Trade and Investment

11 ways to align global economic governance with a green new deal

Man wearing hard hat fixing solar panels.

Global economic governance can aid the transition to a green economy. Image: Gustavo Fring, Pexels.

Thomas Hale
Associate Professor of Public Policy, Blavatnik School of Government, University of Oxford
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The Net Zero Transition

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  • The clock is ticking to achieve global climate targets amid a devastating pandemic and financial crisis.
  • To aid recovery and the transition to a green economy we need global economic governance to enable transformation and stimulus at a national level.
  • The Governance to support a global green deal report, outlines 11 steps to achieve this through trade and investment.

As the world economy reels from the largest shock in decades, “build back better” has become an urgent mantra, backed by trillions in emergency spending. But delivering global climate goals – as well as broader aims of sustainable development and economic justice within and across countries – will require transformation as well as stimulus.

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Much of this transformation will need to occur at a national level. But global economic governance – at multilateral, plurilateral, and bilateral levels – exerts a powerful influence on national policies. This influence is two-sided. Economic cooperation across borders can help countries take forward the necessary transition towards a green economy. At the same time, the constraints of these rules and institutions can potentially limit the scope for, and effectiveness of, climate policies.

Five years after the adoption of the landmark Paris Agreement, global economic governance is emerging as a key front in the battle against climate change. Governments, activists, philanthropists, and others seeking to advance climate goals will need to focus more on trade and investment institutions to make progress.

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What is the World Economic Forum doing on trade facilitation?

At present, the world economy and the institutions that govern it are in a state of flux. The trade regime, in particular, is experiencing greater political contestation than perhaps any period since the 1970s. These tensions create risks for the green transition as they can thwart the kinds of cooperation needed to drive economic transformation.

While full alignment will likely take time, change is needed urgently. After several rounds of consultations with a wide range of experts and policymakers, we outline a package of 11 steps to be taken in the next three years in a new report, Governance to support a global green deal.

We focus on the trade and investment regimes. The non-exhaustive list outlined here shows that real progress on aligning global economic governance with climate goals is both feasible and necessary in the medium-term. Here’s some of what we need to do:

1. Support countries to best use policy space in current trade and investment rules

Many countries fear climate policies may run afoul of global trade or investment restrictions (for example, WTO claims have been made against renewable energy support measures adopted by several countries). But with the right design, policies can be made robust to such challenges, and therefore reduce the risk of “regulatory chill”.

2. Strengthen climate engagement at the World Trade Organization

Countries and experts need to make sure climate concerns have a seat at the table across the full suite of technical WTO committees that shape how global trade rules are operationalized.

3. Coordinate national climate trade measures to increase effectiveness and fairness

A rising number of governments are considering how to use trade levers to protect their own green policies and induce others to adopt higher standards. Coordinating these steps can increase their environmental impact and political feasibility, and ensure fairness in the implementation, particularly for developing countries.

4. Develop climate-enhancing preferential trade and investment agreements

We need a new generation of substantive and procedural provisions to include in preferential trade agreements and international investment agreements to make them not just “climate friendly”, but to actively push objectives such as green investment and technology transfer.

5. Net-zero trade finance

Public and private export credit agencies and political risk insurers, which provide the trade financing and risk mitigation that lubricates the global economy, have fallen behind the private sector and development finance institutions on the green transition. These actors should commit to, and set a timeline and targets for, transitioning to net-zero portfolios before 2050.

6. Political declaration on green innovation and industrial policy

Green innovation policies will be key to the green transition, but trade and investment rules have traditionally been cool toward industrial policy. Asserting the legitimacy of green industrial policy goals in the trade and investment space, as well as transparent standards on how to define it, would represent an important political signal.

7. Reform the Energy Charter Treaty

This treaty, which provides blanket protections for investors in fossil fuels, is proving a barrier to green transitions in Europe and beyond.

8. Develop a climate-aligned “aid for trade” initiative

Trade-related financial support to developing countries is essential for supporting trade-related climate mitigation and adaptation goals. Such steps are essential to unlock a broader political bargain around a global green deal.

9. Develop rules to support fossil fuel subsidy reform

Previous commitments to phase out fossil fuel subsidies have largely gone unmet. But progress can be made by identifying rules prohibiting specific types of fossil fuel subsidies on the basis of their climate impacts, while incorporating development priorities.

10. Ensure reform of investor-state dispute settlement advances climate goals

As countries renegotiate rules for investment protection in the UN Commission on International Trade Law (UNCITRAL) and other fora, climate should be on the agenda. Developing climate-consistent provisions (e.g. those limiting protections for fossil fuels) for adoption in new or reformed investment treaties can make these reforms stick.

11. Develop science-based climate standards in the International Organization for Standardization (ISO) and beyond

Standards around net-zero, climate neutrality and other related terms are currently under development in the ISO, at national and regional level, and in various industry bodies. To achieve climate goals and prevent greenwashing, these standards should be science-based and transparent.

Report co-authors: Carolyn Deere Birkbeck, Lise Johnson, Emily Jones, Andreas Klasen, Gregory Messenger, Harro van Asselt and Bentley Allan.

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