Decarbonization and international trade

November 09, 2023

Trade can drive global decarbonization, harnessing green energy from Latin America and the Caribbean for a green and just transition.

Decarbonization and international trade

There will soon be another COP that will, once again, address compliance with the Paris Agreement to limit the increase in the planet's average temperature to 1.5C. These efforts are more than necessary, after all, despite the fact that the planet's average temperature is rising faster than predicted and that there is unequivocal evidence of the link between climate change and the increased intensity of extreme weather events, we have so far not seen the sense of urgency that the situation requires.

What we do see is a great and growing focus on the business opportunities associated with climate change and policies aimed at local interests, when the issue transcends borders and requires cooperation and coordinated, collective action. By way of example, more than 85% of new green energy projects are concentrated in a few developed countries and China, as if it were possible to save oneself, while developing countries face great difficulties in accessing finance and technologies for adaptation and mitigation.

Although the efforts of advanced countries and China to advance the energy transition are important - after all, they are the largest emitters of greenhouse gases - it will be several decades before their electricity matrices become carbon neutral. Concern grows even more as we witness delays and relaxations in environmental targets and policies in several advanced countries and as we also witness a growing popular wave of opposition to decarbonization policies. This issue is becoming so complex and divisive that it is already part of election campaigns and is even leading companies to review their green investment plans in these economies.

To preserve the planet, it will be necessary to use a wider arsenal of instruments, one of which is international trade. Indeed, economic interconnectedness between countries offers unique opportunities for decarbonization. Consider powershoring. Latin America and the Caribbean (LAC) has the greenest electricity matrix in the world and several countries already have practically green or very green matrices, the result of comparative environmental advantages, significant previous efforts to invest in renewable energies and the development of biofuels and other sustainable technologies and value chains. All this puts the region in a privileged position in terms of time-to-market and attractive cost structures to produce green manufactures. In addition, politicians and the general public are supportive of sustainability policies.

Consider the cases of green steel and sustainable aviation fuel (SAF). LAC countries have high-quality iron ore, ample water resources and renewable energy to produce green hydrogen (H2V), all of which are necessary for the production of clean steel, a critical input for greening many production chains around the world. Countries in the region also already have the biomass and other conditions necessary to produce PBS very competitively.

By embracing energy-intensive industrial chains and accelerating the supply of green manufactured products to the world, powershoring reduces the costs and timelines of decarbonization, helps address resistance to environmental policies in advanced countries, and serves corporate interests in competitiveness, compliance and decarbonization. Thus, powerhoring promotes efficiency while serving everyone's interests.

But there are other channels through which international trade can accelerate decarbonization. Trade encourages the diffusion of cleaner and innovative technologies, facilitates access to renewable energy technologies, promotes energy efficiency through the exchange of knowledge and innovative products, and stimulates greener supply chains. International trade also rewards, through the market, countries that seek to lead investments and technologies in sustainable practices, stimulating a global race for new solutions. The global market for carbon credits and environmental services also encourages decarbonization and conservation. And international trade can serve as a platform for collaboration and partnerships.

But despite the obvious benefits of trade for decarbonization, there are challenges. Protectionist, discriminatory and subsidized green policies pursued by advanced countries are already causing profound distortions in pricing systems and in the allocation of resources and investments, mainly alienating developing countries. Likewise, policies leading to the virtual paralysis of the dispute settlement system and other institutional frameworks within the WTO also limit the contribution of trade to decarbonization.

Another major challenge is the unilateral imposition by advanced countries of rules, standards, certifications and other mechanisms and non-tariff barriers that neutralize comparative and competitive environmental advantages, especially for LAC countries. The lack of impartial and balanced international arbitration to determine and monitor standards, norms and non-tariff barriers in the green area weighs on turning the decarbonization agenda into an inclusive and collectively empowering agenda. Another challenge is the huge inequality in access to sustainable technologies and to financing and guarantees to make green investments viable in developing countries. Finally, coherence and balance between environmental, trade and economic and social development policies is essential for decarbonization to take into account the immense differences and needs between countries.

Trade is perhaps the agenda with the most holistic approach to promoting decarbonization. After all, trade accelerates the time and reduces the costs of the transition, as well as combining the climate agenda with national interest agendas, green and just transition and corporate interests. It is therefore no exaggeration to consider trade as one of the most powerful catalysts in the fight against climate change and against resistance to sustainability policies.

Jorge Arbache
Jorge Arbache

Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-