G7 Summit: The Role of Trade Policies in Support of Climate Action

The G7 Energy Ministers’ Summit of April and the Head of State’s Summit of June in Hiroshima (Japan) provide an important opportunity for like-minded, trade-oriented, major economies to agree on a common framework for aligning trade and climate policies. The Consortium for Climate-Aligned Trade (CCAT), an informal coalition of researchers and think tanks, including Institut Montaigne, has provided a set of recommendations on how best to do this and to minimize carbon leakage, which occurs when greenhouse gas emissions are shifted from one country to another and undermines joint climate action. In this piece, Joseph Dellatte, representative of Institut Montaigne in the Consortium, stresses how the G7, currently under Japan’s presidency, could promote trade policies that support rapid decarbonization of energy-intensive industrial sectors such as steel, aluminum, chemicals, hydrogen, and cement. These recommendations include clarifying the timeline for industrial decarbonization, focusing on reducing the greenhouse gas emissions required to manufacture and transport traded goods, stating that climate-related trade policies can be useful and appropriate, creating a mutually supportive, rules-based approach to aligning climate-related trade policies, and finding common ground and exercising due restraint when managing differences in climate-related trade policies.

Climate change is one of the most significant global challenges of our time, and it is imperative that we find ways to align trade policies with efforts to tackle this issue. As a group of leading industrialized nations, the G7 has a unique opportunity to play a key role in developing such policies. This is particularly the case since the G20 has been unable to agree on climate and trade measures, and the fact that article 3 of the UNFCCC prevents Conferences of the Parties from considering trade measures.

Trade policies have the potential to either support or undermine efforts to reduce greenhouse gas emissions and to mitigate the impacts of climate change. As such, it is crucial that we align our international trade policies with climate change targets to ensure that they are not contributing to the problem we are trying to solve.

The Paris Agreement, adopted in 2015 by the United Nations Framework Convention on Climate Change (UNFCCC), provides a framework for countries to work together to limit global warming to well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5°C. The agreement, however, does not ask countries to take into account the impact that trade is having on their climate action,  nor does it encourage trade policies to take account of  climate action.

Trade policies can have a negative impact on climate action. Over the last few decades, the amount of greenhouse gas (GHG) emissions produced during the creation and transportation of goods and services that are exported and imported has risen. On average, these emissions make up 20-30% of the world’s total GHG emissions. Trade agreements that prioritize economic growth over environmental protection may lead to increased greenhouse gas emissions through transportation, the trade in carbon-intensive goods or deforestation. Additionally, trade policies that prioritize cheap and easy access to fossil fuels may encourage their continued use, rather than encourage  the adoption of renewable energy sources in manufacturing and production. To ensure that international trade policies are aligned with climate change targets, we need to take a comprehensive approach that considers both the positive and negative impacts of trade policies on the climate.

One key area where trade policies can support climate action is by promoting low-carbon technologies and the creation of lead markets. Countries could use trade agreements to incentivize the deployment of renewable energy technologies, such as wind and solar power, green hydrogen, or to phase out subsidies for fossil fuels by agreeing to only import goods that respect these requirements through a monitored carbon accounting. This would not only help to reduce greenhouse gas emissions, but also promote the development of new carbon neutral industries and create new jobs in these sectors.

The role of the G7

The G7 nations should reaffirm their  commitment to decarbonizing their industrial sectors within a timeframe compatible with the Paris Agreement. The G7 nations have already pledged to reach zero net emissions by mid-century, but achieving this goal will require deep decarbonization of their entire economies, including their energy-intensive industrial sectors such as steel, cement, or chemicals. Last year, G7 countries launched a Climate Club that now needs to be strengthened as recommended in the Institut Montaigne research report.

The G7 should therefore clarify that industrial decarbonization will occur fast enough to contribute to achieving the temperature goals of the Paris Agreement. By clearly establishing the credibility of the policy, this will foster the essential investments needed for decarbonization efforts. Reducing the embedded carbon emissions or carbon intensity of traded goods should be the primary focus of climate-related trade policies taken by industrialized nations.

Policies aimed at addressing climate change and fighting carbon leakage such as the USA’s Inflation Reduction Act and the EU’s Carbon Border Adjustment Mechanism, have already been met with suspicion and criticized for being protectionist. However, it is vital for countries to implement such bold policies in order to tackle the climate crisis and achieve carbon neutrality within the next 27 years. The best achievable policy options for one country may not always be the same as those for its trading partners, which can create tension and the potential for retaliatory measures.

In this context, the G7 should state for the first time that climate-related trade policies, when done in accordance with international rules, can be useful and appropriate policy tools for tackling the climate crisis. Such policies can include subsidies for climate technologies, carbon border adjustment mechanisms, green procurement, and more. When done right, climate-related trade policies are legitimate ways for nations to advance climate goals.

In the aim to collectively tackle the climate challenge, countries should therefore agree to exercise due restraint when managing differences on climate-related trade policies. G7 countries should strive to avoid trade irritants and work to overcome differences through dialogue whenever possible. Even when differences remain, nations should make every effort to avoid escalating trade disputes or seeking international review.

Industrialized nations must champion the creation, well before 2030, of a mutually supportive, rules-based approach to aligning climate-related trade policies, working with other countries, including developing ones, whenever feasible. Decarbonizing the industrial sectors will become more difficult, if not impossible, if nations are reluctant to adopt strong climate policies because they fear carbon leakage. The G7 should set a time-bound goal for arriving at a common framework for aligning trade and climate policies, building on existing national and regional approaches.

Accordingly, the G7 should agree to work together to expand trade in climate-friendly goods and services in ways that help create resilient and secure supply chains. Like-minded and climate-minded nations should commit to working together and with others when possible to increase the availability of carbon-neutral goods and services, creating lead-markets, while also improving supply chain resilience and security.

Aligning international trade policies with the carbon neutrality targets is a critical component of global efforts to mitigate the impacts of climate change. By promoting the adoption of low-carbon technologies, and by avoiding policies that prioritize economic growth over environmental protection, we can help to build a more sustainable and resilient global economy for future generations. It is a complex task, but it is essential to the future of our planet. Although the G7 does not encompass the whole global trade anymore, it holds a crucial position in creating effective, equitable policies to adapt international rules. If the G7 aligns its trade policies with climate objectives, it can lead the way towards a sustainable future and inspire non-G7 nations to do the same.

The view of this post are solely those of the author and may not reflect the viewpoints of all organizations and individual experts involved in CCAT.