Is climate change policy incompatible with free trade?

The Minister’s remarks were based on the following talking points
(check against delivery)

Commissioner, Ambassadors, friends,

• Thank you, Madam Chair (Eva Bratholm), and my thanks to the organisers – the European Commission Delegation to Norway, Ambassador Westerlund and his team, and the NHO (the Confederation of Norwegian Enterprise), and Finn Bergesen jr – for inviting me to this discussion. A hearty welcome to Commissioner Mandelson, with whom I spent many nights this summer (negotiating in Geneva that is), and to Fredric Hauge – Time Magazine’s “Hero of the Environment”.
• Anyway, before commenting on the question of the compatibility of trade and climate change policy, let me make a few general points.
• The first is related to the fact that our globalised world is facing fundamental challenges: poverty, development and climate change. And trade relates to all three, but not in a simple straight-forward way. These are complex issues, with few easy answers. – Reference to the WTO negotiations (Doha trade talks), fight against poverty. An inclusive approach, burden-sharing, get the balance right.
• Most people agree that trade is an important tool for creating economic and social development. But trade alone will not eradicate poverty. Only a broad and comprehensive effort at the national, regional and global level can do that. The same applies to climate change. Climate change will have consequences for many aspects of our societies. And addressing climate change requires a multi-faceted response.
• Furthermore, we know that there are many linkages between poverty and climate change. Governments in poor countries facing the combined challenges of poverty and climate change, will – if there are competing interests – give priority to poverty eradication before climate change mitigation. Poverty is immediately present, visible and acute, while the “inconvenient” consequences of climate change may be regarded as more long-term in nature.
• This hard political reality is also reflected in the Climate Convention, under which the Parties have agreed to strive for “an open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties”.
• My second general point is related to the term “free trade”, which should not be confused with the term “unregulated trade”. Trade takes place within a complex system of rules, at the global, regional and national level. And the global framework of the World Trade Organization (WTO) explicitly acknowledges the freedom of countries to regulate their rules, for example in connection with health and environmental policies. 
• We do not have a global laissez-faire system today, and I am confident that we never will. A lack of regulations leads to critical downsides – take a look at some of today’s financial markets.
• What we do have is a rules-based global trading regime. We need to ensure that this system remains strong. As Peter Mandelson put it in an article for the Daily Telegraph on 31 July 2008 – just as we recovered from having met the roadblock in Geneva – “The WTO and a system of global trade rules is the only way that we will resolve questions of commerce and equity, trade and development in the global economy”.
• Reference to: workers’ rights, social protection, ILO’s Decent Work Agenda (the conference in Oslo two weeks ago). Social justice for a fair globalisation.

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• On the basis of these general points – on poverty, development and the global trading regime – I’d like to concentrate my further comments to three observations or questions: First, how can the current trade regime stimulate climate change mitigation? Second, does the current trade regime represent a barrier to climate change mitigation? And third, could trade restrictions be used to support climate change policies?
• So, first, the question of how the current trade regime could stimulate climate change mitigation. The closest we come to addressing climate change in the WTO today are the negotiations on liberalising trade in environmental goods and services. Reducing trade barriers will facilitate better access to new technology, and hence provide new opportunities for protecting the environment.
• At the same time, this is a growing global market estimated to be worth more than 550 billion dollars a year in these sectors. These negotiations could deliver a double win for many WTO members, and can clearly be counted among the positive incentives for change.
• This is the most obvious step forward that can be achieved in the WTO within a relatively short time frame.
• My second observation relates to whether the current trade regime represents a barrier to effective climate change policies.
• Well, there are nuances – but the most immediate answer is “no”. We have seen that international trade and environment institutions and agreements have worked side-by-side without any major problems up to now. It is vital that this balance is preserved in the future.
• An important question in this context is whether incentives – active policies – in the form of subsidies for developing new technology should be permitted or not.
• Let me briefly refer to Norway’s experience related to carbon capture and storage (CCS). The short version is that – if successfully developed and then deployed worldwide – CCS could make a significant contribution to combating climate change. The IPCC has indicated that CCS technology could represent around 20% of the emissions cuts needed – and I have heard Frederic Hauge maintaining that for industrialised countries cuts will have to be around 50 % – i.e. massive.
• At the same time, this technology will not get off the ground without positive incentives. As always: First movers need an extra incentive. 
• As you all know, government support for this project initially met obstacles in connection with the interpretation of the rules on state aid in the EEA agreement. It took some time before we saw eye-to-eye with the EU on this issue, but projects of this kind are now considered to qualify for state aid. So, this we welcome. It is necessary for success – not to obtain short term benefits in the markets (that is prohibited under current EU and EEA competition law, as it should be), but to get research and development off the ground. Reference to: Norway and the EU.
• In other words, the extra support needed to develop climate change mitigation technology is compatible with the regional trade regime of the EEA. 
• A far more controversial issue is the use of subsidies that stimulate the consumption of fossil fuels. These measures may be important tools at the national level to stimulate economic growth, but they may also slow down the development of more climate friendly technologies and consumption patterns.
• Changes in global rules on subsidies could be – and I believe should be – part of a broad climate change policy package.
• There may also be other areas where we need to look into the links between climate change policies and the trade regime. For example the relationship between the intellectual property system and the TRIPS agreement on the one hand, and the need for technology transfer on the other hand.
• With this in view, Norway has taken initiatives – for example in the OECD – for an analysis on trade and climate change, which will be completed well in advance of the Climate Conference in Copenhagen in December 2009. 
• The third question is whether trade restrictions could be used to support climate change policies, for instance by subjecting imports from countries that have not signed climate agreements to a special tax.
• Such measures – at least in theory – could prevent carbon leakage by discouraging companies from moving production to countries with a weaker regulatory framework. And such measures could – again – also provide more countries with an incentive to join the climate regime. Sharing of technology.
• The question is whether such policies would be effective. Frankly, I doubt that economic “threats” will convince countries like China, India, or for that matter the US, to join a new global climate regime. Threats are not conducive to a climate of international consensus. What we need is coalition building.
• Such an approach could quickly lead to confrontation during both the negotiations and the implementation of a post-Kyoto regime. The WTO and its dispute settlement system would be burdened with conflicts regarding the legality of using trade measures for climate change purposes. And nobody would benefit.  
• For developing countries, the issue of poverty reduction adds another dimension. Threats to apply trade measures in a climate change context will be seen by many as threats to their economic and social development.
• On the other hand we will need mechanisms that reflect the need for a regime that includes proper burden sharing. This means that rich and industrialised countries should contribute more and thus pay a price for having advanced during times when large emissions were not considered a problem.

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• Summing up, I think it is fair to say that there is no inherent conflict between the trade regime and climate change regimes. But as we develop new rules, governments will have to make sure that there is coherence between the two regimes. Again we can see a parallel to the development of labour law standards.
• At the same time, we will need to take a closer look at incentives; incentives are key to the functioning of the market economy. And as I agree with Sir Nicholas Stern that global warming must be seen as a major market failure. Thus, politically introduced incentives must be seen in the light of restoring the proper functioning of the market – this is something we need and should all support.
• And finally, in our focus on rules and regimes, we should be wary of the political interests that may lie behind them. Threatening to use trade measures as a sanction for not implementing climate change commitments should be avoided. This could reduce our chances of establishing an effective global climate regime, rather than stimulating agreement.  
• On the other hand, climate change could be regarded as a trade and investment challenge. Because the technology that helps us reduce greenhouse gas emissions is traded like any other. The skills to deal with climate change can be exported, and imported. In other words, trade can be part of the climate change solution.