How trade and investment can be part of climate solutions? This brief suggests policy options to answer this question. By Albert F. Park & Jong Woo Kang
Trade and investment underpin the remarkable development story of many G20 economies, but this progress has come with environmental costs that contribute to climate change. Many developing economies of the G20, especially those in Asia, are net exporters of carbon emissions to developed economies. However, with the right mix of policies, trade and investment could be part of the climate solution. For this to happen, priority should be given to promoting freer trade in environmental goods and services; putting in place appropriate regulations, standards, and certification schemes to incentivize green investment; strengthening international and regional cooperation including through climate commitments in trade agreements and investment treaties; and utilizing market-based approaches such as carbon pricing mechanisms. This brief draws heavily from the analyses and discussions contained in the Asian Development Bank’s Asian Economic Integration Report 2023, of which the authors of this brief were part.
The G20 economies should lead the transformation of trade and investment policies to become ‘climate smart’ and ‘climate sensitive’ to ensure that trade and FDI contribute to the climate solution rather than being part of the problem. They need to take the lead in spearheading individual as well as collective efforts to set the agenda for policy reforms to ‘green’ trade and investment while allowing economies to continue gaining positive economic benefits from cross-border flows of goods, services, and capital. Urgent actions need to be taken in four key policy areas.
First, promoting trade in environmental goods and services can help facilitate renewable energy transition and enable the spread of low-carbon production technologies. Second, environmental regulations, and standardisation and certification of green products along with policy incentives including tax credits and low-cost financing, can also support the greening of production procedures and international trade. Third, more efforts are needed to strengthen the greening function of bilateral and regional trade agreements and investment treaties in facilitating trade in environmental goods, ensuring interoperability and regulatory coherence, and fostering green investments across the borders. Fourth, carbon pricing mechanisms are an integral part of the broader climate policy architecture to help economies reduce emissions by addressing the negative externalities associated with climate change and helping internalise various climate costs into production, investment and production decisions. A global approach to carbon pricing mechanism, in particular, retains a huge potential to accelerate the pace of global net-zero transition and minimise the risks of cross-border carbon leakages.
