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9 December 2020updated 31 May 2021 1:17pm

Green free trade: Oxymoron or potential climate action tool?

The EU wants to use global trade as a tool to fight climate change, but with negotiators under pressure to get deals done, turning free trade agreements into purveyors of clean energy technology will be tough.

By Dave Keating

Historically, the UK and the US have been the greatest champions of free trade. However, negotiators in Brussels and Wellington, New Zealand, believe they are in the vanguard today as they hammer out an EU-New Zealand free trade agreement. As the pressure to meet climate targets grows, they hope the deal will be the greenest in history. This increased attention on environmental protection in trade deals is part of a wider, slowly growing trend.

While the economic results of shipping goods around the world may be positive (although not everyone would agree), the climate and environmental impacts are definitely more than questionable. If the world is to reduce emissions in line with the Paris Agreement, industry and governments will have to take a good hard look at whether free trade is compatible with this goal. Negotiations taking place between the EU and New Zealand could offer a template for a greener global trading system.

Talks between Brussels and Wellington on a free trade deal are in their early stages. But both sides are “very committed” to making this vision a reality, says Johanna Lehne, a senior policy adviser with the climate think tank E3G. She cites the involvement of the EU and New Zealand in recent efforts at the World Trade Organisation aimed at liberalising trade in environmental goods and services, eliminating fossil fuel subsidies and encouraging eco-labelling.

The EU is desperate to find positive messages about free trade. The bloc’s free trade deal with Canada (CETA) was almost killed at the last moment by the Belgian region of Wallonia in 2014, over myriad concerns including labour rights and the environment. Parallel US-EU free trade talks (TTIP) were also already in serious hot water over various environmental and social issues when the election of Donald Trump in 2016 finally killed them off.

These failures triggered some deep thinking in some quarters in Europe. Even Germany, generally more focused on the economic potential of trade, seemed to be coming round to the importance of including climate provisions in free trade agreements (FTAs).

“The design of future trade agreements is a very important question,” said German Economy Minister Peter Altmaier in October .”Anything that helps to ensure the European path to climate neutrality can be consistently pursued without competitive disadvantages for European industry and business is of course supported by Germany.”

However, for many climate campaigners, the idea of ‘green free trade’ is an oxymoron.

“Many NGOs think free trade deals have led to overconsumption,” says Lehne, acknowledging that a “huge proportion” of the decline in EU emissions is thanks to the bloc offshoring the production of goods with a large embodied carbon footprint.

The other side to the story is that “there is also a strong factor of bringing down the learning costs of technology globally, diffusing green technologies, and accelerating climate ambition,” adds Lehne. “Trade can also be a powerful potential tool for fighting climate change if we get it right.”

Getting greener

The key question is whether the sustainability chapters of free trade deals can balance out the parts that may lead to more environmental damage or emissions. That is why lots of effort is going into fleshing out and strengthening these chapters, which until now have mostly been lip service.

The shift can be seen in the EU’s most recent trade talks. “The rule of thumb seems to be the newer the agreement, the better some of these elements are – at least on paper,” says Marianne Kettunen, a policy analyst with the Institute for European Environmental Policy. She points to the EU-Japan FTA that took effect in February last year as the greenest deal yet, along with those being negotiated with New Zealand and Australia.

“It means the EU is learning and improving, but not always,” says Kettunen. “Australia and New Zealand are being negotiated at the same time as Mercosur, but the latter isn’t looking as green as the former. So the final outcome of a trade negotiation is a combination of the heightened level of EU aspirations and the partner country government.”

The EU’s trade deal with Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) bucks the greening trend. Negotiations on that pact were concluded in 2019, but ratification looks increasingly unlikely because of concerns about its environmental impact – particularly that it would drive increased destruction of the Amazon rainforest. France and Ireland have been most vocal in opposing the deal, and last month the European Parliament voted to officially reject it. The lesson to the Commission was clear: if the trade deal you negotiated isn’t green, it is likely to be rejected by MEPs and member governments.

Enforceability challenge

So what makes a deal green? Enforcement tools in the trade and sustainable development chapters are most important, says Lehne.

“Look for an action plan, a clear timeline in which partners expect commitments to be adhered to,” she says. “The problem with labour and climate issues is they have been treated as the second-class citizens of trade agreements. They are in a separate section. It is important they are embedded fundamentally throughout the trade agreement.”

The problem with keeping sustainability provisions in a separate chapter is that they become less enforceable than the rest of the text. “Breaches to these provisions lead to no sanctions, and it is unclear what happens when there is a dispute,” says Kettunen.

Mechanisms to address sustainability disputes haven’t really been tested, but they are about to be put in the spotlight with a first-ever dispute settlement on labour rights under a sustainable development chapter of the EU-Korea FTA. “Korea seems to be claiming sustainable development chapters are merely aspirational and obligations can’t be derived from them,” says Kettunen.

The Commission also appears to be acknowledging that the sustainability provisions it has negotiated so far may not have been stringent enough. In his confirmation hearing last year, Commission Vice-President Valdis Dombrovskis, who is in charge of trade, said the implementation and enforcement of sustainability rules “should be stepped up”. It was a major departure from the policy of his predecessor Cecilia Malmstrom, who had told the European Parliament that insisting on enforcement would mean the EU had to make capitulations in the trade realm in return. The new narrative is that partner countries know that without those enforcement guarantees they won’t get a deal with the EU, as has been shown by the Mercosur debacle.

