Trade in Climate Mitigation Goods and Services : Opportunities and Challenges ICC Side Event UNFCCC Conference 9 June 2008 –Bonn, Germany

Why Liberalisation of Climate Mitigation Technologies? Conceptual Issues The Relevance of Trade: Results analysis of Climate-friendly EGS by World Bank. Key Issues and Challenges for Environmental Goods Negotiations at the WTO and Brief State of Play Recognising non-trade drivers of EGS imports-Analysis by Veena Jha and World Banks 43 Climate-Friendly List Dynamic Comparative Advantage Energy-efficient Goods and Services Negotiations on Environmental Services and EG&S Synergies The Relevance of RTAs Other Important Issues Annex: Maximum and Applied Tariff Rates for the World Banks 43 Climate- friendly List (Derived from the WTO 153 List). Overview of presentation

Why Liberalisation of Climate Change EGS? Some Views. Stern Review has highlighted the potential gains from trade- liberalisation in clean technologies. IPCC report also refers to trade liberalisation EGS liberalisation (with other drivers) =>expansion of markets for climate friendly technologies and services=>incentive for innovation. Diffusion of and access to EGS =>Improvement of thermal and environmental efficiency in fossil-fuel use in industry and households+ Use of cleaner energy=>Puts economy on low- carbon trajectory. Liberalizing trade in renewables will change the Clean Development Mechanism baseline for renewable energy projects and could thereby facilitate more high-end and state-of-the-art technology-transfer through CDM projects. (World Bank, 2007).

Traditional Goods vs EPPs Traditional Goods To address an environmental problem. Eg: Carbon capture technologies EPPs Main purpose Other uses Main purpose But environmental benefits arise during Production E.g. Zero CO2 emitting steel Consumption/Use E.g. Solar cars/panels Disposal E.g. Jute Bags Note: For every EPP there exists a substitute or like product with a similar use that is not as environmentally friendly

Why have Environmental Goods assumed significance now? Environmental Goods always part of trade agenda but subsumed within industrial or (depending on interpretation) also agricultural negotiations. Singled out for first time by Para 31 (iii) of Doha Ministerial Declaration. Para 31(iii) calls for the reduction or as appropriate elimination of tariff and non-tariff barriers to environmental goods and services.

The Relevance of Trade EGS Market estimated at 550 billion. But developing country markets growing more rapidly especially in Asia. (EBI). This is seen as an opportunity for firms producing these products. Developing countries mainly net importers but some emerging as key players. China and India have emerged as leading producers of wind energy as well as wind energy manufacturing equipment, China and Indonesia in fluorescent lamps while Brazil is a world leader in the manufacture of bio-fuel equipment. In efficient lighting for instance, strong market growth in developed countries has been fuelled by imports mostly from developing countries.

Removal of tariffs and NTBs for four basic clean energy technologies (wind, solar, clean coal, and efficient lighting) in 18 of the high-GHG-emitting developing countries will result in trade gains of up to 13 percent. World Bank Trade Simulation of Select Climate- friendly products Source: World Bank

The Relevance of Trade But challenge is not about liberalising trade. The context in which this is done is important for realising climate change and economic benefits. There is a need to identify other drivers of EGS demand and the factors which can maximise economic and environmental benefits for developing countries.

Key Issues and Challenges for Environmental Goods Negotiations at WTO What to Liberalise? : Issues of Product Coverage Challenges related to the Harmonised Commodity Coding and Description (HS)system makes it tricky to: (i) Isolate climate-friendly products from others for easier trade liberalisation. Dual-use categories includes environmental and non-environmental products. Eg: Efficient supercritical and ultra-supercritical boilers (and turbines) cannot be easily tracked because there is no suitable HS code differentiation for boilers (and turbines) by temperature and pressure. (ii) Deal with intrinsically dual-use products such as pipes and valves.

