The G7 climate action you may have missed – harmonizing trade policies with climate goals

This article discusses recent G7 outcomes on trade and climate, highlighting new reports on this topic by Climate Advisers and its partners in the Consortium for Climate-Aligned Trade, and previews a public event with Senator Bill Cassidy on May 2nd, during which he will discuss his forthcoming proposal for a U.S. carbon border adjustment mechanism. The views expressed in this article represent solely those of Climate Advisers and may not reflect the viewpoints of all organizations and individual experts involved in CCAT.

Recent news reports about G7 political discussions on climate change have focused on different views these nations have about how quickly to phase down fossil fuel use. In so doing, press reports overlooked encouraging progress within the G7 on harmonizing trade and climate policies. 

International trade is tied to 25% of global greenhouse gas (GHG) emissions. Achieving global science-based climate goals, including limiting warming to 1.5° C, won’t be possible unless nations use trade policies to accelerate climate action.

How? First, trade policies need to support government policies and programs to spur the development and adoption of clean technologies. Second, trade policies also have a role to play in guarding against carbon leakage, which is the shifting of purchasing to offshore goods to escape costs associated with climate policy. Let’s look at each of these ideas in turn.

Governments play an important role in spurring innovation and scaling-up markets for clean technologies. The United States is now priming the pump for the clean economy at an unprecedented scale through the Inflation Reduction Act (IRA) and other legislation passed by Congress during President Biden’s first two years in office. The European Union is now working on its own legislation to introduce large incentives for climate solutions. These incentives will lower costs and increase demand for low emission technologies, such as electric vehicles, solar panels, wind turbines, and advanced batteries. These policies will have significant impact on the industrial sectors that will support the development of the clean economy and account for nearly one-third of global GHG emissions.

While many nations believe that these sorts of policies and programs are essential to drive down the cost of climate solutions for all, other countries consider these types of policies problematic under international trade rules, which prohibit certain types of harmful subsidies to ensure free and fair trade. Of particular concern to many nations and trade experts are subsidies that only benefit domestically made goods, as is the case with the electric car tax incentives in the IRA.

Trade and climate considerations also intersect when it comes to efforts to combat carbon leakage. Carbon leakage is bad for business, workers, and the environment. Countries that are leading on climate action need to know that the adoption of strong climate policies will not harm their economies, industry, or workers. Trade measures are needed to ensure that companies and consumers don’t simply switch to buying goods made in nations with weak climate policies simply to avoid domestic regulations and carbon pricing policies.

Carbon leakage undercuts the effectiveness of climate policies, while also harming the economy and manufacturing communities. Nations are still figuring out how best to minimize carbon leakage. The European Union has adopted and is currently phasing in a carbon border adjustment measure (CBAM), which imposes fees on certain imported goods from nations that do not have comparable climate policies. Both liberals and conservatives in the U.S. Congress have voiced support for the United States adopting its own CBAM. Many nations and companies, however, fear that CBAMs will become protectionist tools that undermine free and fair trade.

Carbon leakage is of particular concern in the industrial economy. Industrial commodities such as steel, aluminum, cement, fertilizer, and chemicals require a lot of energy to produce and can be made in many countries. Climate policies, therefore, risk moving industry or supply chains offshore. These are also the sectors where current trade conflicts exist, as evidenced by ongoing negotiations between the United States and the European Union on permanently lifting steel and aluminum tariffs imposed by the previous U.S. administration as well as European counter measures.

As these examples make clear, making sure that trade policies align with climate goals is both essential and challenging. While global solutions are needed, creating consensus solutions may take time. As a first step toward a more broadly supported international system, the United States needs to work with its closest trading partners via the G7 to develop a practical and effective approach.

To support G7 coordination, Climate Advisers helped bring together nearly a dozen leading think tanks and individual experts from across G7 countries. Made up of organizations that have done cutting-edge research on trade and climate issues, these stakeholders joined together as the Consortium for Climate Aligned Trade (CCAT). Earlier this Spring, CCAT released its first consensus recommendations for G7 policymakers, accompanied by a background report on the G7’s role to utilizing trade to meet climate goals prepared by my colleague Matthew Piotrowski at Climate Advisers.

I am delighted to report that when G7 climate, energy and environment ministers met in Sapporo, Japan, on April 15-16, 2023, they adopted many of CCAT’s recommendations in their official communique and in this manner found important common ground on trade and climate issues. The table below shows just how much progress G7 ministers made and how their negotiated statement compares to CCAT’s consensus recommendations.

When G7 Leaders meet in Hiroshima, Japan, on May 19, 2023, they will have a chance to build on the progress made by their ministers. Climate Advisers and I urge G7 leaders to adopt the remaining CCAT recommendations, including the goal of creating a G7-wide policy framework for aligning trade and climate policies before the end of the decade.

On May 2, 2023, before the G7 Summit, Climate Advisers and the Climate Leadership Council will co-host a virtual public event to discuss the G7 ministerial outcomes, the G7 Summit, and CCAT recommendations. This event provides an opportunity to hear from guest speakers who are leading policy development in this space including U.S. Senator Bill Cassidy (R-LA) and European Commission Director General Climate Action Kurt Vandenberghe. The event will also include an expert panel of Consortium for Climate-Aligned Trade participants will offer recommendations on how the United States and other G7 members can promote climate-aligned trade policy. Please register for the event here.