The worry, however, is that countries will spurn the EU and go to other countries like the US and China for a trade deal. China has just concluded the Regional Comprehensive Economic Partnership (RCEP) free trade deal with a host of Asia-Pacific nations. Negotiators used a skeleton of the Trans-Pacific Partnership (TPP), which was being negotiated by the US with these countries but was abandoned by the Trump administration, for the deal. However, while the TPP had some small green provisions, the RCEP has none.

Kettunen questions why Japan, New Zealand and Australia have not insisted on sustainability provisions in the RCEP, when their free trade agreements with the EU will be among the greenest the EU has negotiated. “What is the perspective of those countries?” she says. “How have they entered these different agreements with very different standards?”

Inexperienced British

The need for robust guarantees has been at the heart of the EU-UK free trade negotiations, with the EU demanding robust level playing field provisions to ensure the UK doesn’t deregulate in areas such as the environment in order to unfairly compete with the EU.

The UK has said it wants to be a great free-trading nation after Brexit, and that it wants its free trade deals to be green. But so far, it has been mostly preoccupied with negotiating replications of the already-existing FTAs the EU has with third countries, so as to avoid a disruption of UK trade with those countries on 1 January. London has not pushed for those deals to be any greener than the existing arrangements with the EU.

“It’s hard to say whether EU or UK free trade will be more green in the future,” says Kettunen. “The EU has an existing greenish or in process of being greened framework in place for its FTAs. It has a starting point the UK doesn’t have because the UK is just starting to negotiate free trade deals for the first time in decades.”

Gwen Buck, a policy adviser with the think tank Green Alliance, says it is hard to know yet if the UK government is as serious about green trade as the EU.

“They have got the rhetoric in place around giving their future trade agreements a climate focus, but what is missing is that being backed up by legal requirements,” she says. “MPs don’t legally have a vote on future trade agreements, which means the government isn’t accountable and there isn’t pressure.”

While the European Commission is facing the pressure of the European Parliament and national governments to make sure its negotiations are green, the UK government is facing no such oversight.

“The government has started doing some good things; joining the WTO group on trade and sustainability, for instance,” says Buck. “But at the same time there seems to be less join up on things like investment, supply chains, and making sure environmental provisions are enforceable in trade deals.”

The big question is whether a future US-UK trade deal would be green or not. Both sides have made supportive noises, even if the final outcome remains far from clear.

“We saw some encouraging things from Biden’s campaign about green trade, like no fossil fuel subsidies in trade deals,” says Buck. “That being said, the substance of a US trade deal could still be really damaging for the environment in the UK. US agriculture is extremely intensive, there are lower standards, [and] antibiotics, pesticides use and chemical legal limits are much higher.”

Another concern is that the UK did not try to increase the environmental or sustainability aspects in the trade deal it recently signed with Japan, which is essentially a carbon copy of the EU-Japan trade deal. This could have been a way for the government to signal that Brexit could have a positive material impact. Instead, the focus was on getting the deal done before the end of the Brexit transition period on 31 December.

A US-EU free trade deal may be more likely to have pioneering green provisions than a US-UK deal, since the former is a negotiation of two equal powers while the latter is heavily tilted in the US’s favour. “I would imagine if or when TTIP is revived, the EU will follow the Green Deal premise, so it will be at least striving towards sustainability and greenness,” says Kettunen.

Investor protections

More than anything else, what almost killed the EU-Canada free trade deal in 2014 was the inclusion of controversial investor state dispute settlement (ISDS) mechanisms. Climate campaigners say these arrangements, which protect investors against sudden policy shifts by governments, are preventing climate policies from being enacted.

They point to the Energy Charter Treaty as an example. It was signed by European countries at the end of the Cold War to give investors confidence in the new democracies in eastern Europe. However, it has morphed into something far beyond its original intention, and is being used by companies to sue governments for energy policy changes.

“We got very worried when German company Uniper used the treaty to threaten the Netherlands for its coal phase out law,” says Cornelia Maarfield, trade and climate project manager at Climate Action Network Europe. “Though they didn’t pull the trigger, the threat was made publicly just ahead of the Dutch parliament deciding on the law. It was a clear attempt by the company to influence decision makers. That can lead to regulatory chill. It can mean the law becomes weaker or that climate action gets a high price tag if taxpayers have to pay for these compensations.”

The European Commission is preparing a proposal to present to the non-EU treaty parties to remove fossil fuels from the scope of the treaty, but it will be an uphill battle to convince them. NGOs would prefer to see the EU pull out of the treaty entirely, a move that would likely make the whole instrument collapse. As the EU eyes new trade deals around the world, campaigners say these ISDS previsions for fossil fuels are incompatible with any idea of green trade.

“There are so many problems associated with this kind of investment protection – the substantive rights that investors get as part of these agreements are in many cases more than the protection investors get even under national law,” says Maarfield.

The EU’s greener focus on trade, and its experience with CETA, may mean ISDS fail to make it into new trade deals, she adds. “If TTIP is revived I honestly don’t think the risk for ISDS being in it is so great,” she says. “I think both sides would be cautious about trying for a comprehensive trade agreement. I think considering the resistance TTIP had on both sides of the Atlantic last time, and the fact Biden doesn’t seem to be so keen on having a huge trade deal with the EU, it is unlikely.”

As EU negotiations with Australia and New Zealand go forward, and UK talks with those countries take place in parallel, observers will be watching to see what type of green trade ideas take shape. International pressure to reduce emissions is on, but with so much international competition to secure free trade deals, a race to the bottom could be the dangerous result as countries focus simply on getting deals over the finishing line.

This article is part of a New Statesman series on green free trade. See also:

Why Investor lawsuits could slow the energy transition

Could Covid-19 kill the investment treaty?

Featured photo by Roslan RahmanAFP via Getty Images.

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