Dual Use Type 1 6-digit HS code entry (841360) : Pumps for liquids, whether or not fitted with a measuring device; other rotary positive displacement pumps Environmental Good Ex-Out: Pumps for Sewage and Wastewater treatment Non-environmental good Other pumps Non-environmental good Other pumps

Dual-Use-Type 2 Pipes As an Environmental Good: Used in Solar Hot Water Systems As a Non-Environmental Good: Used in Oil and Gas Transportation

Key Issues and Challenges for Environmental Goods Negotiations at WTO What to Liberalise? : Issues of Product Coverage (iii) Present HS classification also makes it tricky to give a trade preference to relatively friendlier products especially if product remains the same but embedded technology changes. Eg: Energy efficient products. Greater exportables from developing countries Opportunities in parts and components although many are dual-use. Developing countries net importers but import-export ratio declining for many goods. Agricultural Products?-Brazil keen on bio-ethanol and bio-fuel manufacturing equipment

How to Liberalise?: Issues of Process. Approaches to Liberalisation List: Bound, MFN permanent liberalisation on pre-determined products. (Friends of Env Goods: Canada, the EU, Japan, Korea, New Zealand, Norway, Chinese Taipei, Switzerland and the US). Project/Integrated: Temporary liberalisation of all goods and services for designated projects. (India and Argentina). Request-Offer: Negotiations on the basis of bilateral or plurilateral requests on products of interest. Offers extends on MFN basis to all Members.(Brazil) Differentiated treatment among Members? Various proposals. Non-tariff measures will be important to address. Technical Assistance and access to technology important issues.

Brief State of Play Qatars submission calls for liberalising natural gas fired generation systems and advanced gas-generation systems, citing a reference to its benefits under the UNFCCC. (TN/TE/W/14, W/19 and W/27). Qatar also referred to the IPCC Assessment Reports, which have recommended increased use of natural gas over other fossil fuels as a way to reduce greenhouse gas emissions. Friends of EGS submitted an informal list of 153 product entries (at 6-digit level). Includes climate mitigation goods within renewable energy, heat and energy management and solid waste management. Recently US-EU informal proposal to liberalise 43 climate friendly goods and also climate friendly services on an accelerated basis. Zero tariffs on these goods by Some Members have proposed a review mechanism to identify and extend liberalisation benefits to new technologies that would evolve. Relevant from an eco-innovation point of view. Progress in other issues such as agriculture and industrial market access (NAMA) negotiations may also affect pace of negotiations.

Drivers of Environmental Goods Imports-Some findings by Veena Jha (ICTSD, 2008) Analysed drivers of trade of 153 products proposed in WTO for liberalisation by Friends of Env Goods-(Canada, EU, Korea, Japan, New Zealand, Norway, Taiwan, Switzerland and the US). Categories relevant to climate change include Heat and Energy Management and Renewable Energy as well as Solid Waste Management. In many categories of environmental goods proposed by WTO Members variables like GDP, FDI, Enforcement of environmental regulations (shown by Environmental Performance Indices) more important than tariffs in expanding trade. However some categories of env.goods especially those in the category of heat and energy management and renewable energy appear more responsive to tariff reduction.

Drivers for Technology Acquisition World Bank (2007) quotes research by Hakura and Jaumotte (1999) which states that trade serves as a channel for technology acquisition by developing countries. According to World Bank Report-the main driver for tech- transfer is intra-industry trade which is less prevalent between developed and developing countries than inter-industry trade. Hence other approaches to technology access important-Eg: investment, joint-ventures, licensing, development aid, temporary relocation of employees etc. (OECD, 2002). Soft skills and know-how important for technology absorption. (Mytelka, ICTSD 2007). Also building domestic capacities to manufacture and deploy these technologies is important.

Identifying Climate-Friendly Products: World Bank Analysis of 153 List 43 products identified by Bank from 153 products list proposed by proponents of Env Goods liberalisation in the WTO. 43 products comprises diverse products from wind turbines to solar panels to water saving shower. Global trade in these 43 products have doubled from USD 67 billion to USD 119 billion. Rapid growth in imports and exports. World Bank list is a starting premise- many climate relevant technologies are not included in 153 list. Eg: Wave-power technologies. Maximum bound and applied tariffs higher for developing countries.

Veena Jhas (ICTSD, 2008) analysis continued Trade in renewable energy (RE) and heat and energy management (HEM) products more sensitive to tariff reduction compared to other categories. But covers only 26 products in World Bank list (43 products). Imports of products in renewable energy category found to be negatively correlated with level of GDP. But imports of RE and HEM products also positively correlated with general Environmental Performance Index (EPI) of countries. Covers 26 products from Word Bank list. In general, high EPI ranking implies a better framework of implementation of environmental regulations, as well as better chances of attainment of environmental targets. Strong import correlation with technical assistance projects-for 30 products in World Bank list.

