Simon Stiell, the Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), warned that humanity has little time left to save the planet against climate change, stressing that the next two years are critical to saving the planet.
When the UNFCCC1 was signed in 1992 to prevent abnormal climate phenomena caused by global warming, humanity thought that global warming would soon be resolved. However, the concentration of carbon dioxide in the atmosphere has continued to increase.
A few potential reasons are the initial costs incurred by companies when transitioning from an economic model based on fossil fuel energy to renewable energy, increased cost burdens on the buyer, and bureaucratic inefficiency that influences government policy-making.
Specifically, companies that produce cars with internal combustion engines face initial facility investment costs when converting to electric vehicles, which places a bigger cost burden on buyers of eco-friendly electric vehicles until the company achieves economies of scale. Therefore, the government needs to establish policies to subsidize the purchase of eco-friendly electric vehicles. However, policy-making is heavily influenced both domestically by the political power of its voters and internationally by WTO trade agreements.
In the short term, tackling global warming will cost individuals, businesses, and governments. However, transitioning to a green economy will benefit all actors in the mid to long term. Therefore, the climate crisis calls for not just the efforts of one country, but the establishment of an international policy for a coordinated global response.
The EU's Carbon Border Adjustment Mechanism (CBAM)2, which took effect in October 2023, currently imposes only the obligation for EU importers to report greenhouse gas emissions until 2025. However, from 2026 onward, importers will be required to obtain emissions verification and purchase and submit CBAM certificates. The US has also introduced a parallel act called the Clean Competition Act (CCA), which imposes greenhouse gas emission tariffs ($55 per ton) on 12 imported items from energy-intensive industries such as oil refining, petrochemical, steel, and others. Under these acts by the EU and the US, if Hyundai Motor Company generated 120 tons of greenhouse gas while producing the automobiles exported to the US in 2023, it may have to pay an additional $60 million in tariff costs. Therefore, it can be said that environmental issues have become an agenda linked not only to trade but also to industry and technology.
However, such trade policies should not be used to indirectly implement domestic industry promotion policies and protection trade. In other words, just as the EU's CBAM has influenced neighboring countries to implement similar measures, such as the US (in the form of the CCA), the US Inflation Reduction Act (IRA), which can deter fair competition, has also influenced Europe's Net-Zero Industry Act (NZIA) and Core Raw Material Act (CRMA).3 Therefore, it is of utmost importance and urgency that countries establish an international system for global cooperation on critical matters such as climate change.
Building a system for international cooperation has long been a challenge in the trade sector. Still, there have been attempts in the shipbuilding industry. The shipbuilding industry utilizes a custom manufacturing process, and all shipyards compete in a single global market. Based on these characteristics, major shipbuilding countries signed the OECD Shipbuilding Agreement, the first international convention of its kind in December 1994, before the establishment of the World Trade Organization (WTO), to prevent actions that distort the market of the shipbuilding industry. Unfortunately, this agreement was never entered into force4. Later, in April 2010, the 110th OECD Council Working Party on Shipbuilding (WP6) launched negotiations on a new OECD Shipbuilding Agreement centered on Korea, the US, Japan, China, and the EU, but this attempt also failed.
Looking back on the OECD Shipbuilding Agreement, the ostensible reason for the failed negotiations lies in the differences in opinion on matters related to whether to increase or match the level of subsidy discipline with the WTO agreements, the introduction of antidumping law, and the financial support from export agencies. However, the fundamental reasons for each country's failure to achieve international cooperation may be different.
First, major players in the shipbuilding industry, including Korea, China, and Japan, disagreed on the issue of dumping practices and subsidies. The ship pricing and subsidy policies of each country were not unfavorable to its domestic producers, and the short-term incentive for each government to impose stringent regulations on these practices was relatively weak. Also, international organizations rely on funding from member states with national sovereignty, which makes it difficult for the treaty to be effectively enforced. Due to the reasons above, both negotiations for the OECD Shipbuilding Agreement failed to land.
Circling back, why must we fight against climate change? Unlike other trade agreements since the establishment of the WTO, climate change agreements are directly and explicitly related to human survival and sustainable development. Then, how should we approach the problem?
With global companies already emphasizing greenhouse gas reduction and investment into corporate social responsibility, companies' voluntary participation in Renewable Energy 100% (RE100), a campaign for promoting renewable energy, is considered a necessity rather than an option. Global companies like Apple, Google, and BMW are actively calling on suppliers in their supply chains to use renewable energy.
At this point, global trade linkage policies on climate change between countries should aim to effectively reduce carbon emissions and develop interconnected policies between various countries to maintain fair competition rather than protection trade.5 Such a linkage system cannot be established within the limitations of international conventions and organizations. Instead, it calls for the urgent collective effort of all sovereign nations. This is because there is not much time left for humanity to save the planet from the climate crisis.
Footnotes
1. The United Nations Framework Convention on Climate Change (UNFCCC) is an international environmental treaty adopted on May 9, 1992, that aims for its state parties to set and achieve carbon emission reduction targets through the Kyoto Protocol. This protocol utilizes a market-based approach to commit parties to their emission limitation objectives via three flexible mechanisms: International Emissions Trading (IET), the Clean Development Mechanism (CDM), and Joint Implementation (JI).
2. The Carbon Border Adjustment Mechanism (CBAM) is a policy that imposes carbon border taxes on carbon-intensive imports to the EU if the products emit more carbon than domestically manufactured products. It applies to the imported goods of six industries: steel, aluminum, cement, fertilizer, energy, and hydrogen.
3. The Net-Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRMA) were enacted by the European Commission on March 16, 2023, to foster the development of eco-friendly industries within the region and achieve carbon neutrality by 2050. These acts aim to reform the electricity market, reduce dependence on external imports, and establish a supply chain for green energy by enhancing manufacturing and industrial capabilities in eco-friendly technologies to replace 40% of the EU's total energy demand with green energy.
4. The negotiations on the OECD Shipbuilding Agreement began at the suggestion of the US to establish principles regarding government support provided to the shipbuilding industry. The European Commission further raised issues of unfair pricing and dumping. Thus, the discussions focused on these two main pillars: government subsidy and dumping. Although a treaty was concluded, it did not come into effect because it was not ratified by the US Congress.
5. Much like how free trade agreements (FTAs) and customs unions (CUs) are allowed to deviate from the principles of the WTO trading system, such as the most-favored-nation treatment and multilateralism because reducing or eliminating trade barriers can facilitate trade in services and investment not only with members of the agreement but also with non-members and ultimately create favorable conditions for other WTO members, climate change-related trade policies should be designed more flexibly to facilitate interconnected strategies among countries with the primary goal of the effective reduction of carbon emissions.
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