Editing IPCC:AR6/WGIII/Chapter-14 (section)

==== 14.5.1.3 Trade Agreements ====

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As discussed in AR5, policies to open up trade can have a range of effects on GHG emissions, just as mitigation policies can influence trade flows among countries. Trade rules may impede mitigation action by limiting countries’ discretion in adopting trade-related climate policies, but they also have the potential to stimulate the international adoption and diffusion of mitigation technologies and policies ( [[#Droege--2017|Droege et al. 2017]] ).

The mitigation impacts of trade agreements are difficult to ascertain, and the limited evidence is mixed. Examining the effects of three free trade agreements (FTAs) – Mercosur, the North American Free Trade Agreement (NAFTA) and the Australia–United States Free Trade Agreement – on GHG emissions, [[#Nemati--2019|Nemati et al. (2019)]] find that these effects depend on the relative income levels of the countries involved, and that FTAs between developed and developing countries may increase emissions in the long run. However, studies also suggest that FTAs incorporating specific environmental or climate-related provisions can help reduce GHG emissions ( [[#Baghdadi--2013|Baghdadi et al. 2013]] ; [[#Sorgho--2020|Sorgho and Tharakan 2020]] ).

Investment agreements, which are often integrated in FTAs, seek to encourage the flow of foreign investment through investment protection. While international investment agreements hold potential to increase low-carbon investment in host countries ( [[#PAGE--2018|PAGE 2018]] ), these agreements have tended to protect investor rights, constraining the latitude of host countries in adopting environmental policies ( [[#Miles--2019|Miles 2019]] ). Moreover, international investment agreements may lead to ‘regulatory chill’, which may lead to countries refraining from or delaying the adoption of mitigation policies, such as phasing out fossil fuels ( [[#Tienhaara--2018|Tienhaara 2018]] ). More contemporary investment agreements seek to better balance the rights and obligations of investors and host countries, and in theory offer greater regulatory space to host countries ( [[#UNCTAD--2019|UNCTAD 2019]] ), although it is unclear to what extent this will hold true in practice.

In their NDCs, Parties mention various trade-related mitigation measures, including import bans, standards and labelling schemes, border carbon adjustments (BCAs; see also Chapter 13), renewable energy support measures, fossil fuel subsidy reform, and the use of international market mechanisms ( [[#Brandi--2017|Brandi 2017]] ). Some of these ‘response measures’ ( [[#Chan--2016b|Chan 2016b]] ) may raise questions concerning their consistency with trade agreements of the World Trade Organization (WTO). Non-discrimination is one of the foundational rules of the WTO. This means, among others, that ‘like’ imported and domestic products are not treated differently (‘national treatment’) and that a WTO member should not discriminate between other members (‘most-favoured-nation treatment’). These principles are elaborated in a set of agreements on the trade in goods and services, including the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services(GATS), the Agreement on Technical Barriers to Trade (TBT), and the Agreement on Subsidies and Countervailing Measures (ASCM).

Several measures that can be adopted as part of carbon pricing instruments to address carbon leakage concerns have been examined in the light of WTO rules. For instance, depending on the specific design, the free allocation of emissions allowances under an ETS could be considered a subsidy inconsistent with the ASCM ( [[#Rubini--2012|Rubini and Jegou 2012]] ; [[#Ismer--2021|Ismer et al. 2021]] ). The WTO compatibility of another measure to counter carbon leakage, BCAs, has also been widely discussed (Box 14.2). Alternatives to BCAs, such as consumption charges on carbon-intensive materials ( [[#Pollitt--2020|Pollitt et al. 2020]] ), can be consistent with WTO law, as they do not involve discrimination between domestic and foreign products based on their carbon intensity ( [[#Ismer--2007|Ismer and Neuhoff 2007]] ; [[#Tamiotti--2011|Tamiotti 2011]] ; [[#Pauwelyn--2013|Pauwelyn 2013]] ; [[#Holzer--2014|Holzer 2014]] ; [[#Ismer--2016|Ismer and Haussner 2016]] ; [[#Cosbey--2019|Cosbey et al. 2019]] ; [[#European%20Commission--2019|European Commission 2019]] ; [[#Mehling--2019|Mehling et al. 2019]] ; [[#Porterfield--2019|Porterfield 2019]] ; [[#Ismer--2020|Ismer et al. 2020]] ).

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