Davos Agenda

Will trade and climate clash or align? 4 future scenarios played out

Leveraging trade for climate action.

Leveraging trade for climate action. Image: Pexels.

Tim Figures
Associate Director, EU & Global Trade and Investment, Boston Consulting Group
Kimberley Botwright
Head, Sustainable Trade, World Economic Forum
Jeet Kar
Lead, Sustainable Trade, World Economic Forum
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Davos Agenda

This article is part of: Annual Meeting of the New Champions

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  • As efforts to slow the process of climate change grow strong, so do the links to global trade flows and policies.
  • Carbon competitiveness will affect the risks and trade-offs inherent in the effort to meet global net-zero goals.
  • Four scenarios showcase how carbon mitigation measures might impact global trade and how countries and companies should respond.

Climate change urgently requires countries and companies to strengthen their efforts in accelerating emissions mitigation measures. Trade in the products and services needed to drive decarbonization will increase, and associated production and consumption flows will shift. Domestic measures being put forward by countries to deliver on their net-zero goals, such as carbon pricing, subsidies, renewable mandates, energy efficiency standards and public procurement commitments will also increasingly have an impact far beyond borders of the jurisdictions implementing them.

For example, 79 carbon pricing initiatives are in place today across national and subnational jurisdictions, covering 23% of global greenhouse gas emissions. That’s up from seven initiatives 20 years ago.

We call this interaction between climate efforts and their impact on traded products and services in the global economy “carbon competitiveness”. Carbon competitiveness will affect opportunities, risks, and trade-offs inherent in the effort to meet net-zero.

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Several recent policy developments have accelerated the trend towards global, rather than simply local impact, throwing “carbon competitiveness” questions into the headlines. Some examples include the EU’s Carbon Border Adjustment Mechanism (CBAM), which for the first time plans a carbon price on certain imports into the region, the US Inflation Reduction Act (IRA) that links local content requirements to green subsidies, and an EU-US effort to cut a bilateral deal on green steel and aluminium trade. All of these will have consequences for governments and businesses worldwide.

To help stakeholders understand the dynamic “carbon competitiveness” landscape, the World Economic Forum and Boston Consulting Group (BCG) consulted with experts, industry leaders and governments to generate possible, fictional futures for the relationship between action on climate change, trade flows and trade policies. We have created four scenarios based on the interaction of two key variables: the degree of trade-related collaboration among countries; and the extent to which countries’ climate mitigation measures are in line with the Paris Agreement and accompanied by adequate adaptation measures. Our timeframe is 2023-2030.

Future Scenarios for climate and trade.
Future Scenarios for climate and trade. Image: World Economic Forum

4 future scenarios

1. Climate on track

In this future, international cooperation on climate measures and trade competitiveness topics has avoided destructive commercial disputes, which could have threatened key climate action supply chains. Trade in green goods and services has surged. Development banks have teamed up with corporate alliances to improve supply-chain decarbonization in emerging and climate-vulnerable economies. We see global emissions decline by 43% from 2019 levels in line with the pathway to meet Paris Agreement goals.

2. Fractured effort

In this this future, protectionism is rising as countries seek to shield domestic companies from carbon leakage, but in a non-collaborative way. Non-inclusive “climate clubs” – green trade deals or resource access arrangements, but with high barriers to entry, or geopolitically-linked – are deployed, creating a complex landscape for business to navigate. Relative differences in green subsidies lead to unbalanced green investment, and the poorest nations suffer the consequences. Emissions decline by 30% from 2019 levels, which is not enough to curb the worst impacts of climate change.

3. Exponential disasters

In this future, there is increasing conflict over critical materials, which is slowing down climate efforts and encouraging protectionism. Powerful nations also seek to control the supply chains most threatened by climate change, including food, and poverty rates are on the rise. Investment is focused on adapting to climate change, pulling resources from mitigation, and we see global emissions increase significantly to 125% of 2019 levels.

4. Collective avoidance

In this future, international talks on climate mitigation and trade competitiveness are surface level. Governments have pushed back emissions-reduction targets, and negotiations on green goods and services trade also falter. Efforts to deal with key supply-chain risks in the face of growing climate impacts produce little action, and global growth slows. Emissions are up to 115% of 2019 levels.

These scenarios have been deliberately drawn in bold terms, and it is important to remember that none of the scenarios is likely to develop exactly as described. Still, the goal is to stimulate thinking about their strategic implications. Given these futures, what should stakeholders do today to best manage their carbon competitiveness risks and opportunities?

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What’s the World Economic Forum doing about climate change?

Trade and climate: Strategies for the future

Following community discussions, we have generated five recommendations for governments, and five recommendations for business. While it is unrealistic to expect the world to move seamlessly to a unified global effort to tackle climate change in less than a decade, there are certainly steps the public and private sectors can take to have the best change to leverage trade for climate action.

Recommendations for governments

  • Align carbon pricing and reporting standards: The plethora of options creates an uneven landscape on which to build trade-related climate measures. International standardisation discussions should first focus on carbon-intensive, heavily traded materials, and look to move quickly beyond G7-only forums.
  • Agree principles for the deployment of green subsidies and scale public procurement: A subsidy race is neither affordable nor practical. Agreement on broad principles for the application of green subsidies would help promote global cooperation and ensure decarbonization happens in a mutually supportive way. Cooperation on green public procurement definitions, meanwhile, can help scale markets for low-carbon products and services.
  • Promote the green economy and development programmes: “Greening” aid-for-trade is vital. Development assistance programmes need to create pathways for green trade from developing countries. In addition, investment promotion agencies in developing nations must align their efforts with national climate goals, helping to advance sustainable capital inflows.
  • Develop climate clubs to be as inclusive as possible: Countries can use climate clubs to cooperate on climate change measures that affect trade competitiveness. But clubs with just a few nations will not move the dial globally. Graduation programmes into climate clubs need to be outlined and support provided for low-income countries.
  • Use international institutions coherently: Governments must build bridges between international institutions focused on economic and climate policies. The time for siloes has passed.

Recommendations for businesses

  • Assess your carbon competitiveness: New regulatory measures, including carbon pricing and green subsidies, will alter your balance of competitiveness. Ensure you have identified the potential impacts across your value chain for a range of scenarios and develop a playbook of possible responses.
  • Understand your resilience: Once you have identified potential weak points in your value chain from the climate-trade nexus, such as the availability of critical raw materials, ensure you have strategies in place to manage. That could include engaging in efforts to generate circular, secondary raw materials markets.
  • Take advantage of new investment opportunities: Policy developments also create carbon competitiveness opportunities. Plan to take advantage of these.
  • Engage with your networks: Work with your supplier network, including addressing gaps you foresee in suppliers meeting your decarbonization targets.
  • Engage with policy-makers: You should be setting science-based targets aligned with a 1.5°C pathway. You can advocate for strong climate and environment policies to help build up green markets. It is vital to do so even as policies may raise competitiveness questions. Work with policy-makers to understand how climate and trade policies can best shape a just transition towards a global net-zero future for all.
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Related topics:
Davos AgendaGlobal CooperationTrade and InvestmentClimate Change
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