Dynamic Comparative advantage, (Veena Jha, ICTSD, 2008) In 4 Env Goods categories developing countries have an improving dynamic comparative advantage ( ). This includes heat and energy management equipment together with air-pollution control, solid waste management and noise and vibration abatement. Main developing country beneficiaries are middle income developing countries such as China, Mexico and Indonesia. For RE equipment, dynamic comp. advantage in 2015 (using 2006 as base) continues to lie in industrialised countries.

Energy-Efficient Goods and Services Estimated that 40 per-cent of savings needed to reach Kyoto targets would come from energy-efficiency. Energy-efficient goods could be those used for energy- saving in transport by firms and households. For households-wide variety of consumer goods (but problematic in WTO context). Services like designing and engineering for energy- efficiency (Eg: buildings) may also be relevant as would installation and maintenance services for energy- efficient goods and technologies.

Negotiations on Environmental Services Carried out separately in Council for Trade in Services US-EU proposal covers climate friendly services Some existing environmental services such as cleaning services for exhaust gases relevant to climate change. But climate-friendly services will need to be clearly defined as in most cases they will be part of bigger services such as engineering or consultancy rather than a stand-alone environmental service. Slow progress in WTO negotiations though many Members including developing countries have offered to make improved liberalisation commitments.

Environmental Goods and Services Synergy According to Steenblik and Drouet, EG&S increasingly provided commercially on an integrated basis. (OECD, 2005). According to Steenblik and Drouet (OECD,2005) certain goods or categories of goods common to several services. Those of interest to climate change mitigation include, among others, heat exchange units and parts (HS and.90) and Solar cells (ex out of ) and photo-sensitive semiconductors. Largest cluster of goods, used in most environmental services by far, is laboratory equipment and glassware. As markets for environmental services expand so do local suppliers and the range and sophistication of their goods on offer. Environmental consultancy relevant to climate change could be of interest to developing countries.-E.g. Energy audit & saving, carbon-asset management. Many firms already coming up in developing countries as well driven by growth of CDM projects.

Environmental Goods and Services Synergy Liberalising environmental services may require new regulatory tools including those relating to pricing and service standards. (Geloso Grosso, 2007). Extent to which environmental services will be a driver of trade in goods will also depend crucially on successful privatisation of a number of infrastructural sectors in developing countries. Regulatory risks and capacities important. (Veena Jha, 2008). Further analysis and data collection, especially related to environmental services FDI, will be necessary to establish the extent to which trade in environmental services is a driver of environmental goods imports (Veena Jha, 2008).

The Relevance of RTAs to Trade in Climate-Mitigation Goods Geography and regional dynamics important in much of trade flows in EGs. Eg: US accounted for 60 % of Mexican imports of water-pollution equipment. Japan leading supplier of solid, hazardous waste-treatment equipment in Malaysia. South-South trade in EGs has regional significance. Hubs of EGS could establish presence in region through RTAs. Eg: Malaysian firms like Sadec Consortium active in water-treatment facility in Vietnam. Brazils CETESB provided consultancy services to other Latin American countries

The Relevance of RTAs to Trade in Climate-Mitigation Goods Dual-Use products less of a problem because of greater ambition of liberalisation and at HS-6 digit level. Trade Creating and Trade Diverting Effects of RTAs need to be considered. Greater ease of harmonisation and alignment of standards for climate-mitigation goods may easier in a regional context. Technical assistance provisions can be more specifically tailored to suit participating countries needs. Bilateral and regional aid flows through environmental cooperation agreements possible. May need to avoid tied-aid problem.

Other Important Issues WB report as well as analysis by Jha shows that package approach will be important. Indeed can expand trade as well as enable access to these goods and services in the long run more than in only liberalisation scenario. This means that complementary measures (financial +technical assistance) to trade liberalisation may be needed. Should these be reflected in a WTO outcome? UNFCC? One area where WTO toolbox may readily play a role is trade-facilitation aspect-helping countries deal with HS codes implementation. WCO could also assist with HS-code development.

Other Important Issues IPR rules in more advanced developing countries important may influence FDI. Extent of competition in market and IPR flexibility or bridging licensing costs will be important for prices. IPR flexibility will also play a role. Working of patents and generic imports. Investment climate as for other sectors will also influence FDI, technology flows in climate mitigation EGS. Developing appropriate environmental regulatory framework essential for rapid deployment of climate mitigation goods and services. Technical assistance to develop appropriate framework will be important. Subsidies to research and eco-industries important to address as there could be trade implications.

ANNEX: Maximum and Applied Tariff Rates for the World Banks 43 Climate-friendly List (Derived from the WTO 153 List).

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