Development, trade and carbon reduction: designing coexistence to promote development

Working and discussion papers
February 2010
Jodie Keane, James MacGregor, Sheila Page, Leo Peskett and Vera Thorstensen

The impact of climate change will impose new costs on developing country exporters, especially if markets do not work correctly and international agreements are not well designed. If the costs of carbon emissions are priced correctly, then markets could ensure that emissions are reduced in the most efficient ways.  Internationally agreed and administered rules are needed for both trade and climate change, as the actions of one country can damage the interests of others and because coordinated action can improve the outcomes for all. These papers explore three ways of helping developing countries and the international system deal with the new problems: aid to meet the additional costs, new markets in carbon reduction commitments, and reconciling the differences between the world trading system and the international conventions on climate change.
Any new rules may themselves impose additional costs.  Jodie Keane’s paper explores some of the adaptation and mitigation options for agricultural producers in low income countries. Measures such as Aid for Trade and climate change finance could work together to address some of the challenges they face. But she cautions that the experience of Aid for Trade shows that there are difficulties in reconciling any aid programme for an internationally agreed objective with country development programmes.
Leo Peskett looks at one of the most advanced proposals for a market-based approach, REDD, the mechanism to Reduce Emissions from Deforestation and Degradation. He examines some of the problems in designing and funding programmes to provide incentives for developing countries to conserve their forests, rather than using their products in trade. He notes the difficulties of ensuring that the carbon saving is correctly priced and that programmes to secure short-term carbon saving do not distort the incentives for investment in longer term projects.
That carbon be priced correctly is a condition for any market approach to work correctly. As James MacGregor argues, this should make exports from developing countries more competitive in international markets because their production methods are usually low-carbon. But he finds that some approaches to calculating ‘carbon footprints’ are too simplistic to give the right answers. There is a risk that inappropriate private standards will create a bias against developing country exports which would damage both development and the environment.
Vera Thorstensen emphasises that the trade and climate change regimes have been developed over the years in completely different contexts. The trade regime is now more than 60 years old. It is based on defining permissible policy measures and has binding rules and an effective dispute settlement mechanism. In contrast, the climate change regime is younger and has emphasised specifying targets, not instruments, without a clear legal framework. Now, with the impacts of climate change on the environment, the economy and international politics, pressure is mounting on governments at the national and multilateral level to use all tools, including trade policies, to slow climate change. She identifies the potential conflicts between mechanisms to deal with climate change, including international and national rules, standards for carbon content, and funding mechanisms, and the WTO’s body of rules which restricts countries from taking measures with effects on trade or investment. 
As Vera Thorstensen concludes, a new pragmatic approach is needed – one that includes the co-existence of different regimes. But this will not be enough. As both she andJames MacGregor note, not all the controversies over trade and climate policies stem from differences on how best to reconcile the objectives of development and carbon reduction. Some use biases in carbon measurement or exceptions to the rules to protect the interests of existing producers in developed countries. 
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