A Sectoral Approach Allows an Artful Merger of Climate and Trade Policy

Abstract

Climate and trade policy present serious contemporary challenges for all nations. Developed market economies are struggling with trade policy in the modern era of globalization, and the resulting realignments are straining the post-war international economic order. National emissions pledges under the Paris Agreement appear at present to fall far short of achieving the greenhouse gas (GHG) emissions cuts that science suggests are needed to remain in a <2°C world. Merging climate and trade policy could provide developed economies a strategy for limiting global emissions while protecting and promoting their economic competitiveness. Since the adoption of the Kyoto Protocol, border carbon adjustments (BCAs) that would help protect domestic energy-intensive industry and prevent leakage have been discussed as a mechanism to make unilateral climate mitigation more politically attractive. Especially if implemented non-cooperatively, BCAs open the backdoor to protectionism and retaliation, and potentially allow nations to retreat behind static barriers. Developments in international trade policy make this alternative to traditional climate diplomacy more viable today than previously, and also increase the chance of climate protectionism. We propose an alternative policy framework—a cooperative sectoral tariff reduction (CSTR)—that would help provide dynamic incentives to improve performance, reduce the chance of BCAs being coopted for protectionist purposes, and create the foundation of a carbon club.