commitments on opening up markets on environmental services will be negotiated at the World Trade Organisation (WTO). Equally important, all reductions in barriers to trade on EGs and ESs will be extended to all WTO members on a Most-Favoured-Nation (MFN) basis. So for example, if all five countries agree that bicycles is indeed unambiguously an environmentally preferable product because of no environmental damage during usage (and has health co-benefits), any exporter of bicycles to ACCTS members will have duty-free access. This non-reciprocal approach stands in sharp contrast with the previous negotiations.
In an article in le mauricien published on 3 December 2019, I urged Mauritius to join the ACCTS group suggesting that any delegation to the COP25 in Madrid contact members from the ACCTS group. I noted that the measures resulting from these negotiations would: 1) help put the country on a sustainable development path; 2) by reflecting the efforts of other committed countries, give additional support at home when facing any politically difficult decisions; 3) burnish the image of Mauritius as an “environmentally friendly” country in the outside world.
Per capita CO2 emissions of Mauritius have been rising rapidly.
Here (and here) I elaborate on why Mauritius should have considered joining and delineate the broad contours of what each ACCTS member can expect from the negotiations, taking for granted that Mauritius and ACCTS members are ‘like-minded’. Fiji and Mauritius have the lowest rankings in the Environmental Protection Index (EPI) and in the share of renewables in energy in consumption. The EPI index is the average of the environment health index and the ecosystem vitality index. Mauritius ranks 172/180 on the ecosystem index and 38/180 on the environment health index. Per capita CO2 emissions of Mauritius have been rising rapidly and were already off track on the Millenium Development Goals (MDG) targets in 2010. Per capita CO2 emission target was 1.4 ton per capita by 2015. MDG target on water usage was also off track.
Eliminating tariffs on Environmental Goods
In previous attempts, negotiators have failed to agree on a list of green goods over which to negotiate tariff reductions. This should not be the case for ACCTS members since whatever list is chosen among those suggested in previous negotiations, average applied tariffs are low across members with zero per cent for Mauritius and Norway. There are also very few tariff peaks above 10%, leading some observers to conclude that negotiations only dealing with tariffs were at best, removing crumbs on the table. Yet, countries could not agree on lists, clear evidence that negotiators were interested by market access rather than about the environment. Much greater impact will come from reducing environmentally harmful fuel subsidies.
Tackling fuel subsidies
This is where potential environmental benefits from reforms will be greatest. Sustainable Development Goal (SDG) 12 has set out to rationalize “inefficient fossil fuel subsidies that encourage wasteful consumption”. Both the Group of 20 and the Asia Pacific Economic Cooperation (APEC) regional forum have made the same pledge ten years ago to take action “over the medium term”. Here too, so far, no corrective steps have been taken.
Several factors continue to contribute to this inaction. First, measuring fuel subsidies represents a big challenge both because it is technically difficult and because countries do not delegate energy pricing to supra-national bodies, even among the highly integrated economies of the European Union. Second, in low-income countries where governments have limited capacity to collect revenues, fuel subsidies are often the main redistributive instrument in the hands of governments, the objective being to give access to energy to low-income households. Usually, however, this targeting has functioned poorly. A large share of subsidies does not reach the poorest households.
These circumstances contribute to explain, at least partly, why there is no international agreement on the definition of a fuel subsidy, nor one on how to develop an indicator to detect and monitor corrective measures. Fortunately, all ACCTS members are middle or high income countries. They have the capability to collect data to measure the different subsidy categories (production and consumption), helping them to distinguish between environmentally friendly and environmentally harmful subsidies.
Group peer pressure should help speed up the successful completion of these necessary preliminary steps that would pave the way for removal of the most harmful subsidies and for reforms in energy pricing later on. Nonetheless, the sharp differences in fuel prices between two high-income members, Iceland and Norway, and the other group members are indicative of the difficulties ahead when it will come to eliminate progressively subsidies that are harmful to the environment. Again, group participation should help members move forward.
It is widely accepted that the reason behind inaction on fighting Climate Change is that it is the ‘ultimate’ Global Public Good because of perfect leakage of benefits from those who contribute to those who free ride: the ratio of excludable benefits (by those who bear the costs of mitigation) to total benefits tends to zero. However, reducing emissions of polluting gases also have local (i.e. excludable) benefits in the form of reduced health damage. These benefits are excludable, so the incentive for individual (and collective) is greater especially in small groups where coordination costs are lower.
There is a great degree of ‘jointness’ or complementarity between the services provided by Environmental Goods (EGs) and those provided by Environmental Services (ESs), especially for developing countries. Case studies by OECD in 2005 show that the ESs included in environmental projects incorporate an increasingly large array of services that extend beyond those that are classified as ESs. Recent estimates of trade costs in services suggest that they could be two to three times higher than those for trade in goods (estimated using the same method).
Mauritius has a keen interest in consolidating its Services sector.
With three quarters of its GDP in Services, Mauritius has a keen interest in consolidating its Services sector. Mauritius has participated in the GATS and joined the TiSA negotiation group in 2013. These negotiations are stalled since 2016.
Unfortunately, it is far more difficult to come up with measures of restrictiveness in ESs that would guide negotiators about the benefits of where to remove trade restrictions. First, only four sectors are classified as ESs in the UN Central Product Classification (Provisional CPC). Until countries agree on a new classification of ESs, multilateral negotiations would start from this classification that was drawn up during the Uruguay Round before the advent of ICT and supply chain trade.
During the Uruguay Round, negotiations on trade in services took place over 155 services sub-sectors. Among these, only four sub-sectors were classified as ESs: sewage services; refuse disposal services; sanitation and similar sectors; and other services that include cleaning services for exhaust gases, noise abatement services, nature and landscape protection services, and other environmental services not elsewhere classified.
Mauritius’ position on the Environmental Protection Index has deteriorated over the decade.
ACCTS members will want to choose an extended and more appropriate list. Reaching agreement on such a list from which to make commitments on market access and national treatment should be easy among this small group. Here too, the ACCTS group could lead the way for further negotiations down the road. However, benefits from these new commitments would depend on their being extended to all WTO partners on an MFN basis.
Mauritius launched ‘Maurice Ile Durable’ in 2008 as a new long term vision for making Mauritius a sustainable island. Mauritius is also participating in the SDGs establishing targets for 2030. As a signatory of the Paris Agreement on Climate Change in 2015, Mauritius has also submitted mitigation contributions (the so-called Intended Nationally Determined Contributions). As with the lists of mitigation activities proposed by many countries, these contributions do not specify explicit targets.
In the meantime, Mauritius’ position on the Environmental Protection Index has deteriorated over the decade. Joining the Agreement on Climate Change, Trade and Sustainability, if it is not too late, would provide a needed impetus to mitigate more, while at the same time joining a group of countries determined to go ahead and to be the first to adopt measures to protect the environment rather than to carry out an exchange of market access.