Decarbonization and international trade

November 09, 2023

Trade can be the catalyst for global decarbonization, using green energy from Latin America and the Caribbean for an equitable ecological transition.

Decarbonization and international trade

There will soon be another COP which, once again, will deal with 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 there is unequivocal evidence of a link between climate change and an increase in the intensity of extreme weather events, so far we haven't seen the sense of urgency that the situation requires.

What we do see is great and growing attention to the business opportunities associated with climate change and policies that target local interests, when the issue transcends borders and requires cooperation and coordinated, collective action. For example, over 85% of new green energy projects are concentrated in a few developed countries and in China, as if it were possible to save oneself alone, while developing countries face significant difficulties in accessing financing and technologies for adaptation and mitigation.

Although the efforts of advanced countries and China to move forward with the energy transition are important, after all, they are the biggest emitters of greenhouse gases, it will still take several decades for their electricity matrices to be carbon-neutral. The concern grows even more when we witness delays and relaxations in the environmental targets and policies of several advanced countries and when 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 electoral campaigns and is even leading companies to review green investment plans in those economies.

To preserve the planet, it will be necessary to use a wider arsenal of instruments, one of which is international trade. In fact, the economic interconnection 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, major previous investment efforts in renewable energies and the development of technologies and value chains for biofuels and other sustainable technologies. All this puts the region in a privileged position in terms of time-to-market and attractive cost structures for producing green manufactures. In addition, politicians and the general population support sustainability policies.

Think 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), elements required 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 needed to produce SAF in a very competitive way.

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

But there are other channels through which international trade can accelerate decarbonization. Trade encourages the spread of cleaner and more 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, via 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 act as a platform for collaboration and partnerships.

Despite the obvious benefits of trade for decarbonization, there are challenges. Protectionist policies, discrimination and subsidies in the green area implemented by advanced countries are already causing profound distortions in pricing systems and in the allocation of resources and investments, alienating mainly developing countries.

Likewise, policies that lead 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 heavily on converting 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, it is essential that there is coherence and balance between environmental, trade and economic and social development policies so that decarbonization takes 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 speeds up the time and reduces the costs of the transition and also combines the climate agenda with agendas of national interest, green and just transition and corporate interests. It is therefore no exaggeration to consider trade to be 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-